United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to ________.
Commission file number: 1-5740
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 95-2039518
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
3050 East Hillcrest Drive
Westlake Village, California 91362
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (805) 446-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.66 2/3
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the 5,043,541 shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of the Common Stock
on the Nasdaq National Market on June 28, 2002 of $8.53 per share, was
approximately $43,021,405.
The number of shares of the registrant's Common Stock outstanding as of March
14, 2003 was 9,483,764 including 1,075,672 shares of treasury stock.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2003 annual meeting of stockholders are incorporated by reference into Part
III of this Report. Such proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 2002.
1
PART I
Item 1. Business
General
Diodes Incorporated (the "Company"), a Delaware corporation, is engaged in
the manufacture, sale and distribution of discrete semiconductors worldwide,
primarily to manufacturers in the communications, computing, industrial,
consumer electronics and automotive markets, and to distributors of electronic
components to end customers in these markets. The Company's broad product line
includes high-density diode and transistor arrays in ultra-miniature
surface-mount packages, as well as silicon wafers used in manufacturing these
products. Technologies include high density diode and transistor arrays in
multi-pin surface-mount packages; PowermiteR3, high-performance surface-mount
packages; performance Schottkys, switching and rectifier diodes; single and dual
prebiased transistors; performance tight tolerance and low current zener diodes;
subminiature surface mount packages; transient voltage suppressors (TVS and
TSPD); small signal transistors and MOSFETs; and standard, fast, ultra-fast, and
super-fast rectifiers.
Positioning the Company to rapidly respond to the demands of the global
marketplace and continuing to increase its investment in research and
development, the Company is focused on expanding its product portfolio and
closely controlling product quality and time-to-market. Shifting development
priorities toward specialized configurations, such as the Company's high-density
array devices, the Company is introducing a range of new products that improve
the trade-off between size, performance and power consumption for surface-mount
packages, such as the Company's BAT750 Schottky rectifier and SOT-523 product
lines. These product lines are designed for battery-powered and handheld
applications, such as those used in the computer and communications industries;
specifically, wireless devices, notebooks, flat panel displays, digital cameras,
mobile handsets, set top boxes, as well as DC to DC conversion and automotive
electronic applications.
In addition to the Company's corporate headquarters in Westlake Village,
California, which provides sales, marketing, engineering, logistics and
warehousing functions, the Company's wholly-owned subsidiary, Diodes Taiwan
Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales, engineering and
purchasing facility in Taipei, Taiwan. The Company also has a 95% interest in
Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or "KaiHong"), a
manufacturing facility in Shanghai, China, and offices in Shanghai and Shenzhen,
China. In March 2002, the Company opened a sales, warehousing and logistics
subsidiary in Hong Kong ("Diodes-Hong Kong"). In addition, in December 2000, the
Company acquired FabTech Incorporated ("Diodes-FabTech" or "FabTech"), a silicon
wafer manufacturer located near Kansas City, Missouri. An office in Toulouse,
France supports the Company's European sales expansion.
Lite-On Semiconductor Corporation ("LSC"), formerly Lite-On Power
Semiconductor Corporation ("LPSC"), is the Company's largest stockholder,
holding approximately 36.5% of the outstanding shares. LSC is a member of The
Lite-On Group of companies of the Republic of China. The Lite-On Group, with
worldwide sales of approximately $4.5 billion, is a leading manufacturer of
power semiconductors, computer peripherals, and communication products. In
December 2000, LPSC merged with Dyna Image Corporation of Taipei, Taiwan, the
world's largest contact image sensor ("CIS") manufacturer. CISs are primarily
used in fax machines, scanners and copy machines. C.H. Chen, the Company's
President and Chief Executive Officer, is Vice Chairman of the combined company,
which is called LSC.
Strategy
The Company's business strategy is to become a vertically integrated
manufacturer and supplier of discrete semiconductors, to expand the geographic
reach of its sales organization into high growth and/or under serviced markets,
and to pursue manufacturing efficiency across its product lines.
The Company intends to control the manufacturing and manage the
distribution process, from product concept to manufacturing, packaging, and
distribution. The anticipated benefits to this strategy include:
o Better control of product quality;
o Faster time-to-market for new products;
o Ability to customize devices to customer requirements;
o Ability to develop and market devices that are differentiated in the
marketplace with proprietary processes and designs; and,
o Improved access to wafers and devices in limited supply conditions.
2
The Company believes that this strategy will enable it to develop stronger
relationships with existing customers and distributors, participate at new
customers and in new markets, shift its sales mix to include higher margin
devices, and create greater differentiation for the Diodes brand.
In order to become a vertically integrated manufacturer and supplier, the
Company integrates six areas of operations: sales, marketing, product
development, wafer foundry, package development, and assembly/testing.
Historically, discrete semiconductors have been characterized by a slower
rate of innovation and lower value-added than integrated circuits ("ICs").
However, the Company believes that changes in the consumer electronics,
communications and computing industries have created a need for renewed
innovation in discrete semiconductor technology. The proliferation of mobile,
battery-powered devices has placed a premium on smaller size and lower energy
consumption. The Company's product development efforts are focused on devices
that reduce size and power consumption, increase performance and simplify board
design.
In December 2000, the Company acquired FabTech Incorporated in order to
develop higher technology products that command higher margins, as well as to
fulfill its silicon wafer requirements. Diodes-FabTech has the manufacturing
equipment, facilities and technology to produce finished wafers ready for
assembly, as well as the experienced engineering team required to develop higher
technology products. These new high technology products are widening the
Company's product line while increasing its value to customers.
In 2002, the Company continued to increase its rate of new product
introductions and developed a number of products that it believes to be
differentiated in the marketplace. While many competitors are able to devote
vastly greater resources to research and development activities, the Company
believes that its product focus, customer-driven development approach and rapid
development cycle will enable it to develop products that provide higher value
to its customers. The Company's research and development activities are oriented
towards improving on industry standard devices at the process, wafer and
packaging level. In addition, the Company's applications engineers work with
customers to develop applications specific packaging and device configurations
to meet their specific needs.
In addition to becoming a vertically integrated manufacturer and supplier,
the Company intends to continue to expand its existing sales force in Asia and
Europe. The Company significantly expanded its Asian sales force to capture
market share in Taiwan, China, Hong Kong, Singapore and other Southeast Asia
markets, as well as Korea. The Company also is developing sales channels in
Europe to capture market share in countries such as England, France, Germany,
Italy and Israel, among others. The Company targets original equipment
manufacturers ("OEMs") directly, as well as leveraging its expanded distribution
network.
In 2002, the Company invested approximately $7.7 million in plant and
equipment at its Diodes-China manufacturing facility, bringing the total amount
invested to approximately $52.9 million. The Company will continue to invest in
Diodes-China as new packaging opportunities arise. Diodes-China is the Company's
packaging and testing facility in Mainland China. Diodes-China uses chips or die
from silicon wafers and manufactures them into various packaged finished
devices.
Recent Results
The discrete semiconductor industry has historically been subject to severe
pricing pressures. At times, although manufacturing costs have decreased, excess
manufacturing capacity and over-inventory have caused selling prices to decrease
to a greater extent than manufacturing costs. To compete in this highly
competitive industry, the Company has committed substantial new resources to the
further development and implementation of sales and marketing functions, and
expanded manufacturing capabilities. Emphasizing the Company's focus on customer
service, additional sales personnel and programs have been added, primarily in
Asia, and most recently Europe. In order to meet customers' needs at the design
stage of end-product development, the Company also continues to employ
additional applications engineers who work directly with customers to assist
them in "designing in" the correct products to produce optimum results. Regional
sales managers in the U.S., working closely with manufacturers' representative
firms and distributors, have also been added to help satisfy customers'
requirements. In addition, the Company continues to develop relationships with
major distributors who inventory and sell the Company's products.
Beginning in the second half of 1999, and continuing through the first
three quarters of 2000, industry demand significantly exceeded industry
capacity. In addition, OEM customers and distributors increased their purchasing
and inventory levels in anticipation of further increases in end-product demand.
The Company's gross profit margin reached a peak of 34.9% in the third quarter
of 2000.
3
Then, as semiconductor manufacturers, including the Company, continued to
increase manufacturing capacity, the global economy slowed causing a sharp
decline in sales beginning in the fourth quarter of 2000. The semiconductor
industry as a whole experienced a sharp inventory correction primarily in two
key markets, communications and computers. The effect on the Company of these
unforeseen economic and market conditions, and the risks of becoming a fully
integrated manufacturer were amplified with the December 2000 completion of the
wafer facility acquisition because of the fixed costs associated with the
additional manufacturing facility.
Although the Company's market share increased in 2001, average selling
prices for discrete products decreased approximately 23% and silicon wafer
pricing fell approximately 12%. Due to decreased demand in 2001, the Company
also experienced reduced capacity utilization of its manufacturing facilities
and demand-induced changes in product mix, both of which had a negative impact
on gross margins. Due to market conditions, capacity utilization at
Diodes-FabTech decreased to 45%, while Diodes-China's utilization was 52%,
during the third quarter of 2001.
During 2001, the Company responded to the downturn by implementing programs
to cut operating costs, including reducing its worldwide workforce by 26%,
primarily at the FabTech and Diodes-China manufacturing facilities. Some
improvement was seen in the fourth quarter of 2001 when capacity utilization
increased to 65% and 60% for Diodes-China and Diodes-FabTech, respectively, but
gross margins still ended the year at 15.2%.
Year 2002 continued to be a year where demand improved, the Company's
manufacturing capacity utilization increased, and pricing pressures eased
somewhat. Average selling prices decreased approximately 8% for discrete
products and 1% for wafer products. Gross margins increased from 16.2% in the
first quarter to a high of 26.0% in the third quarter when Diodes-China's
capacity utilization reached approximately 88% and Diodes-FabTech approximately
83%. The gross margin was 23.0% for the year.
The Company continues to actively adjust its cost structure as dictated by
market conditions. Long-term, the Company believes that it will continue to
generate value for shareholders and customers, not just from its expanded
Diodes-China manufacturing and Diodes-FabTech's foundry assets, but also by the
addition of an enhanced technology component to the Company. This is a
multi-year initiative that will increase the Company's ability to serve its
customers' needs, while establishing the Company at the forefront of the next
generation of discrete technologies.
In December 2002, the Company completed its implementation of Oracle's
Enterprise Resource Planning ("ERP") software. The Company anticipates increased
efficiency through improved management of its global supply chain,
manufacturing, planning and financial reporting.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company has
applied the new rules on accounting for goodwill beginning in the first quarter
of 2002. An independent appraiser, retained by the Company, performed the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002, and January 1, 2003, and has determined that the goodwill is
fully recoverable. Application of the non-amortization provisions of the
Statements is expected to result in an increase in net income of approximately
$288,000 per year, assuming no impairment adjustment.
Products
Technology in the semiconductor industry is ever changing and the products
traditionally sold by the Company have been mature products. But the additions
of state-of-the-art surface-mount manufacturing capability at Diodes-China and
our newly acquired wafer fabrication facility, Diodes-FabTech, have enabled the
Company to advance technologically with the industry leaders, and to move ahead
in technical advances in both silicon technology and product implementation.
These new technologies will offer higher profit and growth potential.
Product Technology
Semiconductors come in two basic configurations: discrete semiconductors
and integrated circuits ("ICs"). The Company is engaged in the manufacture,
sale, and distribution of discrete semiconductors, which are fixed-function
components such as:
4
Schottky Rectifiers Standard Recovery Rectifiers Transient Voltage Suppressors ("TVS")
Schottky Diodes Bridge Rectifiers NPN Transistors
Super-Fast & Ultra-Fast Recovery Rectifiers Switching Diodes PNP Transistors
Fast Recovery Rectifiers Zener Diodes MOSFET - N-Channel
MOSFET - P-Channel
In terms of function, IC's are far more complex than discrete
semiconductors. They are multi-function devices of the sort found in computer
memory boards and central processing units. IC's, characterized by rapid changes
in both production and application, and the desire to put ever-more intelligence
into ever-smaller packages, have required the development of manufacturing
techniques that are highly sophisticated and expensive.
Discrete semiconductors, which effectively tie integrated circuits to their
surrounding environments and enable them to work, come in hundreds of
permutations and vary according to voltage, current, power handling capability
and switching speed. In a standard industry classification, those discrete
semiconductors operating at less than one watt are referred to as low-power
semiconductors, while those operating at greater than one watt are termed power
semiconductors. Both types of semiconductors are found in a wide assortment of
commercial instrumentation and communication equipment, in consumer products
like televisions and telephones, and in automotive, computer and industrial
electronic products.
Arrays bridge the gap between discrete semiconductors and IC's. Arrays
consist of more than one discrete semiconductor housed in a single package. The
Company added about 100 new 6-pin surface mount array part numbers to its
semiconductor offering. With the flexibility of domestic engineering and
fast-reaction manufacturing facilities in the Far East, the Company is finding
interest in its offering of Application Specific Multi-Chip Circuit arrays.
Silicon wafers are the basic raw material used in producing all types of
semiconductors. Many highly sophisticated and tightly controlled processes are
used to develop finished semiconductor wafers from the raw starting material.
They include high precision lapping and polishing, photo lithography, chemical
vapor deposition of epitaxy, doping and oxidation processes, plasma deposition,
ion implantation, metal plating, sintering and sputtering, chemical etching,
annealing and reaction. Finished wafers are then cut into very small dice in
order to be assembled into the appropriate surface mount or leaded package at
the semiconductor assembly factory.
Product Packaging
Almost as important as the technology of the discrete component, is the
component packaging. The industry trend is to fit discrete components into
ever-smaller and more efficient surface-mount packages. Smaller packaging
provides a reduction in board space, height, and weight and is well suited for
battery-powered, hand-held and wireless applications such as cellular phones,
pagers, modems, notebook and palmtop computers and accessories where space is at
a premium. The objective is to fit the same functionality and power handling
features into smaller packages. The Company's packaging capabilities include:
Surface Mount:
SOT-23 SOT-523 SMA
SOT-25 SOD-523 SMB
SOT-26 SC-59 SMC
SOT-143 SC-75 DPAK
SOT-563 DO216AA D2PAK
SOD-123 MELF
SOD-323 MiniMELF
SOT-363 Powermite3
Leaded:
DO-15 DO-201AD A-405
DO-35 TO-220AC TO-3P
DO-41 TO-220AB Numerous Bridge Rectifier Packages
5
Manufacturing and Significant Vendors
The Company's Far East subsidiary, Diodes-China, manufactures product for
sale primarily to North America and Asia. Diodes-China's manufacturing focuses
on SOT-23 and SOD-123 products, as well as sub-miniature packages such as
SOT-363, SOT-563, and SC-75. These surface-mount devices ("SMD") are much
smaller in size and are used in the computer and communications industries,
destined for cellular phones, notebook computers, pagers, PCMCIA cards, modems,
and garage door transmitters, among others. Diodes-China's state-of-the-art
facilities have been designed to develop even smaller, higher-density products
as electronic industry trends to portable and hand-held devices continue.
Although Diodes-China purchases silicon wafers from FabTech, the majority are
currently purchased from other wafer vendors. The Company plans to increase the
number of Diodes-FabTech wafers used at Diodes-China over the next several
years.
Acquired in December 2000 from LSC, FabTech's wafer foundry is located in
Lee's Summit, Missouri. FabTech manufactures primarily 5-inch silicon wafers,
which are the building blocks for semiconductors. FabTech has full foundry
capabilities, including processes such as silicon epitaxy, silicon oxidation,
photolithography and etching, ion implantation and diffusion, low pressure and
plasma enhanced chemical vapor deposition, sputtered and evaporated metal
deposition, wafer backgrinding, and wafer probe and ink.
FabTech purchases polished silicon wafers and then, by using various
technologies and patents, in conjunction with many chemicals and gases,
fabricates several layers on the wafers, including epitaxial silicon, ion
implants, dielectrics and metals, with various patterns. Depending upon these
layers and the die size (which is determined during the photolithography process
and completed at the customer's packaging site where the wafer is sawn into
square or rectangular die), different types of wafers with various currents,
voltages and switching speeds are produced.
At Diodes-China, silicon wafers are received and inspected in a highly
controlled environment awaiting the assembly operation. At the first step of
assembly, the wafers are mounted in a supporting ring, and using automatic
machinery, the wafers are sawn with very thin, high speed diamond blades into
tiny semiconductor "dice", numbering as many as 200,000 per 5" 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 using
various technologies 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. The fully automatic assembly machinery then
molds the epoxy case around the die and lead frame to produce the desired
semiconductor product. Next is the trim, form, test, mark and re-test operation.
Finally 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.
Each step of the process is precisely controlled and monitored to assure
world-class quality. Samples of each device type are periodically subjected to
rigorous 1,000 hour high reliability testing to assure that the devices will
meet all customers' expectations in the most demanding applications.
As evidence of our total commitment to product quality and customer
satisfaction, the Company's management has developed and continually maintains
processes, procedures and standards of performance that earn our Company widely
recognized quality certifications. Our corporate headquarters received official
ISO 9002 Certification of Registration in 1997 from Underwriters Laboratories
(UL), the leading third-party certification organization in the United States
and the largest in North America. Diodes-China and Diodes-Taiwan received
official ISO 9002 Certification of Registration from DNV in 1997. Diodes-China
also earned QS-9000 and ISO 14001 certifications in 2000, validating high-level
quality management in the automotive supply industry, and our compliance with
official environmental standards, respectively. Diodes-FabTech received ISO 9001
certification in 1997, and QS 9000 certification with AEC-A100 Supplement in
1998 from BSI, an international standards, testing, registration and
certification organization.
ISO 9000 certifications consist of a series of paradigms for the
establishment of systems and protocols to facilitate the creation and
maintenance of superior quality-control techniques. The Company's commitment to
ongoing external validation demonstrates dedication to continual reviews and
renewal of our mission, strategies, operations and service levels. With its
underlying premise that true product quality requires a total quality system,
ISO certification is often required of vendors seeking to establish
relationships with OEMs doing business in intensely competitive global markets.
