sv3
As filed with the Securities and Exchange Commission on
August 25, 2005.
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware |
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95-2039518 |
(State or other jurisdiction
of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
3050 East Hillcrest Drive
Westlake Village, California 91362
(805) 446-4800
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Carl C. Wertz
Chief Financial Officer
3050 East Hillcrest Drive
Westlake Village, California 91362
(805) 446-4800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Peter M. Menard, Esq.
Su Lian Lu, Esq.
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
(213) 620-1780 |
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William B. Brentani, Esq.
Rebecca B. Boyden, Esq.
Simpson Thacher & Bartlett LLP
3330 Hillview Avenue
Palo Alto, California 94304
(650) 251-5000 |
Approximate date of commencement of
proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If the only securities being registered
on this form are being offered pursuant to dividend or interest
reinvestment plans, please check the following
box. o
If any of the securities being
registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the
following
box. o
If this Form is filed to register
additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering. o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the
Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. o
If delivery of the prospectus is
expected to be made pursuant to Rule 434, please check the
following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed maximum |
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Proposed maximum |
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Amount of |
Title of each class of |
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Amount to be |
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offering price |
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aggregate offering |
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registration |
securities to be registered |
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registered(1) |
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per share(2) |
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price(2) |
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fee |
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Common Stock, par value
$0.662/3
per share
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2,875,000 shares |
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$35.18 |
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$101,142,500 |
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$11,904.47 |
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(1) |
Includes 375,000 shares of common stock that the
underwriters have the option to purchase solely to cover
over-allotments, if any. |
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(2) |
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of
1933, based on the average of the high and low prices of the
Registrants common stock as reported on the Nasdaq
National Market on August 19, 2005. |
The Registrant hereby amends this
Registration Statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a
further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933,
or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information
in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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PRELIMINARY PROSPECTUS |
SUBJECT TO COMPLETION |
August 25, 2005 |
2,500,000 Shares
Common Stock
We are offering 1,750,000 shares of our common stock and
the selling stockholder named in this prospectus is offering
750,000 shares of our common stock. We will not receive any
proceeds from the sale of any shares of our common stock by the
selling stockholder.
Our common stock is listed on the Nasdaq National Market under
the symbol DIOD. On August 24, 2005, the last
sale price of our common stock as reported on the Nasdaq
National Market was $37.00 per share.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock
under Risk factors beginning on page 7 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share | |
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Public offering price
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$ |
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$ |
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Underwriting discounts and commissions
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$ |
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$ |
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Proceeds, before expenses, to us
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$ |
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$ |
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Proceeds, before expenses, to the selling stockholder
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$ |
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The underwriters may also purchase up to an additional
375,000 shares of our common stock from us at the public
offering price, less the underwriting discounts and commissions
payable by us to cover over-allotments, if any, within
30 days from the date of this prospectus. If the
underwriters exercise the option in full, the total underwriting
discounts and commissions payable by us will be
$ ,
and the total proceeds, before expenses, to us will be
$ .
The underwriters are offering the common stock as set forth
under Underwriting. Delivery of the shares of common
stock will be made on or
about ,
2005.
UBS Investment Bank
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A.G. Edwards |
C.E. Unterberg, Towbin |
Raymond James |
WR Hambrecht + Co
The date of this prospectus
is ,
2005.
You should rely only on the information contained in this
prospectus. We have not, and the selling stockholder and the
underwriters have not, authorized anyone to provide you with
additional information or information different from that
contained in this prospectus. We and the selling stockholder are
offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where those offers and sales
are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
TABLE OF CONTENTS
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F-1 |
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EX-4.1 |
EX-23.2 |
i
(This page has been left blank intentionally)
Prospectus summary
This summary highlights selected information contained
elsewhere in this prospectus. This summary may not contain all
the information that you should consider before investing in our
common stock. You should carefully read the entire prospectus,
including Risk factors and our historical
consolidated financial statements and related notes, before
making an investment decision.
Unless the context otherwise requires, the words
Diodes, we, us and
our refer to Diodes Incorporated and its
subsidiaries.
OUR BUSINESS
We are a global supplier of discrete semiconductor products. We
design, manufacture and market discrete semiconductors focused
on diverse end-use applications in the consumer electronics,
computing, industrial, communications and automotive sectors.
Discrete semiconductors, which provide electronic signal
amplification and switching functions, are basic building-block
electronic components that are incorporated into almost every
electronic device. We believe that our focus on discrete
semiconductors provides us with a meaningful competitive
advantage relative to broadline semiconductor companies that
provide a wider range of semiconductor products.
Our portfolio of discrete semiconductors addresses the design
needs of many advanced electronic devices, particularly
high-volume consumer devices such as digital audio players,
notebook computers, flat panel displays, mobile handsets,
digital cameras and set-top boxes. We believe that we have
particular strength in designing innovative surface-mount
discrete semiconductors for applications with critical need to
minimize product size while maximizing power and overall
performance, and at a lower cost than alternative solutions. Our
product portfolio includes over 4,000 products, and we shipped
over 7.5 billion units in 2004 and over 4.5 billion
units in the six months ended June 30, 2005.
We serve over 150 direct customers worldwide, which consist of
original equipment manufacturers, or OEMs, and electronic
manufacturing services, or EMS, providers. Additionally, we have
17 distributor customers worldwide, through which we indirectly
serve over 10,000 customers. Our customers include:
(1) industry leading OEMs in a broad range of industries
such as Bose Corporation, Honeywell International, Inc., LG
Electronics, Inc., Logitech, Inc., Motorola, Inc., Quanta
Computer, Inc., Sagem Communication, Samsung Electronics Co.,
Ltd. and Thompson, Inc.; (2) leading EMS providers such as
Celestica, Inc., Flextronics International, Ltd., Hon Hai
Precision Industry Co., Ltd., Inventec Corporation, Jabil
Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation
who build end-market products incorporating our discrete
semiconductors for companies such as Apple Computer, Inc., Cisco
Systems, Inc., Dell, Inc., EMC Corporation, Intel Corporation,
Microsoft Corporation and Roche Diagnostics; and
(3) leading distributors, such as Arrow Electronics, Inc.,
Avnet, Inc., Future Electronics and Yosun Industrial Corp.
For 2004 and for the six months ended June 30, 2005, our
OEM and EMS customers together accounted for 66.3% and 69.0%,
respectively, of our net sales.
We are headquartered in Westlake Village, California, near Los
Angeles. Our manufacturing facilities are located in Shanghai,
China; our wafer fabrication facility is in Kansas City,
Missouri; and our sales and marketing and logistical centers are
located in Taipei, Taiwan; Shanghai and Shenzhen, China; and
Hong Kong. We also have regional sales offices in Derbyshire,
England; Toulouse, France; Frankfurt, Germany; and various
cities in the United States. From 1998 to 2004, our net sales
grew from $60.1 million to $185.7 million,
representing a compound annual growth rate of 20.7%. According
to Gartner, Inc., worldwide sales of discrete semiconductors
grew from $12.8 billion in 1998 to $15.8 billion in
2004. This represents a compound annual growth rate of 3.7%.
1
OUR COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
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Flexible, scalable and
cost-effective
manufacturing. Our
manufacturing operations are a core element of our success and
we have designed our manufacturing base to allow us to respond
quickly to changes in demand trends in the end-markets we serve.
For example, we have structured our Shanghai assembly, test and
packaging facilities to enable us to rapidly and efficiently add
capacity and adjust product mix to meet shifts in customer
demand and overall market trends. As a result, for the past
three years we have operated our Shanghai facilities at near
full capacity, while at the same time significantly expanding
that capacity. Additionally, the Shanghai location of our
manufacturing operations provides us with access to a
highly-skilled workforce at a low overall cost base while
enabling us to better serve our leading customers, many of which
are located in Asia.
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Integrated packaging
expertise. We believe
that we have particular expertise in designing and manufacturing
innovative and proprietary packaging solutions that integrate
multiple separate discrete elements into a single semiconductor
product called an array. Our ability to design and manufacture
highly integrated discrete semiconductor solutions provides our
customers with products of equivalent functionality with fewer
individual parts, and at lower overall cost, than alternative
products. For example, one of our leading diode array products
integrates eight discrete elements into a single
highly-miniaturized package that provides four times the
functionality with less than 20% of the space requirements of
the previous solution. This combination of integration,
functionality and miniaturization makes our products well suited
for high-volume consumer applications such as digital audio
players, notebook computers and digital cameras.
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Broad customer base and diverse
end markets. Our
customers include leading OEMs such as Bose Corporation,
Honeywell International, Inc., LG Electronics, Inc., Logitech,
Inc., Motorola, Inc., Quanta Computer, Inc., Sagem
Communication, Samsung Electronics Co., Ltd. and Thompson, Inc.,
as well as leading EMS providers such as Celestica, Inc.,
Flextronics International, Ltd., Hon Hai Precision Industry Co.,
Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-SCI
Corporation and Solectron Corporation. Overall, we serve over
150 direct customers and over 10,000 additional customers
through our distributors, including leading distributors such as
Arrow Electronics, Inc., Avnet, Inc., Future Electronics and
Yosun Industrial Corp. Our products are ultimately used in end
products in a large number of markets served by our broad base
of customers, which we believe makes us less dependent on either
specific customers or specific end-use applications.
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Customer-focused product
development. Close
collaboration with our customers and a high degree of customer
service are essential elements of our business. We believe
focusing on dependable delivery of discrete semiconductor
solutions tailored to specific end-user applications, has
fostered deep customer relationships and created a key
competitive advantage for us in the highly-fragmented discrete
semiconductor marketplace. We believe our close relationships
with our OEM and EMS customers have provided us with deep
insight into our customers product needs. This results in
differentiation in our product designs and often provides us
with insight into additional opportunities for new design wins
in our customers products.
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Management continuity and
experience. We believe
that the continuity of our management team is a critical
competitive strength. The five members of our senior management
team have an average of over 12 years of service at Diodes
and the length of their service with us has created significant
institutional insight into our markets, our customers and our
operations. In June 2005, we appointed Dr. Keh-Shew Lu as
President and Chief Executive Officer. Dr. Lu has served as
a director of Diodes since 2001 and has 30 years of
relevant industry experience. Dr. Lu began his career at
Texas Instruments in 1974 and retired in 2001 as Senior Vice
President and General Manager of Worldwide Analog, Mixed-Signal
and Logic Products. Our Chief Financial Officer, Carl Wertz, has
been employed by us since 1993 and has over 20 years of
financial experience in manufacturing and distribution
industries. Joseph Liu, our Senior Vice President, Operations,
joined us in 1990 and has over 30 years
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of relevant industry experience having started his career in
1971 at Texas Instruments. Similarly, Mark King, our Senior Vice
President of Sales and Marketing has been employed by us since
1991, as has Steven Ho, our Vice President of Asia Sales. |
OUR STRATEGY
Our strategy is to continue to enhance our position as a global
supplier of discrete semiconductor products. The principal
elements of this strategy include the following:
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continue rapidly introducing
innovative discrete semiconductor products;
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expand our available market
opportunities;
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maintain intense customer focus;
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enhance cost
competitiveness; and
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pursue selective strategic
acquisitions.
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OUR RELATIONSHIP WITH LITE-ON SEMICONDUCTOR AND THE LITE-ON
GROUP
Lite-On Semiconductor Corporation, or Lite-On Semiconductor, is
our principal stockholder, our largest customer and one of our
largest suppliers. As of August 15, 2005, Lite-On
Semiconductor owned 4,601,458 shares of our common stock
(31.5% of our total outstanding common stock) and will own
3,851,458 shares of our common stock after the completion
of this offering (23.5% of our total outstanding common stock
assuming the underwriters over-allotment option is not
exercised). Lite-On Semiconductor is a Taiwanese-based provider
of image-sensing products used in applications such as copiers,
scanners and fax machines, and it also provides discrete
semiconductor products. The Lite-On Group is an affiliation of
several electronics companies, including Lite-On Semiconductor.
We have had a relationship with Lite-On Semiconductor since
1990. For 2004 and the six months ended June 30, 2005,
Lite-On Semiconductor accounted for 9.9% and 9.6%, respectively,
of our net sales. Other members of The Lite-On Group accounted
for an additional 3.3% and 5.1%, respectively, of our net sales
in the same periods. In addition, for 2004 and the six months
ended June 30, 2005, 17.2% and 14.6%, respectively, of our
net sales were derived from the sale of discrete semiconductor
products purchased from Lite-On Semiconductor and subsequently
sold by us.
Several of our directors and executive officers are current or
former directors of Lite-On Semiconductor or other members of
The Lite-On Group. Please refer to Certain relationships
and related party transactions and Principal and
selling stockholders for additional information.
OUR CORPORATE INFORMATION
We were incorporated in California in 1959 and reincorporated in
Delaware in 1969. Our principal executive office is located at
3050 E. Hillcrest Drive, Westlake Village, CA 91362,
and our telephone number at that office is (805) 446-4800.
Our website is located at www.diodes.com. Information
contained on or accessible through our website is not part of
this prospectus.
In 1998, we established an assembly, test and packaging facility
in Shanghai, China, which we refer to in this prospectus as
Diodes-China. In 2000, we acquired FabTech Inc., a wafer
fabrication facility in Kansas City, Missouri, which we refer to
as FabTech. In 2002 and 2004, respectively, we established a
sales and marketing facility in Hong Kong and a second assembly,
test and packaging facility in Shanghai, which we refer to as
Diodes-Hong Kong and Diodes-Shanghai, respectively. Our sales
and marketing office in Taiwan is referred to as Diodes-Taiwan.
You should carefully consider the information contained in the
Risk factors section of this prospectus before you
decide to purchase our common stock.
3
The offering
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Common stock offered by us |
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1,750,000 shares |
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Common stock offered by the selling stockholder |
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750,000 shares |
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Common stock to be outstanding after this offering(1) |
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16,322,044 shares |
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Use of proceeds after expenses |
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We estimate that the net proceeds to us from this offering will
be approximately
$ million,
or approximately
$ million
if the underwriters exercise their overallotment option in full.
We intend to use the net proceeds of this offering for working
capital and other general corporate purposes, including
acquisitions. We will not receive any of the proceeds from the
sale of shares of common stock offered by the selling
stockholder. See Use of Proceeds. |
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Nasdaq National Market symbol |
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DIOD |
The number of shares of common stock to be outstanding
immediately after the closing of this offering is based on
14,572,044 shares of our common stock outstanding as of
June 30, 2005 and includes 1,750,000 shares of common
stock offered by us in this offering. Except as otherwise noted
in this prospectus, the number of shares of our common stock
outstanding excludes:
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2,409,922 shares of common
stock issuable after the completion of this offering upon the
exercise of outstanding stock options under our stock incentive
plans at a weighted average exercise price of $11.78 per
share;
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571,462 shares of common
stock available for future grants under our stock incentive
plans; and
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1,613,508 shares of common
stock held by us as treasury stock.
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Unless otherwise indicated, all amounts assume the
underwriters over-allotment option is not exercised.
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(1) |
As of June 30, 2005, we had 16,185,122 shares
issued of which (a) 14,572,044 shares were outstanding
and (b) 1,613,508 were held as treasury stock, which were
issued but not outstanding. |
4
Summary historical consolidated financial data
The following table presents our summary historical consolidated
financial data for the years ended, December 31, 2000,
2001, 2002, 2003 and 2004. Our consolidated statements of income
data for the years ended December 31, 2002, 2003 and 2004
have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. Our
consolidated statements of income data for the years ended
December 31, 2000 and 2001 have been derived from our
audited consolidated financial statements not included in this
prospectus. Our consolidated balance sheet data as of
June 30, 2005 and our consolidated statement of income for
each of the six-month periods ended June 30, 2004 and 2005
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus and which, in
our opinion, have been prepared on the same basis as our audited
consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial
position for these periods. These historical results are not
necessarily indicative of results to be expected for any future
period. You should read this information together with
Selected historical consolidated financial data,
Managements discussion and analysis of financial
condition and results of operations and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
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Six months | |
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Year ended December 31, | |
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ended June 30 | |
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2000 | |
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2001 | |
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2002 | |
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2003 | |
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2004 | |
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2004 | |
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2005 | |
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(unaudited) | |
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(in thousands, except per share data) | |
Consolidated statement of income data:
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Net sales
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$ |
118,462 |
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$ |
93,210 |
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$ |
115,821 |
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$ |
136,905 |
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$ |
185,703 |
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$ |
88,442 |
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$ |
99,198 |
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Cost of goods sold
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81,035 |
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79,031 |
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89,111 |
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100,377 |
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124,968 |
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60,664 |
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65,105 |
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Gross profit
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37,427 |
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14,179 |
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26,710 |
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36,528 |
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60,735 |
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27,778 |
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34,093 |
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Operating expenses
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Selling, general and administrative
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18,814 |
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13,711 |
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16,228 |
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19,586 |
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23,503 |
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11,908 |
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13,888 |
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Research and development
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141 |
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592 |
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1,472 |
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2,049 |
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3,422 |
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1,562 |
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1,750 |
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Loss (gain) on sale of fixed assets
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8 |
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43 |
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1,037 |
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14 |
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15 |
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(105 |
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Total operating expenses
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18,955 |
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14,311 |
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17,743 |
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22,672 |
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26,939 |
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13,485 |
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15,533 |
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Income (loss) from operations
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|
18,472 |
|
|
|
(132 |
) |
|
|
8,967 |
|
|
|
13,856 |
|
|
|
33,796 |
|
|
|
14,293 |
|
|
|
18,560 |
|
Interest expense, net
|
|
|
940 |
|
|
|
2,074 |
|
|
|
1,183 |
|
|
|
860 |
|
|
|
637 |
|
|
|
327 |
|
|
|
234 |
|
Other income (expense)
|
|
|
501 |
|
|
|
785 |
|
|
|
67 |
|
|
|
(5 |
) |
|
|
(418 |
) |
|
|
(124 |
) |
|
|
(21 |
) |
Income (loss) before taxes and minority interest
|
|
|
18,033 |
|
|
|
(1,421 |
) |
|
|
7,851 |
|
|
|
12,991 |
|
|
|
32,741 |
|
|
|
13,842 |
|
|
|
18,305 |
|
Income tax benefit (provision)
|
|
|
(2,496 |
) |
|
|
1,769 |
|
|
|
(1,729 |
) |
|
|
(2,460 |
) |
|
|
(6,514 |
) |
|
|
(2,543 |
) |
|
|
(2,903 |
) |
Minority interest in earnings of joint venture
|
|
|
(642 |
) |
|
|
(224 |
) |
|
|
(320 |
) |
|
|
(436 |
) |
|
|
(676 |
) |
|
|
(319 |
) |
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,895 |
|
|
$ |
124 |
|
|
$ |
5,802 |
|
|
$ |
10,095 |
|
|
$ |
25,551 |
|
|
$ |
10,980 |
|
|
$ |
14,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.23 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.79 |
|
|
$ |
1.91 |
|
|
$ |
0.83 |
|
|
$ |
1.04 |
|
|
Diluted
|
|
$ |
1.08 |
|
|
$ |
0.01 |
|
|
$ |
0.44 |
|
|
$ |
0.70 |
|
|
$ |
1.65 |
|
|
$ |
0.72 |
|
|
$ |
0.93 |
|
Number of shares used in computation(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,107 |
|
|
|
12,216 |
|
|
|
12,277 |
|
|
|
12,731 |
|
|
|
13,404 |
|
|
|
13,181 |
|
|
|
14,319 |
|
|
Diluted
|
|
|
13,833 |
|
|
|
13,322 |
|
|
|
13,297 |
|
|
|
14,406 |
|
|
|
15,471 |
|
|
|
15,306 |
|
|
|
16,071 |
|
Consolidated statement of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
10,208 |
|
|
|
14,938 |
|
|
|
19,990 |
|
|
|
18,821 |
|
|
|
29,300 |
|
|
|
13,781 |
|
|
|
24,138 |
|
Cash (used in) investing activities
|
|
|
(21,389 |
) |
|
|
(8,477 |
) |
|
|
(6,774 |
) |
|
|
(15,289 |
) |
|
|
(26,133 |
) |
|
|
(10,245 |
) |
|
|
(6,845 |
) |
Cash flow from (used in) financing activities
|
|
|
12,100 |
|
|
|
(2,485 |
) |
|
|
(13,995 |
) |
|
|
1,862 |
|
|
|
2,163 |
|
|
|
(1,890 |
) |
|
|
(3,477 |
) |
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(2)
|
|
$ |
22,334 |
|
|
$ |
9,099 |
|
|
$ |
18,461 |
|
|
$ |
24,488 |
|
|
$ |
45,875 |
|
|
$ |
19,995 |
|
|
$ |
25,855 |
|
Footnotes on following page.
5
Footnotes from previous page.
|
|
(1) |
Adjusted for the effect of 3-for-2 stock splits in July 2000
and November 2003. |
|
(2) |
EBITDA represents earnings before net interest expense,
income tax provision, depreciation and amortization. Our
management believes EBITDA is useful to investors because it is
frequently used by securities analysts, investors and other
interested parties in evaluating companies in our industry. In
addition, our management believes that EBITDA is useful in
evaluating our operating performance compared to that of other
companies in our industry because the calculation of EBITDA
generally eliminates the effects of financing and income taxes
and the accounting effects of capital spending, which items may
vary for different companies for reasons unrelated to overall
operating performance. As a result, our management uses EBITDA
as a measure to evaluate the performance of our business.
However, EBITDA is not a recognized measurement under generally
accepted accounting principles, or GAAP, and when analyzing our
operating performance, investors should use EBITDA in addition
to, and not as an alternative for, income from operations and
net income, each as determined in accordance with GAAP. Because
not all companies use identical calculations, our presentation
of EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a
measure of free cash flow for our managements
discretionary use, as it does not consider certain cash
requirements such as a tax and debt service payments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended | |
|
|
Year ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
Reconciliation of net income to EBITDA: | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
|
|
(in thousands) | |
Net income
|
|
$ |
14,895 |
|
|
$ |
124 |
|
|
$ |
5,802 |
|
|
$ |
10,095 |
|
|
$ |
25,551 |
|
|
$ |
10,980 |
|
|
$ |
14,905 |
|
plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
940 |
|
|
|
2,074 |
|
|
|
1,183 |
|
|
|
860 |
|
|
|
637 |
|
|
|
327 |
|
|
|
234 |
|
|
Income tax provision (benefit)
|
|
|
2,496 |
|
|
|
(1,769) |
|
|
|
1,729 |
|
|
|
2,460 |
|
|
|
6,514 |
|
|
|
2,543 |
|
|
|
2,903 |
|
|
Depreciation and amortization
|
|
|
5,003 |
|
|
|
8,670 |
|
|
|
9,747 |
|
|
|
11,073 |
|
|
|
13,173 |
|
|
|
6,145 |
|
|
|
7,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
23,334 |
|
|
$ |
9,099 |
|
|
$ |
18,461 |
|
|
$ |
24,488 |
|
|
$ |
45,875 |
|
|
$ |
19,995 |
|
|
$ |
25,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a summary of our balance sheet as
of June 30, 2005:
|
|
|
on an actual basis; and
|
|
|
on an as adjusted basis to give
effect to the issuance of 1,750,000 shares of common stock
in this offering.
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 | |
Consolidated balance sheet data: |
|
Actual | |
|
As adjusted | |
| |
|
|
(unaudited, in thousands) | |
Cash
|
|
$ |
33,014 |
|
|
|
|
|
Working capital
|
|
|
66,451 |
|
|
|
|
|
Total assets
|
|
|
186,380 |
|
|
|
|
|
Long-term debt, including current portion
|
|
|
10,768 |
|
|
|
10,768 |
|
Total liabilities
|
|
|
53,387 |
|
|
|
53,387 |
|
Total stockholders equity
|
|
|
132,993 |
|
|
|
|
|
6
Risk Factors
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risks and other
information in this prospectus before you decide to buy our
common stock. Our business, financial condition or operating
results may suffer if any of the following risks is realized.
Additional risks and uncertainties not currently known to us may
also adversely affect our business, financial condition or
operating results. If any of these risks or uncertainties
occurs, the trading price of our common stock could decline and
you could lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
Downturns in the highly cyclical semiconductor industry or
changes in end-market demand could affect our operating results
and financial condition.
The semiconductor industry is highly cyclical, and periodically
experiences significant economic downturns characterized by
diminished product demand, production overcapacity and excess
inventory, which can result in rapid erosion in average selling
prices. For example, beginning in the fourth quarter of 2000 and
continuing into 2003, the semiconductor industry experienced
order cancellations and reduced demand for products, resulting
in significant revenue declines, due to excess inventories at
computer and telecommunications equipment manufacturers and
general economic conditions, especially in the technology
sector. The market for discrete semiconductors may experience
renewed, possibly more severe and prolonged, downturns in the
future which may harm our results of operations and reduce the
value of our business.
In addition, we operate exclusively in the discrete
semiconductor segment of the broader semiconductor market and,
as a result, cyclical fluctuations may affect this segment to a
greater extent than they do the broader semiconductor market.
This may cause us to experience greater fluctuations in our
results of operations than compared to some of our broadline
semiconductor manufacturer competitors. In addition, we may
experience significant changes in our profitability as a result
of variations in sales, changes in product mix, changes in
end-user markets and the costs associated with the introduction
of new products. The markets for our products depend on
continued demand in the consumer electronics, computer,
industrial, communications and automotive sectors. These
end-user markets also tend to be cyclical and may also
experience changes in demand that could adversely affect our
operating results and financial condition.
The semiconductor business is highly competitive, and
increased competition may harm our business and our operating
results.
The discrete semiconductor segment of the semiconductor industry
in which we operate is highly competitive. We expect intensified
competition from existing competitors and new entrants.
Competition is based on price, product performance, product
availability, quality, reliability and customer service. We
compete in various markets with companies of various sizes, many
of which are larger and have greater resources or capabilities
as it relates to financial, marketing, distribution, brand name
recognition, research and development, manufacturing and other
resources than we have. As a result, they may be better able to
develop new products, market their products, pursue acquisition
candidates and withstand adverse economic or market conditions.
Most of our current major competitors are broadline
semiconductor manufacturers who often have a wider range of
product types and technologies than we do, since we focus on
discrete semiconductor products. In addition, companies not
currently in direct competition with us may introduce competing
products in the future. Some of our current major competitors
are Fairchild Semiconductor Corporation, International Rectifier
Corporation, ON Semiconductor Corporation, Philips Electronics
N.V., Rohm Electronics
7
Risk Factors
USA LLC, and Vishay Intertechnology, Inc. We may not be able to
compete successfully in the future, and competitive pressures
may harm our financial condition or our operating results.
We receive a significant portion of our net sales from a
single customer. In addition, this customer is also our largest
external supplier and is a related party. The loss of this
customer or supplier could harm our business and results of
operations.
In 2004 and the six months ended June 30, 2005, Lite-On
Semiconductor, our largest stockholder, our largest customer and
the selling stockholder in this offering, accounted for 9.9% and
9.6%, respectively, of our net sales. Lite-On Semiconductor is
also our largest supplier, providing us with discrete
semiconductor products for subsequent sale by us which
represented approximately 17.2% and 14.6%, respectively, of our
net sales, in 2004 and the six months ended June 30, 2005.
The loss of Lite-On Semiconductor as either a customer or a
supplier, or any significant reduction in either the amount of
product it supplies to us, or the volume of orders it places
with us, could materially harm our business and results of
operations.
Delays in initiation of production at new facilities,
implementing new production techniques or resolving problems
associated with technical equipment malfunctions could adversely
affect our manufacturing efficiencies.
Our manufacturing efficiency has been and will be an important
factor in our future profitability, and we may not be able to
maintain or increase our manufacturing efficiency. Our
manufacturing and testing processes are complex, require
advanced and costly equipment and are continually being modified
in our efforts to improve yields and product performance.
Difficulties in the manufacturing process can lower yields.
Technical or other problems could lead to production delays,
order cancellations and lost revenue. In addition, any problems
in achieving acceptable yields, construction delays, or other
problems in upgrading or expanding existing facilities, building
new facilities, problems in bringing other new manufacturing
capacity to full production or changing our process
technologies, could also result in capacity constraints,
production delays and a loss of future revenues and customers.
Our operating results also could be adversely affected by any
increase in fixed costs and operating expenses related to
increases in production capacity if net sales do not increase
proportionately, or in the event of a decline in demand for our
products.
Our wafer fabrication facility is located in Kansas City,
Missouri, while our facilities in Shanghai, China provide
assembly, test and packaging capabilities. Any disruption of
operations at these facilities could have a material adverse
effect on our business, financial condition and results of
operations.
We are and will continue to be under continuous pressure from
our customers and competitors to reduce the price of our
products, which could adversely affect our growth and profit
margins.
Prices for our products tend to decrease over their life cycle.
There is substantial and continuing pressure from customers to
reduce the total cost of purchasing our products. To remain
competitive and retain our customers and gain new ones, we must
continue to reduce our costs through product and manufacturing
improvements. We must also strive to minimize our
customers shipping and inventory financing costs and to
meet their other goals for rationalization of supply and
production. We experienced annual decreases in average selling
prices for our products of 2.4% in 2002, 1.1% in 2003, and 3.1%
in 2004. At times, average selling prices for some of our
standard discrete semiconductors have been below our costs. Our
growth and the profit margins of our products will suffer if we
cannot effectively continue to reduce our costs and keep our
product prices competitive.
8
Risk Factors
Our customer orders are subject to cancellation or
modification usually with no penalty. High volumes of order
cancellation or reductions in quantities ordered could adversely
affect our results of operations and financial condition.
All of our customer orders are subject to cancellation or
modification, usually with no penalty to the customer. Orders
are generally made on a purchase order basis, rather than
pursuant to long-term supply contracts, and are booked from one
to twelve months in advance of delivery. The rate of booking new
orders can vary significantly from month to month. We and the
semiconductor industry as a whole are experiencing a trend
towards shorter lead-times, which is the amount of time between
the date a customer places an order and the date the customer
requires shipment. Furthermore, our industry is subject to rapid
changes in customer outlook and periods of excess inventory due
to changes in demand in the end markets our industry serves. As
a result, many of our purchase orders are revised, and may be
cancelled, with little or no penalty and with little or no
notice. However, we must still commit production and other
resources to fulfilling these orders even though they may
ultimately be cancelled. If a significant number of orders are
cancelled or product quantities ordered are reduced, and we are
unable to timely generate replacement orders, we may build up
excess inventory and our results of operations and financial
condition may suffer.
New technologies could result in the development of new
products by our competitors and a decrease in demand for our
products, and we may not be able to develop new products to
satisfy changes in demand, which could result in a decrease in
net sales and loss of market share.
Our product range and new product development program is focused
on discrete semiconductor products. Our failure to develop new
technologies, or anticipate or react to changes in existing
technologies, either within or outside of the discrete
semiconductor market, could materially delay development of new
products, which could result in a decrease in our net sales and
a loss of market share to our competitors. The semiconductor
industry is characterized by rapidly changing technologies and
industry standards, together with frequent new product
introductions. This includes the development of new types of
technology or the improvement of existing technologies, such as
analog and digital technology that compete with, or seek to
replace discrete semiconductor technology. Our financial
performance depends on our ability to design, develop,
manufacture, assemble, test, market and support new products and
product enhancements on a timely and cost-effective basis. New
products often command higher prices and, as a result, higher
profit margins. We may not successfully identify new product
opportunities or develop and bring new products to market or
succeed in selling them into new customer applications in a
timely and cost-effective manner.
Products or technologies developed by other companies may render
our products or technologies obsolete or noncompetitive and,
since we operate primarily in the discrete segment of the
broader semiconductor industry, this may have a greater effect
on us than it would if we were a broadline semiconductor
manufacturer with a wider range of product types and
technologies. Many of our competitors are larger and more
established international companies with greater engineering and
research and development resources than us. Our failure to
identify or capitalize on any fundamental shifts in technologies
in our product markets, relative to our competitors, could harm
our business, have a material adverse effect on our competitive
position within our industry and harm our relationships with our
customers. 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, which
could harm our business.
9
Risk Factors
We may be subject to claims of infringement of third-party
intellectual property rights or demands that we license
third-party technology, which could result in significant
expense and reduction in our intellectual property rights.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights. From
time to time, third parties have asserted and may in the future
assert patent, copyright, trademark and other intellectual
property rights to technologies that are important to our
business and have demanded and may in the future demand that we
license their patents and technology. Any litigation to
determine the validity of allegations that our products infringe
or may infringe these rights, including claims arising through
our contractual indemnification of our customers, or claims
challenging the validity of our patents, regardless of its merit
or resolution, could be costly and divert the efforts and
attention of our management and technical personnel. We may not
prevail in litigation given the complex technical issues and
inherent uncertainties in intellectual property litigation. If
litigation results in an adverse ruling we could be required to:
|
|
|
pay substantial damages for past,
present and future use of the infringing technology;
|
|
|
cease the manufacture, use or sale
of infringing products;
|
|
|
discontinue the use of infringing
technology;
|
|
|
expend significant resources to
develop non-infringing technology;
|
|
|
pay substantial damages to our
customers or end users to discontinue use or replace infringing
technology with non-infringing technology;
|
|
|
license technology from the third
party claiming infringement, which license may not be available
on commercially reasonable terms, or at all; or
|
|
|
relinquish intellectual property
rights associated with one or more of our patent claims, if such
claims are held invalid or otherwise unenforceable.
|
We depend on third-party suppliers for timely deliveries of
raw materials, parts and equipment, as well as finished products
from other manufacturers, and our results of operations could be
adversely affected if we are unable to obtain adequate supplies
in a timely manner.
Our manufacturing operations depend upon obtaining adequate
supplies of raw 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 raw
materials, parts and equipment in a timely manner or if the
costs of raw materials, parts or equipment were to increase
significantly. Our business could also be adversely affected if
there is a significant degradation in the quality of raw
materials used in our products, or if the raw materials give
rise to compatibility or performance issues in our products, any
of which could lead to an increase in customer returns or
product warranty claims. Although we maintain rigorous quality
control systems, errors or defects may arise from a supplied raw
material and be beyond our detection or control. Any
interruption in, or change in quality of, the supply of raw
materials, parts or equipment needed to manufacture our products
could adversely affect our business and harm our results of
operations and our reputation with our customers.
In addition, we sell finished products from other manufacturers.
From time to time, such manufacturers may extend lead times,
limit supplies or increase prices due to capacity constraints or
other factors. We have no long-term purchase contracts with any
of these manufacturers and, therefore, have no contractual
assurances of continued supply, pricing or access to finished
products that we sell, and any such manufacturer could
discontinue supplying to us at any time. Additionally,
10
Risk Factors
some of our suppliers of finished products or wafers compete
directly with us and may in the future choose not to supply
products to us.
If we do not succeed in continuing to vertically integrate
our business, we will not realize the cost and other
efficiencies we anticipate and our ability to compete, profit
margins and results of operations may suffer.
We are continuing to vertically integrate our business. Key
elements of this strategy include continuing to expand the reach
of our sales organization, expand our manufacturing capacity,
expand our wafer foundry and research and development capability
and expand our marketing, product development, package
development and assembly/testing operations in company-owned
facilities or through the acquisition of established
contractors. There are certain risks associated with our
vertical integration strategy, including:
|
|
|
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;
|
|
|
difficulties in continuing
expansion of our operations in Asia and Europe, because of the
distance from our U.S. headquarters and differing
regulatory and cultural environments;
|
|
|
the need for skills and techniques
that are outside our traditional core expertise;
|
|
|
less flexibility in shifting
manufacturing or supply sources from one region to another;
|
|
|
even when independent suppliers
offer lower prices, we would continue to acquire wafers from our
captive manufacturing facility, which may result in us having
higher costs than our competitors;
|
|
|
difficulties developing and
implementing a successful research and development team; and
|
|
|
difficulties developing, and
gaining market acceptance of, our 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. In addition, we
may not realize the cost, operating and other efficiencies that
we expect from continued vertical integration. If we fail to
successfully vertically integrate our business, our ability to
compete, profit margins and results of operations may suffer.
Part of our growth strategy involves identifying and
acquiring companies with complementary product lines or
customers. We may be unable to identify suitable acquisition
candidates or consummate desired acquisitions and, if we do make
any acquisitions, we may be unable to successfully integrate any
acquired companies with our operations.
A significant part of our growth strategy involves acquiring
companies with complementary product lines, customers or other
capabilities. For example, in fiscal year 2000, we acquired
FabTech, Inc., a wafer fabrication company, in order to have our
own wafer manufacturing capabilities. While we do not currently
have any agreements in place, or any active negotiations
underway, with respect to any acquisition, we intend to continue
to expand and diversify our operations by making further
acquisitions. However, we may be unsuccessful in identifying
suitable acquisition candidates, or we may be unable to
consummate a desired acquisition. To the extent we do make
acquisitions, if we are unsuccessful in integrating these
companies or their operations 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. In addition, we may not realize all of
the benefits we anticipate from any such acquisitions. Some of
the risks that may
11
Risk Factors
affect our ability to integrate or realize any anticipated
benefits from acquisitions that we may make include those
associated with:
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unexpected losses of key employees
or customers of the acquired company;
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bringing the acquired
companys standards, processes, procedures and controls
into conformance with our operations;
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coordinating our new product and
process development;
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hiring additional management and
other critical personnel;
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increasing the scope, geographic
diversity and complexity of our operations;
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difficulties in consolidating
facilities and transferring processes and know-how;
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difficulties in reducing costs of
the acquired entitys business;
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diversion of managements
attention from the management of our business; and
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adverse effects on existing
business relationships with customers.
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We are subject to many environmental laws and regulations
that could affect our operations or result in significant
expenses.
We are subject to a variety of U.S. federal, state, local
and foreign 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 both in the United States where our wafer
fabrication facility is located, and in China where our assembly
test and packaging facilities are located. Some of these
regulations in the United States include the Federal Clean Water
Act, Clean Air Act, Resource Conservation and Recovery Act,
Comprehensive Environmental Response, Compensation, and
Liability Act and similar state statutes and regulations. 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 such additional expenses, our
product costs could significantly increase, materially 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. Our operations affected by such
requirements include, among others: the disposal of wastewater
containing residues from our manufacturing operations through
publicly operated treatment works or sewer systems, and which
may be subject to volume and chemical discharge limits and may
also require discharge permits; and the use, storage and
disposal of materials that may be classified as toxic or
hazardous. Any of these may result in, or may have resulted in,
environmental conditions for which we could be liable.
Some environmental laws impose liability, sometimes without
fault, for investigating or cleaning up contamination on or
emanating from our currently or formerly owned, leased or
operated property, as well as for damages to property or natural
resources and for personal injury arising out of such
contamination. Such liability may also be joint and several,
meaning that we could be held responsible for more than our
share of the liability involved, or even the entire share. In
addition, the presence of environmental contamination could also
interfere with ongoing operations or adversely affect our
ability to sell or lease our properties. Environmental
requirements may also limit our ability to identify suitable
sites for new or expanded plants. Although we conduct
environmental due diligence on properties that we operate, our
diligence may not have revealed all environmental conditions on
those properties. Discovery of additional contamination for
which we are responsible, the enactment of new
12
Risk Factors
laws and regulations, or changes in how existing requirements
are enforced, could require us to incur additional costs for
compliance or subject us to unexpected liabilities.