All of the products sold by the Company, as well as the materials used by
the Company in its manufacturing operations, are available both domestically and
abroad. In 2002, the largest external supplier of products to the Company was
LSC, a related party. Approximately 18% and 15% of the Company's sales were from
product manufactured by LSC in 2002 and 2001, respectively. Also, in 2002 and
2001, approximately 6% and 4%, respectively of the Company's sales were from
product manufactured by companies owned by Xing International, the 5% minority
partner in Diodes-China, and a related party. In addition, sales of products
manufactured by Diodes-China and Diodes-FabTech, the Company's manufacturing
subsidiaries, were
6
approximately 34% and 25% in 2002, respectively, versus 27% and 15% in 2001,
respectively. The Company anticipates that Diodes-China will become an
increasingly valuable supplier. No other manufacturer of discrete semiconductors
accounted for more than 8% and 7% of the Company's sales in 2002 and 2001,
respectively.
The Company's Diodes-China manufacturing facility receives wafers from
FabTech, among others. Output from the FabTech facility includes wafers used in
the production of Schottky barrier diodes, fast recovery epitaxial diodes
(FREDs), and other widely used value-added products. Schottky barrier diodes are
employed in the manufacture of the power supplies found in personal computers,
telecommunications devices and other applications where high frequency, low
forward voltage and fast recovery are required.
Until October 2000, Diodes-Taiwan manufactured product for sale to
Diodes-North America and to trade customers. The Company moved its Taiwan
manufacturing to China because the Taiwan manufactured products were lower
technology products, fairly labor intensive, and the cost savings of moving the
manufacturing to the Company's qualified minority partner in Diodes-China were
attractive and necessary to meet market demand. In connection with the
manufacturing move, the Company sold approximately $150,000 of equipment to the
minority partner of Diodes-China. Diodes-Taiwan continues as the Company's
Asia-Pacific sales, logistics and distribution center. Diodes-China participates
in final testing, inspection and packaging of these products, formerly
manufactured by Diodes-Taiwan.
Although the Company believes alternative sources exist for the products of
any of its suppliers, the loss of any one of its principal suppliers or the loss
of several suppliers in a short period of time could have a materially adverse
effect on the Company until an alternate source is located and has commenced
providing such products or raw materials.
Sales, Marketing and Distribution
The Company sells its products through its own internal and regional sales
departments, as well as through representatives and distributors. The Company's
sales team, aided by the sales force of approximately 30 independent sales
representatives located throughout North America, Asia, and most recently
Europe, supplies approximately 200 OEM accounts. In 2002, OEM customers
accounted for approximately 69% of the Company's sales, compared to
approximately 66% in 2001. The increase was primarily due to wafer sales at
Diodes-FabTech. OEM customers range from small, privately held electronics
companies to Fortune 500 companies.
The Company's major OEM customers include industry leaders such as: Intel
Corporation, Cisco Systems Incorporated, Sony Corporation, Nortel Networks
Corporation, Delphi Automotive, Bose Corporation, Scientific Atlanta
Incorporated, Samsung Electronics, Asustek Computer, Inc., Quanta and LG
Electronics, Inc. The Company further supplies approximately 40 distributors
(31% of 2002 sales), who collectively sell to approximately 10,000 customers on
the Company's behalf. The Company's worldwide distribution network includes
Arrow Electronics, Inc., Avnet, Inc., Digi-Key Corporation, Future Electronics
Ltd., Jaco Electronics, Inc., Reptron Electronics, Inc., and All American
Semiconductor, Inc., among others. The Company is not dependent on any one
customer to support its level of sales. For the fiscal year ended December 31,
2002, not one OEM customer accounted for more than 14% of the Company's sales,
while the largest distributor accounted for 4% of sales. The twenty largest
customers accounted, in total, for approximately 61% of the Company's sales in
2002, compared to 55% in 2001.
The Company's products are sold primarily in North America, the Far East,
and Europe, both directly to end users and through electronic component
distributors. In 2002, approximately 49%, 48%, and 3% of the Company's products
were sold in North America, the Far East, and Europe, respectively, compared to
54%, 45%, and 1% in 2001, respectively. See Note 12 of "Notes to Consolidated
Financial Statements" for a description of the Company's geographic and segment
information. An increase in the percentage of sales in the Far East is expected
as the Company significantly increased its sales presence there and believes
there is greater potential to increase market share in that region due to the
expanding base of electronic product manufacturers.
Through Diodes-Taiwan, the Company employs a general manager who acts as
the Far East purchasing liaison with respect to product procurement from other
vendors located in the Far East. Diodes-Taiwan also sells product to customers
in Taiwan, Korea, and Singapore, among others Asia-Pacific countries.
In June 2001, the Company expanded its sales force into Europe with a
regional manager and distribution network to serve the UK, France, Germany,
Italy and Israel, among others.
In March 2002, the Company opened a sales, warehousing, and logistics
office in Hong Kong to strengthen its competitive market position in Asia.
Because more communication and personal computer companies are moving to
7
China, having sales and warehousing direct out of Hong Kong enables the Company
to provide shorter lead times on orders and better service to this growing
customer base.
Through ongoing sales and customer service efforts, the Company continues
to develop business relationships with companies who are considered leaders in
their respective market segments. The Company's marketing efforts also have
benefited from an ongoing program to develop strategic alliances with
manufacturers, such as LSC, among others, to better control its destiny in terms
product technology, quality and especially the availability of the products it
sells.
Over the years, there has been a tendency among some larger manufacturers
to limit or de-emphasize the production and marketing of discrete components in
favor of integrated and hybrid circuits. With fewer service-oriented sources of
discrete components available to OEMs, the Company has captured additional
market share. The Company's products primarily include catalog items, but also
include units designed to specific customer requirements.
Competition
Numerous semiconductor manufacturers and distributors serve the discrete
semiconductor components market where competition is intense. Some of the larger
companies include Fairchild Semiconductor Corporation, International Rectifier
Corporation, Rohm Electronics, Phillips Electronics, On Semiconductor
Corporation, and Vishay Intertechnology, Inc., many of which have greater
financial, marketing, distribution, brand name recognition and other resources
than the Company. Accordingly, in response to market conditions, the Company
from time to time may reposition product lines or decrease prices, which may
adversely affect the Company's profit margins on such product lines.
Competitiveness in sales of the Company's products is determined by the price
and quality of the product, and the ability of the Company to provide delivery
and customer service in keeping with the customers' needs. The Company believes
that it is well equipped to be competitive in respect to these requirements.
Engineering and Research and Development
The Company's engineering and research and development consist of
customer/applications engineers and product development engineers who assist in
determining the direction of the Company's future product lines. Their primary
function is to work closely with market-leading customers to further refine,
expand and improve the Company's product range within the Company's 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, the Company's
applications engineers reduce the required number of components and, thus,
circuit board size requirements, while increasing the component technology to a
higher level.
Product engineers work directly with the semiconductor wafer design and
process engineers at Diodes-FabTech who craft die designs needed for products
that precisely match our customer's requirements. Further, Diodes-FabTech's R&D
engineers are developing higher technology products, which are expected to
propel the Company to leadership positions in our focused areas. Direct contact
with the Company's manufacturing facilities allows the manufacturing of products
that are in line with current technical requirements. With the addition of
FabTech, the Company has the capability to capture the customer's electrical and
packaging requirements through its customer/applications engineers and product
development engineers, and then transfer those requirements to Diodes-FabTech's
R&D and engineering department, so that the customer's requirements can be
translated, designed, and manufactured with full control, even to the elemental
silicon level.
Patents
Patents have begun to be more significant to our business. Developing and
maintaining a competitive advantage requires that the Company pursue patent
protection for certain devices and processes, particularly those developed or in
development at Diodes-FabTech. The Company currently holds five patents and has
seven patents pending in technologies ranging from ruggedized Schottky devices
to thirty-five hundred volt Ultra-Fast devices. To protect our intellectual
property from being copied by competitors, the Company will continue to
aggressively pursue patent protection.
Inventory
In general, the Company maintains sufficient inventories of standard
products at its U.S. facility and Diodes-Taiwan and Diodes-Hong Kong facilities
to permit rapid delivery of customers' orders. In addition, the Company
continuously coordinates with strategic alliances and subcontractors to support
product demand. The Company implemented
8
a program in coordination with its distributors, enabling the Company to
transfer inventory from distributors to OEM customers to better manage the
Company's on-hand inventory.
The Company's inventory is composed of discrete semiconductors and silicon
wafers, which are, for the most part, standardized in electronic related
industries. Historically, finished goods inventory turns over approximately four
times annually. Due to a concentrated effort to reduce inventory, inventory
turns increased to approximately 5.5 times at December 31, 2002. The Company has
no special inventory or working capital requirements that are not in the
ordinary course of business.
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 minimal or no penalty to the customer. Orders are generally booked
from one to twelve months in advance of delivery. The rate of booking new orders
can vary significantly from month to month. The Company and the industry as a
whole are experiencing a trend towards shorter lead-times (the amount of time
between the date a customer places an order and the date the customer requires
shipment). The amount of backlog at any date depends upon various factors,
including the timing of the receipt of orders, fluctuations in orders of
existing product lines, and the introduction of any new lines. Accordingly, the
Company believes that the amount of backlog at any date is not meaningful and is
not necessarily indicative of actual future shipments. The Company strives to
maintain proper inventory levels to support customers' just-in-time order
expectations.
Employees
As of December 31, 2002, the Company employed a total of 958 employees. At
such date, Diodes-North America had 74 full-time employees, Diodes-Taiwan had an
additional 56 employees, Diodes-China had a total of 645 employees, and
Diodes-FabTech had a total of 183 employees. None of the Company's employees is
subject to a collective bargaining agreement. The Company considers its
relations with its employees to be good.
Imports and Import Restrictions
During 2002, the Company's U.S. operations, which accounted for
approximately 49% of the Company's total sales, imported substantially all of
its products, of which approximately 17% was imported from Mainland China and
approximately 12% from Taiwan. The balance of the imports is primarily from
Germany, Japan, India, the Philippines, England and Korea. As a result, the
Company's operations are subject to the customary risks of doing business
abroad, including, but not limited to, the difficulty and expense of maintaining
foreign sourcing channels, cultural and institutional barriers to trade,
fluctuations in currency exchange rates, restrictions on the transfer of funds
and the imposition of tariffs, political instability, transportation delays,
expropriation, import and export controls and other non-tariff barriers
(including export licenses and changes in the allocation of quotas), as well as
the uncertainty regarding the future relationship between China and Taiwan, and
other U.S. and foreign regulations that may apply to the export and import of
the Company's products, and which could have a material adverse effect on the
Company. Any significant disruption in the Company's Taiwanese or Chinese
sources of supply or in the Company's relationship with its suppliers located in
Taiwan or China could have a material adverse effect on the Company.
The Company transacts business with foreign suppliers primarily in United
States dollars. To a limited extent, and from time to time, the Company
contracts (e.g., a portion of the equipment purchases for the Diodes-China
expansion) in foreign currencies, and, accordingly, its results of operations
could be materially affected by fluctuations in currency exchange rates. Due to
the limited number of contracts denominated in foreign currencies and the
complexities of currency hedges, the Company has not engaged in hedging to date.
If the volume of contracts written in foreign currencies increases, and the
Company does not engage in currency hedging, any substantial change in the value
of such currencies could have a material adverse effect on the Company's results
of operations. Management believes that the current contracts written in foreign
currencies are not significant enough to justify the costs inherent in currency
hedging.
Imported products are also subject to United States customs duties and, in
the ordinary course of business, the Company, from time to time, is subject to
claims by the United States Customs Service for duties and other charges. The
Company attempts to reduce the risk of doing business in foreign countries by,
among other things, contracting in U.S. dollars, and, when possible, maintaining
multiple sourcing of product groups from several countries.
9
Related Parties
The Company conducts business with two related party companies, LSC and
Xing International. LSC, a 36.5% shareholder, is the Company's largest
shareholder, and Xing International is owned by the Company's 5% joint venture
partner in Diodes-China. C.H. Chen, the Company's President and Chief Executive
Officer, and a member of the Company's Board of Directors, is also Vice-Chairman
of LSC. M.K. Lu, a member of the Company's Board of Directors, is President of
LSC, while Raymond Soong, the Company's Chairman of the Board, is the Chairman
of the Lite-On Group, a significant shareholder of LSC.
In 2002, the Company sold silicon wafers to LSC totaling 13.7% (7.7% in
2001) of the Company's sales, making LSC the Company's largest customer. Also
for 2002, 17.9% (15.2% in 2001) of the Company's sales were from discrete
semiconductor products purchased from LSC, making LSC the Company's largest
outside vendor. The Company has a long-standing sales agreement where the
Company is the exclusive North American distributor for certain of LSC product
lines. In addition, the Company leases warehouse space from LSC for its
operations in Hong Kong. All such transactions are on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
In December 2000, the Company acquired the wafer foundry, FabTech, Inc.,
from LSC. As part of the purchase price, at December 31, 2002, LSC holds a
subordinated, interest-bearing note for approximately $8.5 million. In May 2002,
the Company renegotiated the terms of the note to extend the payment period from
two years to four years, and therefore, payments of approximately $208,000 plus
interest began in July 2002. In connection with the terms of the acquisition,
LSC entered into a volume purchase agreement to purchase wafers from FabTech. In
addition, as per the terms of the stock purchase agreement, the Company has
entered into several management incentive agreements with members of FabTech's
management. The agreements provide members of FabTech's management 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 is reimbursed by LSC.
In 2002, the Company sold silicon wafers to companies owned by Xing
International totaling 1.5% (0.6% in 2001) of the Company's sales. Also for
2002, 5.6% (4.4% in 2001) of the Company's sales were from discrete
semiconductor products purchased from companies owned by Xing International. In
addition, Diodes-China leases its manufacturing facilities from, subcontracts a
portion of its manufacturing process (metal plating) to, and pays a consulting
fee to Xing International. All such transactions are on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
Reporting Segment
For financial reporting purposes, the Company is deemed to engage in one
industry segment - discrete semiconductors. See Note 12 of "Notes to
Consolidated Financial Statements" for a description of the Company's geographic
information.
Environmental Matters
We are subject to a variety of United States federal, foreign, state and
local governmental laws, rules and regulations related to the use, storage,
handling, discharge or disposal of certain toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. Any of these regulations
could require us to acquire equipment or to incur substantial other expenses to
comply with environmental regulations. If we were to incur substantial
additional expenses, product costs could significantly increase, thus materially
and adversely affecting our business, financial condition and results of
operations. Any failure to comply with present or future environmental laws,
rules and regulations could result in fines, suspension of production or
cessation of operations, any of which could have a material adverse effect on
our business, financial condition and results of operations.
The Company received a claim from one of its former U.S. landlords
regarding potential groundwater contamination at a site in which the Company
engaged in manufacturing from 1967 to 1973, alleging that the Company may have
some responsibility for cleanup costs. The Company does not anticipate that the
ultimate outcome of this matter will have a material effect on its financial
condition.
Available Information
Our Internet address is http://www.diodes.com. We make available, free of
charge through our Internet website, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably
10
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission ("the SEC"). 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 world-wide markets. With its extensive online
Product (Parametric) Catalog with advanced search capabilities, our website
facilitates quick and easy product selection. Our website provides easy access
to world-wide 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 current and complete investor financial information, including SEC
filings and press releases, as well as stock quotes.
Cautionary Statement for Purposes of the "Safe Harbor" Provision of the Private
Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters
addressed in this Annual Report on Form 10-K constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements are subject to a variety of risks and
uncertainties, including those discussed under "Risk Factors" and elsewhere in
this Annual Report on Form 10-K that could cause actual results to differ
materially from those anticipated by the Company's management. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made on this Annual Report on Form 10-K are made pursuant to the Act.
All forward-looking statements contained in this Annual Report on Form 10-K
are subject to, in addition to the other matters described in this Annual Report
on Form 10-K, a variety of significant risks and uncertainties. The following
discussion highlights some of these risks and uncertainties. Further, from time
to time, information provided by the Company or statements made by its employees
may contain forward-looking information. There can be no assurance that actual
results or business conditions will not differ materially from those set forth
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
Risk Factors
Vertical Integration We are in the process of vertically integrating our
business. Key elements of this strategy include (i) expanding our manufacturing
capacity, (ii) establishing wafer foundry and research and development
capability through the acquisition of FabTech and (iii) establishing sales,
marketing, product development, package development and assembly/testing
operations in company-owned facilities or through the acquisition of established
contractors. We have a limited history upon which an evaluation of the prospects
of our vertical integration strategy can be based. There are certain risks
associated with our vertical integration strategy, including:
o difficulties associated with owning a manufacturing business,
including, but not limited to, the maintenance and management of
manufacturing facilities, equipment, employees and inventories
and limitations on the flexibility of controlling overhead;
o difficulties implementing our Enterprise Resource Planning system;
o difficulties expanding our operations in the Far East and developing
new operations in Europe;
o difficulties developing and implementing a successful research and
development team;
o difficulties developing proprietary technology; and,
o 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.
Economic Conditions
The discrete segment of the semiconductor industry is highly cyclical, and
the value of our business may decline during the "down" portion of these cycles.
During recent years, we, as well as many others in our industry, experienced
significant declines in the pricing of, as well as demand for, our products and
lower facilities utilization. The market for discrete semiconductors may
experience renewed, possibly more severe and prolonged, downturns in the future.
The markets for our products depend on continued demand in the communications,
computer, industrial, consumer electronic and automotive markets, and these
end-markets may experience changes in demand that could adversely affect our
operating results and financial condition.
11
Competition
The discrete semiconductor industry is highly competitive. We expect
intensified competition from existing competitors and new entrants. Competition
is based on price, product performance, product availability, quality, and
reliability and customer service. We compete in various markets with companies
of various sizes, many of which are larger and have greater resources or
capabilities as it relates to financial, marketing, distribution, brand name
recognition and other resources than we have and, thus, may be better able to
pursue acquisition candidates and to withstand adverse economic or market
conditions. In addition, companies not currently in direct competition with us
may introduce competing products in the future. Some of our current major
competitors are Fairchild Semiconductor Corporation, International Rectifier
Corporation, Rohm Electronics, Phillips Electronics, On Semiconductor
Corporation, and Vishay Intertechnology, Inc. We may not be able to compete
successfully in the future, or competitive pressures may harm our financial
condition or our operating results.
Foreign Operations
We expect revenues from foreign markets to continue to represent a
significant portion of our total revenues. In addition, we maintain facilities
or contracts with entities in the Philippines, Taiwan, Germany, Japan, England,
India, and China, among others. There are risks inherent in doing business
internationally, including:
o changes in, or impositions of, legislative or regulatory
requirements, including tax laws in the United States and in the
countries in which we manufacture or sell our products;
o trade restrictions, transportation delays, work stoppages, and economic
and political instability;
o changes in import/export regulations, tariffs and freight rates;
o difficulties in collecting receivables and enforcing contracts;
o currency exchange rate fluctuations;
o restrictions on the transfer of funds from foreign subsidiaries to
Diodes-North America; and,
o longer customer payment terms.
Variability of Quarterly Results
We have experienced, and expect to continue to experience, a substantial
variation in net sales and operating results from quarter to quarter. We believe
that the factors that influence this variability of quarterly results include:
o general economic conditions in the countries where we sell our products;
o seasonality and variability in the computer and communications market
and our other end markets;
o the timing of our and our competitors' new product introductions;
o product obsolescence;
o the scheduling, rescheduling and cancellation of large orders by our
customers;
o the cyclical nature of demand for our customers' products;
o our ability to develop new process technologies and achieve volume
production at our fabrication facilities;
o changes in manufacturing yields;
o adverse movements in exchange rates, interest rates or tax rates; and
o the availability of adequate supply commitments from our outside
suppliers or subcontractors.
Accordingly, a comparison of the Company's results of operations from
period to period is not necessarily meaningful and the Company's results of
operations for any period are not necessarily indicative of future performance.
New Technologies
We cannot assure that we will successfully identify new product
opportunities and develop and bring products to market in a timely and
cost-effective manner, or that products or technologies developed by others will
not render our products or technologies obsolete or noncompetitive. In addition,
to remain competitive, we must continue to reduce package sizes, improve
manufacturing yields and expand our sales. We may not be able to accomplish
these goals.
Production
Our manufacturing efficiency will be an important factor in our future
profitability, and we cannot assure you that we will be able to maintain or
increase our manufacturing efficiency. Our manufacturing processes require
advanced and costly equipment and are continually being modified in an effort to
improve yields and product performance. We may experience manufacturing problems
in achieving acceptable yields or experience product delivery delays in the
future as a result of, among other things, capacity constraints, construction
delays, upgrading or expanding existing facilities or changing our process
technologies, any of which could result in a loss of future revenues. Our
operating results also could be adversely affected by the increase in fixed
costs and operating expenses related to increases in production capacity if
revenues do not increase proportionately.
12
Future Acquisitions
As part of our business strategy, we expect to review acquisition prospects
that would implement our vertical integration strategy or offer other growth
opportunities. While we have no current agreements and no active negotiations
underway with respect to any acquisitions, we may acquire businesses, products
or technologies in the future. In the event of future acquisitions, we could:
o use a significant portion of our available cash;
o issue equity securities, which would dilute current stockholders'
percentage ownership;
o incur substantial debt;
o incur or assume contingent liabilities, known or unknown;
o incur amortization expenses related to intangibles; and
o incur large, immediate accounting write-offs.
Such actions by us could harm our operating results and/or adversely
influence the price of our Common Stock.
Integration of Acquisitions
During fiscal year 2000, we acquired FabTech, Inc. We may continue to
expand and diversify our operations with additional acquisitions. If we are
unsuccessful in integrating these companies or product lines with our
operations, or if integration is more difficult than anticipated, we may
experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. Some of the risks that
may affect our ability to integrate or realize any anticipated benefits from
companies we acquire include those associated with:
o unexpected losses of key employees or customers of the acquired company;
o conforming the acquired company's standards, processes, procedures and
controls with our operations;
o coordinating our new product and process development;
o hiring additional management and other critical personnel;
o increasing the scope, geographic diversity and complexity of our
operations;
o difficulties in consolidating facilities and transferring processes and
know-how;
o diversion of management's attention from other business concerns; and
o adverse effects on existing business relationships with customers.
Backlog
The amount of backlog to be shipped during any period is dependent upon
various factors and all orders are subject to cancellation or modification,
usually with minimal or no penalty to the customer. Orders are generally booked
from one to twelve months in advance of delivery. The rate of booking new orders
can vary significantly from month to month. The Company and the industry as a
whole are experiencing a trend towards shorter lead-times (the amount of time
between the date a customer places an order and the date the customer requires
shipment). The amount of backlog at any date depends upon various factors,
including the timing of the receipt of orders, fluctuations in orders of
existing product lines, and the introduction of any new lines. Accordingly, the
Company believes that the amount of backlog at any date is not meaningful and is
not necessarily indicative of actual future shipments. The Company strives to
maintain proper inventory levels to support customers' just-in-time order
expectations.
Product Resources
We sell products primarily pursuant to purchase orders for current
delivery, rather than pursuant to long-term supply contracts. Many of these
purchase orders may be revised or canceled without penalty. As a result, we must
commit resources to the production of products without any advance purchase
commitments from customers. Our inability to sell, or delays in selling,
products after we devote significant resources to them could have a material
adverse effect on our business, financial condition and results of operations.
Qualified Personnel
Our future success depends, in part, upon our ability to attract and retain
highly qualified technical, sales, marketing and managerial personnel. Personnel
with the necessary expertise are scarce and competition for personnel with these
skills is intense. We may not be able to retain existing key technical, sales,
marketing and managerial employees or be successful in attracting, assimilating
or retaining other highly qualified technical, sales, marketing and managerial
personnel in the future. If we are unable to retain existing key employees or
are unsuccessful in attracting new highly qualified employees, our business,
financial condition and results of operations could be materially and adversely
affected.
13
Expansion
Our ability to successfully offer our products in the discrete
semiconductor market requires effective planning and management processes. Our
past growth, and our targeted future growth, may place a significant strain on
our management systems and resources, including our financial and managerial
controls, reporting systems and procedures. In addition, we will need to
continue to train and manage our workforce worldwide.
Suppliers
Our manufacturing operations depend upon obtaining adequate supplies of
materials, parts and equipment on a timely basis from third parties. Our results
of operations could be adversely affected if we are unable to obtain adequate
supplies of materials, parts and equipment in a timely manner or if the costs of
materials, parts or equipment increase significantly. In addition, a significant
portion of our total sales is from parts manufactured by outside vendors. From
time to time, suppliers may extend lead times, limit supplies or increase prices
due to capacity constraints or other factors. Although we generally use
products, materials, parts and equipment available from multiple suppliers, we
have a limited number of suppliers for some products, materials, parts and
equipment. While we believe that alternate suppliers for these products,
materials, parts and equipment are available, any interruption could materially
impair our operations.
Environmental Regulations
We are subject to a variety of United States Federal, foreign, state and
local governmental laws, rules and regulations related to the use, storage,
handling, discharge or disposal of certain toxic, volatile or otherwise
hazardous chemicals used in our manufacturing process. Any of these regulations
could require us to acquire equipment or to incur substantial other expenses to
comply with environmental regulations. If we were to incur substantial
additional expenses, product costs could significantly increase, thus materially
and adversely affecting our business, financial condition and results of
operations. Any failure to comply with present or future environmental laws,
rules and regulations could result in fines, suspension of production or
cessation of operations, any of which could have a material adverse effect on
our business, financial condition and results of operations.
The Company received a claim from one of its former U.S. landlords,
regarding potential groundwater contamination at a site in which the Company
engaged in manufacturing from 1967 to 1973, alleging that the Company may have
some responsibility for cleanup costs. The Company does not anticipate that the
ultimate outcome of this matter will have a material effect on its financial
condition.
Product Liability
One or more of our products may be found to be defective after we have
already shipped such products in volume, requiring a product replacement or
recall. We may also be subject to product returns, which could impose
substantial costs and have a material and adverse effect on our business,
financial condition and results of operations. Product liability claims may be
asserted with respect to our technology or products. Although we currently have
product liability insurance, there can be no assurance that we have obtained
sufficient insurance coverage, or that we will have sufficient resources, to
satisfy all possible product liability claims.
System Outages
Risks are presented by electrical or telecommunications outages, computer
hacking or other general system failure. To try to manage our operations
efficiently and effectively, we rely heavily on our internal information and
communications systems and on systems or support services from third parties.
Any of these systems are subject to failure. System-wide or local failures that
affect our information processing could have material adverse effects on our
business, financial condition, results of operations and cash flows. In
addition, insurance coverage for the risks described above may be unavailable.
Downward Price Trends
Our industry is intensely competitive and prices for existing products tend
to decrease steadily over their life cycle. There is substantial and continuing
pressure from customers to reduce the total cost of using our parts. To remain
competitive, we must achieve continuous cost reductions through process and
product improvements. We must also be in a position to minimize our customers'
shipping and inventory financing costs and to meet their other goals for
rationalization of supply and production. Our growth and the profit margins of
our products will suffer if our competitors are more successful than we are in
reducing the total cost to customers of their products.
Obsolete Inventories
The life cycles of some of our products depend heavily upon the life cycles
of the end products into which our products are designed. Products with short
life cycles require us to manage closely our production and inventory levels.
Inventory may also become obsolete because of adverse changes in end-market
demand. We may in the future be adversely affected by obsolete or excess
inventories which may result from unanticipated changes in the estimated total
demand for our products or the estimated life cycles of the end products into
which our products are designed.
14
Deferred Taxes
As of December 31, 2002, accumulated and undistributed earnings of
Diodes-China is approximately $26.2 million. Through March 31, 2002, the Company
had not recorded deferred Federal or state tax liabilities (estimated to be $8.9
million) on these cumulative earnings since the Company 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,
under the direction of the Board of Directors, the Company began to record
deferred taxes on a portion of the earnings of Diodes-China. As of December 31,
2002, the Company has recorded $850,000 in deferred taxes.
The Company is evaluating the need to provide additional deferred taxes for
the future earnings of Diodes-China to the extent such earnings may be
appropriated for distribution to Diodes-North America, and as further investment
strategies with respect to Diodes-China are determined. Should the Company's
North American cash requirements exceed the cash that is provided through the
domestic credit facilities, cash can be obtained from the Company's foreign
subsidiaries. However, the distribution of any unappropriated funds to the U.S.
will require the recording of income tax provisions on the U.S. entity, thus
reducing net income.
Foreign Currency Risk
The Company faces exposure to adverse movements in foreign currency
exchange rates, primarily in Asia and, to a lesser extent, in Europe. The
Company's foreign currency risk may change over time as the level of activity in
foreign markets grows and could have an adverse impact upon the Company's
financial results. Certain of the Company's 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 of each individual currency exposure, the Company does not employ
hedging techniques designed to mitigate foreign currency exposures. Therefore,
the Company could experience currency gains and losses.
Interest Rate Risk
The Company has credit agreements with U.S. and Far East financial
institutions at interest rates equal to LIBOR or similar indices plus a
negotiated margin. A rise in interest rates could have an adverse impact upon
the Company's cost of working capital and its interest expense. The Company
entered into 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. At December 31, 2002, the interest
rate swap agreement applies to $4.8 million of the Company's long-term debt and
expires November 30, 2004. The swap contract is inversely correlated to the
related hedged long-term debt and is therefore considered an effective cash flow
hedge of the underlying long-term debt. The level of effectiveness of the hedge
is measured by the changes in the market value of the hedged long-term debt
resulting from fluctuation in interest rates. As a matter of policy, the Company
does not enter into derivative transactions for trading or speculative purposes.
Political Risk
The Company has a significant portion of its assets in Mainland China,
Taiwan and Hong Kong. The possibility of political conflict between these
countries or with the United States could have an adverse impact upon the
Company's ability to transact business through these important business segments
and to generate profits.
Financial Information About Foreign and Domestic Operations and Export Sales
With respect to foreign operations, see Notes 1, 11 and 12 of "Notes to
Consolidated Financial Statements."
Item 2. Properties
The Company's primary physical properties during the year ended
December 31, 2002 were as follows:
A. The Company's headquarters and product distribution center is located in an
industrial building at 3050 East Hillcrest Drive, Westlake Village, CA
91362 USA, and consists of approximately 30,900 square feet. The Company is
the primary lessee under a lease that has been extended five years and
expires in 2006, at an amount of $28,500 per month, with a 5-year option.
B. Regional sales offices located in the U.S., leased at less than $1,000 per
month, at the following locations:
1. One Overlook Drive, Suite 8, Amherst, NH 03031
15
2. 160-D East Wend, Lemont, IL 60439
3. 18430 Brookhurst Street, Suite 201A, Fountain Valley, CA 92708
C. Industrial premises consisting of approximately 9,000 square feet and
located at 5Fl. 501-16 Chung-Cheng Road, Hsin-Tien City, Taipei, Taiwan,
Republic of China. These premises, owned by Diodes-Taiwan, are used as a
warehousing facility.
D. Industrial premises consisting of approximately 7,000 square feet and
located at 2Fl. 501-15 Chung-Cheng Road, Hsin-Tien City, Taipei, Taiwan,
Republic of China. These premises, owned by Diodes-Taiwan, are used as
sales, warehouse and administrative offices.
E. Industrial building located at No. 999 Chen Chun Road, Xingqiao Town,
Songjiang County, Shanghai, People's Republic of China. This building,
consisting of approximately 9,000 square meters, is the corporate
headquarters, product distribution and manufacturing facility for
Diodes-China. The building is under a lease that expires in 2017 from a
company owned by the 5% joint venture partner at a monthly rate of
approximately $35,000 per month.
F. Regional offices located in Mainland China, leased at less than $1,000 per
month, at the following locations:
1. Room 313, 555 Building, No. 555, West Nanjing Road, Shanghai, China
2. Room 1726, 17/F, No. 2008, Shenzhen Kerry Centre Renminnan Road,
Shenzhen, China
G. Industrial building located at 777 N. Blue Parkway Suite 350, Lee's Summit,
MO 64086 USA. Acquired in December 2000, Diodes-FabTech's 5-inch wafer
foundry includes a 16,000 sq. ft. clean room within a 70,000 sq. ft.
manufacturing facility formerly owned by AT&T, under a lease that expires
in 2009, at an amount of $120,000 per month.
H. Industrial building located at Number 102, 1st Floor, International Plaza,
20 Sheung Yuet Road, Kowloon Bay, Kowloon, Hong Kong. These premises are
leased from Lite-On Semiconductors, Ltd. at a rate of $2,000 per month, and
are used as sales, warehousing and logistics offices.
I. Sales and administrative offices located at 22, Avenue Paul Sejourne
F-31000 Toulouse, France, leased at less than $500 per month.
The Company believes its current facilities are adequate for the
foreseeable future. See Notes 3 and 13 of "Notes to Consolidated Financial
Statements."
Item 3. Legal Proceedings
The Company is, from time to time, involved in litigation incidental to the
conduct of its business. The Company does not believe that any currently pending
litigation, to which it is a party, will have a material effect on its financial
condition or results of operations.
The Company received a claim from one of its former U.S. landlords
regarding potential ground-water contamination at a site in which the Company
engaged in manufacturing from 1967 to 1973. The landlord has alleged that the
Company may have some responsibility for cleanup costs. The Company does not
anticipate that this event will have a material effect on its financial results.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders by the Company during
the last three months of the year ending December 31, 2002.
16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "DIOD." Prior to June 19, 2000, the Company's Common
Stock was traded on the American Stock Exchange ("AMEX") under the symbol "DIO."
In July 2000, the Company effected a 50% stock dividend in the form of a
three-for-two stock split. The ex-dividend date was July 17, 2000. The following
table shows the range of high and low closing sales prices per share, adjusted
for the three-for-two stock split, for the Company's Common Stock for each
fiscal quarter from January 1, 2001 as reported by Nasdaq.
---------------------------------------------- ------------------------------------
Calendar Quarter Closing Sales Price of
Ended Common Stock
---------------------------------------------- ------------------------------------
High Low
--------------- ---------------
First quarter (through March 14) 2003 $ 12.300 $ 9.560
---------------------------------------------- --------------- ---------------
Fourth quarter 2002 10.870 6.120
Third quarter 2002 9.450 7.080
Second quarter 2002 9.500 7.470
First quarter 2002 8.490 7.020
---------------------------------------------- --------------- ---------------
Fourth quarter 2001 7.800 4.500
Third quarter 2001 9.900 4.450
Second quarter 2001 11.000 6.250
First quarter 2001 15.500 8.375
---------------------------------------------- --------------- ---------------
On March 14, 2003, the closing sales price of the Company's Common Stock as
reported by Nasdaq was $9.56, and there were approximately 3,000 stockholders of
record. Stockholders are urged to obtain current market quotations for the
Common Stock.
No cash dividends have been declared to stockholders during the past three
years, and the Company does not expect to declare cash dividends in the
foreseeable future. The payment of dividends is within the discretion of the
Company's Board of Directors, and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, and general
business conditions. In addition, the Company's bank credit agreement currently
includes covenants restricting dividend payments.
17
Item 6. Selected Financial Data
The following selected financial data for the fiscal years ended December
31, 1998 through 2002 is qualified in its entirety by, and should be read in
conjunction with, the other information and financial statements, including the
notes thereto, appearing elsewhere herein (in 000's except per share data).
Certain 1998 through 2001 amounts as presented in the accompanying financial
statements have been reclassified to conform to 2002 financial statement
presentation. These reclassifications had no impact on previously reported net
income or stockholders' equity.