Our products may be found to be defective and, as a result,
product liability claims may be asserted against us which may
harm our business and our reputation with our customers.
Our products are typically sold at prices that are significantly
lower than the cost of the equipment or other goods in which
they are incorporated. For example, our products that are
incorporated into a personal computer may be sold for several
cents, whereas the personal computer might be sold by the
computer maker for several hundred dollars. Although we maintain
rigorous quality control systems, we shipped over
7.5 billion individual semiconductor devices in 2004 to
customers around the world, and in the ordinary course of our
business we receive warranty claims for some of these products
that are defective, or that do not perform to published
specifications. Since a defect or failure in our product could
give rise to failures in the end products that incorporate them
(and consequential claims for damages against our customers from
their customers), we may face claims for damages that are
disproportionate to the revenues and profits we receive from the
products involved. In addition, our ability to reduce such
liabilities may be limited by the laws or the customary business
practices of the countries where we do business. Even in cases
where we do not believe we have legal liability for such claims,
we may choose to pay for them to retain a customers
business or goodwill or to settle claims to avoid protracted
litigation. Our results of operations and business could be
adversely affected as a result of a significant quality or
performance issue in our products, if we are required or choose
to pay for the damages that result. Although we currently have
product liability insurance, we may not have sufficient
insurance coverage, or that we will have sufficient resources,
to satisfy all possible product liability claims. In addition,
any perception that our products are defective would likely
result in reduced sales of our products, loss of customers and
harm to our reputation.
We may fail to attract or retain the qualified technical,
sales, marketing and management personnel required to operate
our business successfully.
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. For example, we have faced, and continue to face,
intense competition for qualified technical and other personnel
in Shanghai, China, where our assembly, test and packaging
facilities are located. A number of U.S. and multi-national
corporations, both in the semiconductor industry and in other
industries, have recently established and are continuing to
establish factories and plants in this region and the
competition for qualified personnel has increased significantly
as a result. 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.
We may not be able to maintain our growth or achieve future
growth and such growth may place a strain on our management and
on our systems and resources.
Our ability to successfully grow our business within the
discrete semiconductor market requires effective planning and
management. Our past growth, and our targeted future growth, may
place a significant strain on our management and on our 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. If we are
unable to effectively plan and manage our growth
13
Risk Factors
effectively, our business and prospects will be harmed and we
will not be able to maintain our profit growth or achieve future
growth.
Our business may be adversely affected by obsolete
inventories as a result of changes in demand for our products
and change in life cycles of our products.
The life cycles of some of our products depend heavily upon the
life cycles of the end products into which our are devices are
designed. These types of end-market 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. In addition, some customers
restrict how far back the date of manufacture for our products
can be, and therefore some of our products inventory may become
obsolete.
If OEMs do not design our products into their applications, a
portion of our net sales may be adversely affected.
We expect an increasingly significant portion of net sales will
come from products we design specifically for our customers.
However, we may be unable to achieve these design wins. In
addition, a design win from a customer does not necessarily
guarantee future sales to that customer. Without design wins
from OEMs, we would only be able to sell our products to these
OEMs as a second source, which usually means we are only able to
sell a limited amount of product to them. Once an OEM designs
another suppliers semiconductors into one of its product
platforms, it is more difficult for us to achieve future design
wins with that OEMs product platform because changing
suppliers involves significant cost, time, effort and risk to an
OEM. Achieving a design win with a customer does not ensure that
we will receive is significant revenues from that customer and
we may be unable to convert design into actual sales. Even after
a design win, the customer is not obligated to purchase our
products and can choose at any time to stop using our products,
if, for example, its own products are not commercially
successful.
We rely heavily on our internal electronic information and
communications systems, and any system outage could adversely
affect our business and results of operations.
All of our operations, other than FabTech, operate on a single
technology platform. To manage our international operations
efficiently and effectively, we rely heavily on our Enterprise
Resource Planning system, internal electronic information and
communications systems and on systems or support services from
third parties. Any of these systems are subject to electrical or
telecommunications outages, computer hacking or other general
system failure. Difficulties in upgrading or expanding our
Enterprise Resource Planning system or 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.
We are subject to interest rate risk which could have an
adverse effect on our cost of working capital and interest
expenses.
We have credit facilities with U.S. and Asian financial
institutions, as well as other debt instruments, with interest
rates equal to LIBOR or similar indices plus a negotiated
margin. A rise in interest rates could have an adverse impact
upon our cost of working capital and our interest expense. As of
June 30, 2005, our outstanding interest-bearing debt was
$9.6 million. An increase of 1.0% in interest rates would
increase our annual interest rate expense by approximately
$96,000.
14
Risk Factors
If we fail to maintain an effective system of internal
controls or discover material weaknesses in our internal
controls over financial reporting, we may not be able to report
our financial results accurately or detect fraud, which could
harm our business and the trading price of our common stock.
Effective internal controls are necessary for us to produce
reliable financial reports and are important in our effort to
prevent financial fraud. We are required to periodically
evaluate the effectiveness of the design and operation of our
internal controls. These evaluations may result in the
conclusion that enhancements, modifications or changes to our
internal controls are necessary or desirable. While management
evaluates the effectiveness of our internal controls on a
regular basis, these controls may not always be effective. There
are inherent limitations on the effectiveness of internal
controls including collusion, management override, and failure
of human judgment. Because of this, control procedures are
designed to reduce rather than eliminate business risks. In
connection with their audit of our financial statements for
2004, our independent registered public accounting firm
identified one significant deficiency in our internal controls,
as well as several other deficiencies including a need for
additional accounting personnel. If we fail to maintain an
effective system of internal controls or if management or our
independent registered public accounting firm were to discover
material weaknesses in our internal controls, we may be unable
to produce reliable financial reports or prevent fraud and it
could harm our financial condition and results of operations and
result in loss of investor confidence and a decline in our stock
price.
Terrorist attacks, or threats or occurrences of other
terrorist activities whether in the United States or
internationally may affect the markets in which our common stock
trades, the markets in which we operate and our
profitability.
Terrorist attacks, or threats or occurrences of other terrorist
or related activities, whether in the United States or
internationally, may affect the markets in which our common
stock trades, the markets in which we operate and our
profitability. Future terrorist or related activities could
affect our domestic and international sales, disrupt our supply
chains and impair our ability to produce and deliver our
products. Such activities could affect our physical facilities
or those of our suppliers or customers. Such terrorist attacks
could cause ports or airports to or through which we ship to be
shut down, thereby preventing the delivery of raw materials and
finished goods to or from our manufacturing facilities in
Shanghai, China or Kansas City, Missouri, or to our regional
sales offices. Due to the broad and uncertain effects that
terrorist attacks have had on financial and economic markets
generally, we cannot provide any estimate of how these
activities might affect our future results.
RISKS RELATED TO OUR INTERNATIONAL OPERATIONS
Our international operations subject us to risks that could
adversely affect our operations.
We expect net sales from foreign markets to continue to
represent a significant portion of our total net sales. In
addition, the majority of our manufacturing facilities are
located overseas in China. In 2004 and in the six months ended
June 30, 2005, net sales to customers outside the United
States represented 71.4% and 74.6%, respectively, of our net
sales. There are risks inherent in doing business
internationally, including:
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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;
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compliance with trade or other
laws in a variety of jurisdictions;
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trade restrictions, transportation
delays, work stoppages, and economic and political instability;
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changes in import/export
regulations, tariffs and freight rates;
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15
Risk Factors
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difficulties in collecting
receivables and enforcing contracts;
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currency exchange rate
fluctuations;
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restrictions on the transfer of
funds from foreign subsidiaries to the United States;
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the possibility of international
conflict, particularly between or among China and Taiwan and the
United States;
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legal regulatory, political and
cultural differences among the countries in which we do
business; and
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longer customer payment terms.
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Any or all of these factors could cause harm to our business.
We have significant operations and assets in China, Taiwan
and Hong Kong and, as a result, will be subject to risks
inherent in doing business in those jurisdictions, which may
adversely affect our financial performance.
We have a significant portion of our assets in mainland China,
Taiwan and Hong Kong. Our ability to operate in China, Taiwan
and Hong Kong may be adversely affected by changes in those
jurisdictions laws and regulations, including those
relating to taxation, import and export tariffs, environmental
regulations, land use rights, property and other matters. In
addition, our results of operations in China, Taiwan and Hong
Kong are subject to the economic and political situation there.
We believe that our operations in China, Taiwan and Hong Kong
are in compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations.
Changes in the political environment or government policies in
those jurisdictions could result in revisions to laws or
regulations or their interpretation and enforcement, increased
taxation, restrictions on imports, import duties or currency
revaluations. In addition, a significant destabilization of
relations between or among China, Taiwan or Hong Kong and the
United States could result in restrictions or prohibitions on
our operations or the sale of our products or the forfeiture of
our assets in these jurisdictions. There can be no certainty as
to the application of the laws and regulations of these
jurisdictions in particular instances. Enforcement of existing
laws or agreements may be sporadic and implementation and
interpretation of laws inconsistent. Moreover, there is a high
degree of fragmentation among regulatory authorities, resulting
in uncertainties as to which authorities have jurisdiction over
particular parties or transactions. The possibility of political
conflict between these countries or with the United States could
have an adverse impact upon our ability to transact business in
these jurisdictions and to generate profits.
We are subject to foreign currency risk as a result of our
international operations.
We face exposure to adverse movements in foreign currency
exchange rates, primarily to some Asian currencies and, to a
lesser extent, the Euro. For example, many of our employees, who
are located in China are paid in the Chinese Yuan and,
accordingly, an increase in the value of the Yuan compared to
the U.S. dollar could increase our operating expenses. In
addition, we sell our products in various currencies and,
accordingly, a decline in the value of any such currency against
the U.S. dollar, which is our primary functional currency,
could create a decrease in our net sales. Our foreign currency
risk may change over time as the level of activity in foreign
markets grows and could have an adverse impact upon our
financial results. These currencies are principally the Chinese
Yuan, the Taiwanese dollar, the Japanese Yen, the Euro and the
Hong Kong dollar. The Chinese government has recently
16
Risk Factors
taken action to permit the Yuan to U.S. dollar exchange
rate to fluctuate, which may exacerbate our exposure to foreign
currency risk and harm our results of operations. Currently, we
do not employ hedging techniques designed to mitigate foreign
currency exposures and, therefore, we could experience currency
losses as these currencies fluctuate against the
U.S. dollar.
We may not continue to receive preferential tax treatment in
China, thereby increasing our income tax expense and reducing
our net income.
As an incentive for establishing our first Shanghai-based
manufacturing subsidiary, which we refer to as Diodes-China, in
1996 and in accordance with the taxation policies of China,
Diodes-China, received preferential tax treatment for the years
ended December 31, 1996 through 2004 and the six months
ended June 30, 2005.
Diodes-China is located in the Songjiang district, where the
standard central government tax rate is 24.0%. However, as an
incentive for establishing Diodes-China, the earnings of
Diodes-China were subject to a 0% tax rate by the central
government from 1996 through 2000, and to a 12.0% tax rate from
2001 through 2004. For 2005 and future years,
Diodes-Chinas earnings will continue to be subject to a
12.0% tax rate provided it exports at least 70.0% of its
net sales. In addition, due to a $18.5 million permanent
re-investment of Diodes-China earnings in 2004, Diodes-China has
applied to the Chinese government for additional preferential
tax treatment on earnings that are generated by this
$18.5 million investment. If approved, those earnings will
be exempted from central government income tax for two years,
and then subject to a 12.0% tax rate for the following
three years.
In addition, the earnings of Diodes-China would ordinarily be
subject to a standard local government tax rate of 3.0%.
However, as an incentive for establishing Diodes-China the local
government waived this tax from 1996 through the first six
months of 2005. Management expects this tax to be waived for at
least the remainder of 2005, however, the local government can
re-impose this tax at any time in its discretion.
In 2004, we established our second Shanghai-based manufacturing
facility, Diodes-Shanghai, located in the Songjiang Export Zone
of Shanghai, China. In the Songjiang Export Zone, the central
government standard tax rate is 15.0%. There is no local
government tax. During 2004, Diodes-Shanghai earnings were
subject to the standard 15.0% central government tax rate. As an
incentive for establishing Diodes-Shanghai, for 2005 and 2006
the earnings of Diodes-Shanghai are exempted from central
government income tax, and for the years 2007 through 2009 its
earnings will be subject to a 7.5% tax rate. From 2010 onward,
provided that Diodes-Shanghai exports over 70.0% of its net
sales, its earnings will be subject to a 10.0% tax rate.
We may not be able to continue receiving this preferential tax
treatment, which may cause an increase in our income tax
expense, thereby reducing our net income.
The distribution of any earnings of our foreign subsidiaries
to the United States may be subject to U.S. income taxes,
thus reducing our net income.
We are currently planning, and may in the future plan, to
distribute earnings of our foreign subsidiaries from Asia to the
United States. We may be required to pay U.S. income taxes
on these earnings to the extent we have not previously recorded
deferred U.S. taxes on such earnings. Any such taxes would
reduce our net income in the period in which these earnings are
distributed.
On October 22, 2004, the American Jobs Creation Act, or
AJCA, was signed into law. Among other items, the AJCA
establishes a phased repeal of the extraterritorial income
exclusion, a new incentive tax deduction for
U.S. corporations to repatriate cash from foreign
subsidiaries equal to 85% of cash
17
Risk Factors
dividends received in the year elected that exceeds a
base-period amount, and significantly revises the taxation of
U.S. companies doing business abroad.
In December 2004, we estimated that we would repatriate a
minimum of $8.0 million of cash from our subsidiaries in
China and Hong Kong under the AJCA, and recorded a corresponding
income tax expense in 2004 of approximately $1.3 million.
Under the AJCA guidelines, we are developing a domestic
reinvestment plan, covering items such as our U.S. credit
agreement repayment, U.S. capital expenditures and
U.S. research and development activities, among others, to
utilize the $8.0 million dividend repatriation. In
addition, we are completing a quantitative analysis of the
benefits of the AJCA, the foreign tax credit implications, and
state and local tax consequences of a dividend from our foreign
subsidiaries to us, to maximize the tax benefits of such a
dividend in 2005. In the six months ended June 30, 2005, we
accrued $370,000 for U.S. taxes in connection with a
potential increase in the planned $8.0 million dividend. We
are currently evaluating the benefits of further increasing the
dividend, including the additional associated income tax expense.
We are also evaluating the need to provide additional deferred
taxes for the future earnings of Diodes-China, Diodes-Shanghai
and Diodes-Hong Kong, to the extent such earnings may be
appropriated for distribution to us in the United States, and as
further investment strategies with respect to foreign earnings
are determined. Should our U.S. cash requirements exceed
the cash that is available to us from our U.S. operations
or under our U.S. credit facilities, cash can be obtained
from our foreign subsidiaries. However, the distribution of
unappropriated funds to the United States in excess of that
which has already been taxed in the United States will require
the recording of U.S. federal and state income tax by the
U.S. entity receiving such funds, thus reducing our net
income in the period any such distribution is made.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
Variations in our quarterly operating results may cause our
stock price to be volatile.
We may experience, substantial variations in net sales and
operating results from quarter to quarter. We believe that the
factors that influence this variability of quarterly results
include:
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general economic conditions in the
countries where we sell our products;
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seasonality and variability in the
computer and communications market and our other end markets;
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the timing of our and our
competitors new product introductions;
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product obsolescence;
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the scheduling, rescheduling and
cancellation of large orders by our customers;
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the cyclical nature of demand for
our customers products;
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our ability to develop new process
technologies and achieve volume production at our fabrication
facilities;
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changes in manufacturing yields;
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adverse movements in exchange
rates, interest rates or tax rates; and
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the availability of adequate
supply commitments from our outside suppliers or subcontractors.
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Accordingly, a comparison of our results of operations from
period to period is not necessarily meaningful to investors and
our results of operations for any period do not necessarily
indicate future performance. Variations in our quarterly results
may trigger volatile changes in our stock price.
18
Risk Factors
We may enter into future acquisitions and take certain
actions in connection with such acquisitions which could affect
the price of our common stock.
As part of our growth 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:
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use a significant portion of our
available cash;
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issue equity securities, which
would dilute current stockholders percentage ownership;
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incur substantial debt;
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incur or assume contingent
liabilities, known or unknown;
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incur amortization expenses
related to intangibles; and
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incur large, immediate accounting
write-offs.
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Such actions by us could harm our results from operations and
adversely affect the price of our common stock.
Our directors, executive officers and significant
stockholders hold a substantial portion of our common stock,
which may lead to conflicts with other stockholders over
corporate transactions and other corporate matters.
After giving effect to this offering, our directors, executive
officers and our affiliate, Lite-On Semiconductor, will
beneficially own 32.3% of our outstanding common stock,
including options to purchase shares of our common stock that
are exercisable within 60 days of August 15, 2005.
These stockholders, acting together, will be able to influence
significantly all matters requiring stockholder approval,
including the election of directors and significant corporate
transactions such as mergers or other business combinations.
This control may delay, deter or prevent a third party from
acquiring or merging with us, which could adversely affect the
market price of our common stock.
After giving effect to this offering, Lite-On Semiconductor, our
largest stockholder, will own 23.5% of our common stock. Some of
our directors and executive officers may have potential
conflicts of interest because of their positions with Lite-On
Semiconductor or their ownership of Lite-On Semiconductor common
stock. Some of our directors are Lite-On Semiconductor directors
and officers, and our non-employee chairman of the board is
chairman of the board of Lite-On Semiconductor. Several of our
directors and executive officers own Lite-On Semiconductor
common stock and hold options to purchase Lite-On Semiconductor
common stock. Service on our board of directors and as a
director or officer of Lite-On Semiconductor, or ownership of
Lite-On Semiconductor common stock by our directors and
executive officers, could create, or appear to create, actual or
potential conflicts of interest when directors and officers are
faced with decisions that could have different implications for
us and Lite-On Semiconductor. For example, potential conflicts
could arise in connection with decisions involving the common
stock issued to Lite-On Semiconductor, or under the other
agreements we may enter into with Lite-On Semiconductor. In 2004
and the six months ended June 30, 2005, Lite-On
Semiconductor was our largest external supplier of discrete
semiconductor products for subsequent sale by us. In 2004 and
the six months ended June 30, 2005, approximately 17.2% and
14.6%, respectively, of our net sales were from products
manufactured by Lite-On Semiconductor. In addition to being our
largest external supplier of finished products in each of these
periods, we sold silicon wafers to Lite-On Semiconductor
totaling 9.9% and 9.6%, respectively, during such periods, of
our net sales, making Lite-On Semiconductor our largest customer.
19
Risk Factors
We may have difficulty resolving any potential conflicts of
interest with Lite-On Semiconductor, and even if we do, the
resolution may be less favorable than if we were dealing with an
entirely unrelated third party.
Our early corporate records are incomplete. As a result, we
may have difficulty in assessing and defending against claims
relating to rights to our common stock purporting to arise
during periods for which our records are incomplete.
We were formed in 1959 under the laws of California and
reincorporated in Delaware in 1969. We have had several transfer
agents over the past 45 years. In addition, our early
corporate records, including our stock ledger, are incomplete.
As a result, we may have difficulty in assessing and defending
against claims relating to rights to our common stock purporting
to arise during periods for which our records are incomplete.
We will have broad discretion in how we use the proceeds of
this offering, and we may not use these proceeds effectively.
We will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the
opportunity, as part of your investment decision, to assess
whether we will use the proceeds effectively. We currently
intend to use the net proceeds for working capital and other
general corporate purposes, including acquisitions. We have not
finalized yet the amount of net proceeds that we will use
specifically for each of these purposes. We may use the net
proceeds for corporate purposes that do not yield a significant
return or any return at all for our stockholders.
The future sale of our common stock could negatively affect
our stock price after this offering.
After this offering, based on the number of outstanding shares
as of August 15, 2005, we will have approximately
16,370,683 shares of common stock outstanding. Sales of a
substantial number of our shares of common stock in the public
market following this offering or the expectation of such sales
could cause the market price of our common stock to decline. All
the shares sold in this offering will be freely tradeable,
except that any shares purchased by our affiliates will remain
subject to certain restrictions.
Lite-On Semiconductor, the selling stockholder in this offering,
and our largest stockholder, will own 23.5% of our common stock
after this offering. Any future sales of our common stock by
Lite-On Semiconductor, or a perception among investors that such
sales may occur, could negatively affect the price of our common
stock.
20
Special note regarding forward-looking statements
Many of the statements included in this prospectus contain
forward-looking statements and information relating to our
company. We generally identify forward-looking statements by the
use of terminology such as may, will,
could, should, potential,
continue, expect, intend,
plan, estimate, anticipate,
believe, or similar phrases or the negatives of such
terms. We base these statements on our beliefs as well as
assumptions we made using information currently available to us.
Such statements are subject to risks, uncertainties and
assumptions, including those identified in Risk
factors, as well as other matters not yet known to us or
not currently considered material by us. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected. Given these
risks and uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements.
Forward-looking statements do not guarantee future performance
and should not be considered as statements of fact.
You should not unduly rely on these forward-looking statements,
which speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to publicly update
or revise any forward-looking statements to reflect new
information or future events or otherwise. You should, however,
review the factors and risks we describe in our annual,
quarterly and other reports we will file with the Securities and
Exchange Commission, or SEC, after the date of this prospectus.
See Where you can find additional information.
Industry data
This prospectus includes statistical data about the
semiconductor industry that comes from Gartner, Inc., an
independent industry research firm. All semiconductor market
data attributed to Gartner are taken from the Forecast:
Semiconductor, Worldwide, 2002-2010 (3Q05 Update) report
published August 15, 2005, except for: 1998 discrete
semiconductor segment data is taken from the Worldwide
Semiconductor Market Trends: Discretes, 2003 report
published August 7, 2003; and 2000 through 2001 overall
semiconductor industry data is taken from the
Semiconductor Forecast Worldwide Forecast
Database report published August 15, 2005. This type
of data represents the estimates of Gartner only and data from
Gartner is specifically referenced each time it is used.
21
Use of proceeds
We estimate that the net proceeds to us from the sale of
1,750,000 shares of common stock that we are offering will
be approximately
$ million
after the payment of underwriting discounts and commissions and
the estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we
estimate the net proceeds to us from this offering to be
approximately
$ .
We will not receive any of the proceeds from the sale of shares
of common stock offered by the selling stockholder.
We intend to use the net proceeds from this offering for working
capital and other general corporate purposes, including
acquisitions. We have no current agreements or commitments with
respect to any acquisition, and we currently are not engaged in
negotiations with respect to any acquisition. Accordingly, our
management will have broad discretion in applying the net
proceeds of this offering.
Pending application of the net proceeds, as described above, we
intend to invest the net proceeds of this offering in
short-term, investment-grade, interest-bearing securities.
Market price of common stock
Our common stock is listed on the Nasdaq National Market under
the symbol DIOD. The following table sets forth the
quarterly range of high and low reported sale prices of our
common stock on the Nasdaq National Market for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Common stock price | |
|
|
| |
|
|
High | |
|
Low | |
| |
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
8.40 |
|
|
$ |
6.25 |
|
Second quarter
|
|
|
14.63 |
|
|
|
7.01 |
|
Third quarter
|
|
|
16.60 |
|
|
|
11.79 |
|
Fourth quarter
|
|
|
21.75 |
|
|
|
13.41 |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
26.96 |
|
|
$ |
18.93 |
|
Second quarter
|
|
|
25.25 |
|
|
|
20.15 |
|
Third quarter
|
|
|
26.20 |
|
|
|
16.15 |
|
Fourth quarter
|
|
|
29.66 |
|
|
|
21.50 |
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
27.86 |
|
|
$ |
19.07 |
|
Second quarter
|
|
|
33.85 |
|
|
|
24.70 |
|
Third Quarter (through August 24, 2005)
|
|
|
38.80 |
|
|
|
30.80 |
|
On November 25, 2003, we effected a three-for-two stock
split in the form of a 50% stock dividend. The sales prices
above prior to such date have been adjusted to reflect the stock
split.
On August 24, 2005, the last sale price per share for our
common stock as reported on the Nasdaq National Market was
$37.00 per share. As of August 15, 2005, there were
595 holders of record of our common stock.
Dividend policy
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
near future. Any determination in the future to pay dividends
will depend upon our financial condition, capital requirements,
operating results and other factors deemed relevant by our board
of directors, including any contractual or statutory
restrictions on our ability to pay dividends.
22
Capitalization
The following table sets forth our cash and capitalization as of
June 30, 2005:
|
|
|
on an actual basis; and
|
|
|
on an as adjusted basis to give
effect to the issuance of 1,750,000 shares of common stock
by us in this offering, resulting in estimated proceeds of
$ ,
after deducting underwriting discounts and commissions and the
estimated offering expenses payable by us.
|
You should read this table together with Managements
discussion and analysis of financial condition and results of
operations, Description of capital stock and
our consolidated financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
June 30, 2005 | |
|
|
| |
|
|
Actual | |
|
As adjusted | |
| |
|
|
(in thousands, except share | |
|
|
and per share data, | |
|
|
unaudited) | |
Cash
|
|
$ |
33,014 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$ |
10,768 |
|
|
$ |
10,768 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Class A convertible preferred stock, par value
$1.00 per share, 1,000,000 shares authorized, no
shares issued and outstanding, actual and as adjusted
|
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.662/3 per
share, 30,000,000 shares authorized, 16,185,552 shares
issued, actual; 30,000,000 shares authorized,
17,935,552 shares issued, as adjusted
|
|
|
10,791 |
|
|
|
|
|
|
Additional paid-in capital
|
|
|
26,946 |
|
|
|
|
|
|
Retained earnings
|
|
|
96,235 |
|
|
|
96,235 |
|
Less: Treasury stock 1,613,508 shares of common
stock, at cost
|
|
|
1,782 |
|
|
|
1,782 |
|
Less: Accumulated other comprehensive income
|
|
|
(803 |
) |
|
|
(803 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
132,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
176,775 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The table above excludes:
|
|
|
2,409,922 shares of common
stock issuable after the completion of this offering upon the
exercise of outstanding stock options under our stock incentive
plans at a weighted average exercise price of $11.78 per
share; and
|
|
|
571,462 shares of common
stock available for future grants under our stock incentive
plans.
|
23
Selected historical consolidated financial data
The following table presents our summary historical consolidated
financial data for the years ended, December 31, 2000,
2001, 2002, 2003 and 2004. Our consolidated statements of income
data for the years ended December 31, 2002, 2003 and 2004
have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. Our
consolidated statements of income data for the years ended
December 31, 2000 and 2001 have been derived from our
audited consolidated financial statements not included in this
prospectus. Our consolidated balance sheet data as of
June 30, 2005 and our consolidated statement of income for
each of the six-month periods ended June 30, 2004 and 2005
have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus and which, in
our opinion, have been prepared on the same basis as our audited
consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial
position for these periods. These historical results are not
necessarily indicative of results to be expected for any future
period. You should read this information together with
Summary historical consolidated financial data,
Managements discussion and analysis of financial
condition and results of operations, and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months | |
|
|
Year ended December 31, | |
|
ended June 30, | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
|
(in thousands, except per share data) | |
|
(unaudited) | |
Consolidated statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
118,462 |
|
|
$ |
93,210 |
|
|
$ |
115,821 |
|
|
$ |
136,905 |
|
|
$ |
185,703 |
|
|
$ |
88,442 |
|
|
$ |
99,198 |
|
Cost of goods sold
|
|
|
81,035 |
|
|
|
79,031 |
|
|
|
89,111 |
|
|
|
100,377 |
|
|
|
124,968 |
|
|
|
60,664 |
|
|
|
65,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,427 |
|
|
|
14,179 |
|
|
|
26,710 |
|
|
|
36,528 |
|
|
|
60,735 |
|
|
|
27,778 |
|
|
|
34,093 |
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
18,814 |
|
|
|
13,711 |
|
|
|
16,228 |
|
|
|
19,586 |
|
|
|
23,503 |
|
|
|
11,908 |
|
|
|
13,888 |
|
|
Research and development
|
|
|
141 |
|
|
|
592 |
|
|
|
1,472 |
|
|
|
2,049 |
|
|
|
3,422 |
|
|
|
1,562 |
|
|
|
1,750 |
|
|
Loss (gain) on sale of fixed assets
|
|
|
|
|
|
|
8 |
|
|
|
43 |
|
|
|
1,037 |
|
|
|
14 |
|
|
|
15 |
|
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,955 |
|
|
|
14,311 |
|
|
|
17,743 |
|
|
|
22,672 |
|
|
|
26,939 |
|
|
|
13,485 |
|
|
|
15,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
18,472 |
|
|
|
(132 |
) |
|
|
8,967 |
|
|
|
13,856 |
|
|
|
33,796 |
|
|
|
14,293 |
|
|
|
18,560 |
|
Interest expense, net
|
|
|
940 |
|
|
|
2,074 |
|
|
|
1,183 |
|
|
|
860 |
|
|
|
637 |
|
|
|
327 |
|
|
|
234 |
|
Other income (expense)
|
|
|
501 |
|
|
|
785 |
|
|
|
67 |
|
|
|
(5 |
) |
|
|
(418 |
) |
|
|
(124 |
) |
|
|
(21 |
) |
Income (loss) before taxes and minority interest
|
|
|
18,033 |
|
|
|
(1,421 |
) |
|
|
7,851 |
|
|
|
12,991 |
|
|
|
32,741 |
|
|
|
13,842 |
|
|
|
18,305 |
|
Income tax benefit (provision)
|
|
|
(2,496 |
) |
|
|
1,769 |
|
|
|
(1,729 |
) |
|
|
(2,460 |
) |
|
|
(6,514 |
) |
|
|
(2,543 |
) |
|
|
(2,903 |
) |
Minority interest in earnings of joint venture
|
|
|
(642 |
) |
|
|
(224 |
) |
|
|
(320 |
) |
|
|
(436 |
) |
|
|
(676 |
) |
|
|
(319 |
) |
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,895 |
|
|
$ |
124 |
|
|
$ |
5,802 |
|
|
$ |
10,095 |
|
|
$ |
25,551 |
|
|
$ |
10,980 |
|
|
$ |
14,905 |
|
Earnings per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.23 |
|
|
$ |
0.01 |
|
|
$ |
0.47 |
|
|
$ |
0.79 |
|
|
$ |
1.91 |
|
|
$ |
0.83 |
|
|
$ |
1.04 |
|
|
Diluted
|
|
$ |
1.08 |
|
|
$ |
0.01 |
|
|
$ |
0.44 |
|
|
$ |
0.70 |
|
|
$ |
1.65 |
|
|
$ |
0.72 |
|
|
$ |
0.93 |
|
Number of shares used in computation(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,107 |
|
|
|
12,216 |
|
|
|
12,277 |
|
|
|
12,731 |
|
|
|
13,404 |
|
|
|
13,181 |
|
|
|
14,319 |
|
|
Diluted
|
|
|
13,833 |
|
|
|
13,322 |
|
|
|
13,297 |
|
|
|
14,406 |
|
|
|
15,471 |
|
|
|
15,306 |
|
|
|
16,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
10,208 |
|
|
|
14,938 |
|
|
|
19,990 |
|
|
|
18,821 |
|
|
|
29,300 |
|
|
|
13,781 |
|
|
|
24,138 |
|
Cash (used in) investing activities
|
|
|
(21,389 |
) |
|
|
(8,477 |
) |
|
|
(6,774 |
) |
|
|
(15,289 |
) |
|
|
(26,133 |
) |
|
|
(10,245 |
) |
|
|
(6,845 |
) |
Cash flow from (used in) financing activities
|
|
|
12,100 |
|
|
|
(2,485 |
) |
|
|
(13,995 |
) |
|
|
1,862 |
|
|
|
2,163 |
|
|
|
(1,890 |
) |
|
|
(3,477 |
) |
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(2)
|
|
$ |
22,334 |
|
|
$ |
9,099 |
|
|
$ |
18,461 |
|
|
$ |
24,488 |
|
|
$ |
45,875 |
|
|
$ |
19,995 |
|
|
$ |
25,855 |
|
Footnotes on following page.
24
Selected historical consolidated financial data
Footnotes from previous page.
|
|
(1) |
Adjusted for the effect of 3-for-2 stock splits in July 2000
and November 2003. |
|
(2) |
EBITDA represents earnings before net interest expense,
income tax provision, depreciation and amortization. Our
management believes EBITDA is useful to investors because it is
frequently used by securities analysts, investors and other
interested parties in evaluating companies in our industry. In
addition, our management believes that EBITDA is useful in
evaluating our operating performance compared to that of other
companies in our industry because the calculation of EBITDA
generally eliminates the effects of financing and income taxes
and the accounting effects of capital spending, which items may
vary for different companies for reasons unrelated to overall
operating performance. As a result, our management uses EBITDA
as a measure to evaluate the performance of our business.
However, EBITDA is not a recognized measurement under generally
accepted accounting principles, or GAAP, and when analyzing our
operating performance, investors should use EBITDA in addition
to, and not as an alternative for, income from operations and
net income, each as determined in accordance with GAAP. Because
not all companies use identical calculations, our presentation
of EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a
measure of free cash flow for our managements
discretionary use, as it does not consider certain cash
requirements such as a tax and debt service payments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended | |
|
|
Year ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
Reconciliation of net income to EBITDA: |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
|
|
(in thousands) | |
Net income
|
|
$ |
14,895 |
|
|
$ |
124 |
|
|
$ |
5,802 |
|
|
$ |
10,095 |
|
|
$ |
25,551 |
|
|
$ |
10,980 |
|
|
$ |
14,905 |
|
plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
940 |
|
|
|
2,074 |
|
|
|
1,183 |
|
|
|
860 |
|
|
|
637 |
|
|
|
327 |
|
|
|
234 |
|
|
Income tax provision (benefit)
|
|
|
2,496 |
|
|
|
(1,769) |
|
|
|
1,729 |
|
|
|
2,460 |
|
|
|
6,514 |
|
|
|
2,543 |
|
|
|
2,903 |
|
|
Depreciation and amortization
|
|
|
5,003 |
|
|
|
8,670 |
|
|
|
9,747 |
|
|
|
11,073 |
|
|
|
13,173 |
|
|
|
6,145 |
|
|
|
7,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
23,334 |
|
|
$ |
9,099 |
|
|
$ |
18,461 |
|
|
$ |
24,488 |
|
|
$ |
45,875 |
|
|
$ |
19,995 |
|
|
$ |
25,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of June 30, | |
|
|
| |
|
| |
Consolidated balance sheet data: |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
|
|
(in thousands) | |
Total assets
|
|
$ |
112,950 |
|
|
$ |
103,258 |
|
|
$ |
105,010 |
|
|
$ |
123,795 |
|
|
$ |
167,801 |
|
|
$ |
143,033 |
|
|
$ |
186,380 |
|
Working capital
|
|
|
17,291 |
|
|
|
19,798 |
|
|
|
20,830 |
|
|
|
27,154 |
|
|
|
49,571 |
|
|
|
33,083 |
|
|
|
66,451 |
|
Long-term debt, net of current portion
|
|
|
15,997 |
|
|
|
21,164 |
|
|
|
12,583 |
|
|
|
6,750 |
|
|
|
7,833 |
|
|
|
5,500 |
|
|
|
3,877 |
|
Stockholders equity
|
|
|
51,253 |
|
|
|
51,124 |
|
|
|
57,679 |
|
|
|
71,450 |
|
|
|
112,148 |
|
|
|
86,326 |
|
|
|
132,993 |
|
25
Managements discussion and analysis of financial condition
and results of operations
The following discussion should be read in conjunction with
our consolidated financial statements and accompanying notes
included elsewhere in this prospectus. It contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere
in this prospectus, particularly under the heading Risk
factors.
OVERVIEW
We are a global supplier of discrete semiconductor products. We
design, manufacture and market discrete semiconductors focused
on diverse end-use applications in the consumer electronics,
computing, industrial, communications and automotive sectors.
Discrete semiconductors, which provide electronic signal
amplification and switching functions, are basic building block
electronic components that are incorporated into almost every
electronic device. We believe that our focus on discrete
semiconductors provides us with a meaningful competitive
advantage relative to broadline semiconductor companies that
provide a wider range of semiconductor products.
We are headquartered in Westlake Village, California, near Los
Angeles. Our manufacturing facilities are located in Shanghai,
China; our wafer fabrication facility is in Kansas City,
Missouri; and our sales and marketing and logistical centers are
located in Taipei, Taiwan; Shanghai and Shenzhen, China; and
Hong Kong. We also have regional sales offices in Derbyshire,
England; Toulouse, France; Frankfurt, Germany; and various
cities in the United States.
In 1998, we began to transform our business from the
distribution of discrete semiconductors manufactured by others
to the design, manufacture and marketing of discrete
semiconductor products using our internal manufacturing
capabilities. The key elements of our strategy of transforming
our business from a distribution-based model to one primarily
based on the design and manufacture of proprietary products are:
|
|
|
expanding our manufacturing
capacity, including establishing integrated state-of-the-art
packaging and testing facilities in Asia, in 1998 and 2004, and
acquiring a wafer foundry in the United States in 2000;
|
|
|
expanding our sales and marketing
organization in Asia in order to address the shift of
manufacturing of electronics products from the United States to
Asia;
|
|
|
establishing our sales and
marketing organization in Europe commencing in 2002; and
|
|
|
expanding the number of our field
application engineers to design our products into specific
end-user applications.
|
In implementing this strategy, the following factors have
affected, and, we believe, will continue to affect, our results
of operations:
|
|
|
Since 1998, we have experienced
increases in the demand for our products, and substantial
pressure from our customers and competitors to reduce the
selling price of our products. We expect future increases in net
income to result primarily from increases in sales volume and
improvements in product mix in order to offset reduced average
selling prices of our products.
|
|
|
In 2004 and the six months ended
June 30, 2005, 14.3% and 15.8%, respectively, of our net
sales derived from products introduced within the last three
years, which we term new products, compared to 12.1% in 2003.
New products generally have gross profit margins that are higher
|
26
Managements discussion and analysis of financial
condition and results of operations
|
|
|
than the margins of our standard products. We expect net sales
derived from new products to increase in absolute terms,
although our net sales of new products as a percentage of our
net sales will depend on the demand for our standard products,
as well as our product mix. |
|
|
Our gross profit margin was 34.4% in the six months ended
June 30, 2005, compared to 32.7% in 2004 and 26.7% in 2003.
This improvement in our gross margin was due to improvements in
product mix, as well as increases in wafer and packaging yields,
reductions in manufacturing costs and increases in capacity
utilization. We expect only modest improvements in yields and
capacity utilization in the future and, as a result, future
gross profit margins will depend primarily on our product mix,
as well as on the demand for our product. |
|
|
As of June 30, 2005, we had invested approximately
$83.0 million in our Asian manufacturing facilities. For
the six months ended June 30, 2005, we invested
approximately $6.0 million in our Asian manufacturing
facilities and expect to invest an additional $9.0 to
$11.0 million in these facilities for the remainder of
2005. We expect to continue to invest in our manufacturing
facilities, although the amount to be invested will depend on
product demand and new product developments. |
|
|
In the six months ended June 30, 2005, the percentage of
our net sales derived from our Asian subsidiaries was 64.7%,
compared to 59.1% in 2004 and 55.5% in 2003. We expect our net
sales to the Asian market to continue to increase as a
percentage of our total net sales for the remainder of 2005 and
2006 as a result of the continuing shift of the manufacture of
electronic products from the United States to Asia. |
|
|
We have increased research and development expenses from
$2.0 million, or 1.5% of net sales, in 2003 to
$3.4 million, or 1.8% of net sales in 2004. We continue to
seek to hire qualified engineers who fit our focus on
proprietary discrete processes and packaging technologies. Our
goal is to expand research and development expenses to
approximately 3.0% of net sales as we bring additional
proprietary devices to the market. |
In addition, as part of our growth strategy, we may pursue
acquisitions of complementary businesses, technologies or
product lines.
Financial operations overview
Net sales
We generate a substantial portion of our net sales through the
sale of discrete semiconductor products, designed and
manufactured by us or third parties. We also generate a portion
of our net sales from outsourcing manufacturing capacity to
third parties and from the sale of silicon wafers to
manufacturers of discrete semiconductor components. We serve
customers across diversified industry segments, including the
consumer electronics, computer, industrial, communications and
automotive markets.
We recognize revenue from product sales when title to and risk
of loss of the product have passed to the customer, there is
persuasive evidence of an arrangement, the sale price is fixed
or determinable and collection of the related receivable is
reasonably assured. These criteria are generally met upon
shipment to our customers. Net sales is stated net of reserves
for pricing adjustments, discounts, rebates and returns.
The principal factors that have affected or could affect our net
sales from period to period are:
|
|
|
the condition of the economy in
general and of the semiconductor industry in particular;
|
|
|
our customers adjustments in
their order levels;
|
27
Managements discussion and analysis of financial
condition and results of operations
|
|
|
changes in our pricing policies or
the pricing policies of our competitors or suppliers;
|
|
|
the termination of key supplier
relationships;
|
|
|
the rate of introduction to, and
acceptance of new products by, our customers;
|
|
|
our ability to compete effectively
with our current and future competitors;
|
|
|
our ability to enter into and
renew key corporate and strategic relationships with our
customers, vendors and strategic alliances;
|
|
|
changes in foreign currency
exchange rates;
|
|
|
a major disruption of our
information technology infrastructure; and
|
|
|
unforeseen catastrophic events,
such as armed conflict, terrorism, fires, typhoons and
earthquakes.
|
Cost of goods sold
Cost of goods sold includes manufacturing costs for our discrete
semiconductors and our wafers. These costs include raw materials
used in our manufacturing processes as well as the labor costs
and overhead expenses. Cost of goods sold is also impacted by
yield improvements, capacity utilization and manufacturing
efficiencies. Cost of goods sold also includes cost of products
that we purchase from other manufacturers and sell to our
customers. Cost of goods sold is also affected by inventory
obsolescence if our inventory management is not efficient.
Selling, general and administrative expenses
Selling, general and administrative expenses relate primarily to
compensation and associated expenses for personnel in general
management, sales and marketing, information technology,
engineering, human resources, procurement, planning and finance,
and sales commissions, as well as outside legal, accounting and
consulting expenses, and other operating expenses. We expect our
selling, general and administrative expenses to increase in
absolute dollars as we hire additional personnel and expand our
sales, marketing and engineering efforts and information
technology infrastructure.
Research and development expenses
Research and development expenses consist of compensation and
associated costs of employees engaged in research and
development projects, as well as materials and equipment used
for these projects. Research and development expenses are
associated with our wafer facility in Kansas City, Missouri and
our manufacturing facilities in China, as well as our engineers
in our U.S. headquarters.
All research and development expenses are expensed as incurred,
and we expect our research and development expenses to increase
in absolute dollars as we invest in new technologies and product
lines.
Interest expense, net
Interest expense consists of interest payable on our outstanding
credit facilities and other debt instruments. Interest income
consists of interest earned on our cash balances.
Income tax provision
Our global presence requires us to pay income taxes in a number
of jurisdictions. In general, earnings in the United States and
Taiwan are currently subject to tax rates of 39.0% and 35.0%,
respectively. Earnings of Diodes-Hong Kong are currently subject
to a 17.5% tax for local sales and/or local source
28
Managements discussion and analysis of financial
condition and results of operations
sales, all other sales are foreign income tax-free. Earnings at
Diodes-Taiwan and Diodes-Hong Kong are also subject to
U.S. taxes with respect to those earning that are derived
from product manufactured by our China subsidiaries and sold to
customers outside of Taiwan and Hong Kong, respectively. The
U.S. tax rate on these earnings is the computed as the
difference between the foreign effective tax rates and the
U.S. tax rate. In accordance with U.S. tax law, we
receive credit against our U.S. federal tax liability for
income taxes paid by our foreign subsidiaries.
As an incentive for establishing Diodes-China in 1996, and in
accordance with the current taxation policies of China,
Diodes-China, received preferential tax treatment for the years
ended December 31, 1996 through 2004 and the six months
ended June 30, 2005.
Diodes-China is located in Songjiang district, where the
standard central government tax rate is 24.0%. However, as an
incentive for establishing Diodes-China, the earnings of
Diodes-China were subject to a 0% tax rate by the central
government from 1996 through 2000, and to a 12.0% tax rate from
2001 through 2004. For 2005 and future years,
Diodes-Chinas earnings will continue to be subject to a
12.0% tax rate provided it exports at least 70.0% of its
net sales. In addition, due to a $18.5 million permanent
re-investment of Diodes-China earnings in 2004, Diodes-China has
applied to the Chinese government for additional preferential
tax treatment on earnings that are generated by this
$18.5 million investment. If approved, those earnings will
be exempted from central government income tax for two years,
and then subject to a 12.0% tax rate for the following
three years.
In addition, the earnings of Diodes-China would ordinarily be
subject to a standard local government tax rate of 3.0%.
However, as an incentive for establishing Diodes-China the local
government waived this tax from 1996 through the first six
months of 2005. Management expects this tax to be waived for at
least the remainder of 2005, however, the local government can
re-impose this tax at any time in its discretion.
In 2004, we established Diodes-Shanghai located in the Songjiang
Export Zone of Shanghai, China. In the Songjiang Export Zone,
the central government standard tax rate is 15.0%. There is no
local government tax. During 2004, Diodes-Shanghai earnings were
subject to the standard 15.0% central government tax rate.
As an incentive for establishing Diodes-Shanghai, for 2005 and
2006, the earnings of Diodes-Shanghai are exempted from central
government income tax, and for the years 2007 through 2009 its
earnings will be subject to a 7.5% tax rate. From 2010 onward,
provided that Diodes-Shanghai exports over 70.0% of its net
sales, the earnings will be subject to a 10.0% tax rate. We
currently intend to maintain this volume of exports in the
future.
On October 22, 2004, the American Jobs Creation Act, or
AJCA, was signed into law. Among other items, the AJCA
establishes a phased repeal of the extraterritorial income
exclusion, a new incentive tax deduction for
U.S. corporations to repatriate cash from foreign
subsidiaries equal to 85% of cash dividends received in the year
elected that exceeds a base-period amount, and significantly
revises the taxation of U.S. companies doing business
abroad.
In December 2004, we estimated that we would repatriate a
minimum of $8.0 million of cash from our subsidiaries in
China and Hong Kong under the AJCA, and recorded a corresponding
income tax expense in 2004 of approximately $1.3 million.
Under the AJCA guidelines, we are developing a domestic
reinvestment plan, covering items such as our U.S. credit
agreement repayment, U.S. capital expenditures and
U.S. research and development activities, among others, to
utilize the $8.0 million dividend repatriation. In
addition, we are completing a quantitative analysis of the
benefits of the AJCA, the foreign tax credit implications, and
state and local tax consequences of a dividend from our foreign
subsidiaries to us, to maximize the tax benefits of such a
dividend in 2005. In the six months ended June 30, 2005, we
accrued $370,000 for U.S. taxes in connection with a
potential increase in
29
Managements discussion and analysis of financial
condition and results of operations
the planned $8.0 million dividend to be received from our
Asian subsidiaries in accordance with the AJCA. We are currently
evaluating the benefits of further increasing the dividend,
including the additional associated income tax expense.
We are also evaluating the need to provide additional deferred
taxes for the future earnings of Diodes-China, Diodes-Shanghai
and Diodes-Hong Kong to the extent such earnings may be
appropriated for distribution to us in the United States, and as
further investment strategies with respect to foreign earnings
are determined. Should our U.S. cash requirements exceed
the cash that is available to us from our U.S. operations
or under our U.S. credit facilities, cash can be obtained
from our foreign subsidiaries. However, the distribution of
unappropriated funds to the United States in excess of that
which has already been taxed in the United States will require
the recording of U.S. federal and state income tax by the
U.S. entity receiving such funds, thus reducing our net
income in the period any such distribution is made.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. On an on-going basis,
we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, inventory reserves
and income taxes, among others. Our estimates are based upon
historical experiences, market trends and financial forecasts
and projections, and upon various other assumptions that
management believes to be reasonable under the circumstances and
at that certain point in time. Actual results may differ,
significantly at times, from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies and
estimates affect the significant estimates and judgments we use
in the preparation of our consolidated financial statements, and
may involve a higher degree of judgment and complexity than
others.
Revenue recognition
We recognize revenue when there is persuasive evidence that an
arrangement exists, when delivery has occurred, when our price
to the buyer is fixed or determinable and when collectibility of
the receivable is reasonably assured. These elements are met
when title to the products is passed to the buyers, which is
generally when our product is shipped.
We reduce revenue in the period of sale for estimates of product
returns, distributor price adjustments and other allowances, the
majority of which are related to our North American operations.
Our reserve estimates are based upon historical data as well as
projections of revenues, distributor inventories, price
adjustments, average selling prices and market conditions.
Actual returns and adjustments could be significantly different
from our estimates and provisions, resulting in an adjustment to
revenues.
Inventory reserves
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out
method. On an on-going basis, we evaluate our inventory, both
finished goods and raw material, for obsolescence and
slow-moving items. This evaluation includes analysis of sales
levels, sales projections, and purchases by item, as well as raw
material usage related to our manufacturing facilities. Based
upon this analysis, as well as an inventory aging analysis, we
accrue a reserve for obsolete and slow-moving inventory. If
future demand or market conditions are different than our
30
Managements discussion and analysis of financial
condition and results of operations
current estimates, an inventory adjustment may be required, and
would be reflected in cost of goods sold in the period the
revision is made.
Accounting for income taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
of the tax jurisdictions in which we operate. This process
involves using an asset and liability approach whereby deferred
tax assets and liabilities are recorded for differences in the
financial reporting bases and tax bases of our assets and
liabilities. Significant management judgment is required in
determining our provision for income taxes, deferred tax assets
and liabilities. Management continually evaluates its deferred
tax asset as to whether it is likely that the deferred tax
assets will be realized. If management ever determined that our
deferred tax asset was not likely to be realized, a write-down
of the asset would be required and would be reflected as an
expense in the accompanying period.
Allowance for doubtful accounts
Management evaluates the collectability of our accounts
receivable based upon a combination of factors, including the
current business environment and historical experience. If we
are aware of a customers inability to meet its financial
obligations to us, we record an allowance to reduce the
receivable to the amount we reasonably believe we will be able
to collect from the customer. For all other customers, we record
an allowance based upon the amount of time the receivables are
past due. If actual accounts receivable collections differ from
these estimates, an adjustment to the allowance may be necessary
with a resulting effect on operating expense.
Impairment of long-lived assets
As of December 31, 2004, goodwill was $5.1 million
($4.2 million related to the FabTech acquisition, and
$881,000 related to Diodes-China). Beginning in fiscal 2002 with
the adoption of SFAS No. 142 (Goodwill and Other
Intangible Assets), goodwill is no longer amortized, but
instead tested for impairment at least annually. As a result of
our adoption of SFAS No. 142, we performed the
required impairment tests of goodwill annually and has
determined that the goodwill is fully recoverable.
We assess the impairment of long-lived assets, including
goodwill, on an on-going basis and whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Our impairment review process is based upon
(1) an income approach from a discounted cash flow
analysis, which uses our estimates of revenues, costs and
expenses, as well as market growth rates, and (2) a market
multiples approach which measures the value of an asset through
an analysis of recent sales or offerings or comparable public
entities. If ever the carrying value of the goodwill is
determined to be less than the fair value of the underlying
asset, a write-down of the asset will be required, with the
resulting expense charged in the period that the impairment was
determined.
31
Managements discussion and analysis of financial
condition and results of operations
RESULTS OF OPERATIONS
The following table sets forth the items in our consolidated
income statements as a percentage of net sales for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months | |
|
|
|
|
ended | |
|
|
Year ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
Consolidated statements of income data: |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold
|
|
|
76.9 |
|
|
|
73.3 |
|
|
|
67.3 |
|
|
|
68.6 |
|
|
|
65.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23.1 |
|
|
|
26.7 |
|
|
|
32.7 |
|
|
|
31.4 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
14.0 |
|
|
|
14.3 |
|
|
|
12.7 |
|
|
|
13.5 |
|
|
|
14.0 |
|
Research and development expenses
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
1.8 |
|
|
|
1.8 |
|
|
|
1.8 |
|
Impairment of fixed assets
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
Income from operations
|
|
|
7.7 |
|
|
|
10.1 |
|
|
|
18.2 |
|
|
|
16.2 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1.0 |
) |
|
|
(0.6 |
) |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
Other income (expense)
|
|
|
0.1 |
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
|
|
Income before taxes and minority interest
|
|
|
6.8 |
|
|
|
9.5 |
|
|
|
17.7 |
|
|
|
15.7 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(1.5 |
) |
|
|
(1.8 |
) |
|
|
(3.5 |
) |
|
|
(2.9 |
) |
|
|
(2.9 |
) |
Minority interest in earnings of joint venture
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5.0 |
% |
|
|
7.4 |
% |
|
|
13.8 |
% |
|
|
12.4 |
% |
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2005 compared to six months
ended June 30, 2004
Net sales
Net sales increased approximately $10.8 million, or 12.2%,
for the six months ended June 30, 2005, compared to the
same period in 2004, due primarily to an approximately 27.8%
increase in units sold as a result of increased demand,
primarily in Asia. Our average selling prices, for discrete
devices decreased approximately 6.9% from the same period in
2004 due primarily to product mix changes. Average selling
prices for wafer products decreased approximately 9.9% from the
same period last year due primarily to market pricing pressure.
The following table sets forth the geographic breakdown of our
net sales for the periods indicated based on the country to
which the product is shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales | |
|
|
|
|
six months | |
|
Percentage of | |
|
|
ended June 30, | |
|
net sales | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
|
|
(dollars in thousands) | |
|
|
Taiwan
|
|
$ |
33,606 |
|
|
$ |
23,464 |
|
|
|
33.9 |
% |
|
|
26.5 |
% |
China
|
|
|
25,535 |
|
|
|
19,161 |
|
|
|
25.7 |
|
|
|
21.7 |
|
United States
|
|
|
25,157 |
|
|
|
25,550 |
|
|
|
25.4 |
|
|
|
28.9 |
|
Korea
|
|
|
5,225 |
|
|
|
8,577 |
|
|
|
5.3 |
|
|
|
9.7 |
|
Singapore
|
|
|
4,494 |
|
|
|
5,319 |
|
|
|
4.5 |
|
|
|
6.0 |
|
All others
|
|
|
5,181 |
|
|
|
6,371 |
|
|
|
5.2 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
99,198 |
|
|
$ |
88,442 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Managements discussion and analysis of financial
condition and results of operations
Cost of goods sold
Cost of goods sold increased approximately $4.4 million, or
7.3%, for the six months ended June 30, 2005, compared to
the same period in 2004. As a percent of net sales, cost of
goods sold decreased to 65.6% for the six months ended
June 30, 2005 from 68.6% for the same period in 2004. Our
average unit cost for discrete devices decreased approximately
8.5% in the six months ended June 30, 2005 from the same
period in 2004. Average unit cost for wafer products decreased
approximately 6.2% in the six months ended June 30, 2005
from the same period in 2004. This decrease was due primarily to
improved manufacturing efficiencies.
Gross profit
Gross profit for the six months ended June 30, 2005
increased approximately $6.3 million, or 22.7%, compared to
the same period in 2004. Of the $6.3 million increase,
approximately $3.4 million was due to the 12.1% increase in
net sales, while $2.9 million was due to the increase in
gross margin percentage to 34.4% from 31.4%. The higher gross
margin percentage was due primarily to improved product sales
mix, increased capacity utilization and manufacturing
efficiencies, partially offset by pricing pressure on our wafer
products.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months
ended June 30, 2005 increased approximately
$2.0 million, or 16.6%, compared to the same period in
2004, due primarily to (1) audit and legal expenses
associated with Sarbanes-Oxley Act compliance, (2) a
$358,000 expense relating to share inducement grants made to
Dr. Keh-Shew Lu, our President and Chief Executive Officer,
and C.H. Chen, our Vice Chairman, (3) higher sales
commissions, wages and marketing expenses associated with
increased sales and (4) consulting expenses associated with
the upgrade to our Enterprise Resource Planning system.
Selling, general and administrative expenses, as a percentage of
net sales, was 14.0% for the six months ended June 30,
2005, compared to 13.5% in the same period in 2004.
Research and development expenses
Research and development expenses for the six months ended
June 30, 2005 increased 12.0% to $1.8 million from
$1.6 million in the same period in 2004, although as a
percentage of net sales they remained unchanged at 1.8%.
Research and development expenses were primarily related to
increasing our manufacturing and packaging capability.
Gain on sale of fixed assets
Gain on sale of fixed assets of $105,000 for the six months
ended June 30, 2005 was due primarily to a gain on the
termination of two capital leases in China.
Interest expense, net
Net interest expense for the six months ended June 30, 2005
decreased approximately $93,000, or 28.4%, compared to the same
period in 2004, due primarily to a reduction in our total debt
from $17.5 million at June 30, 2004 to
$10.8 million at June 30, 2005. Our interest expense
has been primarily the result of borrowings to finance the
FabTech acquisition in 2000, as well as our ongoing investment
in, and expansion of, our Diodes-China and Diodes-Shanghai
manufacturing facilities.
33
Managements discussion and analysis of financial
condition and results of operations
Other expense
Other expense for the six months ended June 30, 2005
decreased $103,000, compared to the same period in 2004, due
primarily to lower currency exchange losses in Taiwan as well as
the expiration of management incentive agreements associated
with the FabTech acquisition.
Income tax provision
We recognized income tax expense of $2.9 million for the
six months ended June 30, 2005, resulting in an effective
tax rate of 15.9%, as compared to 18.4% for the same period in
2004, due primarily to an increase in profits earned in lower
tax rate jurisdictions. For the six months ended June 30,
2005, we accrued an additional $370,000 for taxes on an increase
of a planned $8.0 million dividend to be paid to us by our
Asian subsidiaries in accordance with the provisions of the
AJCA. We are evaluating the benefits of further increasing this
dividend and the additional income tax expense associated with
such increase.
Minority interest in joint venture earnings
Minority interest in joint venture earnings represents the
minority investors share of the income of Diodes-China and
Diodes-Shanghai for the relevant period. We established
Diodes-Shanghai in 2004. The increase in these
subsidiaries income for the six months ended June 30,
2005 is primarily the result of increased sales, and
manufacturing efficiencies. As of June 30, 2005, we had a
95.0% controlling interest in each of these subsidiaries.
Net income
We generated net income of $14.9 million (or $1.04 basic
earnings per share and $0.93 diluted earnings per share) for the
six months ended June 30, 2005, as compared to
$11.0 million (or $0.83 basic earnings per share and $0.72
diluted earnings per share) for the same period in 2004. This
35.7% increase in net income is due primarily to the 12.2% net
sales increase to an average gross profit margin of 34.4% for
the six months ended June 30, 2005, compared to an average
gross profit margin of 31.4% in the same period in 2004.
Year ended December 31, 2004 compared to year ended
December 31, 2003
Net sales
Net sales for 2004 increased $48.8 million to
$185.7 million from $136.9 million for 2003. The 35.6%
increase was due primarily to an approximately 40.0% increase in
units sold as a result of increased demand for our products, as
well as an improved product mix, offset in part by a 9.1%
decrease in average selling prices for wafers.
34
Managements discussion and analysis of financial
condition and results of operations
The following table sets forth the geographic breakdown of our
net sales for the periods indicated based on the country to
which the product is shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales year ended | |
|
Percentage of | |
|
|
December 31, | |
|
net sales | |
|
|
| |
|
| |
Country |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| |
|
|
(dollars in thousands) | |
|
|
United States
|
|
$ |
53,204 |
|
|
$ |
41,593 |
|
|
|
28.7 |
% |
|
|
30.4 |
% |
Taiwan
|
|
|
50,716 |
|
|
|
38,087 |
|
|
|
27.3 |
|
|
|
27.8 |
|
China
|
|
|
44,311 |
|
|
|
25,908 |
|
|
|
23.9 |
|
|
|
18.9 |
|
Korea
|
|
|
16,447 |
|
|
|
14,455 |
|
|
|
8.9 |
|
|
|
10.6 |
|
Singapore
|
|
|
9,407 |
|
|
|
9,032 |
|
|
|
5.1 |
|
|
|
6.6 |
|
All others
|
|
|
11,618 |
|
|
|
7,830 |
|
|
|
6.1 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
185,703 |
|
|
$ |
136,905 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
Cost of goods sold increased $24.6 million, or 24.5%, for
2004 compared to 2003 as a result of the increase in net sales.
As a percent of net sales, however, cost of goods sold decreased
from 67.3% for 2004 to 73.3% for 2003. Our average unit cost for
discrete devices decreased approximately 6.5% from 2003, and
average unit cost for wafer products decreased approximately
12.1%. These cost decreases were due primarily to improved
manufacturing efficiencies.
Gross profit
Gross profit for 2004 increased 66.3% to $60.7 million from
$36.5 million for 2003. Of the $24.2 million increase,
$13.0 million was due to an increase in gross profit margin
from 26.7% in 2003 to 32.7% in 2004, while $11.2 million
was due to the 35.6% increase in net sales. Gross profit
increases in Asia were the primary contributor to the overall
gross profit increase in 2004. Gross profit margin increased due
to enhanced capacity utilization, continuing manufacturing
efficiencies, relatively stable pricing, and a product mix that
continued to shift toward higher-value performance discrete
semiconductor devices and arrays.
Selling, general and administrative expenses
For 2004, selling, general and administrative expenses increased
$3.9 million to $23.5 million from $19.6 million
for 2003. The 19.9% increase in selling, general and
administrative expenses was due primarily to higher sales
commissions, incentives, marketing and royalty expenses
associated with the 35.6% increase in net sales for the year,
and higher wage and benefits expenses. Also contributing to the
increased selling, general and administrative expenses were
higher corporate and administrative expenses, including legal
and accounting fees associated with Sarbanes-Oxley Act
compliance. However, as a percentage of sales, selling, general
and administrative expenses decreased to 12.7% for 2004 from
14.3% in 2003.
Research and development expenses
Research and development expenses increased to
$3.4 million, or 1.8% of net sales, in 2004 from
$2.0 million, or 1.5% of sales, in 2003. Research and
development expenses were primarily related to new product
development relating to silicon wafers, and, to a lesser extent,
to packaging. We continue
35
Managements discussion and analysis of financial
condition and results of operations
to seek to hire qualified engineers who fit our focus on
next-generation discrete processes and packaging technologies.
Interest expense, net
Net interest expense for 2004 decreased $223,000 to $637,000
from $860,000 in 2003, due primarily to a decrease in the use of
our credit facilities, as well as to lower interest rates. In
2004, we repaid $3.6 million of debt outstanding under our
credit facilities, reducing the balances outstanding from
$21.1 million at December 31, 2003 to
$17.5 million at December 31, 2004.
Other expense
Other expense for 2004 increased $413,000 compared to 2003,
primarily due to approximately $400,000 in currency exchange
losses related to the weakened U.S. dollar, primarily versus the
Taiwan dollar, recorded in the fourth quarter of 2004.
Income tax provision
Our effective tax rate in 2004 was 19.9%, compared to 18.9% for
2003. We recorded a provision for income taxes in the amount of
$6.5 million for the year 2004, compared to
$2.5 million for 2003. Included in the tax provision for
2004 is $1.3 million in deferred taxes recorded in the
fourth quarter for the $8.0 million planned dividend
distribution from our Asian subsidiaries in 2005 under the AJCA,
offset by a $1.2 million foreign investment tax refund (net
of U.S. taxes), and approximately $500,000 research and
development tax credit.
Minority interest in joint venture earnings
The minority interest in joint venture earnings represents the
minority investors share of income of Diodes-China and
Diodes-Shanghai for the relevant period. We established
Diodes-Shanghai in 2004. The increase in these
subsidiaries income for 2004 is primarily the result of
increased sales of higher margin products. As of
December 31, 2004, we had a 95.0% controlling interest in
each of these subsidiaries.
Net income
We generated net income of $25.6 million (or $1.91 basic
earnings per share and $1.65 diluted earnings per share) in
2004, as compared to $10.1 million (or $0.79 basic earnings
per share and $0.70 diluted earnings per share) for 2003. This
153.5% increase is due primarily to the 35.6% net sales increase
to an average gross profit margin of 32.7% in 2004, compared to
an average gross profit margin of 26.7% in 2003.
Year ended December 31, 2003 compared to year ended
December 31, 2002
Net sales
Net sales for 2003 increased $21.1 million to
$136.9 million from $115.8 million for 2002. This
18.2% increase was due primarily to a 19.5% increase in units
sold, resulting from increased demand for our products, as well
as an improved product mix, offset in part by a 7.2% decrease in
average selling prices for wafers.
36
Managements discussion and analysis of financial
condition and results of operations
The following table sets forth the geographic breakdown of our
net sales for the periods indicated based on the country to
which the product is shipped:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales year ended | |
|
Percentage of | |
|
|
December 31, | |
|
net sales | |
|
|
| |
|
| |
Country |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
|
(dollars in thousands) | |
|
|
United States
|
|
$ |
41,593 |
|
|
$ |
40,125 |
|
|
|
30.4 |
% |
|
|
34.6 |
% |
Taiwan
|
|
|
38,087 |
|
|
|
25,507 |
|
|
|
27.8 |
|
|
|
22.0 |
|
China
|
|
|
25,908 |
|
|
|
23,467 |
|
|
|
18.9 |
|
|
|
20.3 |
|
Korea
|
|
|
14,455 |
|
|
|
5,255 |
|
|
|
10.6 |
|
|
|
4.5 |
|
Singapore
|
|
|
9,032 |
|
|
|
9,496 |
|
|
|
6.6 |
|
|
|
8.2 |
|
All others
|
|
|
7,830 |
|
|
|
11,971 |
|
|
|
5.7 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
136,905 |
|
|
$ |
115,821 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
Cost of goods sold increased $11.3 million, or 12.7%, for
2003 compared to 2002. However, as a percent of net sales, cost
of goods sold decreased to 73.3% for 2003 from 76.9% for 2002.
Our average unit price for discrete semiconductor devices
increased approximately 3.6% from 2002, due primarily to a
product mix shift, while average unit cost for wafer products
decreased approximately 11.2%, due primarily to improved
manufacturing efficiencies.
Gross profit
Gross profit for 2003 increased 36.8% to $36.5 million,
from $26.7 million for 2002. Of the $9.8 million
increase, $5.0 million was due to the increase in gross
profit margin from 23.1% in 2002 to 26.7% in 2003, while
$4.9 million was due to the 18.2% increase in net sales.
Gross profit increases in Asia were the primary contributors to
the gross profit increase in 2003. Gross profit margin for 2003
increased due to increased capacity utilization, continuing
manufacturing efficiencies, relatively stable pricing, and a
product mix that continued to shift towards higher-margin
performance discrete semiconductor devices and arrays.
Selling, general and administrative expenses
For 2003, selling, general and administrative expenses increased
20.7% to $19.6 million, from $16.2 million for 2002.
The $3.4 million increase in selling, general and
administrative expenses was due primarily to higher sales
commissions associated with the 18.2% increase in sales, and
higher wage and benefits expenses. Also contributing to the
increased selling, general and administrative expenses were
higher corporate and administrative expenses, including legal
and accounting fees associated with Sarbanes-Oxley Act
compliance. Selling, general and administrative expenses, as a
percentage of sales, increased to 14.3% for 2003 from 14.0% in
2002.
Research and development expenses
Research and development expenses increased to
$2.0 million, or 1.5% of sales, in 2003 from
$1.5 million, or 1.3% of net sales, in 2002. Research and
development expenses are primarily related to new product
development relating to silicon wafers, and, to a lesser extent,
to packaging.
37
Managements discussion and analysis of financial
condition and results of operations
Impairment of fixed assets and loss on disposal of fixed
assets
In 2003, operating profit margins were negatively affected by a
$1.0 million reserve for fixed asset impairment, primarily
as a result of the re-engineering of our wafer production lines.
During the year, we took advantage of opportunities to purchase
more efficient equipment at discounts. As a result, we retired
non-depreciated equipment.
Interest expense, net
Net interest expense for 2003 decreased $323,000 to $860,000
from $1.2 million in 2002, due primarily to a decrease in
the use of our credit facilities, as well as to lower interest
rates. In 2003, we repaid $5.8 million of debt outstanding
under our credit facilities, reducing the balances outstanding
from $12.6 million at December 31, 2002 to
$6.8 million at December 31, 2003.
Other expense
Other expense for 2003 was $5,000, compared to other income of
$67,000 in 2002, primarily due to the discontinuance of income
FabTech was receiving from a third partys use of its
testing facilities in 2002, a decrease in high-technology grant
income received at Diodes-China in 2003, and currency exchange
losses primarily in Asia in 2003, partly offset by a severance
payment in accordance with the terms of a separation agreement
in 2002, as well as the reduction in the expense recorded for
the management incentive agreement at FabTech in 2003.
Income tax provision
Our effective tax rate for 2003 was 18.9%, compared to 22.0% for
2002, due primarily to a higher proportion of income earned by
our Asian subsidiaries, some of which are in jurisdictions that
have lower effective tax rates than the United States. We
benefited from our Diodes-Hong Kong subsidiary, established in
2002, not only due to its lower tax rates, but also as another
entry point into the Asia market. We recorded a provision for
income taxes in the amount of $2.5 million for the year
2003, compared to $1.7 million for 2002. Included in the
tax provision for 2003 is $840,000 in deferred taxes recorded
for a portion of the 2003 earnings of Diodes-China, and $200,000
for a portion of the 2003 earnings of Diodes-Hong Kong.
Minority interest in joint venture earnings
The minority interest in joint venture represents the minority
investors share of Diodes-Chinas income for the
relevant period. The increase in Diodes-Chinas earnings
for 2003 is primarily the result of increased sales. As of
December 31, 2003, we had a 95.0% controlling interest in
this subsidiary.
Net income
We generated net income of $10.1 million (or $0.79 basic
earnings per share and $0.70 diluted earnings per share) in
2003, compared to $5.8 million (or $0.47 basic earnings per
share and $0.44 diluted earnings per share) for 2002. This 74.0%
increase is due primarily to the 18.2% sales increase to an
average gross profit margin of 26.7% in 2003, compared to an
average gross profit margin of 23.1% in 2002.
38
Managements discussion and analysis of financial
condition and results of operations
QUARTERLY RESULTS OF OPERATIONS
The following table represents unaudited statement of operations
data for our most recent ten fiscal quarters. You should read
the following table in conjunction with our consolidated
financial statements and related notes included elsewhere in
this prospectus. The results of operations of any quarter are
not necessarily indicative of the results that may be expected
for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended | |
|
|
| |
|
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
Sep 30, | |
|
Dec 31, | |
|
Mar 31, | |
|
Jun 30, | |
|
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
| |
|
|
(in thousands, except share and per share data) | |
Net sales
|
|
$ |
29,446 |
|
|
$ |
33,316 |
|
|
$ |
34,941 |
|
|
$ |
39,202 |
|
|
$ |
41,435 |
|
|
$ |
47,017 |
|
|
$ |
49,353 |
|
|
$ |
47,898 |
|
|
$ |
48,600 |
|
|
$ |
50,598 |
|
Cost of goods sold
|
|
|
21,985 |
|
|
|
24,970 |
|
|
|
25,779 |
|
|
|
27,643 |
|
|
|
28,685 |
|
|
|
31,989 |
|
|
|
32,607 |
|
|
|
31,687 |
|
|
|
32,004 |
|
|
|
33,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,461 |
|
|
|
8,346 |
|
|
|
9,162 |
|
|
|
11,559 |
|
|
|
12,750 |
|
|
|
15,028 |
|
|
|
16,746 |
|
|
|
16,211 |
|
|
|
16,596 |
|
|
|
17,497 |
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
4,233 |
|
|
|
4,777 |
|
|
|
5,089 |
|
|
|
5,487 |
|
|
|
5,476 |
|
|
|
6,417 |
|
|
|
6,171 |
|
|
|
5,439 |
|
|
|
6,692 |
|
|
|
7,196 |
|
|
Research and development expenses
|
|
|
346 |
|
|
|
400 |
|
|
|
612 |
|
|
|
691 |
|
|
|
763 |
|
|
|
815 |
|
|
|
942 |
|
|
|
902 |
|
|
|
900 |
|
|
|
850 |
|
|
Loss (gain) on sale of fixed assets
|
|
|
(88 |
) |
|
|
32 |
|
|
|
300 |
|
|
|
793 |
|
|
|
23 |
|
|
|
(8 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,491 |
|
|
|
5,209 |
|
|
|
6,001 |
|
|
|
6,971 |
|
|
|
6,262 |
|
|
|
7,224 |
|
|
|
7,112 |
|
|
|
6,341 |
|
|
|
7,487 |
|
|
|
8,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,970 |
|
|
|
3,137 |
|
|
|
3,161 |
|
|
|
4,588 |
|
|
|
6,488 |
|
|
|
7,804 |
|
|
|
9,634 |
|
|
|
9,870 |
|
|
|
9,109 |
|
|
|
9,451 |
|
Interest expense, net
|
|
|
244 |
|
|
|
218 |
|
|
|
209 |
|
|
|
189 |
|
|
|
182 |
|
|
|
145 |
|
|
|
160 |
|
|
|
150 |
|
|
|
154 |
|
|
|
79 |
|
Other income (expense)
|
|
|
(89 |
) |
|
|
(7 |
) |
|
|
126 |
|
|
|
(35 |
) |
|
|
(147 |
) |
|
|
24 |
|
|
|
91 |
|
|
|
(386 |
) |
|
|
(34 |
) |
|
|
12 |
|
Income before taxes and minority interest
|
|
|
2,637 |
|
|
|
2,912 |
|
|
|
3,078 |
|
|
|
4,364 |
|
|
|
6,159 |
|
|
|
7,683 |
|
|
|
9,565 |
|
|
|
9,334 |
|
|
|
8,921 |
|
|
|
9,384 |
|
Income tax benefit (provision)
|
|
|
(617 |
) |
|
|
(651 |
) |
|
|
(416 |
) |
|
|
(776 |
) |
|
|
(1,160 |
) |
|
|
(1,383 |
) |
|
|
(2,134 |
) |
|
|
(1,837 |
) |
|
|
(1,442 |
) |
|
|
(1,461 |
) |
Minority interest in joint venture earnings
|
|
|
(97 |
) |
|
|
(89 |
) |
|
|
(99 |
) |
|
|
(151 |
) |
|
|
(143 |
) |
|
|
(177 |
) |
|
|
(189 |
) |
|
|
(167 |
) |
|
|
(239 |
) |
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,923 |
|
|
$ |
2,172 |
|
|
$ |
2,563 |
|
|
$ |
3,437 |
|
|
$ |
4,856 |
|
|
$ |
6,123 |
|
|
$ |
7,242 |
|
|
$ |
7,330 |
|
|
$ |
7,240 |
|
|
$ |
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.15 |
|
|
$ |
0.17 |
|
|
$ |
0.20 |
|
|
$ |
0.27 |
|
|
$ |
0.37 |
|
|
$ |
0.46 |
|
|
$ |
0.54 |
|
|
$ |
0.53 |
|
|
$ |
0.51 |
|
|
$ |
0.53 |
|
|
Diluted
|
|
$ |
0.14 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
0.23 |
|
|
$ |
0.32 |
|
|
$ |
0.40 |
|
|
$ |
0.47 |
|
|
$ |
0.47 |
|
|
$ |
0.46 |
|
|
$ |
0.47 |
|
Number of shares used in computation(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,472 |
|
|
|
12,678 |
|
|
|
12,813 |
|
|
|
12,954 |
|
|
|
13,097 |
|
|
|
13,265 |
|
|
|
13,356 |
|
|
|
13,897 |
|
|
|
14,218 |
|
|
|
14,419 |
|
|
Diluted
|
|
|
13,727 |
|
|
|
14,268 |
|
|
|
14,546 |
|
|
|
14,932 |
|
|
|
15,286 |
|
|
|
15,330 |
|
|
|
15,367 |
|
|
|
15,708 |
|
|
|
15,683 |
|
|
|
16,210 |
|
|
|
(1) |
Adjusted for the effect of a 3-for-2 stock split in November
2003. |
Liquidity and capital resources
Our primary sources of liquidity are cash, funds from operations
and borrowings under our credit facilities. Our primary
liquidity requirements have been to meet our inventory and
capital expenditure needs.
In 2002, 2003 and 2004, our capital expenditures were
$6.8 million, $15.6 million and $26.2 million,
respectively. In the six months ended June 30, 2005, our
capital expenditures were $6.8 million. Our capital
expenditures for these periods were primarily related to
manufacturing expansion in our facilities in China and, to a
lesser extent, our wafer fabrication facility in the United
States. The increased amount of capital expenditures from 2002
through 2004 is primarily attributable to increasing capacity at
our facilities to meet demand for our products, including the
establishment of our Diodes-Shanghai facilities in 2004. In
2005, we expect our capital expenditures to be approximately
$15.0 to $18.0 million as a result of the slower market
growth compared to 2004.
39
Managements discussion and analysis of financial
condition and results of operations
In addition, as part of our growth strategy, we may pursue
acquisitions of complementary businesses, technology or product
lines, which may require additional capital and require us to
seek additional financing. Such additional funds or financing
may not be available on terms acceptable to us, or at all.
We expect that our working capital, available borrowings under
our credit facilities and the net proceeds we receive from this
offering will be sufficient to meet our capital commitments and
fund our operational needs for at least the next 18 to
24 months.
Discussion of cash flows
Cash has increased from $7.3 million at December 31,
2002, to $12.8 million at December 31, 2003, to
$19.0 million at December 31, 2004, to
$33.0 million at June 30, 2005.