Year Ended December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
Income Statement Data
Net sales $ 60,121 $ 78,245 $ 116,079 $ 93,210 $ 115,821
Gross profit 15,402 20,948 37,427 14,179 26,603
Selling, general and administrative expenses 11,016 13,670 18,814 13,711 16,300
Research and development expenses -- -- 141 592 1,472
Income (loss) from operations 4,386 7,278 18,472 (124) 8,831
Interest expense, net 281 292 940 2,074 1,183
Other income 93 182 501 777 203
Income (loss) before taxes and minority interest 4,198 7,168 18,033 (1,421) 7,851
Income tax benefit (provision) (1,511) (1,380) (2,496) 1,769 (1,729)
Minority interest in joint venture earnings (14) (219) (642) (224) (320)
Net income 2,673 5,569 14,895 124 5,802
Earnings per share (1):
Basic $ 0.35 $ 0.73 $ 1.85 $ 0.02 $ 0.71
Diluted $ 0.33 $ 0.68 $ 1.62 $ 0.01 $ 0.65
Number of shares used in computation (1):
Basic 7,544 7,625 8,071 8,144 8,185
Diluted 8,057 8,204 9,222 8,881 8,865
As of December 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002
Balance Sheet Data
Total assets $ 45,389 $ 62,407 $ 112,950 $ 103,258 $ 105,010
Working capital 16,639 15,903 17,291 19,798 20,830
Long-term debt, net of current portion 5,991 4,672 15,997 21,164 12,583
Stockholders' equity 27,460 34,973 51,253 51,124 57,679
(1) Adjusted for the effect of a 3-for-2 stock split in July 2000.
18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the Company's financial condition and results
of operations should be read together with the consolidated financial statements
and the notes to consolidated financial statements included elsewhere in this
Form 10-K. Except for the historical information contained herein, the matters
addressed in this Item 7 constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those
discussed above under the heading "Cautionary Statement for Purposes of the
"Safe Harbor" Provision of the Private Securities Litigation Reform Act of 1995"
and elsewhere in this Annual Report on Form 10-K, that could cause actual
results to differ materially from those anticipated by the Company's management.
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made in this Annual Report on Form 10-K are made
pursuant to the Act.
General
Diodes Incorporated (the "Company"), a Delaware corporation, is engaged in
the manufacture, sale and distribution of discrete semiconductors worldwide,
primarily to manufacturers in the communications, computing, industrial,
consumer electronics and automotive markets, and to distributors of electronic
components to end customers in these markets. The Company's broad product line
includes high-density diode and transistor arrays in ultra-miniature
surface-mount packages, as well as silicon wafers used in manufacturing these
products. Technologies include high density diode and transistor arrays in
multi-pin surface-mount packages; PowermiteR3, high-performance surface mount
packages; performance Schottkys, switching and rectifier diodes; single and dual
prebiased transistors; performance tight tolerance and low current zener diodes;
subminiature surface mount packages; transient voltage suppressors (TVS and
TSPD); small signal transistors and MOSFETs; and standard, fast, ultra-fast, and
super-fast rectifiers.
Positioning the Company to rapidly respond to the demands of the global
marketplace and continuing to increase its investment in research and
development, the Company is focused on expanding its product portfolio and
closely controlling product quality and time-to-market. Shifting development
priorities toward specialized configurations, such as the Company's high-density
array devices, the Company is introducing a range of new products that improve
the trade-off between size, performance and power consumption for surface-mount
packages, such as the Company's BAT750 Schottky rectifier and SOT-523 product
lines. These product lines are designed for battery-powered and handheld
applications, such as those used in the computer and communications industries;
specifically, wireless devices, notebooks, flat panel displays, digital cameras,
mobile handsets, set top boxes, as well as DC to DC conversion and automotive
electronic applications.
In addition to the Company's corporate headquarters in Westlake Village,
California, which provides sales, marketing, engineering, logistics and
warehousing functions, the Company's wholly-owned subsidiary, Diodes Taiwan
Corporation, Ltd. ("Diodes-Taiwan"), maintains a sales, engineering and
purchasing facility in Taipei, Taiwan. The Company also has a 95% interest in
Shanghai KaiHong Electronics Co., Ltd. ("Diodes-China" or "KaiHong"), a
manufacturing facility in Shanghai, China, and offices in Shanghai and Shenzhen,
China. In March 2002, the Company opened a sales, warehousing and logistics
subsidiary in Hong Kong ("Diodes-Hong Kong"). In addition, in December 2000, the
Company acquired FabTech Incorporated ("Diodes-FabTech" or "FabTech"), a silicon
wafer manufacturer located near Kansas City, Missouri. An office in Toulouse,
France supports the Company's European sales expansion.
Sales, Marketing and Distribution
The Company sells its products through its own internal and regional sales
departments, as well as through representatives and distributors. The Company's
sales team, aided by the sales force of approximately 30 independent sales
representatives located throughout North America, Asia, and most recently
Europe, supplies approximately 200 OEM accounts. In 2002, OEM customers
accounted for approximately 69% of the Company's sales, compared to
approximately 66% in 2001. The increase was primarily due to wafer sales at
Diodes-FabTech. OEM customers range from small, privately held electronics
companies to Fortune 500 companies.
The Company's major OEM customers include industry leaders such as: Intel
Corporation, Cisco Systems Incorporated, Sony Corporation, Nortel Networks
Corporation, Delphi Automotive, Bose Corporation, Scientific Atlanta
Incorporated, Samsung Electronics, Asustek Computer, Inc., Quanta and LG
Electronics, Inc. The Company further supplies approximately 40 distributors
(31% of 2002 sales), who collectively sell to approximately 10,000 customers on
the Company's behalf. The Company's worldwide distribution network includes
Arrow Electronics, Inc., Avnet, Inc., Digi-Key Corporation, Future Electronics
Ltd., Jaco Electronics, Inc., Reptron Electronics, Inc., and All American
Semiconductor, Inc., among others. The Company is not dependent on any one
customer to support its level of sales. For the fiscal year ended December 31,
2002, not one OEM customer accounted for more than 14% of the Company's sales,
while the largest distributor accounted for 4% of
19
sales. The twenty largest customers accounted, in total, for approximately 61%
of the Company's sales in 2002, compared to 55% in 2001.
The Company's products are sold primarily in North America, the Far East,
and Europe, both directly to end users and through electronic component
distributors. In 2002, approximately 49%, 48%, and 3% of the Company's products
were sold in North America, the Far East, and Europe, respectively, compared to
54%, 45%, and 1% in 2001, respectively. See Note 12 of "Notes to Consolidated
Financial Statements" for a description of the Company's geographic and segment
information. An increase in the percentage of sales in the Far East is expected
as the Company significantly increased its sales presence there and believes
there is greater potential to increase market share in that region due to the
expanding base of electronic product manufacturers.
Related Parties
The Company conducts business with two related party companies, LSC and
Xing International. LSC, a 36.5% shareholder, is the Company's largest
shareholder, and Xing International is owned by the Company's 5% joint venture
partner in Diodes-China. C.H. Chen, the Company's President and Chief Executive
Officer, and a member of the Company's Board of Directors, is also Vice-Chairman
of LSC. M.K. Lu, a member of the Company's Board of Directors, is President of
LSC, while Raymond Soong, the Company's Chairman of the Board, is the Chairman
of the Lite-On Group, a significant shareholder of LSC.
In 2002, the Company sold silicon wafers to LSC totaling 13.7% (7.7% in
2001) of the Company's sales, making LSC the Company's largest customer. Also
for 2002, 17.9% (15.2% in 2001) of the Company's sales were from discrete
semiconductor products purchased from LSC, making LSC the Company's largest
outside vendor. The Company has a long-standing sales agreement where the
Company is the exclusive North American distributor for certain of LSC product
lines. In addition, the Company leases warehouse space from LSC for its
operations in Hong Kong. All such transactions are on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
In December 2000, the Company acquired the wafer foundry, FabTech, Inc.,
from LSC. As part of the purchase price, at December 31, 2002, LSC holds a
subordinated, interest-bearing note for approximately $8.5 million. In May 2002,
the Company renegotiated the terms of the note to extend the payment period from
two years to four years, and therefore, payments of approximately $208,000 plus
interest began in July 2002. In connection with the terms of the acquisition,
LSC entered into a volume purchase agreement to purchase wafers from FabTech. In
addition, as per the terms of the stock purchase agreement, the Company has
entered into several management incentive agreements with members of FabTech's
management. The agreements provide members of FabTech's management 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 is reimbursed by LSC.
In 2002, the Company sold silicon wafers to companies owned by Xing
International totaling 1.5% (0.6% in 2001) of the Company's sales. Also for
2002, 5.6% (4.4% in 2001) of the Company's sales were from discrete
semiconductor products purchased from companies owned by Xing International. In
addition, Diodes-China leases its manufacturing facilities from, subcontracts a
portion of its manufacturing process (metal plating) to, and pays a consulting
fee to Xing International. All such transactions are on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
Manufacturing and Significant Vendors
The Company's Far East subsidiary, Diodes-China, manufactures product for
sale primarily to North America and Asia. Diodes-China's manufacturing focuses
on SOT-23 and SOD-123 products, as well as sub-miniature packages such as
SOT-363, SOT-563, and SC-75. These surface-mount devices ("SMD") are much
smaller in size and are used in the computer and communication industries,
destined for cellular phones, notebook computers, pagers, PCMCIA cards, modems,
and garage door transmitters, among others. Diodes-China's state-of-the-art
facilities have been designed to develop even smaller, higher-density products
as electronic industry trends to portable and hand-held devices continue.
Although Diodes-China purchases silicon wafers from FabTech, the majority are
currently purchased from other wafer vendors. The Company plans to increase the
number of Diodes-FabTech wafers used at Diodes-China over the next several
years.
Acquired in December 2000 from LSC, FabTech's wafer foundry is located in
Lee's Summit, Missouri. FabTech manufactures primarily 5-inch silicon wafers,
which are the building blocks for semiconductors. FabTech has full foundry
capabilities, including processes such as silicon epitaxy, silicon oxidation,
photolithography and etching, ion implantation and diffusion, low pressure and
plasma enhanced chemical vapor deposition, sputtered and evaporated metal
deposition, wafer backgrinding, and wafer probe and ink.
20
Diodes-FabTech purchases polished silicon wafers, and then by using various
technologies, in conjunction with many chemicals and gases, fabricates several
layers on the wafers, including epitaxial silicon, ion implants, dielectrics,
and metals, with various patterns. Depending upon these layers and the die size
(which is determined during the photolithography process and completed at the
customer's packaging site where the wafer is sawn into square or rectangular
die), different types of wafers with various currents, voltages, and switching
speeds are produced.
All of the products sold by the Company, as well as the materials used by
the Company in its manufacturing operations, are available both domestically and
abroad. In 2002, the largest external supplier of products to the Company was
LSC, a related party. Approximately 18% and 15% of the Company's sales were from
product manufactured by LSC in 2002 and 2001, respectively. Also, in 2002 and
2001, approximately 6% and 4%, respectively of the Company's sales were from
product manufactured by companies owned by Xing International, the 5% minority
partner in Diodes-China, and a related party. In addition, sales of products
manufactured by Diodes-China and Diodes-FabTech, the Company's manufacturing
subsidiaries, were approximately 34% and 25% in 2002, respectively, versus 27%
and 15% in 2001, respectively. The Company anticipates that Diodes-China will
become an increasingly valuable supplier. No other manufacturer of discrete
semiconductors accounted for more than 8% and 7% of the Company's sales in 2002
and 2001, respectively.
Although the Company believes alternative sources exist for the products of
any of its suppliers, the loss of any one of its principal suppliers or the loss
of several suppliers in a short period of time could have a materially adverse
effect on the Company until an alternate source is located and has commenced
providing such products or raw materials.
Recent Results
The discrete semiconductor industry has historically been subject to severe
pricing pressures. At times, although manufacturing costs have decreased, excess
manufacturing capacity and over-inventory have caused selling prices to decrease
to a greater extent than manufacturing costs. To compete in this highly
competitive industry, the Company has committed substantial new resources to the
further development and implementation of sales and marketing functions, and
expanded manufacturing capabilities. Emphasizing the Company's focus on customer
service, additional sales personnel and programs have been added, primarily in
Asia, and most recently Europe. In order to meet customers' needs at the design
stage of end-product development, the Company also continues to employ
additional applications engineers who work directly with customers to assist
them in "designing in" the correct products to produce optimum results. Regional
sales managers in the U.S., working closely with manufacturers' representative
firms and distributors, have also been added to help satisfy customers'
requirements. In addition, the Company continues to develop relationships with
major distributors who inventory and sell the Company's products.
Beginning in the second half of 1999, and continuing through the first
three quarters of 2000, industry demand significantly exceeded industry
capacity. In addition, OEM customers and distributors increased their purchasing
and inventory levels in anticipation of further increases in end-product demand.
The Company's gross profit margin reached a peak of 34.9% in the third quarter
of 2000.
Then, as semiconductor manufacturers, including the Company, continued to
increase manufacturing capacity, the global economy slowed causing a sharp
decline in sales beginning in the fourth quarter of 2000. The semiconductor
industry as a whole experienced a sharp inventory correction primarily in two
key markets, communications and computers. The effect on the Company of these
unforeseen economic and market conditions, and the risks of becoming a fully
integrated manufacturer were amplified with the December 2000 completion of the
wafer facility acquisition because of the fixed costs associated with the
additional manufacturing facility.
Although the Company's market share increased in 2001, average selling
prices for discrete products decreased approximately 23% and silicon wafer
pricing fell approximately 12%. Due to decreased demand in 2001, the Company
also experienced reduced capacity utilization of its manufacturing facilities
and demand-induced changes in product mix, both of which had a negative impact
on gross margins. Due to market conditions, capacity utilization at
Diodes-FabTech decreased to 45%, while Diodes-China's utilization was 52%,
during the third quarter of 2001.
During 2001, the Company responded to the downturn by implementing programs
to cut operating costs, including reducing its worldwide workforce by 26%,
primarily at the FabTech and Diodes-China manufacturing facilities. Some
improvement was seen in the fourth quarter of 2001 when capacity utilization
increased to 65% and 60% for Diodes-China and Diodes-FabTech, respectively, but
gross margins still ended the year at 15.2%.
Year 2002 continued to be a year where demand improved, the Company's
manufacturing capacity utilization increased, and pricing pressures eased
somewhat. Average selling prices decreased approximately 8% for discrete
21
products and 1% for wafer products. Gross margins increased from 16.2% in the
first quarter to a high of 26.0% in the third quarter when Diodes-China's
capacity utilization reached approximately 88% and Diodes-FabTech approximately
83%. The gross margin was 23.0% for the year.
The Company continues to actively adjust its cost structure as dictated by
market conditions. Long-term, the Company believes that it will continue to
generate value for shareholders and customers, not just from its expanded
Diodes-China manufacturing and Diodes-FabTech's foundry assets, but also by the
addition of an enhanced technology component to the Company. This is a
multi-year initiative that will increase the Company's ability to serve its
customers' needs, while establishing the Company at the forefront of the next
generation of discrete technologies.
In December 2002, the Company completed its implementation of Oracle's
Enterprise Resource Planning ("ERP") software. The Company anticipates increased
efficiency through improved management of its global supply chain,
manufacturing, customer service, planning and financial analysis.
Income taxes
In accordance with the current taxation policies of the People's Republic
of China ("PRC"), Diodes-China was granted preferential tax treatment for the
years ended December 31, 1996 through 2003. Earnings were subject to 0% tax
rates from 1996 through 2001, and 12% in 2002. Earnings in 2003 will be taxed at
12% (one half the normal central government tax rate), and at normal rates
thereafter. Earnings of Diodes-China are also subject to tax of 3% by the local
taxing authority in Shanghai. The local taxing authority waived this tax in
2002. Earnings of Diodes-Taiwan are currently subject to a tax rate of 35%,
which is comparable to the U.S. Federal tax rate for C corporations.
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 state income taxes. In the years ending December 31, 2000 and 2001,
Diodes-Taiwan distributed dividends of approximately $1.5 million and $2.6
million respectively, which is included in Federal and state taxable income.
As of December 31, 2002, accumulated and undistributed earnings of
Diodes-China was approximately $26.2 million. Through March 31, 2002, the
Company had not recorded deferred Federal or state tax liabilities (estimated to
be $8.9 million) 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
2002 earnings of Diodes-China in preparation of a possible dividend
distribution. As of December 31, 2002, the Company has recorded $850,000 in
deferred taxes and has made no distributions.
The Company is evaluating the need to provide additional deferred taxes for
the future earnings of Diodes-China to the extent such earnings may be
appropriated for distribution to the Company's corporate office in North
America, and as further investment strategies with respect to Diodes-China are
determined. Should the Company's North American cash requirements exceed the
cash that is provided through the domestic credit facilities, cash can be
obtained from the Company's foreign subsidiaries. However, the distribution of
any unappropriated funds to the U.S. will require the recording of income tax
provisions on the U.S. entity, thus reducing net income.
Available Information
Our Internet address is http://www.diodes.com. We make available, free of
charge through our Internet website, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after such material
is electronically filed with or furnished to the Securities and Exchange
Commission ("the SEC"). 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
world-wide markets. With its extensive online Product (Parametric) Catalog with
advanced search capabilities, our website facilitates quick and easy product
selection. Our website provides easy access to world-wide 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 current and complete investor
financial information, including SEC filings and press releases, as well as
stock quotes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
22
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, among
others, affect the significant estimates and judgments we use in the preparation
of our consolidated financial statements:
Revenue Recognition
Revenue is recognized when the product is actually shipped to both end
users and electronic component distributors. The Company reduces revenue in the
period of sale for estimates of product returns, distributor price adjustments
and other allowances. Actual returns and adjustments could be different from our
estimates and provisions, resulting in future adjustments to revenues.
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 customer's inability to meet its
financials obligations to us, we record an allowance to reduce the receivable to
the amount we reasonable 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 to bad debt expense.
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 for obsolescence and slow-moving items. This
evaluation includes analysis of sales levels, sales projections and purchases by
items. Based upon this analysis we accrue a reserve for obsolete and slow-moving
inventory. If future demand or market conditions are different than our 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 the Company's 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 its 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.
23
Results of Operations
The following table sets forth, for the periods indicated, the percentage
that certain items in the statement of income bear to net sales and the
percentage dollar increase (decrease) of such items from period to period.