Operating activities
Net cash provided by operating activities for the six months
ended June 30, 2005 was $24.1 million, resulting
primarily from $14.9 million of net income in this period.
Net cash provided by operating activities was $29.3 million
for 2004, $18.8 million for 2003 and $20.0 million for
2002. Net cash provided by operations increased by
$10.5 million from 2003 to 2004. This increase resulted
primarily from a $15.5 million increase in our net income
(from $10.1 million in 2003 to $25.6 million in 2004),
partially offset by increases in inventories and accounts
receivable, resulting from slower inventory turns due to our
customers negotiating higher inventory requirements and longer
payment terms. We continue to closely monitor our credit terms
with our customers, while at times providing extended terms
required by our customers in Asia and Europe. Net cash provided
by operating activities decreased by $1.2 million from 2002
to 2003. This decrease was primarily the result of an increase
in inventories and accounts receivable, partially offset by a
$4.3 million increase in net income.
Investing activities
Net cash used by investing activities for the six months ended
June 30, 2005 was $6.8 million resulting from capital
expenditures. Net cash used by investing activities was
$26.1 million for 2004, $15.3 million for 2003 and
$6.8 million for 2002. Net cash used for investing
activities in those periods primarily related to manufacturing
expansion in our facilities in China and, to a lesser extent,
our wafer fabrication facility in the United States.
Financing activities
Net cash used by financing activities for the six months ended
June 30, 2005 was $3.5 million, resulting from
$6.7 million repaid under our debt instruments during this
period, offset by $3.0 million received in connection with
the exercise of stock options. Net cash provided by financing
activities was $2.2 million for 2004 and $1.9 million
for 2003, and net cash used by financing activities in 2002 was
$14.0 million. Net cash provided by financing activities
for 2004 was primarily due to $5.6 million received in
connection with the exercise of stock options, partially offset
by $4.8 million repaid under our debt instruments. Net cash
provided by financing activities for 2003 was primarily due to
$2.0 million received in connection with the exercise of
stock options. Net cash used for financing activities for 2002
was primarily due to $14.6 million repaid under our debt
instruments.
Debt instruments
Under our U.S. credit agreement with Union Bank of
California, N.A., we have available a revolving credit facility
of up to $7.5 million and a term loan facility in an
initial amount of $5.0 million and which, as of
June 30, 2005, had $4.1 million outstanding. Term
loans under this credit agreement
40
Managements discussion and analysis of financial
condition and results of operations
mature on August 3, 2009 and amortize monthly. As of
June 30, 2005, we had no revolving credit loans
outstanding. Loans to Diodes Incorporated under this facility
are guaranteed by our subsidiary, FabTech. The $4.1 million
currently outstanding under this facility is a loan directly to
FabTech by the bank, which is guaranteed by Diodes Incorporated.
All loans under this agreement are collateralized by all of
Diodes Incorporateds and FabTechs accounts,
instruments, chattel paper, documents, general intangibles,
inventory, equipment, furniture and fixtures. Revolving credit
loans under this credit agreement bear interest at the
lenders prime rate (effective rate of 6.3% at
June 30, 2005) and term loans bear interest at LIBOR plus
1.6% (effective rate of 4.8% at June 30, 2005). This credit
agreement contains covenants which require us to maintain a
leverage ratio not greater than 2.0 to 1, a fixed charge
coverage ratio of not less than 1.35 to 1 and a current ratio of
not less than 1.15 to 1. It also requires us to achieve a net
profit after taxes of not less than $500,000 in any fiscal
quarter. In addition, this credit agreement limits our ability
to dispose of assets, incur additional indebtedness, declare
dividends, engage in a liquidation, merger, partnership or other
combination and make capital expenditures. This credit agreement
also contains customary representations, warranties, affirmative
and negative covenants and events of default. The revolving
credit facility under this credit agreement expired on
June 1, 2005, though we have received an extension of such
facility until August 29, 2005. We are currently
negotiating revised terms, including increased availability, of
this facility, though no assurance can be made as to whether we
will be successful in such negotiations.
As of June 30, 2005, FabTech also owed $2.5 million
under a note in favor of Lite-On Semiconductor, which debt was
incurred in connection with our acquisition of FabTech from
Lite-On Semiconductor in 2000. This note matures on
June 30, 2006 and amortizes monthly. The obligations under
this note are subordinated to the obligations under our
U.S. credit agreement with Union Bank of California, N.A.
This note bears interest at a rate of LIBOR plus 2.0% (effective
rate of 5.1% at June 30, 2005).
Diodes-China and Diodes-Taiwan have available lines of credit of
up to an aggregate of $26.5 million, with a number of
Chinese and Taiwanese financial institutions. These lines of
credit are unsecured, uncommitted and in some instances may be
repayable on demand. Loans under these lines of credit bear
interest at LIBOR or similar indices plus a specified margin
(our average effective rate under these lines of credit at
June 30, 2005 was 4.3%).
As of June 30, 2005, Diodes-China owed $1.2 million
under a note to one of our customers, which debt was incurred in
connection with our investing in manufacturing equipment. This
note, which is unsecured and interest-free, is repaid by us in
quarterly price concession installments, with any remaining
balance due in July 2008.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, arrangements and other
relationships with unconsolidated entities that will affect our
liquidity or capital resources. We have no special purpose
entities that provided off-balance sheet financing, liquidity or
market or credit risk support, nor do we engage in leasing,
hedging (except for the interest rate swap agreement, which
expired in November 30, 2004), or research and development
services, that could expose us to liability that is not
reflected on the face of our financial statements.
41
Managements discussion and analysis of financial
condition and results of operations
CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations as of
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
|
|
More than | |
|
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
|
(in thousands) | |
Long-term debt
|
|
$ |
11,347 |
|
|
$ |
3,514 |
|
|
$ |
7,250 |
|
|
$ |
583 |
|
|
$ |
|
|
Capital leases
|
|
|
2,777 |
|
|
|
230 |
|
|
|
460 |
|
|
|
460 |
|
|
|
1,627 |
|
Operating leases
|
|
|
13,498 |
|
|
|
3,461 |
|
|
|
6,420 |
|
|
|
3,617 |
|
|
|
|
|
Purchase obligations
|
|
|
2,927 |
|
|
|
2,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$ |
30,549 |
|
|
$ |
10,132 |
|
|
$ |
14,130 |
|
|
$ |
4,660 |
|
|
$ |
1,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no material changes to our contractual
obligations as of June 30, 2005, as compared to
December 31, 2004.
Inflation did not have a material effect on net sales or net
income in fiscal years 2002 through the second quarter of 2005.
A significant increase in inflation could affect future
performance.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk
We face exposure to adverse movements in foreign currency
exchange rates, primarily in Asia. Our foreign currency risk may
change over time as the level of activity in foreign markets
grows and could have an adverse impact upon our financial
results. Certain of our assets, including certain bank accounts
and accounts receivable, and liabilities exist in
non-U.S. dollar denominated currencies, which are sensitive
to foreign currency exchange fluctuations. These currencies are
principally the Chinese Yuan, the Taiwanese dollar, the Japanese
Yen, and the Hong Kong dollar. Because of the relatively small
size and nature of each individual currency exposure, we do not
employ hedging techniques designed to mitigate foreign currency
exposures. Therefore, we could experience currency gains and
losses. If the Chinese Yuan and the Taiwanese dollar were to
strengthen or weaken by 1.0% against the U.S. dollar, we
would have experienced currency gains or losses of approximately
$150,000 and $60,000, respectively. In the future, we may enter
into hedging arrangements designed to mitigate foreign currency
fluctuations.
In July 2005, the Chinese government allowed the Chinese Yuan to
float and be traded freely, although it is only permitted to
float within a 0.3% band against the Chinese central bank rate
set for the U.S. dollar. Should the Chinese government
allow a significant Chinese Yuan appreciation, and we do not
take appropriate means to offset this exposure, the effect could
have an adverse impact upon our financial results.
Interest rate risk
We have credit facilities with U.S. and Asian financial
institutions as well as other debt instruments with interest
rates equal to LIBOR or similar indices plus a negotiated
margin. A rise in interest rates could have an adverse impact
upon our cost of working capital and our interest expense. In
July 2001, we entered into an interest rate swap agreement to
hedge our exposure to variability in expected future cash flows
resulting from interest rate risk related to a portion of our
long-term debt. The interest rate under the swap agreement was
fixed at 6.8% and was based on the notional amount of
U.S. $2.3 million as of December 31, 2003. At
November 30, 2004 the interest rate swap agreement on our
long-term debt expired. The swap contract was inversely
correlated to the related hedged long-term debt and was
therefore considered an effective cash flow hedge of the
underlying long-term debt.
42
Managements discussion and analysis of financial
condition and results of operations
The level of effectiveness of the hedge was measured by the
changes in the market value of the hedged long-term debt
resulting from fluctuation in interest rates. As a matter of
policy, we do not enter into derivative transactions for trading
or speculative purposes. As of June 30, 2005, our
outstanding debt under our interest-bearing credit agreements
was $9.6 million. Based on an increase or decrease by 1.0%
for the year, our annual interest rate expense would increase or
decrease by approximately $96,000.
Political risk
We have a significant portion of our assets in mainland China
and Taiwan. The possibility of political conflict between the
two countries or with the United States could have an adverse
impact upon our ability to transact business through these
important business segments and to generate profits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND PROPOSED
ACCOUNTING CHANGES
In December 2004, the FASB issued SFAS No. 123(R).
This new standard requires companies to adopt the fair value
methodology of valuing stock-based compensation and recognizing
that valuation in the financial statements from the date of
grant. Accordingly, the adoption of
SFAS No. 123(R)s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will partially depend on
levels of share-based payments granted in the future. However,
had we adopted SFAS No. 123(R) in prior periods, the
impact of that standard would have approximated the impact of
SFAS No. 123 as shown in the Stock-based Compensation
table contained in note 1 of our financial statements
included elsewhere in this prospectus. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under
current literature. We are currently evaluating several option
valuation models in order to calculate the required compensation
expense. We have elected to adopt the provisions of
SFAS No. 123(R) on a modified prospective application
method with no restatement of any prior periods.
SFAS No. 123(R) is effective for us as of the
beginning of the fiscal year ending December 31, 2006.
In December 2004, the FASB also issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4, which will become effective for the
Company beginning January 1, 2006. This standard clarifies
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material should be expensed as
incurred and not included in overhead. In addition, this
standard requires that the allocation of fixed production
overhead costs to inventory be based on the normal capacity of
the production facilities. We are currently evaluating the
potential impact of this standard on its financial position and
results of operations, but we do not believe the impact of the
change will be material.
On October 22, 2004, the American Jobs Creation Act of 2004
was passed, which raised a number of issues with respect to
accounting for income taxes. In response, on December 21,
2004, the FASB issued two FASB Staff Positions (FSP), FSPP
109-1 Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004 and FSP 109-2 Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004,
which became effective for us upon issuance.
The AJCA provides a deduction for income from qualified domestic
production activities, to be phased in from 2005 through 2010,
which is intended to replace the existing extra-territorial
income exclusion for foreign sales. In FSP 109-1, the FASB
decided the deduction for qualified domestic production
activities should be accounted for as a special deduction under
SFAS No. 109, rather than as a rate
43
Managements discussion and analysis of financial
condition and results of operations
reduction. Accordingly, any benefit from the deduction will be
reported in the period in which the deduction is claimed on the
tax return. No adjustment to deferred taxes at December 31,
2004 was required.
The AJCA also creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85.0% dividends received deduction for
certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations and uncertainty
remains as to how to interpret numerous provisions in the AJCA.
FSP 109-2 addresses when to reflect in the financial statements
the effects of the one-time tax benefit on the repatriation of
foreign earnings. Under SFAS No. 109, companies are
normally required to reflect the effect of new tax law changes
in the period of enactment. FSP 109-2 provides companies
additional time to determine the amount of earnings, if any,
that they intend to repatriate under the AJCAs provisions.
See Note 8 of our financial statements included elsewhere
in this prospectus for more discussion of the impact of the
AJCA, including the impact on our repatriation of foreign
earnings.
In November 2004, the Emerging Issues Task Force, or EITF,
reached a consensus on EITF Issue No. 03-13, Applying the
Conditions in Paragraph 42 of FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, in Determining Whether to Report Discontinued
Operations. The consensus provides guidance in determining:
(1) which cash flows should be taken into consideration
when assessing whether the cash flows of the disposal component
have been or will be eliminated from the ongoing operations of
the entity, (2) the types of involvement ongoing between
the disposal component and the entity disposing of the component
that constitute continuing involvement in the operations of the
disposal component, and (3) the appropriate (re)assessment
period for purposes of assessing whether the criteria in
paragraph 42 have been met. The consensus was ratified by
the FASB at their November 30, 2004 meeting and should be
applied to a component of an enterprise that is either disposed
of or classified as held for sale in fiscal periods beginning
after December 15, 2004. We do not anticipate a material
impact on our financial statements from the adoption of this
consensus.
In September 2004, the EITF reached a consensus on EITF Issue
No. 04-10, Applying Paragraph 19 of FAS 131 in
determining whether to aggregate operating segments that do not
meet the quantitative thresholds. The consensus states that
operating segments that do not meet the quantitative thresholds
can be aggregated only if aggregation is consistent with the
objective and basic principles of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, the segments have similar economic characteristics,
and the segments share a majority of the aggregation criteria
(a)-(e) listed in paragraph 17 of SFAS No. 131.
The effective date of the consensus in this Issue is for fiscal
years ending after October 13, 2004. The ratification of
this Issue did not have an impact on our financial reporting.
In March 2004, the EITF reached a consensus on the remaining
portions of EITF 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments with an
effective date of June 15, 2004. EITF 03-01 provides
new disclosure requirements for other-than-temporary impairments
on debt and equity investments. Investors are required to
disclose quantitative information about: (1) the aggregate
amount of unrealized losses, and (2) the aggregate related
fair values of investments with unrealized losses, segregated
into time periods during which the investment has been in an
unrealized loss position of less than 12 months and greater
than 12 months. In addition, investors are required to
disclose the qualitative information that supports their
conclusion that the impairments noted in the qualitative
disclosure are not other-than temporary. We determined that
EITF 03-01 would not have a material impact on our
financial statements.
In December 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46R
(FIN 46R), Consolidation of Variable
Interest Entities, a revision to Interpretation No. 46
44
Managements discussion and analysis of financial
condition and results of operations
(FIN 46). FIN 46R clarifies the
application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest;
these entities are referred to as variable interest
entities. Variable interest entities within the scope of
FIN 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of
the entitys expected losses, receives a majority of its
expected returns, or both. FIN 46R also requires disclosure
of significant variable interests in variable interest entities
for which a company is not the primary beneficiary. We have
assessed Diodes-Shanghai under the provisions of FIN 46R
and have concluded that our investment in Diodes-Shanghai does
not meet the criteria for consolidation under the standard.
However Diodes-Shanghai is consolidated under other applicable
accounting literature. We will periodically review our
investment in Diodes-Shanghai to insure that we comply with the
guidelines prescribed by FIN 46R.
On June 7, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, a replacement of
Accounting Principles Board Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. Statement 154
requires retrospective application to prior periods
financial statements of a voluntary change in accounting
principle unless it is impracticable. Opinion 20 previously
required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting
principle. Statement 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
45
Business
OVERVIEW
We are a global supplier of discrete semiconductor products. We
design, manufacture and market discrete semiconductors focused
on diverse end-use applications in the consumer electronics,
computing, industrial, communications and automotive sectors.
Discrete semiconductors, which provide electronic signal
amplification and switching functions, are basic building-block
electronic components that are incorporated into almost every
electronic device. We believe that our focus on discrete
semiconductors provides us with a meaningful competitive
advantage relative to broadline semiconductor companies that
provide a wider range of semiconductor products.
Our portfolio of discrete semiconductors addresses the design
needs of many advanced electronic devices, particularly
high-volume consumer devices such as digital audio players,
notebook computers, flat panel displays, mobile handsets,
digital cameras and set-top boxes. We believe that we have
particular strength in designing innovative surface-mount
discrete semiconductors for applications with critical need to
minimize product size while maximizing power efficiency and
overall performance, and at a lower cost than alternative
solutions. Our product portfolio includes over 4,000 products,
and we shipped over 7.5 billion units in 2004 and over
4.5 billion units in the six months ended June 30,
2005.
We serve over 150 direct customers worldwide, which consist of
OEMs and EMS providers. Additionally, we have 17 distributor
customers worldwide, through which we indirectly serve over
10,000 customers. Our customers include: (1) industry
leading OEMs, in a broad range of industries, such as Bose
Corporation, Honeywell International, Inc., LG Electronics,
Inc., Logitech, Inc., Motorola, Inc., Quanta Computer, Inc.,
Sagem Communication, Samsung Electronics Co., Ltd. and Thompson,
Inc.; (2) leading EMS providers such as Celestica, Inc.,
Flextronics International, Ltd., Hon Hai Precision Industry Co.,
Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-SCI
Corporation and Solectron Corporation who build end-market
products incorporating our discrete semiconductors for companies
such as Apple Computer, Inc., Cisco Systems, Inc., Dell, Inc.,
EMC Corporation, Intel Corporation, Microsoft Corporation and
Roche Diagnostics; and (3) leading distributors, such as
Arrow Electronics, Inc., Avnet, Inc., Future Electronics and
Yosun Industrial Corp.
For 2004 and for the six months ended June 30, 2005, our
OEM and EMS customers together accounted for 66.3% and 69.0%,
respectively, of our net sales. For the year ended
December 31, 2004 and for the six months ended
June 30, 2005, Lite-On Semiconductor, which is also our
largest stockholder, accounted for approximately 9.9% and 9.6%,
respectively, of our net sales. Lite-On Semiconductor owned
31.5% of our common stock as of August 15, 2005 and will
own 23.5% of our common stock after completion of this offering.
Additionally, other members of The Lite-On Group accounted for
3.3% and 5.1% of our net sales, respectively, in the same
periods. In 2004 and the six months ended June 30, 2005,
17.2% and 14.6%, respectively, of our net sales were from the
subsequent sale of products we purchased from Lite-On
Semiconductor.
We are headquartered in Westlake Village, California, near Los
Angeles. Our manufacturing facilities are located in Shanghai,
China; and our water fabrication facility is in Kansas City,
Missouri; and our sales and marketing and logistical centers are
located in Taipei, Taiwan; Shanghai and Shenzhen, China; and
Hong Kong. We also have regional sales offices in Derbyshire,
England; Toulouse, France; Frankfurt, Germany; and various
cities in the United States. From 1998 to 2004, our net sales
grew from $60.1 million to $185.7 million,
representing a compound annual growth rate of 20.7%. According
to Gartner, Inc., worldwide sales of discrete semiconductors
grew from $12.8 billion in 1998 to $15.8 billion in
2004. This represents a compound annual growth rate of 3.7%.
46
Business
The diagram below shows the entities through which we conduct
our business and the principal services provided by each entity.
OUR INDUSTRY
Semiconductors are critical components used in the manufacture
of an increasing variety of electronic products and systems.
Since the invention of the transistor in 1948, continuous
improvements in semiconductor process and design technologies
have led to smaller, more complex and more reliable devices at a
lower cost per function. The availability of low-cost
semiconductors together with increased customer demand for
sophisticated electronic systems has led to the proliferation of
semiconductors in diverse end-use applications in the consumer
electronics, computing, industrial, communications and
automotive sectors. These factors have also led to an increase
in the total number of semiconductor components in individual
electronic systems and an increase in value of these components
as a percentage of the total cost of the electronic systems in
which they are incorporated.
Semiconductors vary significantly depending upon the specific
function or application of the end product in which the
semiconductor is embedded. The semiconductor industry is
comprised of three broad segments:
|
|
|
Logic devices which process data
and range from complex semiconductors such as microprocessors to
digital signal processors to application-specific and standard
logic products. According to Gartner the combined
microcomponent, logic and application specific segments
represent approximately 57.7% of total industry sales in 2004.
|
|
|
Memory devices, which store data.
According to Gartner, the memory devices segment represents
21.9% of total industry sales in 2004; and
|
|
|
Analog and discrete devices which
interface with real world signals such as light and heat, or
process electronic signals and control electronic power.
According to Gartner, the combined analog integrated circuits,
discrete, optical and non-optical sensors segments represent
approximately 20.4% of total industry sales in 2004.
|
47
Business
Semiconductors are further classified within these categories as
either standard components or application-specific
semiconductors. Standard components can be used in a broad range
of applications, while application-specific semiconductors are
designed to perform specific application functions. Our products
generally fit within the category of discrete devices, which are
standard components primarily performing a single function.
According to Gartner, worldwide semiconductor market sales were
approximately $219.9 billion in 2004, including sales in
the total addressable discrete devices market of approximately
$15.8 billion.
According to Gartner, in 2004, total industry sales and sales in
the discrete devices market increased 23.4% and 17.5%,
respectively. From 2000 to 2001, total industry sales declined
31.2% from $223.0 billion to $153.5 billion before
increasing 1.4% to $155.6 billion in 2002. The year 2001
was the worst single year downturn in industry history and was
driven both by reduced volumes and average selling prices
resulting primarily from an inventory overbuild and excess
semiconductor manufacturing capacity. After 2002, semiconductor
industry revenues rebounded 14.5% to $178.2 billion in 2003
and 23.4% to $219.9 billion in 2004.
The following table sets forth the total semiconductor industry
consumption from 2003 through 2007 and contains projections for
2005 through 2007 from Gartner as of August 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Projected | |
|
CAGR(3) | |
|
|
| |
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005E | |
|
2006E | |
|
2007E | |
|
03-07E | |
|
|
| |
|
|
(in billions) | |
Logic(1)
|
|
$ |
108.4 |
|
|
$ |
126.9 |
|
|
$ |
137.1 |
|
|
$ |
149.6 |
|
|
$ |
162.5 |
|
|
|
10.7 |
% |
Analog(2)
|
|
|
22.8 |
|
|
|
29.0 |
|
|
|
32.5 |
|
|
|
35.1 |
|
|
|
38.1 |
|
|
|
13.7 |
|
Discrete
|
|
|
13.5 |
|
|
|
15.8 |
|
|
|
16.5 |
|
|
|
17.4 |
|
|
|
19.1 |
|
|
|
9.1 |
|
Memory
|
|
|
33.5 |
|
|
|
48.0 |
|
|
|
49.2 |
|
|
|
52.4 |
|
|
|
45.5 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
178.2 |
|
|
$ |
219.9 |
|
|
$ |
235.4 |
|
|
$ |
254.4 |
|
|
$ |
265.2 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Logic includes the following Gartner segments:
microcomponent, logic and application specific |
|
(2) |
Analog includes the following Gartner segments: analog
integrated circuits, optical and non-optical sensors |
|
(3) |
Represents compound annual growth rate |
OUR COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
|
|
|
Flexible, scalable and
cost-effective
manufacturing. Our
manufacturing operations are a core element of our success, and
we have designed our manufacturing base to allow us to respond
quickly to changes in demand trends in the end-markets we serve.
For example, we have structured our Shanghai assembly, test and
packaging facilities to enable us to rapidly and efficiently add
capacity and adjust product mix to meet shifts in customer
demand and overall market trends. As a result, for the past
three years we have operated our Shanghai facilities at near
full capacity, while at the same time significantly expanding
that capacity. Additionally, the Shanghai location of our
manufacturing operations provides us with access to a
highly-skilled workforce at a low overall cost base while
enabling us to better serve our leading customers, many of which
are located in Asia.
|
|
|
Integrated packaging
expertise. We believe
that we have particular expertise in designing and manufacturing
innovative and proprietary packaging solutions that integrate
multiple separate discrete elements into a single semiconductor
product called an array. Our ability to design and manufacture
highly integrated discrete semiconductor solutions provides our
customers with
|
48
Business
|
|
|
products of equivalent functionality with fewer individual
parts, and at lower overall cost, than alternative products. For
example, one of our leading diode array products integrates
eight discrete elements into a single highly-miniaturized
package that provides four times the functionality, with less
than 20% of the space requirements of the previous solution.
This combination of integration, functionality and
miniaturization makes our products well suited for high-volume
consumer applications such as the digital audio players,
notebook computers and digital cameras. |
|
|
|
Broad customer base and diverse
end markets. Our
customers include leading OEMs such as Bose Corporation,
Honeywell International, Inc., LG Electronics, Inc., Logitech,
Inc., Motorola, Inc., Quanta Computer, Inc., Sagem
Communication, Samsung Electronics Co., Ltd. and Thompson, Inc.,
as well as leading EMS providers such as Celestica, Inc.,
Flextronics International, Ltd., Hon Hai Precision Industry Co.,
Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-SCI
Corporation and Solectron Corporation. Overall, we serve over
150 direct customers and over 10,000 additional customers
through our distributors, including leading distributors, such
as Arrow Electronics, Inc., Avnet, Inc., Future Electronics and
Yosun Industrial Corp. Our products are ultimately used in end
products in a large number of markets served by our broad base
of customers, which we believe makes us less dependent on either
specific customers or specific end-use applications.
|
|
|
Customer focused product
development. Close
collaboration with our customers and a high degree of customer
service are essential elements of our business. We believe
focusing on dependable delivery of discrete semiconductor
solutions tailored to specific end-user applications, has
fostered deep customer relationships and created a key
competitive advantage for us in the highly-fragmented discrete
semiconductor marketplace. We believe our close relationships
with our OEM and EMS customers have provided us with deeper
insight into our customers product needs. This results in
differentiation in our product designs and often provides us
with insight into additional opportunities for new design wins
in our customers products.
|
|
|
Management continuity and
experience. We believe
that the continuity of our management team is a critical
competitive strength. The five members of our senior management
team have an average of over 12 years of service at Diodes
and the length of their service with us has created significant
institutional insight into our markets, our customers and our
operations. In June 2005, we appointed Dr. Keh-Shew Lu as
President and Chief Executive Officer. Dr. Lu has served as
a director of Diodes since 2001 and has 30 years of
relevant industry experience. Dr. Lu began his career at
Texas Instruments in 1974 and retired in 2001 as Senior Vice
President and General Manager of Worldwide Analog, Mixed-Signal
and Logic Products. Our Chief Financial Officer, Carl Wertz, has
been employed by us since 1993 and has over 20 years of
financial experience in manufacturing and distribution
industries. Joseph Liu, our Senior Vice President, Operations,
joined us in 1990 and has over 30 years of relevant
industry experience having started his career in 1971 at Texas
Instruments. Similarly, Mark King, our Senior Vice President of
Sales and Marketing has been employed by us since 1991, as has
Steven Ho, our Vice President of Asia Sales.
|
OUR STRATEGY
Our strategy is to enhance our position as a global supplier of
discrete semiconductor products. The principal elements of this
strategy include the following:
|
|
|
Continue rapidly introducing
innovative discrete semiconductor
products. We intend to
maintain our rapid pace of new discrete product introductions,
especially for high-volume, growth applications with short
design cycles, such as digital audio players, notebook
computers, flat panel displays, mobile handsets, digital
cameras, set-top boxes and other consumer electronics and
|
49
Business
|
|
|
computing devices. During the six months ended June 30,
2005, we introduced 122 new devices in 13 different product
families and achieved new design wins with over 100 OEMs. We
believe that continued introduction of new and differentiated
product solutions is critically important in maintaining and
extending our market share in the highly competitive discrete
semiconductor marketplace. |
|
|
Expand our available market opportunities. We intend to
aggressively maximize our opportunities in the discrete
semiconductor market as well as in related markets, where we can
apply our semiconductor design and manufacturing expertise. A
key element of this is leveraging our highly integrated
packaging expertise through our Application Specific Multi-Chip
Circuit, or ASMCC, product platform, which consists of standard
arrays, function specific arrays and end-equipment specific
arrays. We intend to achieve this by: |
|
|
|
|
- |
Continuing to focus on increasing packaging integration,
particularly with our existing standard array and
customer-specific array products, in order to achieve products
with increased circuit density, reduced component count and
lower overall product cost; |
|
|
- |
Expanding existing products and developing new products in our
function specific array lines, which combine multiple discrete
semiconductor components to achieve specific common electronic
device functionality at a low cost; and |
|
|
- |
Developing new product lines, that we refer to as end-equipment
specific arrays, which combine discrete components with logic
and/or standard analog circuits to provide system-level
solutions for high-volume, high-growth applications. |
|
|
|
Maintain intense customer
focus. We intend to
strengthen and deepen our customer relationships. We believe
that continued focus on customer service will increase our net
sales, operating performance and overall market share. To
accomplish this, we intend to continue to closely collaborate
with our customers to design products that meet their specific
needs. A critical element of this strategy is to continue to
further reduce our design cycle time in order to quickly provide
our customers with innovative products. Additionally, to support
our customer-focused strategy, we are continuing to expand our
sales force and field application engineers personnel,
particularly in Asia and Europe.
|
|
|
Enhance cost
competitiveness. A key
element of our success is our overall low-cost base. While we
believe that our Shanghai manufacturing facilities are among the
most efficient in the industry, we will continue to refine our
proprietary manufacturing processes and technology to achieve
additional cost efficiencies. Additionally, we intend to
continue to operate our facilities at high utilization rates and
to increase product yields in order to achieve meaningful
economies of scale.
|
|
|
Pursue selective strategic
acquisitions. As part
of our strategy to expand our discrete semiconductor product
offerings and to maximize our market opportunities, we may
acquire discrete analog or mixed-signal technologies, product
lines or companies in order to support our ASMCC product
platform and enhance our standard and new product offerings.
|
OUR PRODUCTS
Our product portfolio includes over 4,000 products which are
designed for use in high-volume consumer devices such as digital
audio players, notebook computers, flat-panel displays, mobile
handsets, digital cameras and set-top boxes. We target and serve
end-equipment market segments that we believe have higher growth
rates than the overall semiconductor industry.
50
Business
Our broad product line includes:
|
|
|
Discrete semiconductor products,
including performance Schottky rectifiers; performance Schottky
diodes; Zener diodes and performance Zener diodes, including
tight tolerance and low operating current types; standard, fast,
super-fast and ultra-fast recovery rectifiers; bridge
rectifiers; switching diodes; small signal bipolar transistors;
prebiased transistors; MOSFETs; and transient voltage
suppressors;
|
|
|
Complex high-density diode,
transistor and mixed technology arrays, in multi-pin
ultra-miniature surface-mount packages, including customer
specific and function specific arrays; and
|
|
|
Silicon wafers used in
manufacturing these products.
|
Our discrete semiconductor products are an essential building
block of electronic circuit design and are available in
thousands of permutations varying according to voltage, current,
power handling capability and switching speed.
Our complex diode and transistor arrays help bridge the gap
between discrete semiconductors and integrated circuits. Arrays
consist of multiple discrete semiconductor devices housed in a
single package. Our discrete surface mount devices, which are
components that can be attached to the surface of a substrate
with solder, target end-equipment categories with critical needs
to minimize size while maintaining power efficiency and
performance.
The following table lists the end-markets served and some of the
applications in which our products are used:
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
percentage of our |
|
|
|
|
net sales for the |
|
|
End markets |
|
six months ended |
|
|
served |
|
June 30, 2005 |
|
End product applications |
|
Computing and Peripherals |
|
|
36% |
|
|
Notebooks, flat panel monitors, motherboards, PDAs,
multi-function printers, servers, network interface cards, hard
disk drives |
|
Consumer Electronics |
|
|
34% |
|
|
Set-top boxes, game consoles, digital audio players, digital
cameras, mobile handset, flat panel display, personal medical
devices |
|
Industrial |
|
|
18% |
|
|
Ballast lighting, power supplies, DC-DC conversion,
security/access systems, motor controls, HVAC |
|
Communications |
|
|
8% |
|
|
Gateways, routers, switches, hubs, fiber optics, DSL, cable and
standard modems, networking (wireless, ethernet, power/phone
line) |
|
Automotive |
|
|
4% |
|
|
Comfort controls, audio/video players, GPS navigation, safety,
security, satellite radios, engine control, HID lighting |
|
PRODUCT PACKAGING
Our device packaging technology includes a wide variety of
surface mount and leaded types. Our focus on the development of
smaller, more thermally efficient, and increasingly integrated
packaging, is an important component of our product development.
We provide a comprehensive offering of miniature and
sub-miniature packaging, enabling us to fit discrete components
into smaller and more efficient packages, while maintaining the
same device functionality and power handling capabilities.
Smaller packaging provides a reduction in the height and weight
of, and in the board space required for, our components and is
well suited for battery-powered, hand-held and wireless consumer
applications such
51
Business
as digital audio players, notebook computers, flat panel
displays, mobile handsets, digital cameras and set-top boxes.
CUSTOMERS
We serve over 150 direct customers worldwide, which consist of
OEMs and EMS providers. Additionally, we have 17 distributor
customers worldwide, through which we indirectly serve over
10,000 customers. Our customers include: (1) industry
leading OEMs in a broad range of industries, such as Bose
Corporation, Honeywell International, Inc., LG Electronics,
Inc., Logitech, Inc., Motorola, Inc., Quanta Computer, Inc.,
Sagem Communication, Samsung Electronics Co., Ltd. and Thompson,
Inc.; (2) leading EMS providers, such as Celestica, Inc.,
Flextronics International, Ltd., Hon Hai Precision Industry Co.,
Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-SCI
Corporation and Solectron Corporation, who build end-market
products incorporating our discrete semiconductors for companies
such as Apple Computer, Inc., Cisco Systems, Inc., Dell, Inc.,
EMC Corporation, Intel Corporation, Microsoft Corporation and
Roche Diagnostics; and (3) leading distributors such as
Arrow Electronics, Inc., Avnet, Inc., Future Electronics and
Yosun Industrial Corp.
In 2002, 2003, 2004 and the six months ended June 30, 2005,
Lite-On Semiconductor accounted for 13.7%, 10.5%, 9.9% and 9.6%
of our net sales, respectively. Lite-On Semiconductor was the
only customer that accounted for 10% or more of our net sales in
each of 2002, 2003 and 2004. No customer accounted for 10% or
more of our net sales in the six months ended June 30,
2005. In addition, companies affiliated with Lite-On
Semiconductor, which we refer to collectively as The Lite-On
Group, accounted for 1.5%, 2.5%, 3.3% and 5.1%, respectively, of
our net sales in 2002, 2003, 2004 and the six months ended
June 30, 2005. We believe each member of The Lite On Group
makes independent purchasing decisions. Lite-On Semiconductor is
also our largest stockholder, holding 31.5% of our common stock
as of August 15, 2005.
We believe that our close relationships with our OEM and EMS
customers have provided us with deeper insight into our
customers product needs than other manufacturers who we
believe depend to a greater extent on indirect sales through
distributors. In addition to seeking to expand relationships
with our existing customers, our strategy is to pursue new
customers and diversify our customer base by focusing on leading
global consumer electronics companies and their EMS providers
and distributors.
We generally warrant that products sold to our customers will,
at the time of shipment, be free from defects in workmanship and
materials and conform to our approved specifications. Subject to
certain exceptions, our standard warranty extends for a period
one year from the date of shipment. Warranty expense to date has
not been significant. Generally, our customers may cancel orders
on short notice without incurring a significant penalty.
Many of our customers are based in Asia. Net sales by country
consists of sales to customers assigned to that country based on
the country to which the product is shipped. For the six months
ended June 30, 2005, 33.9%, 25.7%, 25.4% and 15.0% of our
net sales were derived from Taiwan, China, the United States and
all other markets, respectively, compared to 27.3%, 23.9%, 28.6%
and 20.2%, respectively for 2004.
SALES AND MARKETING
We market and sell our products worldwide through a combination
of direct sales and marketing personnel, independent sales
representatives and distributors. We have direct sales personnel
in the United States, United Kingdom, France, Germany, Taiwan
and China. We also have independent sales representatives in the
United States, Japan, Korea, and Europe. We currently have
distributors in the United States, Europe and Asia.
52
Business
As of June 30, 2005, our direct global sales and marketing
organization consisted of over 80 employees operating out
of 14 offices. Our sales and marketing offices are located
in Taipei, Taiwan; Shanghai and Shenzhen, China; Hong Kong;
Derbyshire, England; Toulouse, France; Frankfurt, Germany; and
we have five regional sales offices in the United States. As of
June 30, 2005, we also had 25 independent sales
representative firms marketing our products.
Our marketing group focuses on our product strategy, product
development road map, new product introduction process, demand
assessment and competitive analysis. Our marketing programs
include participation in industry tradeshows, technical
conferences and technology seminars, sales training and public
relations. The marketing group works closely with our sales and
research and development groups to align our product development
road map. The marketing group coordinates its efforts with our
product development, operations and sales groups, as well as
with our customers, sales representatives and distributors. We
support our customers through our field application engineering
and customer support organizations.
To support our global customer-base, particularly in Asia and
Europe, our website is language-selectable into English,
Chinese, Japanese, Korean and German, giving us an effective
marketing tool for these important markets. With its extensive
online product catalog with advanced search capabilities, our
website facilitates quick and easy product selection. Our
website provides easy access to our worldwide sales contacts and
customer support, and incorporates a distributor-inventory check
to provide component inventory availability and a small order
desk for overnight sample fulfillment. Our website also provides
access to investor financial information and our corporate
governance information.
MANUFACTURING OPERATIONS AND FACILITIES
We operate three manufacturing facilities, two of which are
located in Shanghai, China. The third is located in Kansas City,
Missouri. Our facilities in Shanghai perform packaging, assembly
and testing functions, and our Kansas City facility is a 5-inch
wafer foundry.
As of June 30, 2005, we had invested approximately
$83.0 million in plant and state-of-the-art equipment in
China. Both of our Chinese factories manufacture product for
sale by our U.S. and Asian operations, and also sell to external
customers as well. Silicon wafers are received and inspected in
a highly controlled clean room environment awaiting
the assembly operation. At the first step of assembly, the
wafers are sawn with very thin, high speed diamond blades into
tiny semiconductor dice, numbering as many as
200,000 per 5-inch diameter wafer. Dice are then loaded
onto a handler, which automatically places the dice, one by one,
onto lead frames, which are package specific, where they are
bonded to the lead frame pad. Next, automatic wire bonders make
the necessary electrical connections from the die to the leads
of the lead frame, using micro-thin gold wire. Our fully
automated assembly machinery then molds the epoxy case around
the die and lead frame to produce the desired semiconductor
product. After a trim, form, test, mark and re-test operation,
the parts are placed into special carrier housings and a cover
tape seals the parts in place. The taped parts are then spooled
onto reels and boxed for shipment.
Our manufacturing processes use many raw materials, including
silicon wafers, copper lead frames, gold wire and other metals,
mold compound, ceramic packages and various chemicals and gases.
We have no material agreements with any of our suppliers that
impose minimum or continuing supply obligations. From time to
time, suppliers may extend lead times, limit supplies or
increase prices due to capacity constraints or other factors.
Although we believe that supplies of the raw materials we use
are currently and will continue to be available, shortages could
occur in various essential materials due to interruption of
supply or increased demand in the industry.
53
Business
In the United States, our corporate headquarters are located in
a leased facility in Westlake Village, California, approximately
30 miles from Los Angeles. We also lease properties around
the world for use for sales offices, research and development
labs, warehouses, logistic centers and trading offices. The size
and/or location of these properties change from time to time
based on business requirements.