Percent of Net Sales Percentage Dollar Increase (Decrease)
Year Ended December 31, Year Ended December 31,
---------------------------------------------------------- ---------------------------------------------
1998 1999 2000 2001 2002 '98 to '99 '99 to '00 '00 to '01 '01 to '02
----------------------------------------------------------- --------------------------------- -----------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 30.1 % 48.4 % (19.7) % 24.3 %
Cost of goods sold (74.4) (73.2) (67.8) (84.8) (77.0) 28.1 37.3 0.5 12.9
----------------------------------------------------------- --------------------------------- -----------
Gross profit 25.6 26.8 32.2 15.2 23.0 36.0 78.7 (62.1) 87.6
Operating expenses (18.3) (17.5) (16.3) (15.3) (15.3) 24.1 37.6 (27.1) 18.9
----------------------------------------------------------- --------------------------------- -----------
Income (loss) from
operations 7.3 9.3 15.9 (0.1) 7.6 65.9 153.8 (100.7) 7,221.8
Interest expense, net (0.5) (0.4) (0.8) (2.2) (1.0) 3.9 221.9 120.6 (43.0)
Other income 0.2 0.2 0.4 0.8 0.2 95.7 175.3 55.1 (73.9)
----------------------------------------------------------- --------------------------------- -----------
Income (loss) before
taxes and
minority interest 7.0 9.2 15.5 (1.5) 6.8 70.7 151.6 (107.9) 652.5
Income tax benefit
(provision) (2.6) (1.8) (2.2) 1.9 1.5 (8.7) 80.9 (29.1) 197.7
----------------------------------------------------------- --------------------------------- -----------
Minority interest 0.0 (0.3) (0.6) (0.2) (0.3) 1,464.3 193.2 (65.1) 42.9
Net income 4.4 7.1 12.8 0.1 5.0 108.3 167.5 (99.2) 4,579.0
The following discussion explains in greater detail the consolidated
financial condition of the Company. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein.
Year 2002 Compared to Year 2001
Net sales for 2002 increased $22,611,000 to $115,821,000 from $93,210,000
for 2001. The 24.3% increase was due primarily to a 24.6% increase in units sold
as a result of increased demand for the Company's products, as well as an easing
of pricing pressures. Although selling prices stabilized compared to 2001,
suggesting an easing of pricing pressures, there can be no assurance this trend
will continue for 2003. Average selling prices in 2002 decreased approximately
8% for discrete products and 1% for wafer products.
Gross profit for 2002 increased 87.6% to $26,603,000 from $14,179,000 for
2001. Of the $12,424,000 increase, $8,984,000 was due to the increase in gross
profit margin from 15.2% in 2001 to 23.0% in 2002, while $3,440,000 was due to
the 24.3% increase in net sales. Gross profit increases for wafer products was
the primary contributor to the gross profit increase in 2002. Gross profit in
2001 was adversely affected by higher fixed costs associated with the Company's
wafer fabrication facility, reduced capacity utilization at both the wafer
facility and the China manufacturing facility, as well as by demand induced
product mix changes and inventory pricing adjustments at distributors related to
lower market prices.
For 2002, selling, general and administrative expenses ("SG&A") increased
$2,589,000 to $16,300,000 from $13,711,000 for 2001. The 18.9% increase in SG&A
was due primarily to higher sales commissions associated with the 24.3% increase
in sales, and higher wages and benefits expenses. SG&A also increased due to
higher corporate and administrative expenses, including insurance expense partly
offset by reduced goodwill amortization expense per the new account
pronouncements. SG&A, as a percentage of sales, decreased to 14.1% for 2002 from
14.7% last year.
Research and development expenses ("R&D") increased to $1,472,000, or 1.3%
of sales, in 2002 from $592,000, or 0.6% of sales, in 2001. R&D expenses are
primarily related to new product development at the silicon wafer level. The
Company plans to further expand its investment in R&D in 2003 to develop new
specialized products.
Net interest expense for 2002 decreased $891,000 to $1,183,000 from
$2,074,000 in 2001, due primarily to a decrease in the use the Company's credit
facilities. In 2002, the Company paid down its credit facilities by $14.6
million, from $36.0 million to $21.4 million.
24
Other income for 2002 decreased approximately $574,000 compared to last
year, primarily due to (i) a severance payment as per a separation agreement,
(ii) discontinuance of income Diodes-FabTech was receiving from an external
company's use of its testing facilities, and (iii) currency exchange losses
primarily in Asia.
The Company recorded a provision for income taxes in the amount of
$1,729,000 for the year 2002, compared to an income tax benefit of $1,769,000
for 2001, due primarily to increased income in the U.S. at higher tax rates.
Included in the tax provision in 2002 is $810,000 in deferred taxes recorded for
a portion of the 2002 earnings at Diodes-China.
Minority interest in joint venture represents the minority investor's share
of the Diodes-China joint venture's income for the period. The increase in the
joint venture earnings for 2002 is primarily the result of increased gross
profit margins due to increased capacity utilization. The joint venture
investment is eliminated in consolidation of the Company's financial statements,
and the activities of Diodes-China are included therein. As of December 31,
2002, the Company had a 95% controlling interest in the joint venture.
The Company generated net income of $5,802,000 (or $0.71 basic earnings per
share and $0.65 diluted earnings per share) in 2002, as compared to $124,000 (or
$0.02 basic earnings per share and $0.01 diluted earnings per share) for 2001.
This $5,678,000 increase is due primarily to the 24.3% sales increase at gross
profit margins of 23.0% compared to gross profit margins of 15.2% in 2001.
Year 2001 Compared to Year 2000
Net sales for 2001 decreased $22,869,000 to $93,210,000 from $116,079,000
for 2000. The 19.7% decrease was due primarily to (i) a 6.7% decrease in units
sold, and (ii) a decrease in average selling prices of 22.7%, both as a result
of decreased demand attributable to a slower economy, above normal customer
inventories and market pricing pressures. Average selling prices in 2001
decreased approximately 22.7%.
Gross profit for 2001 decreased 62.1% to $14,179,000 from $37,427,000 for
2000. Of the $23,248,000 decrease, $15,874,000 was due to the decrease in gross
profit margin from 32.2% in 2000 to 15.2% in 2001, while $7,374,000 was due to
the 19.7% decrease in net sales. Gross profit for 2001 was adversely affected by
higher fixed costs associated with the Company's wafer fabrication facility,
reduced capacity utilization at both the wafer facility and the China
manufacturing facility, as well as by demand induced product mix changes and
inventory pricing adjustments at distributors related to lower market prices.
For 2001, selling, general and administrative expenses ("SG&A") decreased
$5,103,000 to $13,711,000 from $18,814,000 for 2000. The 27.1% decrease in SG&A
was due primarily to lower sales commissions associated with the 19.7% decrease
in sales, and lower wages and benefits expenses resulting from a work-force
reduction which began in the fourth quarter of 2000. SG&A also decreased due to
lower corporate and administrative expenses, partly offset by the inclusion of
SG&A expenses and goodwill amortization associated with the December 2000
FabTech acquisition. SG&A, as a percentage of sales, decreased to 14.7% for 2001
from 16.2% last year.
Research and development expenses ("R&D") increased to $592,000, or 0.6% of
sales, in 2001 from $141,000, or 0.1% of sales, in 2000. R&D expenses are
primarily related to new product development at the silicon wafer level.
Net interest expense for 2001 increased $1,134,000, due primarily to an
increase use of the Company's credit facility to support the expansion of
Diodes-China and the acquisition of FabTech.
Other income for 2001 increased approximately $276,000 compared to the
previous year, primarily due to high-technology grants received by Diodes-China,
rental income generated by Diodes-FabTech for the use of some of its testing
facilities, and currency exchange gains at the Company's subsidiaries in Taiwan
and China, partially offset by management incentives associated with the FabTech
acquisition. As per the terms of the stock purchase agreement, the Company has
entered into several management incentive agreements with members of FabTech's
management. The agreements provide members of FabTech's management guaranteed
annual payments as well as contingent bonuses based on the annual profitability
of FabTech, subject to a maximum annual amount. In 2001, the contingent bonuses
were not earned or paid. The total guaranteed commitment is $375,000 per year.
Although the $375,000 is reimbursed by LSC (the previous owner of FabTech) to
the Company, because LSC is a principal shareholder in the Company, the $375,000
per year is accounted for as an expense.
The Company recorded an income tax benefit in the amount of $1,769,000 for
the year 2001, compared to an income tax provision of $2,496,000 for 2000. The
reported income tax rate as a percentage of pretax income differs from the
25
statutory combined federal and state tax rates of approximately 40% due
primarily to (i) currently the effective tax rate of Diodes-China is
approximately 12%, and deferred U.S. federal and state income taxes are not
provided on these earnings, and (ii) deferred income tax benefits at a rate of
37.5% have been recognized on losses incurred at Diodes-FabTech.
Minority interest in joint venture represents the minority investor's share
of the Diodes-China joint venture's income for the period. The decrease in the
joint venture earnings for 2001 is primarily the result of decreased gross
profit margins due to excess capacity and demand-induced product mix changes.
The joint venture investment is eliminated in consolidation of the Company's
financial statements, and the activities of Diodes-China are included therein.
As of December 31, 2001, the Company had a 95% controlling interest in the joint
venture.
The Company generated net income of $124,000 (or $0.02 basic earnings per
share and $0.01 diluted earnings per share) in 2001, as compared to $14,895,000
(or $1.85 basic earnings per share and $1.62 diluted earnings per share) for
2000. This $14,771,000 or 99.2% decrease is due primarily to the 19.6% sales
decrease at gross profit margins of 14.9% compared to gross profit margins of
31.6% in 2000, partly offset by a decrease of $4,652,000 in operating expenses.
Financial Condition
Liquidity and Capital Resources
The Company's liquidity requirements arise from the funding of its working
capital needs, primarily inventory, work-in-process and accounts receivable. The
Company's primary sources for working capital and capital expenditures are cash
flow from operations, borrowings under the Company's bank credit facilities and
borrowings from principal stockholders. Any withdrawal of support from its banks
or principal stockholders could have serious consequences on the Company's
liquidity. The Company's liquidity is dependent, in part, on customers paying
within credit terms, and any extended delays in payments or changes in credit
terms given to major customers may have an impact on the Company's cash flow. In
addition, any abnormal product returns or pricing adjustments may also affect
the Company's source of short-term funding.
Cash provided by operating activities in 2002 was $20.2 million compared to
$14.9 million in 2001 and $10.2 million in 2000. The primary sources of cash
flows from operating activities in 2002 were depreciation and amortization of
$9.7 million and net income of $5.8 million. The primary sources of cash flows
from operating activities in 2001 were a decrease in inventories of $14.0
million and depreciation and amortization of $8.7 million. The primary sources
of cash flows from operating activities in 2000 were net income of $14.9 million
and depreciation and amortization of $5.0 million. The primary use of cash flows
from operating activities in 2002 was an increase in accounts receivable of $4.8
million. The primary use of cash flows from operating activities in 2001 was a
decrease in accrued liabilities of $3.5 million and an increase in deferred
income taxes of $3.0 million. The primary use of cash flows from operating
activities in 2000 was an increase in inventories of $9.3 million and an
increase in accounts receivable of $2.2 million.
For the year ended December 31, 2002, accounts receivable increased 27.0%
compared to the 24.3% increase in sales due to a slowing trend in payments,
primarily from major distributors and Far East customers. The Company continues
to closely monitor its credit terms, while at times providing extended terms,
required primarily by Far East customers. The ratio of the Company's current
assets to current liabilities on December 31, 2002 was 1.7 to 1, compared to a
ratio of 1.7 to 1 and 1.4 to 1 as of December 31, 2001 and 2000, respectively.
Cash used by investing activities was $6.9 million in 2002, compared to
$8.5 million in 2001 and $21.4 million in 2000. The primary investments were for
additional manufacturing equipment and expansion at the Diodes-China
manufacturing facility, as well as the FabTech acquisition payments in 2000 and
2001.
On December 1, 2000, the Company purchased all the outstanding capital
stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee's Summit,
Missouri from Lite-On Semiconductor Corporation ("LSC"), the Company's largest
stockholder. The acquisition purchase price consisted of approximately $5
million in cash and an earn-out of up to $30 million if FabTech meets specified
earnings targets over a four-year period. In 2001 and 2002, these earnings
targets were not met, and, therefore, no earn-out was paid. In addition, FabTech
was obligated to repay an aggregate of approximately $19 million, consisting of
(i) approximately $13.6 million note payable to LSC, (ii) approximately $2.6
million note payable to the Company, and (iii) approximately $3.0 million note
payable to a financial institution, which amount was repaid on December 4, 2000
with the proceeds of a capital contribution by the Company. The acquisition was
financed internally and through bank credit facilities.
In June 2001, according to the Company's U.S. bank covenants,
Diodes-FabTech was not permitted to make regularly scheduled principal and
interest payments to LSC on the remaining $10.0 million payable related to the
26
FabTech acquisition note, but was, however, able to renegotiate with LSC the
terms of the note. Under the terms of the amended and restated subordinated
promissory note, payments of approximately $417,000 plus interest were scheduled
to begin again in July 2002, provided the Company met the terms of its U.S.
bank's covenants. In May 2002, the Company renegotiated the terms of the note to
extend the payment period from two years to four years, and therefore, payments
of approximately $208,000 plus interest began in July 2002.
Cash used by financing activities was $14.0 million in 2002, as the Company
reduced its overall debt, compared to cash provided by financing activities of
$2.5 million in 2001 and $12.1 million in 2000. In 2002, the Company paid down
its total credit facilities by $14.6 million, from $36.0 million to $21.4
million. At December 31, 2002, the Company's total bank credit facility of $45.7
million encompasses one major U.S. bank, three banks in Mainland China and four
in Taiwan. As of December 31, 2002, the total credit lines were $15.8 million,
$25.0 million, and $4.9 million, for the U.S. facility secured by substantially
all assets, the unsecured Chinese facilities, and the unsecured Taiwanese
facilities, respectively. As of December 31, 2002, the available credit was $7.5
million, $22.0 million, and $1.9 million, for the U.S. facility, the Chinese
facilities, and the Taiwanese facilities, respectively.
In February 2003, the Company and its U.S. bank renewed its $7.5 million
revolving credit line, extending it for two years, and obtained an additional
$2.0 million credit facility to be used for capital expenditure requirements at
its wafer fabrication facility. This $2.0 million facility increases the
Company's total credit facility to $47.7 million, with the total available and
unused credit of $33.4 million.
The agreements have certain covenants and restrictions, which, among other
matters, require the maintenance of certain financial ratios and operating
results, as defined in the agreements, and prohibit the payment of dividends.
The Company was in compliance with its covenants as of December 31, 2002.
The Company has used its credit facilities primarily to fund the expansion
at Diodes-China and for the FabTech acquisition, as well as to support its
operations. The Company believes that the continued availability of these credit
facilities, together with internally generated funds, will be sufficient to meet
the Company's current foreseeable operating cash requirements.
The Company has entered into an interest rate swap agreement with a major
U.S. bank which expires November 30, 2004, to hedge its exposure to variability
in expected future cash flows resulting from interest rate risk related to 25%
of its long-term debt. The interest rate under the swap agreement is fixed at
6.8% and is based on the notional amount. The swap contract is inversely
correlated to the related hedged long-term debt and is therefore considered an
effective cash flow hedge of the underlying long-term debt. The level of
effectiveness of the hedge is measured by the changes in the market value of the
hedged long-term debt resulting from fluctuation in interest rates. During 2001
and 2002, variable interest rates decreased resulting in an interest rate swap
liability of $150,000 as of December 31, 2002. As a matter of policy, the
Company does not enter into derivative transactions for trading or speculative
purposes.
Total working capital increased approximately 5.2% to $20.8 million as of
December 31, 2002, from $19.8 million as of December 31, 2001. The Company
believes that such working capital position will be sufficient for foreseeable
operations and growth opportunities. The Company's total debt to equity ratio
decreased to 0.82 at December 31, 2002, from 1.02 at December 31, 2001. It is
anticipated that this ratio may increase should the Company use its credit
facilities to fund additional inventory sourcing opportunities.
The Company has no material plans or commitments for capital expenditures
other than in connection with manufacturing expansion at Diodes-China,
Diodes-FabTech equipment requirements, and the Company's implementation of the
ERP software package. However, to ensure that the Company can secure reliable
and cost effective inventory sourcing to support and better position itself for
growth, the Company is continuously evaluating additional internal manufacturing
expansion, as well as additional outside sources of products. The Company
believes its financial position will provide sufficient funds should an
appropriate investment opportunity arise and thereby, assist the Company in
improving customer satisfaction and in maintaining or increasing market share.
Based upon plans for new product introductions, product mixes, capacity
restraints on certain product lines and equipment upgrades, the Company expects
that year 2003 capital expenditures for the manufacturing facilities will be in
excess of the $6.9 million spent in 2002.
Inflation did not have a material effect on net sales or net income in
fiscal years 2000 through 2002. A significant increase in inflation could affect
future performance.
27
A table of the Company's contractual obligations as of
December 31, 2002 follows:
----------------------------------------------------------------------------------------------------------
Payments due by period (in 000's)
----------------------------------------------------------------------------------------------------------
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Contractual Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Long-term debt $ 18,416 $ 5,833 $ 11,333 $ 1,250 $ 0
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Capital lease 3,253 230 460 460 2,103
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Operating leases 12,883 2,309 4,275 3,885 2,414
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Total obligations $ 34,552 $ 8,372 $ 16,068 $ 5,595 $ 4,517
- ---------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk. The Company faces exposure to adverse movements in
foreign currency exchange rates, primarily in Asia. The Company's foreign
currency risk may change over time as the level of activity in foreign markets
grows and could have an adverse impact upon the Company's financial results.
Certain of the Company's 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 of each individual
currency exposure, the Company does not employ hedging techniques designed to
mitigate foreign currency exposures. Therefore, the Company could experience
currency gains and losses.
Interest Rate Risk. The Company has credit agreements with U.S. and Far
East financial institutions at interest rates equal to LIBOR or similar indices
plus a negotiated margin. A rise in interest rates could have an adverse impact
upon the Company's cost of working capital and its interest expense. The Company
entered into 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
applies to $4.8 million of the Company's long-term debt at December 31, 2002 and
expires November 30, 2004. The swap contract is inversely correlated to the
related hedged long-term debt and is therefore considered an effective cash flow
hedge of the underlying long-term debt. The level of effectiveness of the hedge
is measured by the changes in the market value of the hedged long-term debt
resulting from fluctuation in interest rates. As a matter of policy, the Company
does not enter into derivative transactions for trading or speculative purposes.
Political Risk. The Company has approximately 61% of its assets in Mainland
China and Taiwan at December 31, 2002. The possibility of political conflict
between the two countries or with the United States could have an adverse impact
upon the Company's ability to transact business through these important business
segments and to generate profits.
Item 8. Financial Statements and Supplementary Data
See "Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K" for the Company's Consolidated Financial Statements and the notes and
schedules thereto filed as part of this Annual Report on Form 10-K.
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
Not Applicable.
PART III
Item 10: Directors and Executive Officers of the Registrant, Item 11:
Executive Compensation, Item 12: Security Ownership of Certain Beneficial Owners
and Management, and Item 13: Certain Relationships and Related Transactions, are
omitted since the Company intends to file a definitive proxy statement, in
connection with its annual meeting of stockholders, with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the Company's fiscal year ended December 31, 2002. The information required by
those items is set forth in that proxy statement and such information is
incorporated by reference in this Form 10-K.
28
Item 14. Controls and Procedures
Within the 90 days prior to the filing date of this Annual Report on Form
10-K for the year ended December 31, 2002, the Company's Chief Executive
Officer, C.H. Chen, and the Chief Financial Officer, Carl Wertz, with the
participation of the Company's management, carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer believe that, as of the date of the
evaluation, the Company's disclosure controls and procedures are effective in
making known to them material information relating to the Company (including its
consolidated subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objections is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors,
mistakes or intentional circumvention of the established processes.
There were no significant changes in the Company's internal controls, or in
other factors that could significantly affect internal controls, known to the
Chief Executive Officer or the Chief Financial Officer, subsequent to the date
of the evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
(1) Financial statements: Page
Independent Auditors' Report 31
Consolidated Balance Sheet at December 31, 2001 and 2002 32 to 33
Consolidated Statement of Income for the Years Ended December 31,
2000, 2001, and 2002 34
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 2000, 2001, and 2002 35
Consolidated Statement of Cash Flows for the
Years Ended December 31, 2000, 2001, and 2002 36 to 37
Notes to Consolidated Financial Statements 38 to 58
(2) Schedules:
Report of Independent Accountants on Financial Statement Schedule 59
Schedule II -- Valuation and Qualifying Accounts 60
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements and note thereto.
(b) Reports on Form 8-K
None.
29
(c) Exhibits
See the Index to Exhibits at page 64 of this Annual
Report on Form 10-K for exhibits filed or
incorporated by reference.
(d) Financial Statements of Unconsolidated Subsidiaries and Affiliates
Not Applicable.
30
INDEPENDENT AUDITOR'S REPORT
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, 2002 and 2001 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, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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, 2002 and 2001, and the consolidated results of their operations and
cash flows for each of the years in the three year period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
MOSS ADAMS LLP
/s/ Moss Adams LLP
Los Angeles, California
January 27, 2003
31
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 2002
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 8,103,000 $ 7,284,000
Accounts receivable
Customers 16,250,000 19,387,000
Related parties 1,486,000 3,138,000
------------------- -------------------
17,736,000 22,525,000
Allowance for doubtful accounts (343,000) (353,000)
------------------- -------------------
17,393,000 22,172,000
Inventories 17,813,000 15,711,000
Deferred income taxes 4,368,000 4,338,000
Prepaid expenses and other 954,000 1,172,000
Prepaid income taxes 312,000 261,000
------------------- -------------------
Total current assets 48,943,000 50,938,000
PROPERTY, PLANT AND EQUIPMENT, net 44,925,000 44,693,000
DEFERRED INCOME TAXES, non-current 3,672,000 3,205,000
OTHER ASSETS
Goodwill 5,090,000 5,090,000
Other 628,000 1,084,000
------------------- -------------------
TOTAL ASSETS $ 103,258,000 $ 105,010,000
=================== ===================
The accompanying notes are an integral part of these financial statements.
32
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 2001 2002
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 6,503,000 $ 3,025,000
Accounts payable
Trade 5,952,000 9,039,000
Related parties 3,295,000 3,361,000
Accrued liabilities 5,062,000 8,693,000
Current portion of long-term debt
Related party 2,500,000 2,500,000
Other 5,833,000 3,333,000
Current portion of capital lease obligations -- 157,000
------------------ ------------------
Total current liabilities 29,145,000 30,108,000
LONG-TERM DEBT, net of current portion
Related party 7,500,000 6,250,000
Other 13,664,000 6,333,000
CAPITAL LEASE OBLIGATIONS, net of current portion -- 2,495,000
MINORITY INTEREST IN JOINT VENTURE 1,825,000 2,145,000
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -
par value $1 per share;
1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock - par value $.66 2/3 per share;
30,000,000 shares authorized; 9,227,664 and 9,292,764
shares issued at 2001 and 2002, respectively 6,151,000 6,195,000
Additional paid-in capital 7,310,000 8,060,000
Retained earnings 39,882,000 45,684,000
------------------ ------------------
53,343,000 59,939,000
Less:
Treasury stock - 1,075,672 shares of common stock, at cost 1,782,000 1,782,000
Accumulated other comprehensive loss 437,000 478,000
------------------ ------------------
2,219,000 2,260,000
Total stockholders' equity 51,124,000 57,679,000
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,258,000 $ 105,010,000
================== ==================
The accompanying notes are an integral part of these financial statements.
33
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000 2001 2002
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES $ 116,079,000 $ 93,210,000 $ 115,821,000
COST OF GOODS SOLD 78,652,000 79,031,000 89,218,000
------------------ ------------------ ---------------------
Gross profit 37,427,000 14,179,000 26,603,000
OPERATING EXPENSES
Research and development expenses 141,000 592,000 1,472,000
Selling, general and administrative expenses 18,814,000 13,711,000 16,300,000
------------------ ------------------ ---------------------
Total operating expenses 18,955,000 14,303,000 17,772,000
Income (loss) from operations 18,472,000 (124,000) 8,831,000
OTHER INCOME (EXPENSES)
Interest income 392,000 59,000 38,000
Interest expense (1,332,000) (2,133,000) (1,221,000)
Other 501,000 777,000 203,000
------------------ ------------------ ---------------------
Income (loss) before income taxes and
minority interest 18,033,000 (1,421,000) 7,851,000
INCOME TAX BENEFIT (PROVISION) (2,496,000) 1,769,000 (1,729,000)
Income before minority interest 15,537,000 348,000 6,122,000
MINORITY INTEREST IN EARNINGS OF JOINT VENTURE (642,000) (224,000) (320,000)
------------------ ------------------ ---------------------
NET INCOME $ 14,895,000 $ 124,000 $ 5,802,000
================== ================== =====================
EARNINGS PER SHARE
Basic $ 1.85 $ 0.02 $ 0.71
Diluted $ 1.62 $ 0.01 $ 0.65
================== ================== =====================
Number of shares used in computation
Basic 8,707,960 8,144,090 8,184,599
Diluted 9,221,949 8,880,603 8,864,993
================== ================== =====================
The accompanying notes are an integral part of these financial statements.
34
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------------------- Accumulated
Common Additional other
Shares in stock in paid-in Retained comprehensive
Shares Treasury Amount treasury capital earnings loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, 9,008,157 1,075,672 6,006,000 (1,782,000) 5,886,000 24,863,000 34,973,000
December 31, 1999
Exercise of stock options
including $1,048,000
income tax benefit 193,506 128,000 1,257,000 1,385,000
Net income for the year
ended December 31, 2000 -- -- -- -- -- 14,895,000 -- 14,895,000
------------ ------------ ------------ ------------- ------------ ------------ -------------- -----------
BALANCE,
December 31, 2000 9,201,663 1,075,672 6,134,000 (1,782,000) 7,143,000 39,758,000 -- 51,253,000
Comprehensive income,
net of tax
Net income for the year
ended December 31, 2001 124,000 124,000
Translation adjustments (349,000) (349,000)
Change in unrealized loss
on derivative instruments,
net of tax of $59,000 (88,000) (88,000)
------------
Total comprehensive income (313,000)
Exercise of stock options
including $62,000 income
tax benefit 26,001 -- 17,000 -- 167,000 -- -- 184,000
------------ ------------ ------------ ------------- ------------ ------------ -------------- ------------
BALANCE,
December 31, 2001 9,227,664 1,075,672 6,151,000 (1,782,000) 7,310,000 39,882,000 (437,000) 51,124,000
Comprehensive income,
net of tax
Net income for the year
ended December 31, 2001 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 65,100 -- 44,000 -- 375,000 -- -- 419,000
------------ ------------ ------------ ------------- ------------ ------------ -------------- -----------
December 31, 2002 9,292,764 1,075,672 $ 6,195,000 $(1,782,000) $8,060,000 $45,684,000 $ (478,000) $57,679,000
============ ============ ============ ============ ============ ============ ============== ===========
The accompanying notes are an integral part of these financial statements.
35
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 2001 2002
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,895,000 $ 124,000 $ 5,802,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,003,000 8,670,000 9,747,000
Minority interest earnings 642,000 224,000 320,000
Loss on disposal of property, plant and equipment 13,000 239,000 217,000
Changes in operating assets and liabilities:
Accounts receivable (2,161,000) 2,660,000 (4,779,000)
Inventories (9,277,000) 13,975,000 2,102,000
Prepaid expenses and other 38,000 (399,000) (674,000)
Deferred income taxes (1,195,000) (2,978,000) 646,000
Accounts payable 445,000 (2,471,000) 3,153,000
Accrued liabilities 267,000 (3,486,000) 3,481,000
Income taxes payable (refundable) 1,538,000 (1,620,000) 149,000
------------------ ------------------ ----------------
Net cash provided by operating activities 10,208,000 14,938,000 20,164,000
------------------ ------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary, net of cash acquired (4,709,000) -- --
Purchases of property, plant and equipment (16,968,000) (8,477,000) (6,951,000)
Proceeds from sales of property, plant and equipment 288,000 -- 3,000
------------------ ------------------ ----------------
Net cash used by investing activities (21,389,000) (8,477,000) (6,948,000)
------------------ ------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (repayments) on line of credit, net 1,496,000 (1,247,000) (3,478,000)
Net proceeds from the issuance of common stock 337,000 122,000 321,000
Management incentive reimbursement from LSC -- -- 375,000
Proceeds from long-term debt 12,801,000 7,000,000 --
Repayments of long-term debt (2,534,000) (8,360,000) (11,080,000)
Repayments of capital lease obligations -- -- (133,000)
------------------ ------------------ ----------------
Net cash provided (used) by financing activities 12,100,000 (2,485,000) (13,995,000)
------------------ ------------------ ----------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS -- (349,000) (40,000)
INCREASE (DECREASE) IN CASH 919,000 3,627,000 (819,000)
CASH, beginning of year 3,557,000 4,476,000 8,103,000
------------------ ------------------ ----------------
CASH, end of year $ 4,476,000 $ 8,103,000 $ 7,284,000
================== ================== ================
The accompanying notes are an integral part of these financial statements.
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 2000 2001 2002
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 1,243,000 $ 2,123,000 $ 1,229,000
------------------ ------------------ ----------------
Income taxes $ 2,151,000 $ 2,992,000 $ 965,000
================== ================== ================
Non-cash activities:
Tax benefit related to stock options
credited to paid-in capital $ 1,048,000 $ 62,000 $ 98,000
================== ================== ================
Building acquired through capital lease obligation -- -- $ 2,785,000
================== ================== ================
Assets acquired in purchase of FabTech:
Cash $ 441,000
Accounts receivable 2,837,000
Inventory 5,936,000
Prepaid expenses and other 286,000
Deferred tax asset 1,962,000
Plant and equipment 12,510,000
------------------
$ 23,972,000
==================
Liabilities assumed in purchase of FabTech:
Line of credit $ 3,017,000
Accounts payable 1,736,000
Accrued liabilities 2,352,000
Income tax payable 2,000
Long-term debt 13,549,000
------------------
$ 20,656,000
==================
The accompanying notes are an integral part of these financial statements.
36 & 37
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations - Diodes Incorporated and its subsidiaries manufacture
and distribute discrete semiconductor devices to manufacturers in the
communications, computing, industrial, consumer electronics and automotive
markets. The Company's 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 and Asia.
Principles of consolidation - The 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%) owned subsidiary, Shanghai KaiHong
Electronics Co., Ltd. (Diodes-China). Diodes acquired FabTech on December 1,
2000. See Note 16 for a summary of the acquisition and proforma financial
information.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Revenue recognition - Revenue is recognized when the product is shipped to
both end users and electronic component distributors. The Company reduces
revenue in the period of sale for estimates of product returns and other
allowances. Allowances for doubtful accounts approximated $343,000 and $353,000,
for the years ended December 31, 2001 and 2002, respectively.
In fiscal 2001 and 2002, Diodes-China received high-technology grants from
the local Chinese government of approximately $453,000 and $365,000,
respectively. The grants are unrestricted and are available upon receipt to fund
the operations of Diodes-China. The Company recognizes this grant income when
received. Grants are reported within "other income" on the accompanying
statements of income.
Product warranty - The Company generally warrants its products for a period
of one year from the date of sale. Costs of warranty are expensed as incurred
and historically have not been significant.
Inventories - Inventories are stated at the lower of cost or market value.
Cost is determined principally by the first-in, first-out method.
Property, plant and equipment - Property, 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.
Goodwill - Beginning 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 Company's adoption of SFAS No. 142, an
independent appraiser retained by the Company, performed the required impairment
tests of goodwill as of January 1, 2002 and 2003, and has determined that the
goodwill is fully recoverable. Prior to fiscal 2002, goodwill was amortized
using the straight-line method over its estimated period of benefit.
38
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Impairment on long-lived assets - Certain 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,
2002, the Company expects the remaining carrying value of assets to be
recoverable.
Income taxes - Income 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 Company's
assets and liabilities. Income taxes are further explained in Note 9.
Concentration of credit risk - Financial instruments which potentially
subject the Company to concentrations of credit risk include trade accounts
receivable. Credit risk is limited by the dispersion of the Company's 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 maintains cash balances at major financial institutions in the
United States, Taiwan, and China. Accounts at each institution in the United
States are insured by the Federal Deposit Insurance Corporation up to $100,000.
Taiwan dollars held in accounts in Taiwan are insured by the Central Deposit
Insurance Company with no maximum limit. Foreign currency held in accounts in
Taiwan are not insured. Accounts in China and Hong Kong are also not insured.
Stock split - On July 14, 2000, the Company effected a three-for-two stock
split for shareholders of record as of June 28, 2000 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.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
39
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings per share - Earnings 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 Financial Accounting Standards Board Statement No.
128.
For the year ended December 31, 2002, options exercisable for 824,000
shares of common stock have been excluded from the computation of diluted
earnings per share because their effect is currently anti-dilutive.
Year Ended December 31
2000 2001 2002
--------------------------------------------------------------------------------
Net income for earnings
per share computation $ 14,895,000 $ 124,000 $ 5,802,000
=============== ============= =============
Basic
Weighted average number of common
shares outstanding during the year 8,070,960 8,144,090 8,184,599
=============== ============= =============
Basic earnings per share $ 1.85 $ 0.02 $ 0.71
=============== ============= =============
Diluted
Weighted average number of common
shares outstanding used in calculating
basic earnings per share 8,070,960 8,144,090 8,184,599
Add additional shares issuable upon
exercise of stock options 1,150,989 736,513 680,394
---------------- ------------ -------------
Weighted average number of common
shares used in calculating
diluted earnings per share 9,221,949 8,880,603 8,864,993
=============== ============= =============
Diluted earnings per share $ 1.62 $ 0.01 $ 0.65
=============== ============= =============
40
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based compensation - The Company has a stock-based employee
compensation plan, which is described more fully in Note 10. The Company
accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, ("Accounting for Stock Issued to Employees"), and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the plan have an exercise price equal to
the fair market value of the underlying common stock at the date of grant. In
accordance with the disclosure provisions of SFAS No. 148, the following table
illustrates the effect on net income if the Company had applied the fair value
recognition provisions of SFAS No. 123, ("Accounting for Stock Based
Compensation"), to stock based employee compensation.
For the years ended December 31,
- --------------------------------------------------------------------------------
Amounts Per Share
--------------------
Basic Diluted
2000 --------------- ---------- ---------
Net income $ 14,895,000 $ 1.85 $ 1.62
Additional compensation
for fair value of stock options (1,033,000) (0.13) (0.11)
--------------- ---------- ---------
Proforma net income $ 13,862,000 $ 1.72 $ 1.50
=============== ========== =========
2001
Net income $ 124,000 $ 0.02 $0.01
Additional compensation
for fair value of stock options (1,052,000) (0.13) (0.12)
--------------- ---------- ---------
Proforma net income (loss) $ (928,000) $(0.11) $(0.10)
=============== ========== =========
2002
Net income $ 5,802,000 $ 0.71 $ 0.65
Additional compensation
for fair value of stock options (1,133,000) (0.14) (0.13)
--------------- ---------- ---------
Proforma net income $ 4,669,000 $ 0.57 $ 0.53
=============== ========== =========
Derivative financial instrument - The Company uses 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 applies to $4.8 million of the Company's
long-term debt and expires November 30, 2004. Market value of the swap as of
December 31, 2002 is included in "Accumulated Other Comprehensive Income
(Loss)". The swap contract is inversely correlated to the related hedged
long-term debt and is therefore considered an effective cash flow hedge of the
underlying long-term debt. The level of effectiveness of the hedge is measured
by the changes in the market value of the hedged long-term debt resulting from
fluctuation in interest rates. As a matter of policy, the Company does not enter
into derivative transactions for trading or speculative purposes.
Beginning December 31, 2000, the Company adopted FAS No. 133. However, the
effect of the adoption was insignificant as the Company held no derivative
financial instruments as of December 31, 2000. During fiscal 2001, the Company
entered into a swap agreement and variable interest rates decreased during the
period resulting in an interest rate swap liability of $150,000 as of December
31, 2002.
Functional currencies and foreign currency translation - Through its
subsidiaries, the Company maintains operations in Taiwan and China. Through June
30, 2001, the functional currency of Diodes-Taiwan was the U.S. dollar.