Our properties are as follows:
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Approximate | |
Location |
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Use |
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Size (sq. ft.) | |
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Headquarters:
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Westlake Village, CA
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Global headquarters and product distribution |
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30,900 |
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Manufacturing:
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Kansas City, MO
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Wafer fabrication (5), research and development,
engineering, sales and marketing |
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70,000 |
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Shanghai, China (Shanghai Kaihong Electronics, Co., Ltd.) |
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Manufacturing (packaging, assembly and test), research and
development, engineering |
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145,300 |
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Shanghai, China (Shanghai Kaihong Technology Electronic Co.,
Ltd.) |
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Manufacturing (packaging, assembly and test) research and
development, engineering |
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74,300 |
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Others:
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Taipei, Taiwan
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Warehouse |
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9,000 |
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Taipei, Taiwan
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Sales and administrative offices |
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7,000 |
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Shanghai, China
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Regional offices |
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* |
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Shenzhen, China
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Regional offices |
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* |
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Kowloon, Hong Kong
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Sales, warehousing and logistics office |
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* |
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Toulouse, France
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Regional sales office |
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* |
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Amherst, NH
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Regional sales office |
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* |
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Lemont, IL
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Regional sales office |
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* |
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Fountain Valley, CA
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Regional sales office |
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* |
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Brookline, NH
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Regional sales office |
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* |
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* |
Less than 1,000 square feet. |
We lease all of our facilities other than our warehouse in
Taipei, Taiwan, which is owned by Diodes-Taiwan.
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 with no penalty to the
customer. Orders are generally booked from one to twelve months
in advance of delivery. The rate of booking of new orders can
vary significantly from month to month. We, and the industry as
a whole, are experiencing a trend towards shorter lead-times.
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, we believe that the amount of our
backlog at any date is not a useful measure of our future sales.
We strive to maintain proper inventory levels to support our
customers just-in-time order expectations.
54
Business
PATENTS AND TRADEMARKS
Although patents and trademarks have not been material to our
business to date, they may become more significant in the
future, particularly as they relate to packaging technologies.
COMPETITION
Numerous semiconductor manufacturers and distributors serve the
discrete semiconductor components market, making competition
intense. Some of our larger competitors include Fairchild
Semiconductor Corporation, Infineon Technologies A.G.,
International Rectifier Corporation, ON Semiconductor
Corporation, Philips Electronics N.V., Rohm Electronics USA,
LLC, Toshiba Corporation and Vishay Intertechnology, Inc., many
of which have greater financial, marketing, distribution and
other resources than us. Accordingly, in response to market
conditions, we from time to time may reposition product lines or
decrease prices, which may affect our sales of, and profit
margins on, such product lines. The price and quality of the
product, and our ability to design products and deliver customer
service in keeping with the customers needs, determine the
competitiveness of our products. We believe that our focus on
discrete semiconductors and our flexibility and ability to
quickly adapt to customer needs affords us competitive
advantages. Nevertheless, we expect that competition with larger
and better-funded rivals will continue to be a challenge.
ENGINEERING AND RESEARCH AND DEVELOPMENT
Our engineering and research and development groups consist of
customer and applications engineers and product development
engineers who assist in determining the direction of our future
product lines. Their primary function is to work closely with
market-leading customers to further refine, expand and improve
our product range within our product types and packages. In
addition, customer requirements and acceptance of new package
types are assessed and new, higher-density and more
energy-efficient packages are developed to satisfy
customers needs. Working with customers to integrate
multiple types of technologies within the same package, our
applications engineers strive to reduce the required number of
components and, thus, circuit board size requirements of a
device, while increasing the functionality of the component
technology.
Product engineers work directly with our semiconductor wafer
design and process engineers who craft die designs needed for
products that precisely match our customers requirements.
Direct contact with our manufacturing facilities allows the
manufacturing of products that are in line with current
technical requirements. We have the capability to capture the
customers electrical and packaging requirements through
their product development engineers, and then transfer those
requirements to our research and development and engineering
department, so that the customers requirements can be
translated, designed, and manufactured with full control, even
to the elemental silicon level.
For the years ended December 31, 2002, 2003 and 2004,
research and development expense was $1.5 million,
$2.0 million and $3.4 million, respectively. As a
percentage of sales, research and development expense was 1.3%,
1.5% and 1.8% for 2002, 2003 and 2004, respectively. We
anticipate research and development in absolute dollars and as a
percentage of sales to increase as we further develop
proprietary technology.
55
Business
EMPLOYEES
As of June 30, 2005, we employed a total of 1,428
employees, of which 1,197 were in manufacturing, 84 in
sales and marketing, 134 in administration, and 13 in research
and development. On that date, 1,133 of our employees were in
Asia, 291 in the United States and 4 in Europe. None of our
employees is subject to a collective bargaining agreement. We
consider our relations with our employees to be good.
LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings and
litigation incidental to the normal conduct of our business. We
are not currently a party to any litigation or other legal
proceedings that we believe would have a material adverse effect
on our business or financial condition.
56
Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning
each of our executive officers and directors:
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Name |
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Age | |
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Position(s) |
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Dr. Keh-Shew Lu(1)
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58 |
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President, Chief Executive Officer and Director |
Joseph Liu
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63 |
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Senior Vice President, Operations |
Mark A. King
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47 |
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Senior Vice President, Sales & Marketing |
Carl C. Wertz
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51 |
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Chief Financial Officer, Secretary and Treasurer |
Steven Ho
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50 |
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Vice President, Asia Sales |
Raymond Soong
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63 |
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Chairman of the Board |
C.H. Chen(1)(2)(3)
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62 |
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Vice Chairman of the Board |
Michael R. Giordano(1)(2)(4)
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58 |
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Director |
M.K. Lu
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57 |
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Director |
Dr. Shing Mao(3)(4)
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70 |
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Director |
John M. Stich(1)(2)(3)(4)
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63 |
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Director |
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(1) |
Member of our Strategic Planning Committee. |
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(2) |
Member of our Compensation and Stock Options Committee. |
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(3) |
Member of our Nominating Committee. |
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(4) |
Member of our Audit Committee. |
Dr. Keh-Shew Lu was appointed as our President and
Chief Executive Officer in June 2005. Dr. Lu has been one
of our directors since 2001. From 1974 to 2001, Dr. Lu was
employed by Texas Instruments, Inc. He retired in 2001 as Senior
Vice President and General Manager of Worldwide Analog,
Mixed-Signal and Logic Products, a position he had held since
1998. Dr. Lu holds a Bachelors degree in engineering
from the National Cheng Kung University in Taiwan, and a
doctorate degree in electrical engineering from Texas Tech
University. Dr. Lu is also a director of two publicly held
companies in Taiwan: Lite-On Technology Corporation and Windbond
Electronics Corporation. Dr. Lu is Chairman of our
Strategic Planning Committee.
Joseph Liu joined us in 1990 and has served as our Senior
Vice President, Operations, since 2000. Mr. Liu previously
served as our Vice President, Operations from 1994 to 1998 and
Chief Financial Officer, Secretary and Treasurer from 1990 to
1998. Mr. Liu was also our Vice-President, Administration
from 1990 to 1994.
Mark A. King joined us in 1991 and was appointed our
Senior Vice President, Sales in August 2005. Prior to that, he
served as our Vice President, Sales and Marketing. He served as
Vice President, Sales from April 1991 to April 1998. Before
joining us, Mr. King served for nine years in various sales
management positions at Lite-On, Inc., a California corporation
located in Milpitas, California, and a manufacturer of
optoelectronic products.
Carl C. Wertz joined us in 1993 and was appointed our
Chief Financial Officer, Secretary and Treasurer in 1998.
Mr. Wertz served as our Controller from 1993 to 1998.
Before joining us, Mr. Wertz served in various financial
management and accounting positions, most recently as Controller
of Westco Products, a manufacturer and distributor of food
products. Mr. Wertz is a licensed CPA.
57
Management
Steven Ho joined us in 1991 and was appointed as our Vice
President of Asia Sales in August 2005.
Raymond Soong has been one of our directors since 1990.
Mr. Soong has been the Chairman of the Board of Silitek
Corporation, or Silitek, since 1990 and has been Chairman of the
Boards of Lite-On Semiconductor and Lite-On Technology
Corporation since 1992. In October 2002, Silitek and Taiwan
Lite-On merged with Lite-On Technology Corporation.
Mr. Soong is a graduate of the National Taipei Institute of
Technologys Electronic Engineering Department.
C.H. Chen has been one of our directors since 2000.
Mr. Chen served as our President and Chief Executive
Officer from March 2000 until June 2005. From 1969 to 1990,
Mr. Chen was employed by Texas Instruments, Inc.
Mr. Chen is currently the Vice Chairman of Lite-On
Semiconductor. He is also Chairman of our Nominating Committee.
Michael R. Giordano has been one of our directors since
1990. Mr. Giordano joined UBS Financial Services, Inc. as a
Senior Vice President-Investment Consulting when UBS acquired
PaineWebber, Inc in 2000. PaineWebber, Inc. acquired his
previous employer, Kidder Peabody and Co., Inc., with whom he
was employed since 1979. Mr. Giordano received his Bachelor
of Science degree in Aerospace Engineering from California State
Polytechnic University and his Masters degree in Business
Administration from the University of Utah. Mr. Giordano is
Chairman of our Audit Committee and our Compensation and Stock
Options Committee.
M.K. Lu has been one of our directors since 1995.
Mr. Lu is currently President of Lite-On Semiconductor, a
position he was re-appointed to in March 2000. In November 1998,
Mr. Lu formed a new company, Actron Technology Corporation,
and is also acting Chairman of this manufacturer of pressfit
diodes for the automotive market. Mr. Lu earned his
Bachelors degree in Electrical Engineering at Tatung
University of Technology and is a Business Administration
graduate of the National Chengchi University.
Dr. Shing Mao has been one of our directors since
1995. Dr. Mao served as Chairman of the Board of Lite-On,
Inc., a California corporation located in Milpitas, California,
and a wholly owned subsidiary of Taiwan Lite-On, from 1988 to
2000. Dr. Mao has been a director of Dyna Investment Co.,
Ltd. of Taiwan, a venture capital company since 1989.
Dr. Mao was a director of Lite-On Semiconductor from 1989
to 2000. Dr. Mao earned his doctorate degree in electrical
engineering at Stanford University in 1963.
John M. Stich has been one of our directors since 2000.
Mr. Stich is the President and Chief Executive Officer of
The Asian Network; a consulting company that specializes in
assisting high-technology companies to expand their business in
Asia, a position he has held since 2000. Mr. Stich has been
active in leading various industry associations, including
serving as Governor for the American Chamber of Commerce in
Japan and in Hong Kong, as Chairman of the Semiconductor
Industry Association (Japan Chapter), and as President of the
Japan America Society of Dallas/ Fort Worth. In addition,
Mr. Stich is a director of Stonestreet One, Inc., a leading
provider of solutions based on short-range wireless technologies.
BOARD OF DIRECTORS
Our bylaws provide that the number of directors shall be
determined from time to time by the Board of Directors, but may
not be less than five nor more than seventeen. Currently, the
Board of Directors has fixed the number of directors at seven.
Our bylaws further provide for the election of each director at
each annual meeting of stockholders.
58
Management
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a standing Audit Committee, a
Compensation and Stock Options Committee, a Nominating Committee
and a Strategic Planning Committee, each of which consists of
two or more directors who serve at the discretion of the Board
of Directors. The members of each Committee are as follows:
Audit Committee
The Audit Committee consists of Messrs. Giordano, Mao and
Stich, with Mr. Giordano as the Chairman. This committee
makes recommendations to the Board of Directors regarding the
engagement of our independent registered public accounting firm,
reviews the plan, scope and results of the audit, reviews with
management our policies and procedures with respect to internal
accounting and financial controls and reviews changes in
accounting policy and the scope of the non-audit services which
may be performed by our independent registered public accounting
firm. The Audit Committee also monitors policies to prohibit
unethical, questionable or illegal activities by our employees.
The Board of Directors has determined that each member of the
Audit Committee is independent, as that term is
defined under the rules of Nasdaq and the SEC, and is able to
read and understand fundamental financial statements, and that
Mr. Giordano qualifies as an audit committee
financial expert as defined under the rules of the SEC.
Compensation and Stock Options Committee
The Compensation and Stock Options Committee consists of
Messrs. Chen, Giordano and Stich, with Mr. Giordano as
the Chairman. This committee makes recommendations to the Board
of Directors regarding compensation, benefits and incentive
arrangements for the Chief Executive Officer and other officers
and key employees of Diodes. The Compensation and Stock Options
Committee also administers our 1993 Incentive Stock Option Plan,
the 1993 Non-Qualified Stock Option Plan, our Incentive Bonus
Stock Plan, our 401(k) profit sharing plan, and the 2001 Omnibus
Equity Incentive Plan. The Board of Directors has determined
that each member of the Compensation and Stock Options Committee
is independent as that term is defined under the
rules of Nasdaq and the SEC, except for Mr. Chen who was
our President and Chief Executive Officer from March 2000 until
June 2005. This committee is not intended to qualify as a fully
independent compensation committee under the Nasdaq rules. As
required by the rules of Nasdaq, the compensation of our Chief
Executive Officer and other executive officers is determined, or
recommended to the Board of Directors for determination, by a
majority of the independent directors.
Nominating Committee
The Nominating Committee consists of Messrs. Chen, Mao and
Stich, with Mr. Chen as the Chairman. The principal
purposes of this committee are to help ensure that the Board
(i) identifies individuals qualified to become members of
the Board of Directors, consistent with criteria approved by the
Board of Directors, and (ii) selects the director nominees
for the next annual meeting of stockholders. The Board of
Directors has determined that each member of the Nominating
Committee is independent, as that term is defined
under the rules of Nasdaq and the SEC, except for Mr. Chen
who was our President and Chief Executive Officer from March
2000 to June 2005. In addition, Messrs. Lu and Soong attend
meetings of this committee, at the invitation of the committee,
in a non-voting capacity. This committee is not intended to
qualify as a fully independent nominating committee under the
Nasdaq rules. As required by the rules of Nasdaq, director
nominees are either selected, or recommended for selection by
the Board of Directors, by a majority of the independent
directors.
59
Management
Strategic Planning Committee
The Strategic Planning Committee consists of Messrs. Chen,
Giordano, Lu, Mao and Stich. This committee focuses on our new
product development, marketing, and research and development.
DIRECTOR COMPENSATION
Each non-employee director of Diodes receives $1,500 for each
meeting of the Board of Directors or committee meeting attended
in person, and $750 for each meeting in which such director
participates by telephone. In addition, non-qualified stock
options are granted annually to both employee and non-employee
directors. The exercise price of each option is no less than
that fair market value of the common stock on the date of grant,
and the option vests in equal annual installments over a
three-year period commencing on the first anniversary of the
date of grant. For 2005, the Chairman of the Board received an
option to purchase 49,500 shares of our common stock.
The Vice-Chairman of the Board received an option to
purchase 37,500 shares of our common stock and all
other directors each received an option to
purchase 7,000 shares of our common stock. In
addition, the Audit Committee members receive annually an option
to purchase 4,500 shares of our common stock, with the
Audit Committee chairman receiving an additional option to
purchase 3,000 shares, and all other committee members
receive annually an option to purchase 1,500 shares of
our common stock, with the committee chairman receiving an
additional 1,500-share stock option grant. The Board of
Directors may modify such compensation in the future.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
Our certificate of incorporation contains provisions that limit
the liability of our directors for monetary damages to the
fullest extent permitted by Delaware law. Consequently, our
directors will not be personally liable to us or our
stockholders for monetary damages for any breach of fiduciary
duties as directors, except liability for the following:
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any breach of their duty of
loyalty to our company or our stockholders;
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acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law;
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unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in
Section 174 of the Delaware General Corporation
Law; and
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any transaction from which the
director derived an improper personal benefit.
|
Our bylaws provide that we may indemnify to the fullest extent
permitted by law any person who is or was a party or is
threatened to be made a party to any action, suit or proceeding,
other than an action by or in our right, by reason of the fact
that he or she is or was a director, officer, employee or other
agent of Diodes or is or was serving at our request as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. With
respect to any action or suit by or in our right to procure a
judgment in our favor, our bylaws provide that we may indemnify
any such person, except that no indemnification will be provided
if such person was adjudged to be liable to us, unless the court
determines that despite his or her liability to us, he or she is
fairly and reasonably entitled to indemnification. Our bylaws
also provide that we may advance expenses incurred by or on
behalf of a director, officer, employee or agent in advance of
the final disposition of any action or proceeding.
We have obtained insurance policies under which, subject to the
limitations of the policies, coverage is provided to our
directors and officers against loss arising from claims made by
reason of breach of fiduciary duty or other wrongful acts as a
director or officer, including claims relating to public
60
Management
securities matters, and to us with respect to payments which may
be made by us to these officers and directors pursuant to our
indemnification obligations or otherwise as a matter of law.
We have entered into indemnification agreements with each of our
directors and officers that may require us, among other things,
to indemnify our directors and officers against liabilities that
may arise by reason of their status or service. These
indemnification agreements may also require us to advance all
expenses incurred by the directors and officers in investigating
or defending any such action, suit or proceeding. We believe
that these agreements are necessary to attract and retain
qualified individuals to serve as directors and officers.
At present, we are not aware of any pending litigation or
proceeding involving any person who is or was a director,
officer, employee or other agent of Diodes or who is or was
serving at our request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or
other enterprise, for which indemnification is sought, and we
are not aware of any threatened litigation that may result in
claims for indemnification.
61
Certain relationships and related party transactions
We conduct business with two related party companies, Lite-On
Semiconductor (and its subsidiaries and affiliates) and Keylink
International (formerly Xing International) (and its
subsidiaries). Lite-On Semiconductor is our largest stockholder
and owned 31.5% of our outstanding common stock as of
August 15, 2005. Keylink International is our 5% joint
venture partner in Diodes-China and Diodes-Shanghai. C.H. Chen,
our previous President and Chief Executive Officer, and a member
of our Board of Directors, is also Vice Chairman of Lite-On
Semiconductor. M.K. Lu, a member of our Board of Directors, is
President of Lite-On Semiconductor, while Raymond Soong, our
Chairman of the Board, is the Chairman of Lite-On Technology
Corporation, a significant shareholder of Lite-On Semiconductor.
The Audit Committee reviews all related party transactions for
potential conflict of interest situations, and approves all such
transactions, in accordance with such procedures as it may adopt
from time to time. We believe that all related party
transactions are on terms no less favorable to us than would be
obtained from unaffiliated third parties.
In 2004, we sold silicon wafers to Lite-On Semiconductor
totaling 9.9% (10.5% in 2003 and 13.7% in 2002) of our sales,
making Lite-On Semiconductor our largest customer. Also for
2004, 17.2% (17.3% in 2003 and 17.9% in 2002) of our sales were
from discrete semiconductor products purchased from Lite-On
Semiconductor for subsequent sale by us, making Lite-On
Semiconductor our largest outside supplier. For the six months
ended June 30, 2005, we sold silicon wafers to Lite-On
Semiconductor totaling 9.6% of our sales, and 14.6% of our sales
were from discrete semiconductor products purchased from Lite-On
Semiconductor for subsequent sale by us. Under a long-standing
sales agreement, we are the exclusive North American distributor
for certain product lines of Lite-On Semiconductor. In addition,
companies affiliated with Lite-On Semiconductor, which we refer
to collectively as The Lite-On Group, accounted for 1.5%, 2.5%,
3.3% and 5.1% of our net sales, respectively, in 2002, 2003,
2004 and the six months ended June 30, 2005. We also rent
warehouse space in Hong Kong from a member of The Lite-On Group,
which also provides us with warehousing services at that
location. For 2002, 2003 and 2004 we reimbursed this entity in
aggregate amounts of $59,000, $112,000 and $190,000,
respectively, for these items. Such transactions are on terms no
less favorable to us than could be obtained from unaffiliated
third parties. The Audit Committee of the Board of Directors has
approved the arrangements we have with these related party
transactions.
In December 2000, we acquired a wafer foundry, FabTech, Inc.,
from Lite-On Semiconductor. As part of the purchase price,
Lite-On Semiconductor received a subordinated, interest-bearing
note receivable in a principal amount of $13.5 million, of
which approximately $3.8 million and $2.5 million,
respectively, was outstanding as of December 31, 2004 and
June 30, 2005. In May 2002, we renegotiated the terms of
the note to extend the payment period from two years to four
years, and, as a result, monthly payments of approximately
$208,000 plus interest began in July 2002. In connection with
the acquisition, Lite-On Semiconductor entered into a volume
purchase agreement to purchase wafers from FabTech. In addition,
in accordance with the terms of the acquisition, we also entered
into several management incentive agreements with members of
FabTechs management. The agreements provided members of
FabTechs management with guaranteed annual payments as
well as contingent bonuses based on the annual profitability of
FabTech, subject to a maximum annual amount. Any portion of the
guaranteed and contingent liability paid by FabTech was
reimbursed by Lite-On Semiconductor. 2004 was the final year of
the management incentive agreements, with final payment made on
March 31, 2005. Lite-On Semiconductor reimbursed us in the
amount of $375,000 for each of 2002, 2003 and 2004, in respect
of contingent bonuses paid by us under these management
incentive agreements.
62
Certain relationships and related party transactions
In 2004, we sold silicon wafers to companies owned by Keylink
International totaling 0.9% (1.1% in 2003 and 5.6% in 2002) of
our sales. Also for 2004, 3.5% (4.6% in 2003 and 1.6% in 2002)
of our sales were from discrete semiconductor products purchased
from companies owned by Keylink International. For the six
months ended June 30, 2005, we sold silicon wafers to
companies owned by Keylink International totaling 1.1% of our
sales, and 3.0% of our sales were from discrete semiconductor
products purchased from companies owned by Keylink
International. In addition, Diodes-China and Diodes-Shanghai
lease their manufacturing facilities from, and subcontract a
portion of their manufacturing process (metal plating and
environmental services) to, Keylink International. We also pay a
consulting fee to Keylink International. In 2002, 2003 and 2004,
we paid Keylink International an aggregate of $2.8 million,
$3.8 million and $5.2 million, respectively, with
respect to these items. We believe such transactions are on
terms no less favorable to us than could be obtained from
unaffiliated third parties. The Audit Committee of the Board of
Directors has approved the contracts associated with these
related party transactions.
In October 2002, Silitek and Taiwan Lite-On merged with Lite-On
Technology Corporation, a publicly traded company on the Taiwan
Stock Exchange. Prior to this merger, Silitek was affiliated
through common ownership and control with Taiwan Lite-On, and
both companies were members of The Lite-On Group and publicly
traded on the Taiwan Stock Exchange.
Raymond Soong, who became a director and our Chairman of our
board effective March 1993, is also the Chairman of the boards
of Lite-On Technology Corporation and Lite-On Semiconductor,
Raymond Soong is also the founder of The Lite-On Group.
Dr. Shing Mao, who is one of our directors, retired in 2000
as Chairman of the board of Lite-On Milpitas, a wholly-owned
subsidiary of Taiwan Lite-On which merged with Lite-On
Technology Corporation in 2002. Dr. Mao was also a director
of Lite-On Semiconductor from 1989 to 2000.
M.K. Lu, who has been one of our directors, since 1995, is also
President of Lite-On Semiconductor and acting President of
Actron Technology Corporation, both Lite-On Group companies.
From 1983 to 1990, Mr. Lu was General Manager/ Vice
President of Silitek.
Michael Giordano, one of our directors, is Senior Vice
President-Investment Consulting at UBS Financial Services Inc.
Along with his son, James Giordano, Michael Giordano has, from
time to time, assisted our directors, executive officers, and
employees in stock option exercises and subsequent stock sales
of our common stock, and has provided them investment management
services. Mr. Giordano is also the pension consultant for
our 401(k) plan, which is managed by UBS Fiduciary Trust. In
addition, Mr. Giordano has, from time to time, provided
investment management services for directors and officers of The
Lite-On Group. All such services have been provided by UBS
Financial Services Inc. at customary rates and terms.
John M. Stich, one of our directors, is also President and Chief
Executive Officer of The Asian Network. In 2000 and 2001,
Mr. Stich had received fees as a marketing consultant to
us. In 2001, Mr. Stich ceased performing marketing
consulting services for us.
Dr. Keh-Shew Lu, our Chief Executive Officer, received fees
as an engineering consultant to us. In 2003, Dr. Lu ceased
performing engineering consulting services for us.
Mark A. King, our Senior Vice President of Sales and Marketing,
has an approximate $100,000 investment in one of our computer
software vendors (a privately-held company).
Mr. Kings investment was made subsequent to our
purchase of the software, which is used for sales quotation and
channel management, and has been approved by our board of
directors. Fees paid to this software vendor in 2004, including
annual software maintenance and consulting fees, were
approximately $105,000.
63
Principal and selling stockholders
The following table sets forth the beneficial ownership of
common stock as of August 15, 2005 by (1) each person
known to us to be the beneficial owner of more than 5.0% of the
outstanding shares of common stock (other than depositories),
(2) each of our executive officers and directors for and
(3) all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. A person is also considered to
beneficially own shares that such person has the right to
acquire within 60 days after August 15, 2005. Unless
otherwise indicated in a footnote, each individual or group
possesses sole voting and investment power with respect to the
shares indicated as beneficially owned. The percentage of
beneficial ownership is based on 14,620,683 shares of
common stock outstanding as of August 15, 2005 and
16,370,683 shares of common stock outstanding after
completion of this offering. A total of 750,000 shares of
our common stock are being offered for sale by the selling
stockholder, Lite-On Semiconductor. We will not receive any of
the proceeds from the sale of common stock by the selling
stockholder. The table assumes no exercise of the
underwriters over-allotment option. If the
underwriters over-allotment option is exercised in full,
we will sell up to an aggregate of 375,000 additional shares of
common stock, and up to 16,745,683 shares of common stock
will be outstanding after the completion of this offering.
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|
|
|
|
|
|
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|
|
Percent of | |
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|
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|
|
outstanding | |
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|
Number of | |
|
|
|
Number of | |
|
shares | |
|
|
shares | |
|
Number of | |
|
shares | |
|
beneficially | |
|
|
beneficially | |
|
shares to | |
|
beneficially | |
|
owned(3) | |
|
|
owned | |
|
be sold in | |
|
owned | |
|
| |
|
|
prior to | |
|
this | |
|
after the | |
|
Before | |
|
After | |
Name and address of beneficial owner(1) |
|
offering(2) | |
|
offering | |
|
offering(2) | |
|
offering | |
|
offering | |
| |
Lite-On Semiconductor Corporation(4)
|
|
|
4,601,458 |
|
|
|
750,000 |
|
|
|
3,851,458 |
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|
|
31.5 |
% |
|
|
23.5 |
% |
Munder Capital Management
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|
|
803,288 |
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|
|
|
|
|
|
803,288 |
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|
|
5.5 |
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|
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4.9 |
|
Raymond Soong(5)
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|
|
269,100 |
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|
|
|
|
|
|
269,100 |
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|
|
1.8 |
|
|
|
1.6 |
|
C.H. Chen(5)
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|
|
232,500 |
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|
|
|
|
|
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232,500 |
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|
|
1.6 |
|
|
|
1.4 |
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Michael R. Giordano(5)(6)
|
|
|
118,187 |
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|
|
|
|
|
|
118,187 |
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|
|
* |
|
|
|
* |
|
M.K. Lu(5)
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|
|
23,000 |
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|
|
|
|
|
|
23,000 |
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|
|
* |
|
|
|
* |
|
Dr. Shing Mao(5)
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|
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54,000 |
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|
|
|
|
|
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54,000 |
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|
|
* |
|
|
|
* |
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John M. Stich(5)(7)
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36,500 |
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|
|
|
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|
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36,500 |
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|
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* |
|
|
|
* |
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Dr. Keh-Shew Lu(5)
|
|
|
229,000 |
|
|
|
|
|
|
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229,000 |
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|
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1.6 |
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|
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1.4 |
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Joseph Liu(5)
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|
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300,000 |
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|
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|
|
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300,000 |
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|
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2.0 |
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1.8 |
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Mark A. King(5)
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81,000 |
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|
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|
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81,000 |
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|
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* |
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|
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* |
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Carl C. Wertz(5)
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144,281 |
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|
|
|
|
|
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144,281 |
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|
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1.0 |
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* |
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Steven Ho(5)
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|
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50,375 |
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|
|
|
|
|
|
50,375 |
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|
|
* |
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|
|
* |
|
All directors and executive officers as a group (11 persons)(8)
|
|
|
1,537,943 |
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|
|
|
|
|
|
1,537,943 |
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|
|
9.7 |
|
|
|
8.7 |
|
|
|
(1) |
The address of Lite-On Semiconductor is 9F. No. 233-2,
Pao-Chiao Road, Hsin-Tien, Taipei-hsien 23115, Taiwan, R.O.C.
The address of Munder Capital Management is 480 Pierce
Street Birmingham, MI 48009-6063. The address of each our
directors and executive officers is 3050 East Hillcrest
Drive, Westlake Village, California 91362. |
64
Principal and selling stockholders
|
|
(2) |
The named stockholder has sole voting power and investment
power with respect to the shares listed, except as indicated and
subject to community property laws where applicable. |
|
(3) |
Under Rule 13d-3 of the Securities and Exchange Act of
1934, or the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, a
person shares the power to vote or the power to dispose of the
shares). In addition, under Rule 13d-3(d)(1) of the
Exchange Act, shares which the person (or group) has the right
to acquire within 60 days after August 15, 2005 are
deemed to be outstanding in calculating the beneficial ownership
and the percentage ownership of the person (or group) but are
not deemed to be outstanding as to any other person or group. As
a result, the percentage of outstanding shares of any person as
shown in this table does not necessarily reflect the
persons actual ownership of voting power with respect to
the number of shares of common stock actually outstanding at
August 15, 2005. |
|
(4) |
Lite-On Semiconductor is a public company listed on the
Taiwan Stock Exchange Corporation and a member of The Lite-On
Group. |
|
(5) |
Includes the following shares of common stock that the named
individual has the right to acquire within 60 days after
August 15, 2005 by the exercise of vested stock options: |
|
|
|
|
|
|
|
Shares | |
|
|
subject to | |
Named individual |
|
options | |
| |
Raymond Soong
|
|
|
236,250 |
|
C.H. Chen
|
|
|
232,500 |
|
Michael R. Giordano
|
|
|
100,500 |
|
M.K. Lu
|
|
|
23,000 |
|
Shing Mao
|
|
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45,000 |
|
John M. Stich
|
|
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35,000 |
|
Keh-Shew Lu
|
|
|
49,000 |
|
Joseph Liu
|
|
|
267,500 |
|
Mark A. King
|
|
|
81,000 |
|
Carl C. Wertz
|
|
|
139,500 |
|
Steven Ho
|
|
|
39,500 |
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|
|
(6) |
Includes 2,250 shares of common stock held in the name
of UBS Fiduciary Trust for the investment retirement account of
Mr. Giordano. |
|
(7) |
Includes 1,500 shares of common stock held in the name
of Stich Family Holdings LP. |
|
(8) |
Includes 1,208,750 shares that the directors and
executive officers have the right to acquire within 60 days
after August 15, 2005, by the exercise of vested stock
options but excludes an additional 608,500 shares that the
directors and executive officers will have the right to acquire
upon the exercise of stock options which will become exercisable
in installments more than 60 days after August 15,
2005. |
65
Description of capital stock
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our certificate of
incorporation and bylaws. Pursuant to our certificate of
incorporation, our authorized capital stock consists of
31,000,000 shares, of which:
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30,000,000 shares are
designated as common stock, each with a par value of
$0.662/3; and
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1,000,000 shares are
designated as preferred stock, each with a par value of $1.00.
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COMMON STOCK
Each holder of common stock is entitled to one vote for each
share held of record on each matter submitted to a vote of
stockholders. Our stockholders currently may cumulate their
votes for the election of directors. Subject to preferences
which may be granted to the holders of preferred stock, each
holder of common stock is entitled to share ratably in
distributions to stockholders and to receive ratably such
dividends as may be declared by the Board of Directors out of
funds legally available, subject to any preferential dividend
rights of any outstanding preferred stock. In the event of our
liquidation, dissolution or winding up, each common stockholder
is entitled to share ratably in all our assets remaining after
payment of liabilities and the liquidation preference of any
shares of preferred stock that are outstanding at that time.
Holders of common stock have no conversion, preemptive or other
rights to subscribe for additional shares, and there are no
redemption rights or sinking fund provisions applicable to the
common stock. The rights, preferences and privileges of holders
of common stock are subject to, and may be adversely affected
by, the rights of holders of shares of any series of preferred
stock with we may designate and issue in the future without
further stockholder approval.
PREFERRED STOCK
Our Board of Directors is authorized to issue, without further
stockholder approval, shares of preferred stock in one or more
series, and may fix or alter the relative, participating,
optional or other rights, preferences, privileges and
restrictions, including the voting rights, redemption provisions
(including sinking fund provisions), dividend rights, dividend
rates, liquidation preferences and conversion rights, and the
description of and number of shares constituting any wholly
unissued series of preferred stock. Our Board of Directors,
without further stockholder approval, can issue preferred stock
with voting and conversion rights that could adversely affect
the voting power of the holders of common stock, including the
loss of voting control to the holder of preferred stock issued
in the future. No shares of preferred stock presently are
outstanding. The issuance of preferred stock in certain
circumstances may delay, defer or prevent our change in control
without further action by our stockholders, may discourage bids
for the common stock at a premium over the market price of the
common stock and may adversely affect the market price, and the
voting and other rights of the holders, of common stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW
AND OUR CERTIFICATE OF INCORPORATION AND BY-LAWS
Some provisions of Delaware law, our certificate of
incorporation and by-laws may be deemed to have an anti-takeover
effect and may delay or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the
market price for the shares held by stockholders.
66
Description of capital stock
Section 203 of Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law
prohibits certain transactions between a Delaware corporation
and an interested stockholder, which is defined as a
person who, together with any affiliates or associates,
beneficially owns, directly or indirectly, 15.0% or more of the
outstanding voting shares of a Delaware corporation. This
provision prohibits certain business combinations between an
interested stockholder and a Delaware corporation for a period
of three years after the date the stockholder becomes an
interested stockholder, unless:
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either the business combination or
the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the corporations
board of directors prior to the date the interested stockholder
becomes an interested stockholder;
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the interested stockholder
acquired at least 85.0% of the voting stock of the corporation
(other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which the
stockholder became an interested stockholder; or
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the business combination is
approved by a majority of the board of directors and by the
affirmative vote of 66.66% of the outstanding voting stock that
is not owned by the interested stockholder.
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For this purpose, business combinations include mergers,
consolidations, sales or other dispositions of assets having an
aggregate value in excess of 10.0% of the aggregate market value
of the consolidated assets or outstanding stock of the
corporation, and certain transactions that would increase the
interested stockholders proportionate share ownership in
the corporation.
TRANSFER AGENT
The transfer agent and registrar for our common stock is
Continental Stock Transfer and Trust Company.
LISTING
Our common stock is listed on the Nasdaq National Market under
the symbol DIOD.
67
Material U.S. tax consequences to non-U.S. holders
The following is a summary of the material U.S. federal
income tax consequences of the ownership and disposition of our
common stock to non-U.S. holders (as described below), but
does not purport to be a complete analysis of all the potential
tax considerations relating thereto. This discussion does not
address tax consequences of the purchase, ownership or
disposition of our common stock to holders of our common stock
other than those holders who acquired their beneficial ownership
in the common stock in this offering. This summary is based upon
the provisions of the Code, Treasury regulations promulgated
thereunder, administrative rulings and judicial decisions, all
as of the date hereof. These authorities may be changed,
possibly retroactively, so as to result in U.S. federal
income tax consequences different from those set forth below. We
have not sought any ruling from the Internal Revenue Service, or
IRS, with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance
that the IRS will agree with such statements and conclusions.
This summary also does not address estate tax considerations or
the tax considerations arising under the laws of any foreign,
state, local or other tax jurisdiction. In addition, except
where noted, this discussion addresses only those holders who
hold the common stock as capital assets and does not address tax
considerations applicable to an investors particular
circumstances or to investors that may be subject to special tax
rules, including, without limitation:
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banks, insurance companies or
other financial institutions;
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persons subject to the alternative
minimum tax;
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tax-exempt organizations or
government entities;
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brokers or dealers in securities
or currencies;
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traders in securities that elect
to use a mark-to-market method of accounting for their
securities holdings;
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certain former citizens or
long-term residents of the United States;
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certain foreign entities that are
owned by U.S. persons, including controlled foreign
corporations and passive foreign investment
companies;
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persons who hold our common stock
as a position in a hedging transaction, straddle,
conversion transaction or other risk reduction
transaction;
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|
persons deemed to sell our common
stock under the constructive sale provisions of the Code; or
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partnerships or entities taxable
as partnerships.
|
If a partnership holds our common stock, the tax treatment of a
partner generally will depend on the status of the partner and
upon the activities of the partnership. Accordingly,
partnerships which hold our common stock and partners in such
partnerships should consult their tax advisors.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR
PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING
UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR
UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
68
Material U.S. tax consequences to
non-U.S. holders
NON-UNITED STATES HOLDER DEFINED
For purposes of this discussion, you are a non-U.S. bolder
if you are a holder that, for U.S. federal income tax
purposes, is not a U.S. person or a partnership. For
purposes of this discussion, you are a U.S. person if you
are:
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an individual citizen or resident
of the United States;
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|
a corporation or other entity
taxable as a corporation created or organized in the United
States or under the laws of the United States, any state or the
District of Columbia;
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|
an estate whose income is subject
to U.S. federal income tax regardless at its source; or
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|
a trust (i) whose
administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who
have the authority to control all substantial decisions of the
trust or (ii) which has made an election to be treated as a
U.S. person.
|
DISTRIBUTIONS
We have not made any distributions on our common stock, and we
do not plan to make any distributions for the foreseeable
future. However, if we do make distributions on our common
stock, those payments will constitute dividends for
U.S. tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent those
distributions exceed our current and accumulated earnings and
profits, they will constitute a return of capital and will first
reduce your basis in our common stock, but not below zero, and
then will be treated as gain from the sale of stock.
Subject to the discussion below under Income or Gain
Effectively Connected with a United States Trade of
Business, any dividend paid to you generally will be
subject to U.S. withholding tax either at a rate of 30% of
the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. In order to receive a
reduced treaty rate, you must provide us with an IRS
Form W-8BEN or other appropriate version of IRS
Form W-8 certifying qualification for the reduced rate. If
a non-U.S. holder holds the common stock through a foreign
intermediary, a reduced rate of withholding may be obtained if
the foreign intermediary provides a properly executed IRS
Form W-8IMY, stating that such bolder of the common stock
is holding the common stock on behalf of non-U.S. holders
and attaching properly executed IRS Form W-8BENs of such
non-U.S. holders (unless such intermediary is a qualified
intermediary) to the Form W-8IMY. In all situations, the
applicable form must be delivered pursuant to applicable
procedures and must be promptly transmitted to the
U.S. paying/withholding agent.