Effective July 1, 2001, the Company changed the functional currency of
Diodes-Taiwan to the local currency (NT dollar) in Taiwan. As a result of this
change, the translation of the balance sheet and statement of income of
Diodes-Taiwan from the local currency into the reporting currency (US dollar)
results in translation adjustments, the effect of which is reflected in the
accompanying statement of comprehensive income and on the balance sheet as a
separate component of shareholders' equity. Included in net income are foreign
currency exchange gains (losses) of approximately $266,000, $74,000 and
$(82,000) for the years ended December 31, 2000, 2001 and 2002, respectively.
41
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Functional currencies and foreign currency translation (Continued) - The
Company believes this reporting change most appropriately reflects the current
economic facts and circumstances of the operations of Diodes-Taiwan. The Company
continues to use the U.S. dollar as the functional currency in Diodes-China and
Diodes-Hong Kong, as substantially all monetary transactions are made in that
currency, and other significant economic facts and circumstances currently
support that position. As these factors may change in the future, the Company
will periodically assess its position with respect to the functional currency of
Diodes-China and Diodes-Hong Kong.
Comprehensive income - Accounting 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 changes -
During 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 147
("Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements Nos. 72 and 144 and FASB Interpretation No. 9"), No. 146 ("Accounting
for Costs Associated with Exit or Disposal Activities") and No. 145,
("Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS No. 13, and Technical
Corrections as of April 2002"). SFAS No. 147 does not apply to the Company. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002. SFAS No. 145 is effective for financial statements issued after May
15, 2002. Management does not believe the adoption of SFAS No. 145 and SFAS No.
146 will have material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123"), which amends SFAS No. 123. SFAS No. 148, which is effective as of
December 31, 2002, provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation and amends certain disclosure provisions of SFAS No. 123. SFAS No.
148 does not permit the use of the original Statement No. 123 prospective method
of transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. Management has implemented the required
disclosure provisions of SFAS No. 148 as of December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, ("Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others"). The Interpretation elaborates on the
disclosures to be made by sellers or guarantors of products and services, as
well as those entities guaranteeing the financial performance of others. The
Interpretation further clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the obligations it has undertaken
in issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are effective on a prospective basis to
guarantees issued or modified after December 31, 2002, and the disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. The Company believes that its disclosures with regards to
these matters are adequate as of December 31, 2002.
42
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In January 2003, the FASB issued Interpretation No. 46 ("Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51"). The Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. Management does not believe the Interpretation will
have a material impact on the financial statements.
Reclassifications - Certain 2001 and 2000 amounts as well as unaudited
quarterly financial data presented in the accompanying financial statements have
been reclassified to conform with 2002 financial statement presentation. These
reclassifications had no impact on previously reported net income or
stockholders' equity.
NOTE 2 - INVENTORIES
2001 2002
Finished goods $ 12,030,000 $ 9,808,000
Work-in-progress 1,848,000 1,521,000
Raw materials 6,311,000 6,444,000
-------------- --------------
20,189,000 17,773,000
Less: reserves (2,376,000) (2,062,000)
-------------- --------------
$ 17,813,000 $ 15,711,000
============== ==============
43
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
2001 2002
Buildings and leasehold improvements $ 2,353,000 $ 5,153,000
Construction in-progress 2,972,000 5,639,000
Machinery and equipment 57,767,000 61,657,000
------------- -------------
63,092,000 72,449,000
Less accumulated depreciation
and amortization (18,429,000) (28,018,000)
------------- -------------
44,663,000 44,431,000
Land 262,000 262,000
------------- -------------
$ 44,925,000 $ 44,693,000
============= =============
The Company is in the process of implementing an Enterprise Resource
Planning software system for which approximately $1,636,000 and $2,511,000 is
capitalized within construction in-progress in 2001 and 2002, respectively.
NOTE 4 - GOODWILL
No goodwill was acquired or impaired during the year ended December 31,
2002. As of December 31, 2002, U.S. operations goodwill was $5,090,000, and
Asian operations goodwill was zero. The following tables show the effect of SFAS
No. 142 on net income and earnings per share for the years ended December 31,
2000, 2001, and 2002.
Years ending December 31,
-------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------- --------------------------- -----------------------------
Per Share Amount Per Share Amount Per Share Amount
Amount Basic Diluted Amount Basic Diluted Amount Basic Diluted
Reported net income $ 14,895,000 $ 1.85 $ 1.62 $ 124,000 $ 0.02 $ 0.01 $ 5,802,000 $ 0.71 $ 0.65
Add: Goodwill amortization 62,000 0.01 0.01 288,000 0.03 0.03 - - -
------------ ------ ------ --------- ------ ------ ----------- ------ ------
Adjusted net income $ 14,957,000 $ 1.86 $ 1.63 $ 412,000 $ 0.05 $ 0.04 $ 5,802,000 $ 0.71 $ 0.65
============ ====== ====== ========= ====== ====== =========== ====== ======
44
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BANK CREDIT AGREEMENTS AND LONG-TERM DEBT
Lines of credit - The Company maintains credit facilities with several
financial institutions through its affiliated entities in the United States and
Asia. The credit available under the various facilities as of December 31, 2002,
totals $45,700,000, as follows:
2002 Outstanding at December 31,
Credit Facility Terms 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
$17,500,000 Collateralized by all assets, variable interest (prime rate) due monthly $ 12,898,000 $ 6,666,000
$25,000,000 Unsecured, interest at LIBOR plus 0.8% (approximately 2.2% at December 31, 2002)
due quarterly 9,483,000 3,000,000
$3,200,000 Unsecured, variable interest at prime plus 0.25% (approximat1y 4.5% at
December 31, 2002) due monthly 1,720,000 3,025,000
------------- ------------
24,101,000 12,691,000
Less: due after 12 months (included in long-term debt table below) (17,598,000) (9,666,000)
------------- -------------
$ 6,503,000 $ 3,025,000
============== =============
45
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BANK CREDIT AGREEMENTS AND LONG-TERM DEBT (Continued)
Long-term debt - The balances remaining as of December 31 consist of the
following:
2001 2002
------------ -----------
Note payable to a customer for advances made to the Company.
Amount was repaid quarterly by price concessions, and no balance was remaining
as of December 31, 2002. $ 1,899,000 $ -
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 1% (approximately 2.4% at December 31, 2002) and is subordinated
to the interest of the Company's primary lender. 10,000,000 8,750,000
Term note portion of $25,000,000 line of credit facility due in 2003. 7,000,000 3,000,000
Term note portion of $17,500,000 bank credit facility, secured by substantially
all assets, due in aggregate monthly principal payments of $120,000 plus
interest at LIBOR plus 2.1% (approximately 4.5% at December 31, 2002) through
December 2002 and then $70,000 through December 2004.
All outstanding balances were paid in 2002. 3,098,000 -
Term note portion of $17,500,000 bank credit facility, secured by substantially
all assets, due in aggregate monthly principal payments of $208,000 plus
interest at 6.8% fixed by hedge contract through December 2004. 7,500,000 6,666,000
------------ -------------
29,497,000 18,416,000
Current portion 8,333,000 5,833,000
------------- -------------
$ 21,164,000 $ 12,583,000
============= =============
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.
During 2002, the average and maximum borrowings on revolving line of credit
were $1,905,000 and $3,996,000, respectively. The weighted average interest rate
and outstanding borrowings was 4.7% in 2002.
46
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BANK CREDIT AGREEMENTS AND LONG-TERM DEBT (Continued)
The aggregate maturities of long-term debt for future years ending December
31 are:
2003 $ 5,833,000
2004 8,833,000
2005 2,500,000
2006 1,250,000
------------
$ 18,416,000
============
The Company has entered into an interest rate swap agreement with a bank,
which expires November 30, 2004. The Company has entered into this agreement to
hedge its interest exposure. The interest rate under the swap agreement is fixed
at 6.8% and is based on the notional amount, which was $4,792,000 at December
31, 2002.
NOTE 6 - CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital lease agreements are summarized
as follows:
For years ending December 31,
2003 $ 230,000
2004 230,000
2005 230,000
2006 230,000
2007 230,000
Thereafter 2,103,000
-------------
3,253,000
Less: interest (601,000)
-------------
Present value of minimum lease payments 2,652,000
Less: Current portion (157,000)
-------------
Long-term portion $ 2,495,000
=============
At December 31, 2002, property under capital leases had a cost of
$2,785,000. The related accumulated depreciation and amortization amounted to
$186,000 at December 31, 2002.
47
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - ACCRUED LIABILITIES
2001 2002
------------------ -----------------
Employee compensation and payroll taxes $ 1,777,000 $ 3,915,000
Sales commissions 243,000 250,000
Refunds to product distributors 168,000 225,000
Other 1,484,000 2,147,000
Equipment purchases 1,390,000 2,156,000
------------- ------------
$ 5,062,000 $ 8,693,000
============= ============
NOTE 8 - VALUATION OF FINANCIAL INSTRUMENTS
The Company's 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 9 - INCOME TAXES
The components of the income tax provisions are as follows:
2000 2001 2002
--------------------- ---------------------- ----------------------
Current tax provision (benefit)
Federal $ 1,376,000 $ - $ -
Foreign 2,314,000 1,132,000 1,231,000
State 1,000 1,000 1,000
--------------------- ---------------------- ----------------------
3,691,000 1,133,000 1,232,000
Deferred tax expense (benefit) (1,195,000) (2,902,000) 497,000
--------------------- ---------------------- ----------------------
Total income tax provision (benefit) $ 2,496,000 $ (1,769,000) $ 1,729,000
48
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Reconciliation between the effective tax rate and the statutory tax rates
for the years ended December 31, 2000, 2001 and 2002 are as follows:
2000 2001 2002
------------------------------------------------------------------------------------------
Percent Percent Percent
of pretax of pretax of pretax
Amount earnings Amount earnings Amount earnings
------------------------------------------------------------------------------------------
Federal tax $ 6,131,000 34.0 $ (483,000) 34.0 $ 2,669,000 34.0
State franchise tax,
net of Federal benefit 1,046,000 5.8 (82,000) 5.8 455,000 5.8
Foreign income tax rate
difference (4,572,000) (25.4) (1,204,000) 84.7 (1,409,000) (18.0)
Other (109,000) (0.6) - - 14,000 0.2
Income tax provision
(benefit) $ 2,496,000 13.8 $(1,769,000) 124.5 $ 1,729,000 22.0
============== ====== ============ ===== ============= =======
In accordance with the current taxation policies of the Peoples Republic of
China (PRC), Diodes-China was granted preferential tax treatment for the years
ended December 31, 2000 through 2003. Earnings were subject to 0% tax rates in
2000 and 2001, and 12% in 2002. Earnings in 2003 will be taxed at 12% (one half
the normal central government tax rate), and at normal rates thereafter.
Earnings of Diodes-China are also subject to tax of 3% by the local taxing
authority in Shanghai. The local taxing authority waived this tax in 2002.
Earnings of Diodes-Taiwan are currently subject to a tax rate of 35%, which
is comparable to the U.S. Federal tax rate for C corporations.
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 state income taxes. In the years ending December 31, 2000 and 2001,
Diodes-Taiwan distributed dividends of approximately $1.5 million and $2.6
million respectively, which is included in Federal and state taxable income.
As of December 31, 2002, accumulated and undistributed earnings of
Diodes-China is approximately $26.2 million. Through March 31, 2002, the Company
had not recorded deferred Federal or state tax liabilities (estimated to be $8.9
million) 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, under the direction of the Board of Directors, the Company began
to record deferred taxes on a portion of the 2002 earnings of Diodes-China in
preparation of a possible dividend distribution. As of December 31, 2002, the
Company has recorded $850,000 in deferred taxes and has made no distributions.
49
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The Company is evaluating the need to provide additional deferred taxes for
the future earnings of Diodes-China to the extent such earnings may be
appropriated for distribution to the Company's corporate office in North
America, and as further investment strategies with respect to Diodes-China are
determined. Should the Company's North American cash requirements exceed the
cash that is provided through the domestic credit facilities, cash can be
obtained from the Company's foreign subsidiaries. However, the distribution of
any un-appropriated funds to the U.S. will require the recording of income tax
provisions on the U.S. entity, thus reducing net income.
At December 31, 2001 and 2002, the Company's deferred tax assets and
liabilities are comprised of the following items:
2001 2002
------------ -------------
Deferred tax assets, current
Inventory cost $ 1,087,000 $ 631,000
Accrued expenses and accounts receivable 552,000 706,000
Net operating loss carryforwards and other 2,729,000 3,001,000
------------ -------------
$4,368,000 $ 4,338,000
============ =============
Deferred tax assets, non-current
Plant, equipment and intangible assets $ (3,055,000) $ (2,784,000)
Net operating loss carryforwards and other 6,727,000 5,989,000
------------ -------------
$3,672,000 $ 3,205,000
============ =============
NOTE 10 - STOCK OPTION PLANS
The Company has stock option plans for directors, officers, and key
employees, which provide for non-qualified and incentive stock options. The
Board of Directors determines the option price (not to be less than fair market
value for the incentive options) at the date of grant. The options generally
expire ten years from the date of grant and are exercisable over the period
stated in each option. Approximately 881,000 shares were available for future
grants under the plans as of December 31, 2002.
50
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION PLANS (Continued)
Outstanding Options
--------------------------------------------------------
Exercise Price Per Share
-------------------------------------
Number Range Weighted Average
----------- -------------- ----------------
Balance, December 31, 1999 1,661,496 $ 1.25-8.50 $ 4.28
Granted 512,100 14.88-23.92 22.16
Exercised (193,506) 1.25-5.00 3.43
Canceled (41,098) 5.00-23.92 12.17
----------- -------------- ----------------
Balance, December 31, 2000 1,938,992 1.25-23.92 8.90
Granted 226,200 6.23-8.32 8.27
Exercised (26,001) 3.33-5.00 4.70
Canceled (24,099) 6.67-23.92 19.93
----------- -------------- ----------------
Balance, December 31, 2001 2,115,092 1.25-23.92 8.78
Granted 338,100 8.53-9.57 8.58
Exercised (65,100) 1.25-8.32 4.92
Canceled (3,600) 8.32-8.53 8.43
----------- -------------- ----------------
Balance, December 31, 2002 2,384,492 $ 1.25-$23.92 $ 8.86
=========== ============== ================
As of December 31, 2002, approximately 1,718,000 of options granted were
exercisable. The following summarizes information about stock options
outstanding at December 31, 2002:
Range of exercise Number Weighted average Weighted average
prices outstanding remaining contractual life exercise price
------------------- ------------ -------------------------- -----------------
Plan 1 $1.25 - $23.92 1,020,000 4.82 years $9.33
Plan 2 $1.25 - $23.92 1,040,192 5.72 years $8.50
Plan 3 $8.58 - $9.50 324,300 9.32 years $8.49
------------
2,384,492
The Company also has an incentive bonus plan, which reserves shares of
stock for issuance to key employees. As of December 31, 2002, 186,000 shares
remain available for issuance under this plan. No shares were issued under this
incentive bonus plan for years ended December 31, 2000 through 2002.
51
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION PLANS (Continued)
The proforma information disclosed in Note 1 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 and the risk-free interest rate for
the term of the option. The following is the average of the data used to
calculate the fair value:
Risk-free Expected Expected
December 31, interest rate Expected life volatility dividends
2002 4.00% 5 years 44.08% N/A
2001 5.00% 5 years 79.55% N/A
2000 5.00% 5 years 98.44% N/A
NOTE 11 - RELATED PARTY TRANSACTIONS
Lite-On Semiconductor Corporation - In July 1997, Vishay Intertechnology,
Inc. (Vishay) and the Lite-On Group, a Taiwanese consortium, formed a joint
venture - Vishay/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% interest in the Vishay/LPSC
joint venture to the Lite-On Group, the 35% joint venture partner. Because of
this transaction, the Lite-On Group, through LPSC, its wholly-owned subsidiary,
indirectly owned approximately 37% of the Company's common stock. In December
2001, LPSC merged with Dyna Image Corporation of Taipei, Taiwan. Dyna Image is
the world's largest manufacturer of Contact Image Sensors (CIS), which are used
in fax machines, scanners, and copy machines. The combined company is now called
Lite-On Semiconductor Corporation (LSC). The Company considers its relationship
with LSC to be mutually beneficial and the Company and LSC will continue its
strategic alliance as it has since 1991. The Company's subsidiaries buy product
from and sell product to LSC. Net sales to and purchases from LSC were as
follows for years ended December 31:
2000 2001 2002
------------ ------------ --------------
Net sales $ 633,000 $ 7,435,000 $ 16,147,000
Purchases 12,898,000 8,002,000 14,183,000
52
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
As a result of the acquisition of FabTech from LSC (See Note 16), the
Company is indebted to LSC in the amount of $8,750,000 as of December 31, 2002.
Terms of the debt are indicated in Note 5. No interest expense is outstanding as
of December 31, 2002 on this debt. Under the acquisition agreement, LSC has
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.
Other related parties - For the years ended December 31, 2001, and 2002,
the Company purchased approximately $7,394,000 and $9,515,000, respectively, of
its inventory purchases from companies owned by its 5% minority shareholder in
Diodes-China.
Accounts receivable from and accounts payable to related parties were as
follows as of December 31:
2001 2002
Accounts receivable
LSC $ 1,414,000 $ 3,138,000
Other 72,000 -
------------ -----------
$ 1,486,000 $ 3,138,000
============ ===========
Accounts payable
LSC $ 2,854,000 $ 2,803,000
Other 441,000 558,000
------------ -----------
$ 3,295,000 $ 3,361,000
============ ===========
53
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - GEOGRAPHIC 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 Company's chief decision-making
group consists of the President and Chief Executive Officer, Chief Financial
Officer, Vice President of Sales and Marketing, and Vice President of
Operations. The Company operates in a single segment, discrete semiconductor
devices, through its various manufacturing and distribution facilities.
The Company's operations include the domestic operations (Diodes and
FabTech) located in the United States and the Asian operations (Diodes-Taiwan
located in Taipei, Taiwan, Diodes-China located in Shanghai, China, and
Diodes-Hong Kong located in Hong Kong, China).