If you are eligible for a reduced rate of withholding tax
pursuant to a tax treaty, you may obtain a refund of any excess
amounts currently withheld If you file an appropriate claim for
refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
You generally will not be required to pay U.S. federal
income tax on any gain realized upon the sale or other
disposition of our common stock unless:
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the gain is effectively connected
with your conduct of a U.S. trade or business (and if a tax
treaty applies, such gain is attributable to your permanent
establishment in the Unites States) (in either case, see the
discussion below under Income or Gain Effectively
Connected with a United States Trade or Business);
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69
Material U.S. tax consequences to
non-U.S. holders
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you are an individual who holds
our common stock as a capital asset (generally, an asset held
for investment purposes) and who is present in the United States
for a period or periods aggregating 183 days or more during
the calendar year in which the sale or disposition occurs and
certain other conditions are met; or
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our common stock constitutes a
U.S. real property interest by reason of our status as a
U.S. real property holding corporation for
U.S. federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or
your holding period for our common stock.
|
Unless an applicable treaty provides otherwise, if you are an
individual non-U.S. holder described in the second bullet
above, you will be required to pay a flat 30% tax on the gain
derived from the sale, which gain may be offset by
U.S. source capital losses (even thought you are not
considered a resident of the United States). We believe we are
not and do not anticipate becoming a U.S. real
property holding corporation.
INCOME OR GAIN EFFECTIVELY CONNECTED WITH A UNITED STATES
TRADE OR BUSINESS
If you are engaged in a trade or business in the United States
and if dividends on or gain realized on the sale or other
disposition of the common stock are effectively connected with
your conduct of such trade or business (and, if an applicable
tax treaty requires, are attributable to a U.S. permanent
establishment maintained by you in the United States), you will
generally be subject to U.S. federal income tax on such
dividends or gain on a net income basis in the same manner as if
you were a U.S. taxpayer, although you will be exempt
form U.S. withholding tax if you deliver, pursuant to
applicable procedures, a properly executed IRS Form W-8ECI
to the U.S. paying/ withholding agent. In addition, if you
are a foreign corporation, you may be subject to a branch
profits tax equal to 30% (or such lower rate provided by an
applicable U.S. income tax treaty) of a portion of your
effectively connected earnings and profits for the taxable year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we mush report annually to the IRS the amount of
dividends paid to you, your name and address, and the amount of
tax withheld, if any. A similar report is send to you. Pursuant
to tax treaties or other agreements, the IRS may make its
reports available to tax authorities in your country of
residence.
Payments of dividends or of proceeds on the dispositions of
stock made to you may be subject to information reporting and
backup withholding unless you establish an exemption, for
example by properly certifying your non-United States status on
an IRS Form W-8BEN or another appropriate version of IRS
Form W-8. Notwithstanding the foregoing, backup withholding
and information reporting may apply if either we or our paying
agent has actual knowledge, or reason to know, that you are a
U.S. person.
Backup withholding is currently imposed at a rate of 28%;
however, it is not an additional tax. Rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or
credit may be obtained, provided that the required information
is furnished to the IRS.
70
Underwriting
We and the selling stockholder are offering shares of our common
stock described in this prospectus through the underwriters
named below. We will not receive any of the proceeds of the
common stock sold by the selling stockholder. UBS Securities
LLC, A.G. Edwards & Sons, Inc., C.E. Unterberg, Towbin,
LLC, Raymond James & Associates, Inc. and
WR Hambrecht + Co, LLC are the representatives of the
underwriters. UBS Securities LLC is the sole book-running
manager of this offering. We and the selling stockholder have
entered into an underwriting agreement with the representatives.
Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the
number of shares of common stock listed next to its name in the
following table.
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|
|
|
|
|
Underwriters |
|
Number of shares | |
| |
UBS Securities LLC
|
|
|
|
|
A.G. Edwards & Sons, Inc.
|
|
|
|
|
C.E. Unterberg, Towbin, LLC
|
|
|
|
|
Raymond James & Associates, Inc.
|
|
|
|
|
WR Hambrecht + Co, LLC
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,500,000 |
|
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
The common stock offered is subject to a number of conditions,
including:
|
|
|
receipt and acceptance of the
common stock by the underwriters; and
|
|
|
the underwriters right to
reject orders in whole or in part.
|
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option to buy up to an
aggregate of 375,000 additional shares of our common stock. The
underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this
offering. The underwriters have 30 days from the date of
this prospectus to exercise this option. If the underwriters
exercise this option in whole or in part, they will each
purchase approximately in proportion to the amounts specified in
the table above.
COMMISSIONS AND DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to
$ per
share from the offering price. Any of these securities dealers
may resell any shares purchased from the underwriters to other
brokers or dealers at a discount of up to
$ per
share from the offering price. If all the shares are not sold at
the offering price, the representatives may change the offering
price and the other selling terms. Sales of shares made outside
of the United States may be made by affiliates of the
underwriters. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the shares at the
prices and upon the terms stated therein and, as a result, will
thereafter bear any risk associated with changing the offering
price
71
Underwriting
to the public or other selling terms. The representatives of the
underwriters have informed us that they do not expect to sell
more than an aggregate
of shares
of common stock to accounts over which such representatives
exercise discretionary authority.
The selling stockholder will pay the underwriting discounts and
commissions applicable to the shares that it sells. The
following table shows the per share and total underwriting
discounts and commissions we and the selling stockholder will
pay to the underwriters. These amounts are shown assuming both
no exercise and full exercise of the underwriters option
to purchase up to an additional 375,000 shares from us.
|
|
|
|
|
|
|
|
|
|
Underwriters |
|
No exercise | |
|
Full exercise | |
| |
Per share
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering payable by
us, not including underwriting discounts and commissions, will
be approximately $820,000. The underwriters have agreed to
reimburse us up to an aggregate of $150,000 in connection with
expenses incurred by us relating to this offering.
NO SALES OF SIMILAR SECURITIES
We, each of our directors and executive officers and the selling
stockholder have entered into lock-up agreements with the
underwriters. Under these agreements, subject to certain
exceptions specified below, we and each of these persons may
not, without the prior written consent of UBS Securities LLC,
sell, offer to sell, contract or agree to sell, hypothecate,
hedge, pledge, grant any option to purchase or otherwise dispose
of or agree to dispose of, directly or indirectly, any of our
common stock, any securities convertible into or exercisable or
exchangeable for our common stock or other rights to purchase
our common stock. These restrictions will be in effect for a
period of 90 days (180 days in the case of the selling
stockholder) after the date of this prospectus. These lock-up
agreements are subject to such stockholders rights to
transfer their shares of common stock as a bona fide gift or to
a trust for the benefit of an immediate family member or to an
affiliate, provided that such donee or transferee agrees in
writing to be bound by the terms of the lock-up agreement. In
addition, the lock-up agreement signed by our director,
Mr. Giordano, will permit the sale of shares under his
current 10b5-1 plan. At any time and without public notice, UBS
Securities LLC may, in its sole discretion, release some or all
of the affected securities from these lock-up agreements
although it currently has no plans to do so. In addition, we may
grant options to purchase shares of common stock under our stock
incentive plan and issue shares of common stock upon the
exercise of outstanding options.
The applicable lock-up period may be extended for up to 18
additional days under certain circumstances where we announce or
pre-announce earnings or material news or a material event
within approximately 16 days prior to, or approximately
16 days after, the termination of the lock up period.
We and the selling stockholder have agreed to indemnify the
underwriters against certain liabilities, including certain
liabilities under the Securities Act. If we are unable to
provide this indemnification, we have agreed to contribute to
payments the underwriters may be required to make in respect of
those liabilities.
NASDAQ NATIONAL MARKET QUOTATION
Our common stock is listed on the Nasdaq National Market under
the symbol DIOD.
72
Underwriting
PRICE STABILIZATION, SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
|
|
|
stabilizing transactions;
|
|
|
short sales;
|
|
|
purchases to cover positions
created by short sales;
|
|
|
imposition of penalty bids; and
|
|
|
syndicate covering transactions.
|
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of common
stock on the open market to cover positions created by short
sales. Short sales may be covered short sales, which
are short positions in an amount not greater than the
underwriters over-allotment option referred to above, or
may be naked short sales, which are short positions
in excess of that amount.
The underwriters may close out any covered short position by
either exercising their over-allotment option, in whole or in
part, or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through the over-allotment option.
Naked short sales are sales of common stock in excess of shares
of common stock subject to the over-allotment option. The
underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market that could adversely affect investors who
purchased in this offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on the Nasdaq National Market,
in the over-the-counter market or otherwise.
AFFILIATIONS
The underwriters and their affiliates may provide from time to
time certain commercial banking, financial advisory, investment
banking and other services for us which they will be entitled to
receive separate fees. The underwriters and their affiliates may
from time to time in the future engage in transactions with us
and perform services for us in the ordinary course of their
business. One of our directors, Mr. Giordano, is an
employee of UBS Financial Services Inc., an affiliate of
UBS Securities, LLC, one of the underwriters. In that capacity,
Mr. Giordano is the pension consultant for our 401(k) plan.
In addition, Mr. Giordano has from time to time provided
assistance to our directors, executive officers and employees in
connection with stock option exercises and subsequent sales of
our common stock, and has provided them with investment
management services.
73
Notice to investors
EUROPEAN ECONOMIC AREA
With respect to each Member State of the European Economic Area
which has implemented Directive 2003/71/EC, including any
applicable implementing measures, or the Prospectus Directive,
from and including the date on which the Prospectus Directive is
implemented in that Member State, the offering of our common
stock in this offering is only being made:
|
|
|
|
(1) |
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; |
|
|
(2) |
to any legal entity which has two or more of (a) an average
of at least 250 employees during the last financial year;
(b) a total balance sheet of more
than 43,000,000
and (c) an annual net turnover of more
than 50,000,000,
as shown in its last annual or consolidated accounts; or |
|
|
(3) |
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
United Kingdom
Without limitation to the other restrictions referred to herein,
this prospectus is directed only at (1) persons outside the
United Kingdom, (2) persons having professional experience
in matters relating to investments who fall within the
definition of investment professionals in
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005; or (3) high net
worth bodies corporate, unincorporated associations and
partnerships and trustees of high value trusts as described in
Article 49(2) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005. Without limitation to the
other restrictions referred to herein, any investment or
investment activity to which this prospectus relates is
available only to, and will be engaged in only with, such
persons, and persons within the United Kingdom who receive this
communication (other than persons who fall within (2) or
(3) above) should not rely or act upon this communication.
France
The shares of our common stock may only be offered or sold to
qualified investors and/or to a restricted number of investors
in the Republic of France in accordance with
Article L.41 1-2 of the French Code Monetaire et
Financier (Monetary and Financial Code) and with the
Decree no. 98-880 dated 1 October 1998 (the
Decree); neither this prospectus, which has not been
submitted to the Autorité des marchés financiers (the
AMF), nor any information contained therein or any
offering material relating to the shares, may be distributed or
caused to be distributed to the public in France.
You are informed that:
|
|
|
|
(1) |
this prospectus has not been submitted to the clearance
procedures of the AMF; |
|
|
(2) |
in compliance with the Decree, if you subscribe for shares of
our common stock, you will be acting for your own account; |
|
|
(3) |
the direct and indirect distribution by you to the public of
your shares shall only be made in compliance with
Articles L.411-1, L.411-2, L.412-1, and L.621-8 of the
Monetary and Financial Code; and |
74
Notice to investors
|
|
|
|
(4) |
where the exemption for placements within a restricted
circle of investors is relied on and the number of such
investors exceeds 100, you must declare that you have personal
links, either of a professional or family nature, with any of
the underwriters. |
Italy
The offering of the shares of our common stock has not been
registered pursuant to the Italian securities legislation and,
accordingly, our common stock may not be offered or sold in the
Republic of Italy in a solicitation to the public.
The shares of our common stock may only be offered, sold and
delivered in the Republic of Italy to Professional
investors, as defined in Article 31.2 of Commissione
Nazionale per le Società e la Borsa (CONSOB)
Regulation No. 11522 of 1st July 1998
(Regulation No. 11522), as amended, pursuant to
Articles 30.2 and 100 of Legislative Decree No. 58 of
24th February 1998 (Decree No. 58), or in
circumstances where an express exemption from compliance with
the solicitation restrictions provided by Decree No. 58 or
CONSOB Regulation No. 11971 of 14th May 1999 applies,
provided, however, that any such offer, sale, or delivery of
shares or distribution of copies of this prospectus or any other
document relating to the shares in the Republic of Italy must be:
|
|
|
|
(1) |
made by investment firms, banks, or financial intermediaries
permitted to conduct such activities in the Republic of Italy in
accordance with Legislative Decree No. 385 of
1st September 1993 (Decree No. 385),
Decree No. 58, Regulation No. 11522, and any other
applicable laws and regulations; and |
|
|
(2) |
in compliance with any other applicable notification requirement
or limitation which may be imposed by CONSOB or the Bank of
Italy. |
Germany
Shares of our common stock have not been and will not be offered
or sold or publicly promoted or advertised by any Underwriter in
the Federal Republic of Germany other than in compliance with
the provisions of the German Securities Prospectus Act
(WertpapierprospektgestzWpPG) of June 22, 2005, as
amended, or of any other laws applicable in the Federal Republic
of Germany governing the issue, offering and sale of securities.
The Netherlands
Shares of our common stock may not be offered, sold, transferred
or delivered in or from the Netherlands as part of their initial
distribution or at any time thereafter, directly or indirectly,
other than to banks, pension funds, insurance companies,
securities firms, investment institutions, central governments,
large international and supranational institutions and other
comparable entities, including, among others, treasuries and
finance companies of large enterprises, which trade or invest in
securities in the course of a profession or trade. Individuals
or legal entities who or which do not trade or invest in
securities in the course of their profession or trade may not
participate in the offering of the shares, and this prospectus
or any other offering material relating to the shares may not be
considered an offer or the prospect of an offer to sell or
exchange the shares.
75
Notice to investors
Switzerland
Shares of our common stock may be offered in Switzerland only on
the basis of a nonpublic offering. This prospectus does not
constitute an issuance prospectus according to
articles 652a or 1156 of the Swiss Federal Code of
Obligations or a listing prospectus according to article 32
of the Listing Rules of the Swiss exchange. The shares of our
common stock may not be offered or distributed on a professional
basis in or from Switzerland and neither this prospectus nor any
other offering material relating to shares of our common stock
may be publicly issued in connection with any such offer or
distribution. The shares have not been and will not be approved
by any Swiss regulatory authority. In particular, the shares are
not and will not be registered with or supervised by the Swiss
Federal Banking Commission, and investors may not claim
protection under the Swiss Investment Fund Act.
76
Legal matters
The validity of the common stock offered hereby will be passed
upon for us by Sheppard Mullin Richter & Hampton LLP,
Los Angeles, California. Certain legal matters in connection
with this offering will be passed upon for the underwriters by
Simpson Thacher & Bartlett LLP, Palo Alto, California.
Experts
The consolidated financial statements and schedule of Diodes as
of December 31, 2003 and 2004 and for each of the three
years in the period ended December 31, 2004 included in
this prospectus have been audited by Moss Adams LLP, independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report, given on the authority of such firm as experts
in auditing and accounting.
Where you can find additional information
We have filed with the SEC a registration statement on
Form S-3, including exhibits, schedules and any amendments
with respect to the common stock being offered hereby. This
prospectus is a part of that registration statement and includes
all of the information which we believe is material to you in
considering whether to make an investment in our common stock.
We refer you to the registration statement for additional
information about us, our common stock and this offering,
including the full texts of the exhibits, some of which have
been summarized in this prospectus. Statements contained in this
prospectus as to the contents of any contract or any other
document referred to are not necessarily complete. With respect
to each such contract or other document filed as a part of the
registration statement, reference is made to the relevant
exhibit for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its
entirety by such reference. The registration statement is
available for inspection and copying at the SECs Public
Reference Room at 100 F Street, N.E.,
Washington, D.C. The public may obtain information about
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site
that makes available the registration statement. The address of
the SECs Internet site is www.sec.gov. We are
required to file reports and other information with the SEC
pursuant to the informational requirements of the Securities
Exchange Act of 1934.
Incorporation of certain documents by reference
We will incorporate by reference information into
this prospectus by disclosing important information to you by
referring you to another document that is filed separately with
the SEC. The information incorporated by reference is deemed to
be part of this prospectus, and later information that we file
with the SEC will automatically update and supersede that
information. This prospectus incorporates by reference the
documents set forth below that have been previously filed with
the SEC. These documents contain important information about us.
|
|
|
Our annual report on
Form 10-K for the fiscal year ended December 31, 2004
(as amended by the Form 10-K/A (Amendment No. 1)),
including the information incorporated therein from the proxy
statement for our 2005 annual meeting of stockholders);
|
|
|
Our quarterly reports on
Form 10-Q for the fiscal quarters ended March 31, 2005
and June 30, 2005; and
|
77
Incorporation of certain documents by reference
|
|
|
Our current reports on
Form 8-K, filed on May 31, 2005 (except Item 7.01
which is furnished to, but not filed with, the SEC) and
July 28, 2005.
|
We are also incorporating by reference additional documents that
we file with the SEC pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, between the date of this
prospectus and the termination of the offering of common stock;
provided, however, that nothing contained herein shall be deemed
to incorporate information furnished to, but not filed with, the
SEC.
We will provide without charge to each person, including any
beneficial owner, to whom a copy of this prospectus has been
delivered, a copy of any and all of these filings. You may make
a written request for a copy of these filings by contacting us
at:
Diodes Incorporated
3050 E. Hillcrest Drive
Westlake Village, CA 91362
Attn: Carl C. Wertz
78
INDEX TO HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements of Diodes Incorporated
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
Unaudited Consolidated Financial Statements of Diodes
Incorporated
|
|
|
|
|
|
|
|
F-27 |
|
|
|
|
F-29 |
|
|
|
|
F-30 |
|
|
|
|
F-32 |
|
F-1
Diodes Incorporated and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Diodes Incorporated and Subsidiaries as of December 31,
2004 and 2003 and the related consolidated statements of income,
stockholders equity and cash flows for each of the years
in the three-year period ended December 31, 2004. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Diodes Incorporated and Subsidiaries as of
December 31, 2004 and 2003, and the consolidated results of
their operations and cash flows for each of the years in the
three year period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United
States of America.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
January 28, 2005
F-2
Diodes Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
| |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
12,847,000 |
|
|
$ |
18,970,000 |
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
Trade Customers
|
|
|
27,010,000 |
|
|
|
38,682,000 |
|
|
|
Related parties
|
|
|
3,938,000 |
|
|
|
5,526,000 |
|
|
|
|
|
|
|
|
|
|
|
30,948,000 |
|
|
|
44,208,000 |
|
|
|
Allowance for doubtful accounts
|
|
|
(375,000 |
) |
|
|
(432,000 |
) |
|
|
|
|
|
|
|
|
|
|
30,573,000 |
|
|
|
43,776,000 |
|
Inventories
|
|
|
16,164,000 |
|
|
|
22,238,000 |
|
Deferred income taxes, current
|
|
|
5,547,000 |
|
|
|
2,453,000 |
|
Prepaid expenses and other
|
|
|
2,256,000 |
|
|
|
4,243,000 |
|
Prepaid income taxes
|
|
|
446,000 |
|
|
|
406,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
67,833,000 |
|
|
|
92,086,000 |
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
47,893,000 |
|
|
|
60,857,000 |
|
DEFERRED INCOME TAXES, non-current
|
|
|
1,816,000 |
|
|
|
7,970,000 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,090,000 |
|
|
|
5,090,000 |
|
|
Other
|
|
|
1,163,000 |
|
|
|
1,798,000 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
123,795,000 |
|
|
$ |
167,801,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-3
Diodes Incorporated and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$ |
8,488,000 |
|
|
$ |
6,167,000 |
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
14,029,000 |
|
|
|
17,274,000 |
|
|
|
Related parties
|
|
|
3,453,000 |
|
|
|
3,936,000 |
|
|
Accrued liabilities
|
|
|
8,715,000 |
|
|
|
11,459,000 |
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
2,500,000 |
|
|
|
2,500,000 |
|
|
|
Others
|
|
|
3,333,000 |
|
|
|
1,014,000 |
|
|
Current portion of capital lease obligations
|
|
|
161,000 |
|
|
|
165,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,679,000 |
|
|
|
42,515,000 |
|
LONG-TERM DEBT, net of current portion
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
3,750,000 |
|
|
|
1,250,000 |
|
|
Others
|
|
|
3,000,000 |
|
|
|
6,583,000 |
|
CAPITAL LEASE OBLIGATIONS, net of current portion
|
|
|
2,334,000 |
|
|
|
2,172,000 |
|
MINORITY INTEREST IN JOINT VENTURE
|
|
|
2,582,000 |
|
|
|
3,133,000 |
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Class A convertible preferred stockpar value
$1.00 per share; 1,000,000 shares authorized; no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Common stockpar value
$0.662/3
per share; 30,000,000 shares authorized; 14,627,284 and
15,763,266 shares issued at 2003 and 2004, respectively
|
|
|
9,752,000 |
|
|
|
10,509,000 |
|
|
|
Additional paid-in capital
|
|
|
7,942,000 |
|
|
|
21,516,000 |
|
|
|
Retained earnings
|
|
|
55,779,000 |
|
|
|
81,330,000 |
|
|
|
|
|
|
|
|
|
|
|
73,473,000 |
|
|
|
113,355,000 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Treasury stock1,613,508 shares of common stock, at
cost
|
|
|
1,782,000 |
|
|
|
1,782,000 |
|
|
|
Accumulated other comprehensive loss (gain)
|
|
|
241,000 |
|
|
|
(575,000 |
) |
|
|
|
|
|
|
|
|
|
|
2,023,000 |
|
|
|
1,207,000 |
|
|
|
|
Total stockholders equity
|
|
|
71,450,000 |
|
|
|
112,148,000 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
123,795,000 |
|
|
$ |
167,801,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-4
Diodes Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
| |
NET SALES
|
|
$ |
115,821,000 |
|
|
$ |
136,905,000 |
|
|
$ |
185,703,000 |
|
COST OF GOODS SOLD
|
|
|
89,111,000 |
|
|
|
100,377,000 |
|
|
|
124,968,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,710,000 |
|
|
|
36,528,000 |
|
|
|
60,735,000 |
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
16,228,000 |
|
|
|
19,586,000 |
|
|
|
23,503,000 |
|
|
Research and development
|
|
|
1,472,000 |
|
|
|
2,049,000 |
|
|
|
3,422,000 |
|
|
Impairment of fixed assets
|
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
43,000 |
|
|
|
37,000 |
|
|
|
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,743,000 |
|
|
|
22,672,000 |
|
|
|
26,939,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8,967,000 |
|
|
|
13,856,000 |
|
|
|
33,796,000 |
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,183,000 |
) |
|
|
(860,000 |
) |
|
|
(637,000 |
) |
|
Other
|
|
|
67,000 |
|
|
|
(5,000 |
) |
|
|
(418,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(1,116,000 |
) |
|
|
(865,000 |
) |
|
|
(1,055,000 |
) |
|
|
Income before income taxes and minority interest
|
|
|
7,851,000 |
|
|
|
12,991,000 |
|
|
|
32,741,000 |
|
INCOME TAX PROVISION
|
|
|
(1,729,000 |
) |
|
|
(2,460,000 |
) |
|
|
(6,514,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
6,122,000 |
|
|
|
10,531,000 |
|
|
|
26,227,000 |
|
MINORITY INTEREST IN EARNINGS OF JOINT VENTURE
|
|
|
(320,000 |
) |
|
|
(436,000 |
) |
|
|
(676,000 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
5,802,000 |
|
|
$ |
10,095,000 |
|
|
$ |
25,551,000 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.47 |
|
|
$ |
0.79 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.44 |
|
|
$ |
0.70 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,276,899 |
|
|
|
12,730,808 |
|
|
|
13,404,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,297,490 |
|
|
|
14,406,054 |
|
|
|
15,471,438 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-5
Diodes Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years ended December 31, 2002, 2003, and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
other | |
|
|
|
|
|
|
Shares in | |
|
|
|
Common stock | |
|
Additional Paid-In | |
|
Retained | |
|
comprehensive | |
|
|
|
|
Shares | |
|
Treasury | |
|
Amount | |
|
in treasury | |
|
Capital | |
|
earnings | |
|
gain (loss) | |
|
Total | |
| |
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001
|
|
|
13,841,496 |
|
|
|
1,613,508 |
|
|
$ |
9,228,000 |
|
|
$ |
(1,782,000 |
) |
|
$ |
4,233,000 |
|
|
$ |
39,882,000 |
|
|
$ |
(437,000 |
) |
|
$ |
51,124,000 |
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,802,000 |
|
|
|
|
|
|
|
5,802,000 |
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,000 |
) |
|
|
(40,000 |
) |
|
|
Change in unrealized loss on derivative instruments, net of tax
of $400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,761,000 |
|
|
|
|
Management fee from LSC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
|
375,000 |
|
|
Exercise of stock options including $98,000 income tax benefit
|
|
|
97,650 |
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
354,000 |
|
|
|
|
|
|
|
|
|
|
|
419,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
13,939,146 |
|
|
|
1,613,508 |
|
|
$ |
9,293,000 |
|
|
$ |
(1,782,000 |
) |
|
$ |
4,962,000 |
|
|
$ |
45,684,000 |
|
|
$ |
(478,000 |
) |
|
$ |
57,679,000 |
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,095,000 |
|
|
|
|
|
|
|
10,095,000 |
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,000 |
|
|
|
169,000 |
|
|
|
Change in unrealized loss on derivative instruments, net of tax
of $27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,000 |
|
|
|
68,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,332,000 |
|
|
|
|
Management fee from LSC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286,000 |
|
|
|
|
|
|
|
|
|
|
|
286,000 |
|
|
Exercise of stock options including $1,139,000 income tax benefit
|
|
|
688,138 |
|
|
|
|
|
|
|
459,000 |
|
|
|
|
|
|
|
2,694,000 |
|
|
|
|
|
|
|
|
|
|
|
3,153,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
14,627,284 |
|
|
|
1,613,508 |
|
|
$ |
9,752,000 |
|
|
$ |
(1,782,000 |
) |
|
$ |
7,942,000 |
|
|
$ |
55,779,000 |
|
|
$ |
(241,000 |
) |
|
$ |
71,450,000 |
|
|
Comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,551,000 |
|
|
|
|
|
|
|
25,551,000 |
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
793,000 |
|
|
|
793,000 |
|
|
|
Change in unrealized loss on derivative instruments, net of tax
of $9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,000 |
|
|
|
23,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,367,000 |
|
|
|
|
Management fee from LSC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
|
|
|
|
|
|
|
|
|
180,000 |
|
|
Exercise of stock options including $8,514,000 income tax benefit
|
|
|
1,135,982 |
|
|
|
|
|
|
|
757,000 |
|
|
|
|
|
|
|
13,394,000 |
|
|
|
|
|
|
|
|
|
|
|
14,151,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
15,763,266 |
|
|
|
1,613,508 |
|
|
$ |
10,509,000 |
|
|
$ |
(1,782,000 |
) |
|
$ |
21,516,000 |
|
|
$ |
81,330,000 |
|
|
$ |
575,000 |
|
|
$ |
112,148,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-6
Diodes Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,802,000 |
|
|
$ |
10,095,000 |
|
|
$ |
25,551,000 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,747,000 |
|
|
|
11,073,000 |
|
|
|
13,173,000 |
|
|
|
Minority interest earnings
|
|
|
320,000 |
|
|
|
436,000 |
|
|
|
676,000 |
|
|
|
Loss on impairment and disposal of property, plant and equipment
|
|
|
43,000 |
|
|
|
1,037,000 |
|
|
|
14,000 |
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,779,000 |
) |
|
|
(8,490,000 |
) |
|
|
(13,203,000 |
) |
|
|
|
Inventories
|
|
|
2,139,000 |
|
|
|
(1,248,000 |
) |
|
|
(6,074,000 |
) |
|
|
|
Prepaid expenses and other
|
|
|
(711,000 |
) |
|
|
(388,000 |
) |
|
|
(2,474,000 |
) |
|
|
|
Deferred income taxes
|
|
|
646,000 |
|
|
|
270,000 |
|
|
|
5,463,000 |
|
|
|
|
Accounts payable
|
|
|
3,153,000 |
|
|
|
5,082,000 |
|
|
|
3,728,000 |
|
|
|
|
Accrued liabilities
|
|
|
3,481,000 |
|
|
|
|
|
|
|
1,468,000 |
|
|
|
|
Income taxes payable
|
|
|
149,000 |
|
|
|
954,000 |
|
|
|
978,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,990,000 |
|
|
|
18,821,000 |
|
|
|
29,300,000 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(6,777,000 |
) |
|
|
(15,646,000 |
) |
|
|
(26,201,000 |
) |
|
Proceeds from sales of property, plant and equipment
|
|
|
3,000 |
|
|
|
357,000 |
|
|
|
68,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(6,774,000 |
) |
|
|
(15,289,000 |
) |
|
|
(26,133,000 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances (repayments) on line of credit, net
|
|
|
(3,478,000 |
) |
|
|
5,463,000 |
|
|
|
(2,321,000 |
) |
|
Net proceeds from the issuance of common stock
|
|
|
321,000 |
|
|
|
2,014,000 |
|
|
|
5,628,000 |
|
|
Management incentive reimbursement from LSC
|
|
|
375,000 |
|
|
|
375,000 |
|
|
|
375,000 |
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
3,583,000 |
|
|
Repayments of long-term debt
|
|
|
(11,080,000 |
) |
|
|
(5,833,000 |
) |
|
|
(4,819,000 |
) |
|
Minority shareholder investment in subsidiary
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
Repayments of capital lease obligations
|
|
|
(133,000 |
) |
|
|
(157,000 |
) |
|
|
(158,000 |
) |
|
Dividend to minority shareholder
|
|
|
|
|
|
|
|
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
(13,995,000 |
) |
|
|
1,862,000 |
|
|
|
2,163,000 |
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
|
|
|
(40,000 |
) |
|
|
169,000 |
|
|
|
793,000 |
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
(819,000 |
) |
|
|
5,563,000 |
|
|
|
6,123,000 |
|
CASH, beginning of year
|
|
|
8,103,000 |
|
|
|
7,284,000 |
|
|
|
12,847,000 |
|
|
|
|
|
|
|
|
|
|
|
CASH, end of year
|
|
$ |
7,284,000 |
|
|
$ |
12,847,000 |
|
|
$ |
18,970,000 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,229,000 |
|
|
$ |
876,000 |
|
|
$ |
683,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
965,000 |
|
|
$ |
999,000 |
|
|
$ |
2,504,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to stock options credited to paid-in capital
|
|
$ |
98,000 |
|
|
$ |
1,139,000 |
|
|
$ |
8,514,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Building acquired through capital lease obligation
|
|
$ |
2,785,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-7
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES
Nature of operationsDiodes Incorporated and its
subsidiaries manufacture and distribute discrete semiconductor
devices to manufacturers in the communications, computing,
industrial, consumer electronics and automotive markets. The
Companys products include small-signal transistors and
MOSFETs, transient voltage suppressors (TVSs), zeners,
Schottkys, diodes, rectifiers, bridges and silicon wafers. The
products are sold primarily throughout North America, Asia and
Europe.
Principles of consolidationThe consolidated
financial statements include the accounts of the parent company,
Diodes Incorporated (Diodes-North America), its wholly-owned
subsidiaries; Diodes Taiwan Corporation, Ltd. (Diodes-Taiwan),
Diodes Hong Kong, Ltd. (Diodes-Hong Kong) and FabTech, Inc.
(FabTech or Diodes-FabTech); and its majority (95.0%) owned
subsidiaries, Shanghai KaiHong Electronics Co., Ltd.
(Diodes-China) and Diodes Shanghai Company, Ltd.
(Diodes-Shanghai). All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue recognitionRevenue is recognized when there
is persuasive evidence that an arrangement exists, when delivery
has occurred, when our price to the buyer is fixed or
determinable and when collectibility of the receivable is
reasonably assured. These elements are met when title to the
products is passed to the buyers, which is generally when our
product is shipped to both original equipment manufacturers
(OEMs) and electronics component distributors. The Company
reduces revenue in the period of sale for estimates of product
returns and other allowances.
In 2003, Diodes-China received approximately $254,000 in
high-technology grants as an incentive for further investment
from the local Chinese government. The grants were unrestricted
and available upon receipt to fund the operations of
Diodes-China. The Company recognized this grant income when
received and recorded them within other income on
the accompanying statements of income. No grant income was
received in 2004 and management does not expect this type of
income in the future.
Product warrantyThe Company generally warrants its
products for a period of one year from the date of sale.
Historically, warranty expense has not been significant.
InventoriesInventories are stated at the lower of
cost or market value. Cost is determined principally by the
first-in, first-out method. On an on-going basis both finished
goods inventory and raw material inventory is evaluated for
obsolescence and slow-moving items. This evaluation includes
analysis of sales levels, sales projections, and purchases by
item, as well as raw material usage related to our manufacturing
facilities. Based upon this analysis, as well as an inventory
aging analysis, a reserve for obsolete and slow-moving inventory
is accrued (see Note 2).
Property, plant and equipmentProperty, plant and
equipment are depreciated using straight-line and accelerated
methods over the estimated useful lives, which range from 20 to
55 years for buildings and 3 to 10 years for machinery
and equipment. Leasehold improvements are amortized using the
straight-line method over 3 to 5 years (see Note 3).
GoodwillBeginning in fiscal 2002 with the adoption
of Statement of Financial Accounting Standards
(SFAS) No. 142 (Goodwill and Other Intangible
Assets), goodwill is no longer amortized, but instead
tested for impairment at least annually. As a result of the
Companys adoption of SFAS No. 142, an
independent appraiser hired by the Company, performed the
required impairment tests of goodwill as of January 1, 2004
and 2005, and has determined that the goodwill is fully
recoverable. No goodwill was acquired or impaired during the
years ended December 31, 2002, 2003 and 2004. As of
December 31, 2004, goodwill for Diodes-FabTech and
Diodes-China was $4.2 million
F-8
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $0.9 million, respectively. Prior to fiscal 2002,
goodwill was amortized using the straight-line method over its
estimated period of benefit.
Impairment on long-lived assetsCertain long-lived
assets of the Company are reviewed at least annually as to
whether their carrying values have become impaired in accordance
with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Management considers
assets to be impaired if the carrying value exceeds the
undiscounted projected cash flows from operations. If impairment
exists, the assets are written down to fair value or the
projected discounted cash flows from related operations. As of
December 31, 2004, the Company expects the remaining
carrying value of assets to be recoverable.
Income taxesIncome taxes are accounted for using an
asset and liability approach whereby deferred tax assets and
liabilities are recorded for differences in the financial
reporting bases and tax bases of the Companys assets and
liabilities (see Note 8).
Concentration of credit riskFinancial instruments,
which potentially subject the Company to concentrations of
credit risk, include trade accounts receivable. Credit risk is
limited by the dispersion of the Companys customers over
various geographic areas, operating primarily in the electronics
manufacturing and distribution industries. The Company performs
on-going credit evaluations of its customers and generally
requires no collateral from its customers. Historically, credit
losses have not been significant.
The Company currently maintains substantially all of its
day-to-day operating cash balances with major financial
institutions. Cash balances are usually in excess of
U.S. Federal and/or foreign deposit insurance limits.
Use of estimatesThe preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires that
management make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ materially from
those estimates.
Stock splitOn November 25, 2003, the Company
affected a three-for-two stock split for shareholders of record
as of November 14, 2003 in the form of a 50% stock
dividend. All share and per share amounts in the accompanying
financial statements and footnotes reflect the effect of this
stock split.
Earnings per shareEarnings per share are based upon
the weighted average number of shares of common stock and common
stock equivalents outstanding, net of common stock held in
treasury. Earnings per share is computed using the
treasury stock method under the Financial Accounting
Standards Board (FASB) Statement No. 128.
F-9
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 2002, 2003 and 2004,
options outstanding for 824,000 shares,
1,195,000 shares, and 0 shares, respectively, of
common stock have been excluded from the computation of diluted
earnings per share because their effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
| |
Net income for earnings per share computation
|
|
$ |
5,802,000 |
|
|
$ |
10,095,000 |
|
|
$ |
25,551,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the
year
|
|
|
12,276,899 |
|
|
|
12,730,808 |
|
|
|
13,404,276 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.47 |
|
|
$ |
0.79 |
|
|
$ |
1.91 |
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in
calculating basic earnings per share
|
|
|
12,276,899 |
|
|
|
12,730,808 |
|
|
|
13,404,276 |
|
|
Add: additional shares issuable upon exercise of stock options
|
|
|
1,020,591 |
|
|
|
1,675,246 |
|
|
|
2,067,162 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in calculating
diluted earnings per share
|
|
|
13,297,490 |
|
|
|
14,406,054 |
|
|
|
15,471,438 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.44 |
|
|
$ |
0.70 |
|
|
$ |
1.65 |
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensationThe Company maintains
stock-based compensation plans for its board of directors,
officers, and key employees, which provide for non-qualified and
incentive stock options. The plans are described more fully in
Note 9. With the issuance in mid-December 2004 by FASB of
SFAS No. 123(R), Share-Based Payments,
which is a revision to SFAS No. 123,
Accounting for Stock-Based Compensation,
which was issued in 1995, the Company will begin reporting
the fair value of stock-based compensation as an expense in its
financial statements beginning in 2006 (see discussion in
Recently Issued Accounting Pronouncements and Proposed
Accounting Changes below). Prior to implementation of this
new standard, the Company accounted for those plans under the
recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No
compensation cost was reflected in net income for stock options,
as all options granted under those plans have an exercise price
equal to or greater than the market value of the underlying
common stock on the date of the grant. As required by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of
FASB Statement No. 123, the following table
illustrates the effect on net income and earnings per common
F-10
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation
for each period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, | |
|
|
| |
|
|
|
|
Amounts per | |
|
|
|
Amounts per | |
|
|
|
Amounts per | |
|
|
|
|
share | |
|
|
|
share | |
|
|
|
share | |
|
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
2002 | |
|
Basic | |
|
Diluted | |
|
2003 | |
|
Basic | |
|
Diluted | |
|
2004 | |
|
Basic | |
|
Diluted | |
| |
Net income
|
|
$ |
5,802,000 |
|
|
$ |
0.47 |
|
|
$ |
0.44 |
|
|
$ |
10,095,000 |
|
|
$ |
0.79 |
|
|
$ |
0.70 |
|
|
$ |
25,551,000 |
|
|
$ |
1.91 |
|
|
$ |
1.65 |
|
Deduct: stock-based compensation expense determined under
fair value method, net of tax
|
|
|
(1,918,000 |
) |
|
|
(0.15 |
) |
|
|
(0.15 |
) |
|
|
(1,397,000 |
) |
|
|
(0.11 |
) |
|
|
(0.10 |
) |
|
|
(1,642,000 |
) |
|
|
(0.13 |
) |
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
3,884,000 |
|
|
$ |
0.32 |
|
|
$ |
0.29 |
|
|
$ |
8,698,000 |
|
|
$ |
0.68 |
|
|
$ |
0.60 |
|
|
$ |
23,909,000 |
|
|
$ |
1.78 |
|
|
$ |
1.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma information recognizes as compensation the value
of stock options granted using the Black-Scholes option pricing
model which takes into account as of the grant date, the
exercise price and expected life of the option, the current
price of underlying stock and its expected volatility, expected
dividends on the stock, expected forfeitures and the risk-free
interest rate for the term of the option. The following is the
weighted average of the data used to calculate the estimated
fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free | |
|
|
|
Expected | |
|
Expected | |
|
Expected | |
December 31, |
|
interest rate | |
|
Expected life | |
|
volatility | |
|
forfeitures | |
|
dividends | |
| |
2004
|
|
|
3.64% |
|
|
|
5.0 years |
|
|
|
68.36% |
|
|
|
2.64% |
|
|
|
0% |
|
2003
|
|
|
3.31% |
|
|
|
5.0 years |
|
|
|
66.18% |
|
|
|
2.77% |
|
|
|
0% |
|
2002
|
|
|
4.03% |
|
|
|
5.0 years |
|
|
|
75.61% |
|
|
|
2.77% |
|
|
|
0% |
|
The Companys valuations are based upon a single option
valuation approach using the Black-Scholes option valuation
model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable and
negotiable in a free trading market. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and
expected life of the option. Because the Companys stock
options have characteristics significantly different from those
of freely traded options, and changes in the subjective input
assumptions can materially affect the Companys fair value
estimate of those stock options, in the Companys opinion,
existing valuations models, including Black-Scholes, are not
reliable single measures and may misstate the fair value of the
Companys stock options. Because Company stock options do
not trade on a secondary exchange, recipients can receive no
value nor derive any benefit from holding stock options under
these plans without an increase, above the grant price, in the
market price of the Companys stock. Such an increase in
stock price would benefit all stockholders commensurately.
Derivative financial instrumentThe Company used an
interest rate swap agreement to hedge its exposure to
variability in expected future cash flows resulting from
interest rate risk related to a portion of its long-term debt.
The interest rate swap agreement applied to 25.0% of the
Companys long-term debt and expired November 30,
2004. Market value of the swap as of December 31, 2003 and
2004 is included in Accumulated Other Comprehensive
Loss. The swap contract is inversely correlated to the
related hedged long-term debt and was therefore considered an
effective cash flow hedge of the underlying long-term debt. The
level of effectiveness of the hedge was measured by the changes
in the market value of the hedged long-term debt resulting from
fluctuation in
F-11
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
interest rates. As a matter of policy, the Company does not
enter into derivative transactions for trading or speculative
purposes.
Functional currencies and foreign currency
translationThrough its subsidiaries, the Company
maintains operations in Taiwan, Hong Kong and China. The Company
believes the New Taiwan (NT) dollar as the
functional currency at Diodes-Taiwan most appropriately reflects
the current economic facts and circumstances of the operations.
The Company continues to use the U.S. dollar as the
functional currency in Diodes-China, Diodes-Shanghai 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 its
foreign subsidiaries. Included in net income are foreign
currency exchange losses of approximately $82,000, $115,000, and
$424,000 for the years ended December 31, 2002, 2003 and
2004, respectively.
Comprehensive incomeAccounting principles generally
require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and
liabilities are reported as a separate component of the equity
section of the balance sheet, such items, along with net income,
are components of comprehensive income. The components of other
comprehensive income include foreign currency translation
adjustments and changes in the unrealized loss on derivative
instruments from swap liability.
Recently issued accounting pronouncements and proposed
accounting changesIn November 2004, the Emerging
Issues Task Force (EITF) reached a consensus on EITF Issue
No. 03-13, Applying the Conditions in
Paragraph 42 of FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, in Determining
Whether to Report Discontinued Operations. The consensus
provides guidance in determining: (a) which cash flows
should be taken into consideration when assessing whether the
cash flows of the disposal component have been or will be
eliminated from the ongoing operations of the entity,
(b) the types of involvement ongoing between the disposal
component and the entity disposing of the component that
constitute continuing involvement in the operations of the
disposal component, and (c) the appropriate (re)assessment
period for purposes of assessing whether the criteria in
paragraph 42 have been met. The consensus was ratified by
the FASB at their November 30, 2004 meeting and should be
applied to a component of an enterprise that is either disposed
of or classified as held for sale in fiscal periods beginning
after December 15, 2004. The Company does not anticipate a
material impact on the financial statements from the adoption of
this consensus.
In December 2004, the FASB issued FASB Statement No. 153,
Exchanges of Nonmonetary AssetsAn Amendment of APB
Opinion No. 29. The amendments made by Statement
No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial
substance. The provisions in Statement No. 153 are
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Adoption of this
standard is not expected have a material impact on the
consolidated financial statements.
In September 2004, the EITF reached a consensus on EITF Issue
No. 04-10, Applying Paragraph 19 of FAS 131 in
Determining Whether to Aggregate Operating Segments That Do Not
Meet the Quantitative Thresholds. The consensus states that
operating segments that do not meet the quantitative thresholds
can be aggregated only if aggregation is consistent with the
objective and basic principles of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, the
F-12
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segments have similar economic characteristics, and the segments
share a majority of the aggregation criteria (a)-(e) listed in
paragraph 17 of SFAS No. 131. The effective date
of the consensus in this Issue is for fiscal years ending after
October 13, 2004. If the Financial Accounting Standards
Board (FASB) ratifies EITF Issue No. 04-10, the
Company does not anticipate a material impact on the financial
statements.
In March 2004, the EITF reached a consensus on the remaining
portions of EITF 03-01, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments with an effective date of June 15, 2004.
EITF 03-01 provides new disclosure requirements for
other-than-temporary impairments on debt and equity investments.
Investors are required to disclose quantitative information
about: (i) the aggregate amount of unrealized losses, and
(ii) the aggregate related fair values of investments with
unrealized losses, segregated into time periods during which the
investment has been in an unrealized loss position of less than
12 months and greater than 12 months. In addition,
investors are required to disclose the qualitative information
that supports their conclusion that the impairments noted in the
qualitative disclosure are not other-than temporary. The Company
determined that EITF 03-01 would not have a material impact
on the financial statements.
In December 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46R
(FIN 46R), Consolidation of Variable
Interest Entities, a revision to Interpretation No. 46
(FIN 46). FIN 46R clarifies the
application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest;
these entities are referred to as variable interest
entities. Variable interest entities within the scope of
FIN 46R are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of
the entitys expected losses, receives a majority of its
expected returns, or both. FIN 46R also requires disclosure
of significant variable interests in variable interest entities
for which a company is not the primary beneficiary. The Company
has assessed Diodes-Shanghai under the provisions of
FIN 46R and has concluded that its investment in
Diodes-Shanghai does not meet the criteria for consolidation
under the standard. However, Diodes-Shanghai is consolidated
under other applicable accounting literature. The Company will
periodically review its investment in Diodes-Shanghai to insure
that it complies with the guidelines prescribed by FIN 46R.
In December 2004, the FASB also issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4, which will become effective for the
Company beginning January 1, 2006. This standard clarifies
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material should be expensed as
incurred and not included in overhead. In addition, this
standard requires that the allocation of fixed production
overhead costs to inventory be based on the normal capacity of
the production facilities. The Company is currently evaluating
the potential impact of this standard on its financial position
and results of operations, but does not believe the impact of
the change will be material.
On October 22, 2004, a new tax law was passed, the American
Jobs Creation Act of 2004 (the Jobs Creation Act),
which raised a number of issues with respect to accounting for
income taxes. In response, on December 21, 2004, the FASB
issued two FASB Staff Positions (FSP), FSP 109-1
Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act
of 2004 and FSP 109-2Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of
2004,which became effective for the Company upon
issuance.
F-13
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Jobs Creation Act provides a deduction for income from
qualified domestic production activities, to be phased in from
2005 through 2010, which is intended to replace the existing
extra-territorial income exclusion for foreign sales. In FSP
109-1, the FASB decided the deduction for qualified domestic
production activities should be accounted for as a special
deduction under SFAS No. 109, rather than as a rate
reduction. Accordingly, any benefit from the deduction will be
reported in the period in which the deduction is claimed on the
tax return and no adjustment to deferred taxes at
December 31, 2004, is required.
The Jobs Creation Act also creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of
limitations and uncertainty remains as to how to interpret
numerous provisions in the Act. FSP 109-2 addresses when to
reflect in the financial statements the effects of the one-time
tax benefit on the repatriation of foreign earnings. Under
SFAS No. 109, companies are normally required to
reflect the effect of new tax law changes in the period of
enactment. FSP 109-2 provides companies additional time to
determine the amount of earnings, if any, that they intend to
repatriate under the Jobs Creation Acts provisions. See
Note 8 for more discussion of the impact of the Jobs
Creation Act, including the Companys status on the
repatriation of foreign earnings.
In December 2004, the FASB issued SFAS No. 123(R).
This new standard requires companies to adopt the fair value
methodology of valuing stock-based compensation and recognizing
that valuation in the financial statements from the date of
grant. Accordingly, the adoption of
SFAS No. 123(R)s fair value method will have a
significant impact on the Companys results of operations,
although it will have no impact on the Companys overall
financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time
because it will partially depend on levels of share-based
payments granted in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that
standard would have approximated the impact of
SFAS No. 123 as shown in the table above (see
discussion in Stock-Based Compensation above).
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. The Company is
currently evaluating several option valuation models in order to
calculate the required compensation expense. The Company has
elected to adopt the provisions of SFAS No. 123(R) on
a modified prospective application method with no restatement of
any prior periods. SFAS No. 123(R) is effective for
the Company as of the beginning of the fiscal year ending
December 31, 2006.
ReclassificationsCertain prior year amounts as well
as unaudited quarterly financial data presented in the
accompanying consolidated financial statements have been
reclassified to conform to the current year financial statement
presentation. These reclassifications had no impact on
previously reported net income or stockholders equity.
F-14
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2INVENTORIES
Inventories, stated at the lower of cost or market value, at
December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Finished goods
|
|
$ |
9,920,000 |
|
|
$ |
13,118,000 |
|
Work-in-progress
|
|
|
1,818,000 |
|
|
|
2,025,000 |
|
Raw materials
|
|
|
6,519,000 |
|
|
|
9,240,000 |
|
|
|
|
|
|
|
|
|
|
|
18,257,000 |
|
|
|
24,383,000 |
|
Less: reserves
|
|
|
(2,093,000 |
) |
|
|
(2,145,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
16,164,000 |
|
|
$ |
22,238,000 |
|
|
|
|
|
|
|
|
NOTE 3PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Buildings and leasehold improvements
|
|
$ |
5,894,000 |
|
|
$ |
7,126,000 |
|
Construction in-progress
|
|
|
2,810,000 |
|
|
|
2,989,000 |
|
Machinery and equipment
|
|
|
74,171,000 |
|
|
|
90,151,000 |
|
|
|
|
|
|
|
|
|
|
|
82,875,000 |
|
|
|
100,266,000 |
|
Less: Accumulated depreciation and amortization
|
|
|
(35,244,000 |
) |
|
|
(39,671,000 |
) |
|
|
|
|
|
|
|
|
|
|
47,631,000 |
|
|
|
60,595,000 |
|
Land
|
|
|
262,000 |
|
|
|
262,000 |
|
|
|
|
|
|
|
|
|
|
$ |
47,893,000 |
|
|
$ |
60,857,000 |
|
|
|
|
|
|
|
|
The Company implemented an Enterprise Resource Planning software
system for which approximately $2,511,000 and $0 is capitalized
within construction in-progress in 2003 and 2004, respectively.
F-15
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4BANK CREDIT AGREEMENTS AND LONG-TERM DEBT
Line of creditThe Company maintains credit
facilities with several financial institutions through its
affiliated entities in the United States and Asia. The credit
unused and available under the various facilities as of
December 31, 2004, totals $32.3 million, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, | |
2004 | |
|
|
|
| |
Credit Facility | |
|
Terms |
|
2003 | |
|
2004 | |
| |
$ |
7,500,000 |
|
|
Revolving, collateralized by all assets, variable |
|
$ |
5,782,000 |
|
|
$ |
3,167,000 |
|
|
|
|
|
interest (prime rate, approximately 5.25% at December 31,
2004) due monthly |
|
|
|
|
|
|
|
|
$ |
5,000,000 |
|
|
Term loan, collateralized by all assets, variable interest |
|
|
3,333,000 |
|
|
|
4,597,000 |
|
|
|
|
|
(LIBOR + variable margin, approximately 3.80% at
December 31, 2004) due monthly |
|
|
|
|
|
|
|
|
$ |
25,000,000 |
|
|
Unsecured, interest at LIBOR plus margin (approximately 2.30% at
December 31, 2004) due quarterly |
|
|
3,000,000 |
|
|
|
6,000,000 |
|
$ |
8,960,000 |
|
|
Unsecured, variable interest plus margin (approximately 1.70% to
2.30% at December 31, 2003) due monthly |
|
|
2,706,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,460,000 |
|
|
|
|
|
14,821,000 |
|
|
|
13,764,000 |
|
|
|
|
|
|
|
|
|
|
Less: Long-term debt, net of Related Party (included in table
below)
|
|
|
(6,333,000 |
) |
|
|
(7,597,000 |
) |
|
|
|
|
|
|
|
Line of credit
|
|
$ |
8,488,000 |
|
|
$ |
6,167,000 |
|
|
|
|
|
|
|
|
Long-term debtThe balances remaining as of
December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Note payable to LSC, a major stockholder of the Company
(see Note 10), due in equal monthly installments of
$208,000 plus interest beginning July 31, 2002, through
June 30, 2006. The unsecured note bears interest at LIBOR
plus 2.00% (approximately 4.10% at December 31, 2004) and
is subordinated to the interest of the Companys primary
lender. |
|
$ |
6,250,000 |
|
|
$ |
3,750,000 |
|
Term note portion of $25,000,000 China credit facility
due in 2006 |
|
|
3,000,000 |
|
|
|
3,000,000 |
|
Note payable to U.S. bank, collateralized by all
assets, due in aggregate monthly principal payments of $278,000
plus interest at 6.80% fixed by hedge contract through November
2004 |
|
|
3,333,000 |
|
|
|
|
|
Note payable to U.S. bank, collateralized by all
assets, due in aggregate monthly principal payments of $83,000
plus interest at approximately 3.80% at December 31, 2004 |
|
|
|
|
|
|
4,597,000 |
|
|
|
|
|
|
|
|
|
|
|
12,583,000 |
|
|
|
11,347,000 |
|
Less: Current portion
|
|
|
(5,833,000 |
) |
|
|
(3,514,000 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$ |
6,750,000 |
|
|
$ |
7,833,000 |
|
|
|
|
|
|
|
|
F-16
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The credit facilities contain certain covenants and
restrictions, which, among other matters, require the
maintenance of certain financial ratios and attainment of
certain financial results, and prohibit the payment of dividends.
The aggregate maturities of long-term debt for future years
ending December 31 are:
|
|
|
|
|
2005
|
|
$ |
3,514,000 |
|
2006
|
|
|
5,250,000 |
|
2007
|
|
|
1,000,000 |
|
2008
|
|
|
1,000,000 |
|
2009
|
|
|
583,000 |
|
|
|
|
|
|
|
$ |
11,347,000 |
|
|
|
|
|
In July 2001, the Company entered into an interest rate swap
agreement with a bank to hedge its interest exposure. The
interest rate under the swap agreement, which expired
November 30, 2004, was fixed at 6.80% and based on the
notional amount, which was $2,292,000 at December 31, 2003.
NOTE 5CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital lease agreements are
summarized as follows:
|
|
|
|
|
For years ending December 31, |
|
|
| |
2005
|
|
$ |
230,000 |
|
2006
|
|
|
230,000 |
|
2007
|
|
|
230,000 |
|
2008
|
|
|
230,000 |
|
2009
|
|
|
230,000 |
|
Thereafter
|
|
|
1,627,000 |
|
|
|
|
|
|
|
|
2,777,000 |
|
Less: Interest
|
|
|
(440,000 |
) |
|
|
|
|
Present value of minimum lease payments
|
|
|
2,337,000 |
|
Less: Current portion
|
|
|
(165,000 |
) |
|
|
|
|
Long-term portion
|
|
$ |
2,172,000 |
|
|
|
|
|
At December 31, 2004, property under capital leases had a
cost of $2,785,000, and the related accumulated depreciation
amounted to $557,000.
F-17
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6ACCRUED LIABILITIES
Accrued liabilities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Employee compensation and payroll taxes
|
|
$ |
4,501,000 |
|
|
$ |
5,779,000 |
|
Equipment purchases
|
|
|
1,875,000 |
|
|
|
2,012,000 |
|
Taxes payable
|
|
|
|
|
|
|
978,000 |
|
Sales commissions
|
|
|
686,000 |
|
|
|
437,000 |
|
Refunds to product distributors
|
|
|
334,000 |
|
|
|
219,000 |
|
Other
|
|
|
1,319,000 |
|
|
|
2,034,000 |
|
|
|
|
|
|
|
|
|
|
$ |
8,715,000 |
|
|
$ |
11,459,000 |
|
|
|
|
|
|
|
|
NOTE 7VALUATION OF FINANCIAL INSTRUMENTS
The Companys financial instruments include cash, accounts
receivable, accounts payable, working capital line of credit,
and long-term debt. The Company estimates the carrying amounts
of all financial instruments described above to approximate fair
value based upon current market conditions, maturity dates and
other factors.
NOTE 8INCOME TAXES
The components of the income tax provisions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
| |
Current tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
|
|
|
$ |
1,167,000 |
|
|
$ |
4,922,000 |
|
|
Foreign
|
|
|
1,231,000 |
|
|
|
1,183,000 |
|
|
|
4,745,000 |
|
|
State
|
|
|
1,000 |
|
|
|
40,000 |
|
|
|
461,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,232,000 |
|
|
|
2,390,000 |
|
|
|
10,128,000 |
|
Deferred tax expense (benefit)
|
|
|
497,000 |
|
|
|
70,000 |
|
|
|
(3,614,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$ |
1,729,000 |
|
|
$ |
2,460,000 |
|
|
$ |
6,514,000 |
|
|
|
|
|
|
|
|
|
|
|
F-18
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reconciliation between the effective tax rate and the statutory
tax rates for the years ended December 31, 2002, 2003, and
2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
Percent | |
|
|
|
|
of pretax | |
|
|
|
of pretax | |
|
|
|
of pretax | |
|
|
Amount | |
|
earnings | |
|
Amount | |
|
earnings | |
|
Amount | |
|
earnings | |
| |
U.S. Federal tax
|
|
$ |
2,669,000 |
|
|
|
34.0 |
|
|
$ |
4,417,000 |
|
|
|
34.0 |
|
|
$ |
11,131,000 |
|
|
|
34.0 |
|
U.S. State franchise tax, net of U.S. Federal benefit
|
|
|
455,000 |
|
|
|
5.8 |
|
|
|
753,000 |
|
|
|
5.8 |
|
|
|
1,588,000 |
|
|
|
4.8 |
|
Foreign income tax rate difference
|
|
|
(1,409,000 |
) |
|
|
(18.0 |
) |
|
|
(2,808,000 |
) |
|
|
(21.6 |
) |
|
|
(6,629,000 |
) |
|
|
(20.2 |
) |
Other
|
|
|
14,000 |
|
|
|
0.2 |
|
|
|
98,000 |
|
|
|
0.8 |
|
|
|
424,000 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$ |
1,729,000 |
|
|
|
22.0 |
|
|
$ |
2,460,000 |
|
|
|
19.0 |
|
|
$ |
6,514,000 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the current taxation policies of the
Peoples Republic of China (PRC), Diodes-China received
preferential tax treatment for the years ended December 31,
1996 through 2004. Earnings were subject to 0% tax rates from
1996 through 2000, and 12.0% from 2001 through 2004. Due to a
$15.0 million permanent re-investment of Diodes-China
earnings in 2004, earnings from 2005 through 2007 will continue
to be taxed at 12.0% (one half the normal central government tax
rate). Also due to the permanent re-investment, the Company
recorded a $1.2 million tax refund (net of U.S. taxes)
in the fourth quarter of 2004. Earnings of Diodes-China are also
subject to tax of 3.0% by the local taxing authority in
Shanghai. The local taxing authority waived this tax from 2001
through 2004, and is expected to waive this tax in 2005, but can
re-impose the tax at its discretion. For 2004,
Diodes-Shanghais effective tax rate was 15.0%. As an
incentive for the establishment of Diodes-Shanghai, beginning in
2005, earnings will be exempted from income tax for two years.
Then, beginning in 2007, earnings will be subject to 50.0% of
the standard tax rate of 15.0% for the following three years.
Earnings of Diodes-Taiwan are currently subject to a tax rate of
35.0%, which is comparable to the U.S. Federal tax rate for
C corporations. Earnings of Diodes-Hong Kong are currently
subject to a 17.5% tax for local sales and/or local source
sales, all other sales are foreign income tax-free.
In accordance with United States tax law, the Company receives
credit against its U.S. Federal tax liability for corporate
taxes paid in Taiwan and China. The repatriation of funds from
Taiwan and China to the Company may be subject to Federal and
state income taxes.
As of December 31, 2004, accumulated and undistributed
earnings of Diodes-China and Diodes-Shanghai are approximately
$44.2 million, including $25.0 million of restricted
earnings (which are not available for dividends). Through
March 31, 2002, the Company had not recorded deferred
U.S. Federal or state tax liabilities (estimated to be
$8.9 million as of March 31, 2002) on these cumulative
earnings since the Company, at that time, considered this
investment to be permanent, and had no plans or obligation to
distribute all or part of that amount from China to the United
States. Beginning in April 2002, the Company began to record
deferred taxes on a portion of the China earnings in preparation
of a dividend distribution. In the year ended December 31,
2004, the Company received a dividend of approximately
$5.7 million from its Diodes-China subsidiary, for which
the tax effect is included in U.S. Federal and state
taxable income. As of December 31, 2004, the Company
F-19
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has recorded approximately $2.0 million in deferred taxes
on the cumulative earnings of Diodes-China and Diodes-Shanghai.
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of Diodes-China,
Diodes-Shanghai, and Diodes-Hong Kong to the extent such
earnings may be appropriated for distribution to the
Companys corporate office in North America, and as further
investment strategies with respect to foreign earnings are
determined. Should the Companys North American cash
requirements exceed the cash that is provided through the
domestic credit facilities, cash can be obtained from the
Companys 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.
On October 22, 2004, the President of the United States
signed the American Jobs Creation Act (AJCA) into law.
Originally intended to repeal the extraterritorial income
(ETI) exclusion, which had triggered tariffs by the
European Union, the AJCA expanded to cover a wide range of
business tax issues. Among other items, the AJCA establishes a
phased repeal of the ETI, a new incentive tax deduction for
U.S. corporations to repatriate cash from foreign
subsidiaries at a reduced tax rate (a deduction equal to 85% of
cash dividends received in the year elected that exceeds a
base-period amount) and significantly revises the taxation of
U.S. companies doing business abroad.
At December 31, 2004, the Company made a minimum estimate
for repatriating cash from its subsidiaries in China and Hong
Kong of $8.0 million under the AJCA, and recorded an income
tax expense of approximately $1.3 million. Under the
guidelines of the AJCA, the Company will develop a required
domestic reinvestment plan, covering items such as
U.S. bank debt repayment, U.S. capital expenditures
and U.S. research and development activities, among others,
to cover the $8.0 million minimum dividend repatriation. In
addition, the Company will complete a quantitative analysis of
the benefits of the AJCA, the foreign tax credit implications,
and state and local tax consequences of a dividend to maximize
the tax benefits of a 2005 dividend.
At December 31, 2003 and 2004, the Companys deferred
tax assets and liabilities are comprised of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Deferred tax assets, current
|
|
|
|
|
|
|
|
|
|
Inventory cost
|
|
$ |
272,000 |
|
|
$ |
364,000 |
|
|
Accrued expenses and accounts receivable
|
|
|
566,000 |
|
|
|
702,000 |
|
|
Net operating loss carryforwards, foreign tax credits and other
|
|
|
4,709,000 |
|
|
|
1,387,000 |
|
|
|
|
|
|
|
|
|
|
$ |
5,547,000 |
|
|
$ |
2,453,000 |
|
|
|
|
|
|
|
|
Deferred tax assets, non-current
|
|
|
|
|
|
|
|
|
|
Plant, equipment and intangible assets
|
|
$ |
(2,380,000 |
) |
|
$ |
(2,632,000 |
) |
|
Net operating loss carryforwards, foreign tax credits and other
|
|
|
4,196,000 |
|
|
|
10,602,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,816,000 |
|
|
$ |
7,970,000 |
|
|
|
|
|
|
|
|
At December 31, 2004, the Company had U.S. Federal and
state net operating loss (NOL) carryforwards of
approximately $17.0 million and $20.2 million,
respectively, available to offset future regular and alternative
minimum taxable income. The U.S. Federal NOL carryforwards
will begin to expire in 2016 and the state NOL carryforwards
will begin to expire in 2006.
F-20
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2004, the Company had U.S. Federal and
state tax credit carryforwards (primarily relating to foreign
tax credits, and to a lesser extent to research and development
tax credits) of approximately $6.6 million and
$0.1 million, respectively, available to offset future
regular income and partially offset alternative minimum taxable
income. The U.S. Federal credit carryforwards will begin to
expire in 2009 and the state credit carryforwards will begin to
expire in 2020.
NOTE 9EMPLOYEE BENEFIT PLANS
Employee Savings and Retirement PlansThe Company
maintains a 401(k) profit sharing plan (the Plan) for the
benefit of qualified employees at its North American locations.
Employees who participate may elect to make salary deferral
contributions to the Plan up to 100% of the employees
eligible payroll subject to annual Internal Revenue Code maximum
limitations. The Company makes a matching contribution of $1 for
every $2 contributed by the participant up to 6.0% (3.0% maximum
matching) of the participants eligible payroll. In
addition, the Company may make a discretionary contribution to
the entire qualified employee pool, in accordance with the Plan.
As stipulated by the regulations of the PRC, the Company
maintains a retirement plan pursuant to the local Municipal
Government for its employees in China. The Company is required
to make contributions to the retirement plan at a rate of 22.5%
of the employees eligible payroll.
Pursuant to the Taiwan Labor Standard Law and Factory Law, the
Company maintains a retirement plan for its employees in Taiwan.
The Company makes contributions at a rate of 6.0% of the
employees eligible payroll.
For the years ended December 31, 2002, 2003, and 2004, the
Companys total contributions to all plans were
approximately $917,000, $1,241,000, and $1,428,000, respectively.
Stock Option PlansThe Company maintains stock
option plans for directors, officers, and key employees, which
provide for non-qualified and incentive stock options. The
Compensation and Stock Option Committee of the Board of
Directors determines the option price (not to be less than fair
market value of the underlying common stock at the date of grant
for incentive stock options) at the date of grant. The options
generally expire ten years from the date of grant and are
exercisable (vested) over the period stated in each option.
Approximately 440,600 shares were available for future
F-21
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grants under the plans as of December 31, 2004. A summary
of stock option transactions for the plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options | |
|
|
| |
|
|
|
|
Exercise price per share | |
|
|
|
|
| |
|
|
|
|
|
|
Weighted | |
|
|
Number | |
|
Range | |
|
average | |
| |
Balance, December 31, 2001
|
|
|
3,172,641 |
|
|
$ |
0.83-15.94 |
|
|
$ |
5.85 |
|
Granted
|
|
|
515,550 |
|
|
|
5.69-6.38 |
|
|
|
5.72 |
|
Exercised
|
|
|
(97,650 |
) |
|
|
0.83-5.55 |
|
|
|
3.28 |
|
Canceled
|
|
|
(5,400 |
) |
|
|
5.55-5.69 |
|
|
|
5.62 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
3,585,141 |
|
|
|
0.83-15.94 |
|
|
|
5.90 |
|
Granted
|
|
|
502,950 |
|
|
|
10.63-13.04 |
|
|
|
13.03 |
|
Exercised
|
|
|
(688,141 |
) |
|
|
0.83-15.94 |
|
|
|
2.93 |
|
Canceled
|
|
|
(15,325 |
) |
|
|
5.55-15.94 |
|
|
|
7.84 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
3,384,625 |
|
|
|
2.22-15.94 |
|
|
|
7.56 |
|
Granted
|
|
|
526,900 |
|
|
|
18.32-21.85 |
|
|
|
18.35 |
|
Exercised
|
|
|
(1,136,725 |
) |
|
|
2.22-15.94 |
|
|
|
4.96 |
|
Canceled
|
|
|
(35,600 |
) |
|
|
5.55-18.32 |
|
|
|
13.64 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
2,739,200 |
|
|
$ |
2.22-21.85 |
|
|
$ |
10.63 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, approximately 1,737,200 of the
2,739,200 options outstanding were exercisable. The following
table summarizes information about stock options outstanding at
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average | |
|
|
|
|
Range of exercise | |
|
Number | |
|
remaining contractual | |
|
Weighted average | |
|
|
prices | |
|
outstanding | |
|
life (yrs) | |
|
exercise price | |
| |
93 NQO
|
|
$ |
2.67-15.94 |
|
|
|
631,950 |
|
|
|
4.6 |
|
|
$ |
9.42 |
|
93 ISO
|
|
|
2.22-15.94 |
|
|
|
705,400 |
|
|
|
4.9 |
|
|
|
7.45 |
|
01 Plan
|
|
|
4.77-21.85 |
|
|
|
1,401,850 |
|
|
|
8.6 |
|
|
|
12.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2.22-21.85 |
|
|
|
2,739,200 |
|
|
|
6.7 |
|
|
$ |
10.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
exercisable at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise | |
|
Number | |
|
Weighted average | |
|
|
prices | |
|
exercisable | |
|
exercise price | |
| |
93 NQO
|
|
$ |
2.67-15.94 |
|
|
|
630,300 |
|
|
$ |
9.43 |
|
93 ISO
|
|
|
2.22-15.94 |
|
|
|
668,550 |
|
|
$ |
7.53 |
|
01 Plan
|
|
|
5.55-13.04 |
|
|
|
438,350 |
|
|
$ |
8.09 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2.22-15.94 |
|
|
|
1,737,200 |
|
|
$ |
8.36 |
|
|
|
|
|
|
|
|
|
|
|
Stock Bonus PlanThe Company also maintains an
incentive stock bonus plan, which reserves shares of stock for
issuance to key employees. As of December 31, 2004, there
were 279,000 shares available for issuance under this plan.
No shares were issued under this incentive bonus plan for years
ended December 31, 2002 through 2004.
F-22
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10RELATED PARTY TRANSACTIONS
Lite-On Semiconductor Corporation (LSC)In July
1997, Vishay Intertechnology, Inc. (Vishay) and the Lite-On
Group, a Taiwanese consortium, formed a joint
ventureVishay/Lite-On Power Semiconductor Pte., LTD.
(Vishay/LPSC)to acquire Lite-On Power Semiconductor Corp.
(LPSC), a then 37% shareholder of the Company and a member of
the Lite-On Group of the Republic of China. The Lite-On Group is
a leading manufacturer of power semiconductors, computer
peripherals, and communication products.
In March 2001, Vishay agreed to sell its 65.0% interest in the
Vishay/LPSC joint venture to the Lite-On Group, the 35.0% joint
venture partner. Because of this transaction, the Lite-On Group,
through LPSC, its wholly-owned subsidiary, indirectly owned
approximately 37.0% of the Companys common stock. In
December 2001, LPSC merged with Dyna Image Corporation of
Taipei, Taiwan. Dyna Image is the worlds largest
manufacturer of Contact Image Sensors (CIS), which are used in
fax machines, scanners, and copy machines. The combined company
is called Lite-On Semiconductor Corporation (LSC). At
December 31, 2004, LSC owned approximately 32.5% of the
Companys common stock. The Company considers its
relationship with LSC to be mutually beneficial and the Company
and LSC plans to continue its strategic alliance as it has since
1991.
The Company also leases warehouse space from LSC for its
operations in Hong Kong. Such transactions are on terms no less
favorable to the Company than could be obtained from
unaffiliated third parties. As required by Nasdaq, the Audit
Committee of the Board of Directors has approved the contracts
associated with the related party transactions. The Company buys
product from, and sell products to, LSC.
Net sales to, and purchases from, LSC were as follows for years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
Net sales
|
|
$ |
16,147,000 |
|
|
$ |
14,628,000 |
|
|
$ |
20,675,000 |
|
Purchases
|
|
|
14,292,000 |
|
|
|
18,667,000 |
|
|
|
22,368,000 |
|
As a result of the acquisition of FabTech from LSC, the Company
is indebted to LSC in the amount of $3,750,000 as of
December 31, 2004. Terms of the debt are indicated in
Note 4. As per the terms of the acquisition agreement, LSC
entered into a volume purchase agreement with FabTech pursuant
to which LSC is obligated to purchase from FabTech, and FabTech
is obligated to manufacture and sell to LSC, silicon wafers.
As part of the FabTech acquisition, the Company entered into
management incentive agreements with several members of
FabTechs management. The agreements provide a guaranteed
aggregate $375,000 annual payment as well as contingent bonuses
based on the annual profitability of FabTech (subject to a
maximum annual amount). Any portion of the guaranteed and
contingent liability paid by FabTech is reimbursed by LSC.
Guaranteed and maximum contingent bonus payments provided for by
the management incentive agreements for the year ended
December 31, 2004 (the final year of the agreements) were
$375,000 and $1.2 million, respectively. Because the
profitability targets were not met, no contingent bonus was
earned or paid in the years 2002 through 2004.
Other related partyThe Company sells product to,
and purchases inventory from, companies owned by its 5.0%
minority shareholder, Keylink International (formerly Xing
International), in Diodes-China and Diodes-Shanghai. In
addition, Diodes-China and Diodes-Shanghai each leases its
manufacturing facilities from, subcontracts a portion of its
manufacturing process (metal plating and environmental services)
to, and pays a consulting fee to, its 5.0% minority shareholder.
Total amounts for these services for the years ended
December 31, 2002, 2003, and 2004 were $2,699,000,
$3,464,000, and
F-23
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$4,760,000. Such transactions are on terms no less favorable to
the Company than could be obtained from unaffiliated third
parties. As required by Nasdaq, the Audit Committee of the Board
of Directors has approved the contracts associated with the
related party transactions.
Net sales to, and purchases from, companies owned by Keylink
International were as follows for years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
| |
Net sales
|
|
$ |
1,885,000 |
|
|
$ |
1,484,000 |
|
|
$ |
1,677,000 |
|
Purchases
|
|
|
4,394,000 |
|
|
|
2,961,000 |
|
|
|
4,789,000 |
|
Accounts receivable from, and accounts payable to, related
parties were as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2004 | |
| |
Accounts receivable
|
|
|
|
|
|
|
|
|
|
LSC
|
|
$ |
3,111,000 |
|
|
$ |
4,180,000 |
|
|
Other
|
|
|
827,000 |
|
|
|
1,346,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3,938,000 |
|
|
$ |
5,526,000 |
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
LSC
|
|
$ |
2,914,000 |
|
|
$ |
3,308,000 |
|
|
Other
|
|
|
539,000 |
|
|
|
628,000 |
|
|
|
|
|
|
|
|
|
|
$ |
3,453,000 |
|
|
$ |
3,936,000 |
|
|
|
|
|
|
|
|
NOTE 11GEOGRAPHIC INFORMATION
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 Companys chief
decision-making group consists of the President and Chief
Executive Officer, Chief Financial Officer, Vice President of
Sales and Marketing, and Senior Vice President of Operations.
The Company operates in a single segment, discrete semiconductor
devices, through its various manufacturing and distribution
facilities.
The Companys operations include the domestic operations
(Diodes, Inc. and FabTech) located in the United States and the
Asian operations (Diodes-Taiwan located in Taipei, Taiwan,
Diodes-China and Diodes-Shanghai both located in Shanghai,
China, and Diodes-Hong Kong located in Hong Kong, China).
European operations are consolidated within the
U.S. operations.
F-24
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia | |
|
U.S.A. | |
|
Consolidated | |
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
185,308,000 |
|
|
$ |
92,634,000 |
|
|
$ |
277,942,000 |
|
Intercompany sales
|
|
|
(75,527,000 |
) |
|
|
(16,712,000 |
) |
|
|
(92,239,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
109,781,000 |
|
|
$ |
75,922,000 |
|
|
$ |
185,703,000 |
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
116,729,000 |
|
|
$ |
51,072,000 |
|
|
$ |
167,801,000 |
|
Property, plant & equipment, net
|
|
|
48,589,000 |
|
|
|
12,268,000 |
|
|
|
60,857,000 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
124,412,000 |
|
|
$ |
72,188,000 |
|
|
$ |
196,600,000 |
|
Intercompany sales
|
|
|
(48,378,000 |
) |
|
|
(11,317,000 |
) |
|
|
(59,695,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
76,034,000 |
|
|
$ |
60,871,000 |
|
|
$ |
136,905,000 |
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
82,142,000 |
|
|
$ |
41,653,000 |
|
|
$ |
123,795,000 |
|
Property, plant & equipment, net
|
|
|
35,941,000 |
|
|
|
11,952,000 |
|
|
|
47,893,000 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
95,081,000 |
|
|
$ |
66,338,000 |
|
|
$ |
161,419,000 |
|
Intercompany sales
|
|
|
(39,592,000 |
) |
|
|
(6,006,000 |
) |
|
|
(45,598,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
55,489,000 |
|
|
$ |
60,332,000 |
|
|
$ |
115,821,000 |
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
63,721,000 |
|
|
$ |
41,289,000 |
|
|
$ |
105,010,000 |
|
Property, plant & equipment, net
|
|
|
32,313,000 |
|
|
|
12,380,000 |
|
|
|
44,693,000 |
|
NOTE 12COMMITMENTS and CONTINGENCIES
Operating leasesThe Company leases its offices,
manufacturing plants and warehouses under operating lease
agreements expiring through December 2009. Rent expense amounted
to approximately $2,711,000, $2,455,000, and $2,938,000 for the
years ended December 31, 2002, 2003, and 2004, respectively.
Future minimum lease payments under non-cancelable operating
leases for years ending December 31 are:
|
|
|
|
|
2005
|
|
$ |
3,461,000 |
|
2006
|
|
|
3,481,000 |
|
2007
|
|
|
2,939,000 |
|
2008
|
|
|
2,520,000 |
|
2009
|
|
|
1,097,000 |
|
|
|
|
|
|
|
$ |
13,498,000 |
|
|
|
|
|
F-25
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
| |
|
|
March 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
41,435,000 |
|
|
$ |
47,017,000 |
|
|
$ |
49,364,000 |
|
|
$ |
47,887,000 |
|
|
Gross profit
|
|
|
12,750,000 |
|
|
|
15,028,000 |
|
|
|
16,746,000 |
|
|
|
16,211,000 |
|
|
Net income
|
|
|
4,856,000 |
|
|
|
6,123,000 |
|
|
|
7,242,000 |
|
|
|
7,330,000 |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.37 |
|
|
$ |
0.46 |
|
|
$ |
0.54 |
|
|
$ |
0.53 |
|
|
|
Diluted
|
|
|
0.32 |
|
|
|
0.40 |
|
|
|
0.47 |
|
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
| |
|
|
March 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
Fiscal 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
29,446,000 |
|
|
$ |
33,316,000 |
|
|
$ |
34,941,000 |
|
|
$ |
39,202,000 |
|
|
Gross profit
|
|
|
7,461,000 |
|
|
|
8,346,000 |
|
|
|
9,162,000 |
|
|
|
11,559,000 |
|
|
Net income
|
|
|
1,923,000 |
|
|
|
2,172,000 |
|
|
|
2,563,000 |
|
|
|
3,437,000 |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.15 |
|
|
$ |
0.17 |
|
|
$ |
0.20 |
|
|
$ |
0.27 |
|
|
|
Diluted
|
|
|
0.14 |
|
|
|
0.15 |
|
|
|
0.18 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
| |
|
|
March 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
Fiscal 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
26,924,000 |
|
|
$ |
29,946,000 |
|
|
$ |
30,287,000 |
|
|
$ |
28,664,000 |
|
|
Gross profit
|
|
|
4,345,000 |
|
|
|
7,098,000 |
|
|
|
7,862,000 |
|
|
|
7,405,000 |
|
|
Net income
|
|
|
208,000 |
|
|
|
1,564,000 |
|
|
|
1,767,000 |
|
|
|
2,263,000 |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
0.13 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
|
Diluted
|
|
|
0.02 |
|
|
|
0.12 |
|
|
|
0.13 |
|
|
|
0.17 |
|
F-26
Diodes Incorporated and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
18,970,000 |
|
|
$ |
33,014,000 |
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
Customers
|
|
|
38,682,000 |
|
|
|
43,782,000 |
|
|
|
Related parties
|
|
|
5,526,000 |
|
|
|
4,599,000 |
|
|
|
|
|
|
|
|
|
|
|
44,208,000 |
|
|
|
48,381,000 |
|
|
|
Less: Allowance for doubtful receivables
|
|
|
432,000 |
|
|
|
464,000 |
|
|
|
|
|
|
|
|
|
|
|
43,776,000 |
|
|
|
47,917,000 |
|
|
Inventories
|
|
|
22,238,000 |
|
|
|
22,304,000 |
|
|
Deferred income taxes, current
|
|
|
2,453,000 |
|
|
|
2,375,000 |
|
|
Prepaid expenses and other current assets
|
|
|
4,243,000 |
|
|
|
4,160,000 |
|
|
Prepaid income taxes
|
|
|
406,000 |
|
|
|
883,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
92,086,000 |
|
|
|
110,653,000 |
|
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization
|
|
|
60,857,000 |
|
|
|
63,005,000 |
|
Deferred income taxes, non-current
|
|
|
7,970,000 |
|
|
|
7,309,000 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,090,000 |
|
|
|
5,090,000 |
|
|
Other
|
|
|
1,798,000 |
|
|
|
323,000 |
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
167,801,000 |
|
|
$ |
186,380,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-27
Diodes Incorporated and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
2004 | |
|
2005 | |
| |
|
|
(unaudited) | |
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$ |
6,167,000 |
|
|
$ |
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
17,274,000 |
|
|
|
18,374,000 |
|
|
|
Related parties
|
|
|
3,936,000 |
|
|
|
6,071,000 |
|
|
Accrued liabilities
|
|
|
11,459,000 |
|
|
|
12,730,000 |
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
2,500,000 |
|
|
|
2,500,000 |
|
|
|
Other
|
|
|
1,014,000 |
|
|
|
4,391,000 |
|
|
Current portion of capital lease obligations
|
|
|
165,000 |
|
|
|
136,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
42,515,000 |
|
|
|
44,202,000 |
|
LONG-TERM DEBT, net of current portion
|
|
|
|
|
|
|
|
|
|
|
Related party
|
|
|
1,250,000 |
|
|
|
|
|
|
|
Other
|
|
|
6,583,000 |
|
|
|
3,877,000 |
|
CAPITAL LEASE OBLIGATIONS, net of current portion
|
|
|
2,172,000 |
|
|
|
1,678,000 |
|
MINORITY INTEREST IN JOINT VENTURE
|
|
|
3,133,000 |
|
|
|
3,630,000 |
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Class A convertible preferred stockpar value
$1.00 per share; 1,000,000 shares authorized; no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stockpar value
$0.662/3
per share; 30,000,000 shares authorized; 15,763,266 and
16,185,552 shares issued at December 31, 2004 and
June 30, 2005, respectively
|
|
|
10,509,000 |
|
|
|
10,791,000 |
|
|
Additional paid-in capital
|
|
|
21,516,000 |
|
|
|
26,946,000 |
|
|
Retained earnings
|
|
|
81,330,000 |
|
|
|
96,235,000 |
|
|
|
|
|
|
|
|
|
|
|
113,355,000 |
|
|
|
133,972,000 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Treasury stock1,613,508 shares of common stock, at
cost
|
|
|
1,782,000 |
|
|
|
1,782,000 |
|
|
|
Accumulated other comprehensive income
|
|
|
(575,000 |
) |
|
|
(803,000 |
) |
|
|
|
1,207,000 |
|
|
|
979,000 |
|
|
|
|
Total stockholders equity
|
|
|
112,148,000 |
|
|
|
132,993,000 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$ |
167,801,000 |
|
|
$ |
186,380,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-28
Diodes Incorporated and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended | |
|
Six months ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
| |
Net sales
|
|
$ |
47,017,000 |
|
|
$ |
50,598,000 |
|
|
$ |
88,442,000 |
|
|
$ |
99,198,000 |
|
Cost of goods sold
|
|
|
31,989,000 |
|
|
|
33,101,000 |
|
|
|
60,664,000 |
|
|
|
65,105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,028,000 |
|
|
|
17,497,000 |
|
|
|
27,778,000 |
|
|
|
34,093,000 |
|
Selling, general and administrative expenses
|
|
|
6,417,000 |
|
|
|
7,196,000 |
|
|
|
11,908,000 |
|
|
|
13,888,000 |
|
Research and development expenses
|
|
|
815,000 |
|
|
|
850,000 |
|
|
|
1,562,000 |
|
|
|
1,750,000 |
|
Loss (gain) on sale of fixed assets
|
|
|
(8,000 |
) |
|
|
|
|
|
|
15,000 |
|
|
|
(105,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,224,000 |
|
|
|
8,046,000 |
|
|
|
13,485,000 |
|
|
|
15,533,000 |
|
|
Income from operations
|
|
|
7,804,000 |
|
|
|
9,451,000 |
|
|
|
14,293,000 |
|
|
|
18,560,000 |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,000 |
|
|
|
39,000 |
|
|
|
10,000 |
|
|
|
43,000 |
|
|
Interest expense
|
|
|
(153,000 |
) |
|
|
(118,000 |
) |
|
|
(337,000 |
) |
|
|
(277,000 |
) |
|
Other
|
|
|
24,000 |
|
|
|
12,000 |
|
|
|
(124,000 |
) |
|
|
(21,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,000 |
) |
|
|
(67,000 |
) |
|
|
(451,000 |
) |
|
|
(255,000 |
) |
Income before income taxes and minority interest
|
|
|
7,683,000 |
|
|
|
9,384,000 |
|
|
|
13,842,000 |
|
|
|
18,305,000 |
|
Income tax provision
|
|
|
(1,383,000 |
) |
|
|
(1,461,000 |
) |
|
|
(2,543,000 |
) |
|
|
(2,903,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
6,300,000 |
|
|
|
7,923,000 |
|
|
|
11,299,000 |
|
|
|
15,402,000 |
|
Minority interest in joint venture earnings
|
|
|
(177,000 |
) |
|
|
(258,000 |
) |
|
|
(319,000 |
) |
|
|
(497,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
6,123,000 |
|
|
$ |
7,665,000 |
|
|
$ |
10,980,000 |
|
|
$ |
14,905,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.46 |
|
|
$ |
0.53 |
|
|
$ |
0.83 |
|
|
$ |
1.04 |
|
|
Diluted
|
|
$ |
0.40 |
|
|
$ |
0.47 |
|
|
$ |
0.72 |
|
|
$ |
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,265,146 |
|
|
|
14,418,819 |
|
|
|
13,180,992 |
|
|
|
14,318,916 |
|
|
Diluted
|
|
|
15,329,760 |
|
|
|
16,209,651 |
|
|
|
15,306,089 |
|
|
|
16,071,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-29
Diodes Incorporated and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,980,000 |
|
|
$ |
14,905,000 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,145,000 |
|
|
|
7,813,000 |
|
|
|
|
Minority interest earnings
|
|
|
319,000 |
|
|
|
497,000 |
|
|
|
|
Share grant expense
|
|
|
|
|
|
|
358,000 |
|
|
|
|
Loss (gain) on sale of property, plant and equipment
|
|
|
15,000 |
|
|
|
(105,000 |
) |
|
Changes in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,568,000 |
) |
|
|
(4,336,000 |
) |
|
|
|
Inventories
|
|
|
(3,486,000 |
) |
|
|
(66,000 |
) |
|
|
|
Prepaid expenses and others
|
|
|
(66,000 |
) |
|
|
1,558,000 |
|
|
|
|
|
Deferred income taxes
|
|
|
334,000 |
|
|
|
263,000 |
|
|
Changes in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
3,889,000 |
|
|
|
3,235,000 |
|
|
|
|
Accrued liabilities
|
|
|
2,219,000 |
|
|
|
(1,207,000 |
) |
|
|
|
|
Income taxes payable
|
|
|
|
|
|
|
1,223,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,781,000 |
|
|
|
24,138,000 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(10,300,000 |
) |
|
|
(6,845,000 |
) |
|
Proceeds from sale of property, plant and equipment
|
|
|
55,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(10,245,000 |
) |
|
|
(6,845,000 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Repayments of line of credit, net
|
|
|
(827,000 |
) |
|
|
(6,167,000 |
) |
|
Net proceeds from the issuance of common stock
|
|
|
1,868,000 |
|
|
|
2,973,000 |
|
|
|
Repayments of long-term debt, net
|
|
|
(2,916,000 |
) |
|
|
(579,000 |
) |
|
Repayments of capital lease obligations
|
|
|
(90,000 |
) |
|
|
(79,000 |
) |
|
Management incentive reimbursement from LSC
|
|
|
375,000 |
|
|
|
375,000 |
|
|
Dividend to minority shareholder
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(1,890,000 |
) |
|
|
(3,477,000 |
) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS
|
|
|
93,000 |
|
|
|
228,000 |
|
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
|
|
1,739,000 |
|
|
|
14,044,000 |
|
CASH AT BEGINNING OF PERIOD
|
|
|
12,847,000 |
|
|
|
18,970,000 |
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$ |
14,586,000 |
|
|
$ |
33,014,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-30
Diodes Incorporated and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, | |
|
|
| |
|
|
2004 | |
|
2005 | |
| |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
343,000 |
|
|
$ |
289,000 |
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
1,592,000 |
|
|
$ |
1,627,000 |
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options exercised credited to additional
paid-in capital
|
|
$ |
1,755,000 |
|
|
$ |
2,201,000 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
F-31
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
for interim financial information and 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 accounting principles generally accepted in the United
States of America for complete financial statements. These
consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and
related notes contained in the Companys Annual Report on
Form 10-K for the year ended December 31, 2004. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments and accruals) considered necessary for a
fair presentation of the results of operations for the period
presented have been included in the interim period. Operating
results for the six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2005. The consolidated
financial data at December 31, 2004 is derived from audited
financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31,
2004.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
The consolidated financial statements include the accounts of
Diodes-North America and its wholly-owned foreign subsidiaries,
Diodes Taiwan Corporation, Ltd. (Diodes-Taiwan), and
Diodes-Hong Kong Ltd. (Diodes-Hong Kong), the
accounts of Shanghai KaiHong Electronics Co., Ltd.
(Diodes-China) and Diodes Shanghai Co., Ltd.
(Diodes-Shanghai) in which the Company has a 95.0%
interest, and the accounts of its wholly-owned United States
subsidiary, FabTech Incorporated (FabTech or
Diodes-FabTech). All significant intercompany
balances and transactions have been eliminated.
NOTE 2FUNCTIONAL CURRENCIES, COMPREHENSIVE INCOME/ LOSS
AND FOREIGN CURRENCY TRANSLATION
The Company uses the U.S. dollar as the functional currency
for Diodes-China, Diodes-Shanghai and Diodes-Hong Kong, and uses
the NT (New Taiwanese) dollar as the functional
currency for Diodes-Taiwan. The translation of the balance sheet
and statement of income of Diodes-Taiwan from the local currency
into the reporting currency (U.S. dollar) resulted in a
$289,000 translation loss adjustment, the effect of which is
reflected in the accompanying statement of comprehensive income
and on the balance sheet as a separate component of
shareholders equity as of June 30, 2005.
The effect of a $61,000 currency exchange loss and a $289,000
translation loss adjustment resulted in a change in accumulated
other comprehensive gain of $228,000 for the six months ended
June 30, 2005, and is reflected on the balance sheet as a
separate component of shareholders equity. There were no
other components of other comprehensive loss (income) for the
six months ended June 30, 2005.
F-32
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3INVENTORIES
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
2004 | |
|
2005 | |
| |
Finished goods
|
|
$ |
13,118,000 |
|
|
$ |
13,389,000 |
|
Work-in-progress
|
|
|
2,025,000 |
|
|
|
2,511,000 |
|
Raw materials
|
|
|
9,240,000 |
|
|
|
8,558,000 |
|
|
|
|
|
|
|
|
|
|
|
24,383,000 |
|
|
|
24,458,000 |
|
Less: Reserves
|
|
|
(2,145,000 |
) |
|
|
(2,154,000 |
) |
|
|
|
|
|
|
|
Net inventory
|
|
$ |
22,238,000 |
|
|
$ |
22,304,000 |
|
|
|
|
|
|
|
|
NOTE 4INCOME TAXES
In accordance with the current taxation policies of the
Peoples Republic of China (PRC), Diodes-China
received preferential tax treatment for the years ended
December 31, 1996 through 2004. Earnings were subject to 0%
tax rates from 1996 through 2000, and 12.0% from 2001 through
2004. Due to a $15.0 million permanent re-investment of
Diodes-China earnings in 2004, earnings from 2005 through 2007
will continue to be taxed at 12.0% (one half the normal central
government tax rate). Also due to the permanent re-investment,
the Company recorded a $1.2 million tax refund (net of
U.S. taxes) in the fourth quarter of 2004. Earnings of
Diodes-China are also subject to tax of 3.0% by the local taxing
authority in Shanghai. The local taxing authority waived this
tax from 2001 through the first quarter of 2005, and is expected
to waive this tax for all of 2005, but can re-impose the tax at
its discretion. For 2004, Diodes-Shanghais effective tax
rate was 15.0%. As an incentive for the establishment of
Diodes-Shanghai, beginning in 2005, earnings are exempted from
income tax for two years. Then, beginning in 2007, earnings will
be subject to 50% of the standard tax rate of 15.0% for the
following three years.
Earnings of Diodes-Taiwan are currently subject to a tax rate of
35.0%, which is comparable to the U.S. Federal tax rate for
C corporations. Earnings of Diodes-Hong Kong are currently
subject to a 17.5% tax for local sales and/or local source
sales, all other sales are foreign income tax-free.
In accordance with United States tax law, the Company receives
credit against its U.S. Federal tax liability for corporate
taxes paid in Taiwan and China. The repatriation of funds from
Taiwan and China to the Company may be subject to Federal and
state income taxes.
As of June 30, 2005, accumulated and undistributed earnings
of Diodes-China and Diodes-Shanghai are approximately
$54.2 million, including $25.0 million of restricted
earnings (which are not available for dividends). Through
March 31, 2002, the Company had not recorded deferred
U.S. Federal or state tax liabilities (estimated to be
$8.9 million as of March 31, 2002) on these cumulative
earnings since the Company, at that time, considered this
investment to be permanent, and had no plans or obligation to
distribute all or part of that amount from China to the United
States. Beginning in April 2002, the Company began to record
deferred taxes on a portion of the China earnings in preparation
of a dividend distribution. In the year ended December 31,
2004, the Company received a dividend of approximately
$5.7 million from its Diodes-China subsidiary, for which
the tax effect was included in U.S. Federal and state
taxable income.
F-33
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is evaluating the need to provide additional
deferred taxes for the future earnings of the Companys
foreign subsidiaries to the extent such earnings may be
appropriated for distribution to the Companys corporate
office in North America, and as further investment strategies
with respect to foreign earnings are determined. Should the
Companys North American cash requirements exceed the cash
that is provided through the domestic credit facilities, cash
can be obtained from the Companys 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.
On October 22, 2004, the President of the United States
signed the American Jobs Creation Act (AJCA) into
law. Originally intended to repeal the extraterritorial income
(ETI) exclusion, which had triggered tariffs by the
European Union, the AJCA was expanded to cover a wide range of
business tax issues. Among other items, the AJCA establishes a
phased repeal of the ETI, a new incentive tax deduction for
U.S. corporations to repatriate cash from foreign
subsidiaries at a reduced tax rate (a deduction equal to 85.0%
of cash dividends received in the year elected that exceeds a
base-period amount) and significantly revises the taxation of
U.S. companies doing business abroad.
In December 2004, the Company made a minimum estimate for
repatriating cash from its subsidiaries in China and Hong Kong
of $8.0 million under the AJCA, and recorded an income tax
expense of approximately $1.3 million. Under the guidelines
of the AJCA, the Company continues to develop a required
domestic reinvestment plan, covering items such as
U.S. bank debt repayment, U.S. capital expenditures
and U.S. research and development activities, among others,
to cover the $8.0 million minimum dividend repatriation. In
addition, the Company will complete a quantitative analysis of
the benefits of the AJCA, the foreign tax credit implications,
and state and local tax consequences of a dividend to maximize
the tax benefits of a 2005 dividend. In the first six months of
2005, the Company accrued $370,000 for U.S. taxes on
potential increased dividend repatriation in 2005.
NOTE 5SHARE-BASED COMPENSATION
Stock Options. The Company maintains share-based
compensation plans for its Board of Directors (the
Board), officers, and key employees, which provide
for non-qualified and incentive stock options, which are
described more fully in Note 9 of the Companys
audited financial statements included in the Annual Report on
Form 10-K for the year ended December 31, 2004. The
Company accounts for these plans under the recognition and
measurement principles of Accounting Principals Board
(APB) Opinion No. 25 (Accounting for
Stock Issued to Employees), and related
interpretations. No compensation cost was reflected in net
income for stock options, as all options granted under those
plans have an exercise price equal to or greater than the market
value of the underlying common stock on the date of the grant.
During the first six months of 2005, the Company granted 94,200
stock options.
As required by Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, an
amendment of FASB Statement No. 123, the
following table illustrates the effect on net income and
earnings per common share as if the
F-34
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation for each
period presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30 | |
|
|
(in 000s except per share data), | |
|
|
| |
|
|
Amounts per share | |
|
Amounts per share | |
|
|
| |
|
| |
|
|
2004 | |
|
Basic | |
|
Diluted | |
|
2005 | |
|
Basic | |
|
Diluted | |
| |
Net income
|
|
$ |
6,123 |
|
|
$ |
0.46 |
|
|
$ |
0.40 |
|
|
$ |
7,665 |
|
|
$ |
0.53 |
|
|
$ |
0.47 |
|
Additional compensation for fair value of stock options, net of
tax effect
|
|
|
(316 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(567 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net income
|
|
$ |
5,807 |
|
|
$ |
0.44 |
|
|
$ |
0.38 |
|
|
$ |
7,098 |
|
|
$ |
0.49 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30 | |
|
|
(in 000s except per share data), | |
|
|
| |
|
|
Amounts Per Share | |
|
Amounts Per Share | |
|
|
| |
|
| |
|
|
2004 | |
|
Basic | |
|
Diluted | |
|
2005 | |
|
Basic | |
|
Diluted | |
| |
Net income
|
|
$ |
10,980 |
|
|
$ |
0.83 |
|
|
$ |
0.72 |
|
|
$ |
14,905 |
|
|
$ |
1.04 |
|
|
$ |
0.93 |
|
Additional compensation for fair value of stock options, net of
tax effect
|
|
|
(630 |
) |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
(1,083 |
) |
|
|
(0.07 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma net income
|
|
$ |
10,350 |
|
|
$ |
0.79 |
|
|
$ |
0.68 |
|
|
$ |
13,822 |
|
|
$ |
0.97 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma information recognizes as compensation the value
of stock options granted using the Black-Scholes option pricing
model which takes into account as of the grant date, the
exercise price and expected life of the option, the current
price of underlying stock and its expected volatility, expected
dividends on the stock, expected forfeitures and the risk-free
interest rate for the term of the option.
The Companys valuations are based upon a single option
valuation approach using the Black-Scholes option valuation
model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options, which
have no vesting restrictions and are fully transferable and
negotiable in a free trading market. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and
expected life of the option. Because the Companys stock
options have characteristics significantly different from those
of freely traded options, and changes in the subjective input
assumptions can materially affect the Companys fair value
estimate of those stock options, in the Companys opinion,
existing valuations models, including Black-Scholes, are not
reliable single measures and may misstate the fair value of the
Companys stock options. Because Company stock options do
not trade on a secondary exchange, recipients can receive no
value nor derive any benefit from holding stock options under
these plans without an increase, above the grant price, in the
market price of the Companys stock. Such an increase in
stock price would benefit all stockholders commensurately.
Share Grants. On May 31, 2005, the Companys
Board appointed Dr. Keh-Shew Lu as the President and the
Chief Executive Officer of the Company effective as of
June 1, 2005. Dr. Lu will receive an inducement grant
of 180,000 shares of the Companys Common Stock
granted under the Companys Incentive Bonus Plan. On
May 31, 2005, C.H. Chen, who had served as the President
and the Chief Executive Office of the Company since March 2000,
resigned from those positions, and was appointed as the Vice
Chairman of the Companys Board, effective as of
June 1, 2005. Mr. Chen will receive
F-35
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
40,000 shares of the Companys Common Stock granted
under the Companys Incentive Bonus Plan. Under the terms
of the Incentive Bonus Plan, 50% of the shares will become
salable and transferable on the day following the third
anniversary of their appointment, and 50% will become salable
and transferable on the day following the fourth anniversary of
such appointment. If they voluntarily leave the employment of
the Company or are terminated for good cause, they will forfeit
any stock not yet released to them. The share grants will be
recorded each quarter as a non-cash operating expense item. The
expense will be calculated using the quarter-end stock price
multiplied by the total number of shares (220,000) divided by
the 4-year vesting period. In the second quarter of 2005, an
expense of $358,000 was recorded. In addition to the expense,
the 220,000 shares are included in the diluted shares
outstanding calculation. The combined impact of the share grant
reduced Diodes earnings per share during the second
quarter by $0.02, from $0.49 to $0.47.
NOTE 6Geographic 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 Companys chief decision-making
group consists of the President and Chief Executive Officer,
Chief Financial Officer, Vice President of Sales and Marketing,
and Senior Vice President of Operations. The Company operates in
a single segment, discrete semiconductor devices, through its
various manufacturing and distribution facilities.
Revenues were derived from the following countries (All Others
represents countries with less than 10.0% of total revenues
each):
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2004 |
|
Revenue | |
|
% of Total Revenue | |
| |
United States
|
|
$ |
13,823,000 |
|
|
|
29.4 |
|
Taiwan
|
|
$ |
12,434,000 |
|
|
|
26.4 |
|
China
|
|
$ |
10,837,000 |
|
|
|
23.0 |
|
All Others
|
|
$ |
9,923,000 |
|
|
|
21.2 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
47,017,000 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 |
|
Revenue | |
|
% of Total Revenue | |
| |
Taiwan
|
|
$ |
17,042,000 |
|
|
|
33.7 |
|
United States
|
|
$ |
13,085,000 |
|
|
|
25.9 |
|
China
|
|
$ |
12,852,000 |
|
|
|
25.4 |
|
All Others
|
|
$ |
7,619,000 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
50,598,000 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2004 |
|
Revenue | |
|
% of Total Revenue | |
| |
United States
|
|
$ |
25,550,000 |
|
|
|
28.9 |
|
Taiwan
|
|
$ |
23,464,000 |
|
|
|
26.5 |
|
China
|
|
$ |
19,161,000 |
|
|
|
21.7 |
|
All Others
|
|
$ |
20,267,000 |
|
|
|
22.9 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
88,442,000 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
F-36
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2005 |
|
Revenue | |
|
% of Total Revenue | |
| |
Taiwan
|
|
$ |
33,606,000 |
|
|
|
33.9 |
|
China
|
|
$ |
25,535,000 |
|
|
|
25.7 |
|
United States
|
|
$ |
25,157,000 |
|
|
|
25.4 |
|
All Others
|
|
$ |
14,900,000 |
|
|
|
15.0 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
99,198,000 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
The Companys 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 and Diodes-Shanghai, both located
in Shanghai, China; and Diodes-Hong Kong located in Hong Kong,
China). For reporting purposes, European operations, which
accounted for approximately 2.8% and 2.6% of total sales for the
three months and six months ended June 30, 2005,
respectively, are consolidated into the domestic (North America)
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 June 30, 2004 |
|
Far East | |
|
North America | |
|
Segments | |
| |
Total sales
|
|
$ |
46,185,000 |
|
|
$ |
24,051,000 |
|
|
$ |
70,236,000 |
|
Inter-company sales
|
|
|
(18,733,000 |
) |
|
|
(4,486,000 |
) |
|
|
(23,219,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
27,452,000 |
|
|
$ |
19,565,000 |
|
|
$ |
47,017,000 |
|
Property, plant and equipment
|
|
$ |
43,617,000 |
|
|
$ |
11,819,000 |
|
|
$ |
55,436,000 |
|
Assets
|
|
$ |
99,438,000 |
|
|
$ |
43,595,000 |
|
|
$ |
143,033,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated | |
Three Months Ended June 30, 2005 |
|
Far East | |
|
North America | |
|
Segments | |
| |
Total sales
|
|
$ |
56,088,000 |
|
|
$ |
21,554,000 |
|
|
$ |
77,642,000 |
|
Inter-company sales
|
|
|
(22,815,000 |
) |
|
|
(4,229,000 |
) |
|
|
(27,044,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
33,273,000 |
|
|
$ |
17,325,000 |
|
|
$ |
50,598,000 |
|
Property, plant and equipment
|
|
$ |
51,582,000 |
|
|
$ |
11,423,000 |
|
|
$ |
63,005,000 |
|
Assets
|
|
$ |
135,414,000 |
|
|
$ |
50,966,000 |
|
|
$ |
186,380,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated | |
Six Months Ended June 30, 2004 |
|
Far East | |
|
North America | |
|
Segments | |
| |
Total sales
|
|
$ |
87,086,000 |
|
|
$ |
45,428,000 |
|
|
$ |
132,514,000 |
|
Inter-company sales
|
|
|
(35,695,000 |
) |
|
|
(8,367,000 |
) |
|
|
(44,072,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
51,391,000 |
|
|
$ |
37,061,000 |
|
|
$ |
88,442,000 |
|
Property, plant and equipment
|
|
$ |
43,617,000 |
|
|
$ |
11,819,000 |
|
|
$ |
55,436,000 |
|
Assets
|
|
$ |
99,438,000 |
|
|
$ |
43,595,000 |
|
|
$ |
143,033,000 |
|
|
|
|
|
|
|
|
|
|
|
F-37
Diodes Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated | |
Six Months Ended June 30, 2005 |
|
Far East | |
|
North America | |
|
Segments | |
|
Total sales
|
|
$ |
108,803,000 |
|
|
$ |
42,924,000 |
|
|
$ |
151,727,000 |
|
Inter-company sales
|
|
|
(44,649,000 |
) |
|
|
(7,880,000 |
) |
|
|
(52,529,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
64,154,000 |
|
|
$ |
35,044,000 |
|
|
$ |
99,198,000 |
|
Property, plant and equipment
|
|
$ |
51,582,000 |
|
|
$ |
11,423,000 |
|
|
$ |
63,005,000 |
|
Assets
|
|
$ |
135,414,000 |
|
|
$ |
50,966,000 |
|
|
$ |
186,380,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7Reclassifications
Certain 2004 amounts presented in the accompanying financial
statements have been reclassified to conform to 2005 financial
statement presentation. These reclassifications had no impact on
previously reported net income or stockholders equity.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
ITEM 14. |
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. |
The following table sets forth the fees and expenses in
connection with the issuance and distribution of the shares of
common stock being registered hereby, other than underwriting
discounts and commissions. All amounts are estimates except the
Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq National Market listing fee. The
Registrant is paying all of these expenses in connection with
the issuance and distribution of the shares.
|
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$ |
11,904 |
|
NASD filing fee
|
|
|
10,500 |
|
Nasdaq National Market listing fee
|
|
|
21,250 |
|
Accounting fees and expenses
|
|
|
110,000 |
|
Legal fees and expenses
|
|
|
500,000 |
|
Printing and engraving expenses
|
|
|
60,000 |
|
Transfer agent and registrar fees
|
|
|
6,000 |
|
Miscellaneous
|
|
|
100,346 |
|
|
|
|
|
|
Total
|
|
$ |
820,000 |
|
|
|
|
|
ITEM 15. INDEMNIFICATION OF
DIRECTORS AND OFFICERS
Delaware General Corporate Law
Section 145 of the Delaware General Corporation Law (the
DGCL) provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the persons
conduct was unlawful. Section 145 provides further that a
corporation may indemnify any such person against expenses
(including attorneys fees) actually and reasonably
incurred by the person in connection with the defense or
settlement of any action or suit by or in the right of the
corporation, if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the
best interests of the corporation and except that no
indemnification may be made in respect of any claim, issue or
matter as to which such person has been adjudged to be liable to
the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought
determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall
deem proper. To the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described
in this paragraph, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses
(including attorneys fees) actually and reasonably
incurred by such person in connection therewith.
II-1
In addition, Section 102(b)(7) of the DGCL allows a
corporation to eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except
liability for the following:
|
|
|
any breach of their duty of
loyalty to the corporation or its stockholders;
|
|
|
acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law;
|
|
|
unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in
Section 174 of the DGCL; or
|
|
|
any transaction from which the
director derived an improper personal benefit.
|
Section 174 of the DGCL provides, among other things, that
a director, who willfully or negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or
redemption, may be held liable for these actions. A director who
was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her
dissent to these actions to be entered in the books containing
the minutes of the meetings of the board of directors at the
time the action occurred or immediately after the absent
director receives notice of the unlawful acts.
The registrants certificate of incorporation contains
provisions that limit the liability of its directors for
monetary damages to the fullest extent permitted by Delaware law.
The registrants bylaws provide that the registrant shall
indemnify to the fullest extent permitted by law any person who
is or was a party or is threatened to be made a party to any
action, suit or proceeding (other than an action by or in the
right of the registrant) by reason of the fact that he or she is
or was a director, officer, employee or agent of the registrant
or is or was serving at the registrants request as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. With
respect to any action or suit by the registrant or in the
registrants right to procure a judgment in the
registrants favor, the registrants bylaws provide
that it may indemnify any such person, except that no
indemnification will be provided if such person was adjudged to
be liable to the registrant, unless the court determines that
despite his or her liability to the registrant, he or she is
fairly and reasonably entitled to indemnification. The
registrants bylaws also provide that it may advance
expenses incurred by or on behalf of a director, officer,
employee or agent in advance of the final disposition of any
action or proceeding.
Directors and Officers Liability Insurance
Section 145 of the DGCL further provides that a corporation
may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person
and incurred by such person in any such capacity, or arising out
of such persons status as such, whether or not the
corporation would have the power to indemnify such person
against such liability under Section 145.
The registrants bylaws permit the registrant to secure
insurance on behalf of any officer, director, employee or other
agent of the registrant and any person serving at the
registrants request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, for any liability arising out of his or her
actions in that capacity, regardless of whether the
registrants bylaws would otherwise permit indemnification.
The registrant has obtained policies of insurance under which,
subject to the limitations of such policies, coverage will be
provided to the registrants directors and officers against
loss arising from claims made by reason of breach of fiduciary
duty or other wrongful acts as a director or officer, including
claims relating to public securities matters, and to the
registrant with respect to payments
II-2
which may be made by the registrant to these officers and
directors pursuant to the registrants indemnification
obligations or otherwise as a matter of law.
Indemnification Agreements
The registrant has entered into indemnification agreements with
each of its directors and officers that may require the
registrant, among other things, to indemnify its directors and
officers against liabilities that may arise by reason of their
status or service. These indemnification agreements may also
require the registrant to advance all expenses incurred by the
directors and officers in investigating or defending any such
action, suit or proceeding.
Underwriting Agreement
The Underwriting Agreement provides for indemnification by the
underwriters of the officers, directors and controlling persons
of the registrant for certain liabilities arising under the
Securities Act.
|
|
|
|
|
Exhibit |
|
|
number |
|
Description of exhibit |
|
|
1 |
.1* |
|
Form of Underwriting Agreement |
|
4 |
.1 |
|
Form of Certificate for Common Stock, par value
$0.662/3
per share |
|
5 |
.1* |
|
Opinion of Sheppard, Mullin, Richter & Hampton, LLP |
|
23 |
.1* |
|
Consent of Sheppard, Mullin, Richter & Hampton, LLP
(included in its opinion filed as Exhibit 5.1) |
|
23 |
.2 |
|
Consent of Moss Adams, LLP |
|
24 |
.1 |
|
Power of Attorney (See p. II-5) |
|
|
* |
To be filed by amendment. |
|
|
a. |
The undersigned registrant hereby undertakes that: |
|
|
|
|
(1) |
For purposes of determining any liability under the Securities
Act of 1933 (the Securities Act), the information
omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective. |
|
|
(2) |
For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. |
|
|
b. |
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each
filing of the registrants annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the Exchange Act) (and, where applicable, each
filing of an employee benefit plans annual report pursuant
to Section 15(d) of the Exchange Act) that is incorporated
by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof. |
|
|
c. |
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, executive officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission |
II-3
|
|
|
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-3 and has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Westlake Village, State of
California, on August 25, 2005.
DIODES INCORPORATED
Dr. Keh-Shew Lu
President, Chief Executive Officer
and Director (Principal Executive
Officer)
POWER OF ATTORNEY
FILING OF REGISTRATION STATEMENT ON FORM S-3
KNOW ALL BY THESE PRESENTS, that each of the undersigned
directors and officers of Diodes Incorporated, a Delaware
corporation, hereby nominate and appoint Dr. Keh-Shew Lu
and Carl C. Wertz, as his or her agents and attorneys-in-fact
(the Agents), for the undersigned and in the
undersigneds name, place and stead, in any and all
capacities (including the undersigneds capacity as a
director or officer of Diodes Incorporated), to sign this
Registration Statement and any and all amendments (including
post-effective amendments) to this Registration Statement, and
any and all registration statements filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended,
in connection with or related to the offering communicated by
this Registration Statement and its amendments, if any, and to
file or cause to be filed the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto the Agents full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or his substitute, may
lawfully cause to be done by virtue hereof.
This Power of Attorney shall remain in full force and effect
until revoked or superseded by written notice filed with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Keh-Shew Lu
Dr.
Keh-Shew Lu |
|
President and Chief Executive Officer, and Director (Principal
Executive Officer) |
|
August 25, 2005 |
|
/s/ Carl C. Wertz
Carl
C. Wertz |
|
Chief Financial Officer (Principal Financial and Accounting
Officer) |
|
August 25, 2005 |
|
/s/ Raymond Soong
Raymond
Soong |
|
Director |
|
August 25, 2005 |
|
/s/ C.H. Chen
C.H.
Chen |
|
Director |
|
August 25, 2005 |
II-5
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Michael R. Giordano
Michael
R. Giordano |
|
Director |
|
August 25, 2005 |
|
/s/ M.K. Lu
M.K.
Lu |
|
Director |
|
August 25, 2005 |
|
Shing
Mao |
|
Director |
|
August 25, 2005 |
|
/s/ John M. Stich
John
M. Stich |
|
Director |
|
August 25, 2005 |
II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
1 |
.1* |
|
Form of Underwriting Agreement |
|
4 |
.1 |
|
Form of Certificate for Common Stock, par value
$0.662/3
per share |
|
5 |
.1* |
|
Opinion of Sheppard, Mullin, Richter & Hampton, LLP |
|
23 |
.1* |
|
Consent of Sheppard, Mullin, Richter & Hampton, LLP
(included in its opinion filed as Exhibit 5.1) |
|
23 |
.2 |
|
Consent of Moss Adams, LLP |
|
24 |
.1 |
|
Power of Attorney (See p. II-5) |
|
|
* |
To be filed by amendment |
II-7
exv4w1
EXHIBIT 4.1
The Corporation shall furnish without charge to each stockholder who so requests a statement
of the powers, designations, preferences and relative, participating, optional or other special
rights of each class of stock of the Corporation or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Such requests shall be made to the
Corporations Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this certificate, shall be
construed as though they were written out in full according to applicable laws or regulations:
|
|
|
|
|
TCN COM
|
|
|
|
as tenants in common |
TEN ENT
|
|
|
|
as tenants by entireties |
JT TEN
|
|
|
|
as joint tenants with right of
survivorship and not as tenants in common |
|
|
|
|
|
|
|
|
|
|
|
UNIF GIFT MIN ACT |
|
|
|
Custodian
|
|
|
|
|
|
|
|
|
|
|
|
(Cust)
|
|
|
|
|
|
(Minor) |
|
|
|
|
|
under Uniform Gifts to Minors |
|
|
|
|
|
|
|
|
|
|
|
Act |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(State) |
|
UNIF TRF MIN ACT |
|
|
|
Custodian (until age
)
|
|
|
|
|
|
|
|
|
|
(Cust) |
|
|
|
|
|
|
|
|
|
|
and/or Uniform Transfers |
|
|
|
|
|
|
|
|
|
(Minor)
|
|
|
|
|
|
|
|
|
|
|
|
to Minors Act |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(State)
|
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
|
|
|
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
|
|
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney to transfer the said stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated
|
|
|
|
|
|
|
NOTICE:
|
|
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER. |
Signature(s) Guaranteed
|
|
|
|
By |
|
|
|
|
|
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKHOLDERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17AD-15. |
exv23w2
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement on Form S-3 of Diodes
Incorporated of our report dated January 28, 2005 appearing in the Annual Report on Form 10-K of
Diodes Incorporated for the year ended December 31, 2004, of our report dated April 7, 2005 with
respect to managements assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting, which report is
included in this amended annual report on Form 10-K/A of Diodes Incorporated for the year ended
December 31, 2004 and to the reference to us under the heading Experts in the Registration
Statement.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
August 23, 2005