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
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 32,313,000 12,380,000 44,693,000
2001
Total sales $ 71,589,000 $ 53,705,000 $ 125,294,000
Intercompany sales (28,978,000) (3,106,000) (32,084,000)
Net sales $ 42,611,000 $ 50,599,000 $ 93,210,000
Assets 58,877,000 44,381,000 103,258,000
Property, plant & equipment 31,779,000 13,146,000 44,925,000
2000
Total sales $ 104,815,000 $ 64,744,000 $ 169,559,000
Intercompany sales (50,781,000) (2,699,000) (53,480,000)
Net sales $ 54,034,000 $ 62,045,000 $ 116,079,000
Assets 61,149,000 51,801,000 112,950,000
Property, plant & equipment 31,617,000 13,512,000 45,129,000
54
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS and CONTINGENCIES
Operating leases - The Company leases its offices, manufacturing plants and
warehouses under operating lease agreements expiring through December 2010. The
Company may, at its option, extend the lease for a five-year term upon
termination. Rent expense amounted to approximately $503,000, $2,556,000, and
$2,711,000, for the years ended December 31, 2000, 2001 and 2002, respectively.
Future minimum lease payments under non-cancelable operating leases for
years ending December 31 are:
2003 $ 2,309,000
2004 2,178,000
2005 2,097,000
2006 2,106,000
2007 1,779,000
Thereafter 2,414,000
-------------
$ 12,883,000
Environmental matters - The Company has received a claim from one of its
former U.S. landlords regarding potential groundwater contamination at a site in
which the Company engaged in manufacturing from 1967 to 1973. The landlord has
alleged that the Company may have some responsibility for cleanup costs. The
Company does not anticipate that the ultimate outcome of this matter will have a
material adverse effect on its financial condition.
NOTE 14 - EMPLOYEE BENEFITS PLAN
The Company maintains a 401(k) profit sharing plan (the Plan) for the
benefit of qualified employees at the North American locations. Employees who
participate may elect to make salary deferral contributions to the Plan up to
17% of the employees' eligible payroll. The Company makes a contribution of $1
for every $2 contributed by the participant up to 6% of the participant's
eligible payroll. In addition, the Company may make a discretionary contribution
to the entire qualified employee pool, in accordance with the Plan. For the
years ended December 31, 2000, 2001, and 2002, the Company's total contribution
to the Plan was approximately $307,000, $198,000, and $593,000, respectively.
55
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - MANAGEMENT INCENTIVE AGREEMENTS
As part of the FabTech acquisition (see Note 16), the Company entered into
management incentive agreements with several members of FabTech's management.
The agreements provide guaranteed annual payments as well as contingent bonuses
based on the annual profitability of FabTech and subject to a maximum annual
amount. Future guaranteed and maximum payments provided for by the management
incentive agreements for the years ended December 31, are:
Guaranteed Maximum Contingent Total
----------- ------------- -------------
2003 $ 375,000 $ 975,000 $ 1,350,000
2004 375,000 1,200,000 1,575,000
----------- ------------ -------------
$ 750,000 $ 2,175,000 $ 2,925,000
=========== ============ =============
Any portion of the guaranteed and contingent liability paid by FabTech will
be reimbursed by LSC.
NOTE 16 - BUSINESS ACQUISITION
On December 1, 2000, the Company purchased all of the outstanding capital
stock of FabTech, Inc. from LSC (a then 37% shareholder of the Company). FabTech
operates a 5-inch silicon wafer foundry in Lee's Summit, Missouri.
The acquisition was accounted for using the purchase method of accounting,
whereby the assets and liabilities acquired were recorded at their estimated
fair values. The terms of the stock purchase required an initial cash payment of
approximately $5,150,000, including acquisition costs, and the assumption of $19
million in debt (including a $2.5 million loan made by Diodes-North America to
FabTech). In addition, the agreement provides for a potential earnout of up to
$30 million based upon FabTech attaining certain earnings targets over the
four-year period immediately following the purchase. For the years 2000 through
2002, no earnout was paid out as the earnings targets were not met.
As a condition to the purchase agreement, certain officers and management
of FabTech will receive a total of $2,475,000 over four years. Of this amount,
$975,000 was accrued by FabTech as incentive compensation for services rendered
prior to the acquisition. The remaining $1,500,000 will be accrued ratably over
four years following the acquisition, subject to the terms of the management
incentive agreements (see Note 15). The amount of cash paid to the seller at
closing was reduced by $975,000, and any portion of the guaranteed and
contingent liability to be paid by FabTech will be reimbursed by LSC.
The excess of the purchase price over the fair value of assets acquired
(goodwill) amounted to approximately $4,410,000, which beginning in fiscal 2002
is no longer being amortized, but instead will be tested for impairment annually
in accordance with SFAS No. 142 as previously discussed.
56
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - BUSINESS ACQUISITION (Continued)
The results of operations of FabTech are included in the consolidated
financial statements from the date of acquisition. The following represents the
unaudited proforma results of operations as if Fab-Tech had been acquired at
the beginning of 2000.
Year Ended December 31,
-----------------------
2000
-----------------------
Net sales $ 136,438,000
Net income 14,211,000
Earnings per share
Basic 1.76
Diluted 1.54
The proforma results do not represent the Company's actual operating
results had the acquisition been made at the beginning of 2000.
57
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
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 4,352,000 7,131,000 7,867,000 7,253,000
Net income 208,000 1,563,000 1,767,000 2,262,000
Earnings per share
Basic $ 0.03 $ 0.19 $ 0.22 $ 0.28
Diluted 0.03 0.18 0.20 0.25
Quarter Ended
-------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------------- ------------- -------------- --------------
Fiscal 2001
Net sales $ 25,109,000 $ 20,730,000 $ 21,937,000 $ 25,434,000
Gross profit 4,121,000 4,044,000 2,419,000 3,595,000
Net income (loss) 521,000 525,000 (847,000) (75,000)
Earnings (loss) per share
Basic $ 0.06 $ 0.06 $ (0.10) $ (0.01)
Diluted 0.06 0.06 (0.10) (0.01)
Quarter Ended
-------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------------- ------------- -------------- --------------
Fiscal 2000
Net sales $ 26,687,000 $ 32,173,000 $ 31,857,000 $ 25,362,000
Gross profit 8,437,000 10,489,000 11,121,000 7,380,000
Net income 3,140,000 4,320,000 4,650,000 2,785,000
Earnings per share
Basic $ 0.39 $ 0.54 $ 0.57 $ 0.34
Diluted 0.34 0.46 0.50 0.31
58
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
Our audits of the consolidated financial statements of Diodes Incorporated
and Subsidiaries referred to in our report dated January 27, 2003 appearing in
item 8 in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in item 15(a) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
MOSS ADAMS LLP
/s/ Moss Adams LLP
Los Angeles, California
January 27, 2003
59
DIODES INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL A COL B COL C COL D COL E
Additions
Balance at charged Balance at
beginning to costs & end of
Description of period expenses Deductions period
Year ended December 31,
2000
Allowance for doubtful accounts $ 297,000 $ 22,000 $ 8,000 $ 311,000
Reserve for slow moving and obsolete inventory 1,818,000 1,445,000 562,000 2,701,000
2001
Allowance for doubtful accounts $ 311,000 $ 51,000 $ 19,000 $ 343,000
Reserve for slow moving and obsolete inventory 2,701,000 2,117,000 2,442,000 2,376,000
2002
Allowance for doubtful accounts $ 343,000 $ 45,000 $ 35,000 $ 353,000
Reserve for slow moving and obsolete inventory 2,376,000 1,248,000 1,562,000 2,062,000
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIODES INCORPORATED (Registrant)
By: /s/ C.H. Chen March 26, 2003
C.H. CHEN
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ Carl Wertz March 26, 2003
CARL WERTZ
Chief Financial Officer, Treasurer, and Secretary
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant, and in the capacities
indicated, on March 26, 2003.
/s/ Raymond Soong /s/ C.H. Chen
RAYMOND SOONG C.H. CHEN
Chairman of the Board of Directors Director
/s/ Michael R. Giordano /s/ M.K. Lu
MICHAEL R. GIORDANO M.K. LU
Director Director
/s/ Keh-Shew Lu /s/ John M. Stich
KEH-SHEW LU JOHN M. STICH
Director Director
/s/ Shing Mao
SHING MAO
Director
61
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, C.H. Chen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and b) any fraud, whether or not material,
that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ C.H. Chen
C. H. Chen
Chief Executive Officer
Date: March 26, 2003
62
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Wertz, certify that:
1. I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and b) any fraud, whether or not material,
that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Carl Wertz
Carl Wertz
Chief Financial Officer
Date: March 26, 2003
63
INDEX TO EXHIBITS
Number Description Sequential
Page Number
3.1 Certificate of Incorporation of Diodes Incorporated (the "Company") dated July 29, 1968 (1)
3.2 Amended By-laws of the Company dated August 14, 1987 (2)
3.3 Amended Certificate of Incorporation of the Company dated June 12, 2000 (25)
10.1 Stock Purchase and Termination of Joint Shareholder Agreement (3)
10.2 1994 Credit Facility Agreement between the Company and Wells Fargo Bank, National Association (4)
10.3 * Company's 401(k) Plan - Adoption Agreement (5)
10.4 * Company's 401(k) Plan - Basic Plan Documentation #03 (5)
10.5 * Employment Agreement between the Company and Pedro Morillas (6)
10.6 * Company's Incentive Bonus Plan (7)
10.7 * Company's 1982 Incentive Stock Option Plan (7)
10.8 * Company's 1984 Non-Qualified Stock Option Plan (7)
10.9 * Company's 1993 Non-Qualified Stock Option Plan (7)
10.10 * Company's 1993 Incentive Stock Option Plan (5)
10.11 $6.0 Million Revolving Line of Credit Note (8)
10.12 Credit Agreement between Wells Fargo Bank and the Company dated November 1, 1995 (8)
10.13 KaiHong Compensation Trade Agreement for SOT-23 Product (9)
10.14 KaiHong Compensation Trade Agreement for MELF Product (10)
10.15 Lite-On Power Semiconductor Corporation Distributorship Agreement (11)
10.16 Loan Agreement between the Company and FabTech Incorporated (12)
10.17 KaiHong Joint Venture Agreement between the Company and Mrs. J.H. Xing (12)
10.18 Quality Assurance Consulting Agreement between LPSC and Shanghai KaiHong Electronics Company, Ltd. (13)
10.19 Loan Agreement between the Company and Union Bank of California, N.A. (13)
10.20 First Amendment to Loan Agreement between the Company and Union Bank of California, N.A. (14)
10.21 Guaranty Agreement between the Company and Shanghai KaiHong Electronics Co., Ltd. (14)
10.22 Guaranty Agreement between the Company and Xing International, Inc. (14)
10.23 Fifth Amendment to Loan Agreement (15)
10.24 Term Loan B Facility Note (15)
10.25 Bank Guaranty for Shanghai KaiHong Electronics Co., LTD (16)
10.26 Consulting Agreement between the Company and J.Y. Xing (17)
10.27 Software License Agreement between the Company and Intelic Software Solutions, Inc. (18)
10.28 Diodes-Taiwan Relationship Agreement for FabTech Wafer Sales (19)
10.29 Separation Agreement between the Company and Michael A. Rosenberg (20)
10.30 Stock Purchase Agreement dated as of November 28, 2000, among Diodes Incorporated, FabTech, Inc. and Lite-On Power
Semiconductor Corporation (24)
10.31 Volume Purchase Agreement dated as of October 25, 2000, between FabTech, Inc. and Lite-On Power Semiconductor
Corporation (24)
10.32 Credit Agreement dated as of December 1, 2000, between Diodes Incorporated and Union Bank of California (24)
10.33 Subordination Agreement dated as of December 1, 2000, by Lite-On Power Semiconductor Corporation in favor of Union
Bank of California (24)
10.34 Subordinated Promissory Note in the principal amount of $13,549,000 made by FabTech, Inc. payable to Lite-On Power
Semiconductor Corporation (24)
10.35 Amended and Restated Subordinated Promissory Note between FabTech, Inc. and Lite-On Semiconductor Corp. (26)
10.36 Diodes Incorporated Building Lease - Third Amendment (29)
10.37 Document of Understanding between the Company and Microsemi Corporation (29)
10.38 Swap Agreement between the Company and Union Bank of California (30)
10.39 First Amendment and Waver between the Company and Union Bank of California (30)
10.40 Second Amendment and Waver between the Company and Union Bank of California (30)
10.41 Banking Agreement between Diodes-China and Everbright Bank of China (30)
10.42 Banking Agreement between Diodes-China and Agricultural Bank of China (30)
10.43 Banking Agreement between Diodes-Taiwan and Farmers Bank of China (30)
10.44 Audit Committee Charter (31)
10.45 2001 Omnibus Equity Incentive Plan (31)
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10.46 Sale and Leaseback Agreement between the Company and Shanghai Ding Hong Company, Ltd. (32)
10.47 Lease Agreement between the Company and Shanghai Ding Hong Company, Ltd. (32)
10.48 Third Amendment and Waiver to Union Bank Credit Agreement (33)
10.49 Revolving Credit Extension between the Company and Union Bank (34)
10.50 Amended and Restated Credit Agreement between the Company and Union Bank
10.51 $2.0 Million Non Revolving-To-Term Note between the Company and Union Bank
21 Subsidiaries of the Registrant
23.1 Consent of Independent Public Accountants
99.1 Certification Pursuant To 18 U.S.C. 1350 Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
99.2 Certification Pursuant To 18 U.S.C. 1350 Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
99.3 Diodes Incorporated Announces Launch of Comprehensive Line of Pre-biased Transistors
99.4 Diodes Incorporated Announces Conference Call, Updates Outlook for 2002 Year End and Q4 Financial Results
99.5 Diodes Incorporated Reports Fourth Quarter and Year-end 2002 Financial Results
99.6 Diodes Incorporated Introduces Line of Thyristor Surge Protective Devices
99.7 Diodes Incorporated Recognized as Supplier of the Year by Honeywell's System Sensor Division
(1) Previously filed as Exhibit 3 to Form 10-K filed with the Commission for
fiscal year ended April 30, 1981, which is hereby incorporated
by reference.
(2) Previously filed as Exhibit 3 to Form 10-K filed with the Commission
for fiscal year ended April 30, 1988, which is hereby incorporated
by reference.
(3) Previously filed with the Company's Form 8-K, filed with the Commission
on July 1, 1994, which is hereby incorporated by reference.
(4) Previously filed as Exhibit 10.4 to Form 10-KSB/A filed with the
Commission for fiscal year ended December 31, 1993, which is hereby
incorporated by reference.
(5) Previously filed with Company's Form 10-K, filed with the Commission on
March 31, 1995, which is hereby incorporated by reference.
(6) Previously filed as Exhibit 10.6 to Form 10-KSB filed with the Commission
on August 2, 1994, for the fiscal year ended December 31, 1993, which
is hereby incorporated by reference.
(7) Previously filed with Company's Form S-8, filed with the Commission
on May 9, 1994, which is hereby incorporated by reference.
(8) Previously filed with Company's Form 10-Q, filed with the Commission
on November 14, 1995, which is hereby incorporated by reference.
(9) Previously filed as Exhibit 10.2 to Form 10-Q/A, filed with the
Commission on October 27, 1995, which is hereby incorporated
by reference.
(10) Previously filed as Exhibit 10.3 to Form 10-Q/A, filed with the
Commission on October 27, 1995, which is hereby incorporated
by reference.
(11) Previously filed as Exhibit 10.4 to Form 10-Q, filed with the Commission
on July 27, 1995, which is hereby incorporated by reference.
(12) Previously filed with Company's Form 10-K, filed with the Commission on
April 1, 1996, which is hereby incorporated by reference.
(13) Previously filed with Company's Form 10-Q, filed with the Commission on
May 15, 1996, which is hereby incorporated by reference.
(14) Previously filed with Company's Form 10-K, filed with the Commission on
March 26, 1997, which is hereby incorporated by reference.
(15) Previously filed with Company's Form 10-Q, filed with the Commission on
May 11, 1998, which is hereby incorporated by reference.
(16) Previously filed with Company's Form 10-Q, filed with the Commission
on August 11, 1998, which is hereby incorporated by reference.
(17) Previously filed with Company's Form 10-Q, filed with the Commission
on November 11, 1998, which is hereby incorporated by reference.
(18) Previously filed with Company's Form 10-K, filed with the
Commission on March 26, 1999, which is hereby incorporated
by reference.
(19) Previously filed with Company's Form 10-Q, filed with the Commission
on August 10, 1999, which is hereby incorporated by reference.
(20) Previously filed with Company's Form 10-K, filed with the
Commission on March 28, 2000, which is hereby incorporated
by reference.
(21) Previously filed with Company's Form 10-Q, filed with the Commission
on May 10, 2000, which is hereby incorporated by reference.
65
(22) Previously filed with Company's Form 10-Q, filed with the
Commission on August 4, 2000, which is hereby incorporated by reference.
(23) Previously filed with Company's Form 10-Q, filed with the Commission
on November 13, 2000, which is hereby incorporated by reference.
(24) Previously filed with Company's Form 8-K, filed with the Commission
on December 14, 2000, which is hereby incorporated by reference.
(25) Previously filed with Company's Definitive Proxy Statement, filed
with the Commission on May 1, 2000, which is hereby incorporated
by reference.
(26) Previously filed with Company's Form 10-Q, filed with the Commission
on August 7, 2001, which is hereby incorporated by reference.
(27) Previously filed with Company's Form 10-K, filed with the
Commission on March 28, 2001, which is hereby incorporated by reference.
(28) Previously filed with Company's Form 10-Q, filed with the Commission
on May 11, 2001, which is hereby incorporated by reference.
(29) Previously filed with Company's Form 10-Q, filed with the Commission
on November 2, 2001, which is hereby incorporated by reference.
(30) Previously filed with Company's Form 10-K, filed with the Commission
on March 31, 2002, which is hereby incorporated by reference.
(31) Previously filed with Company's Definitive Proxy Statement, filed with
the Commission on April 27, 2001, which is hereby incorporated
by reference.
(32) Previously filed with Company's Form 10-Q, filed with the Commission
on May 15, 2002, which is hereby incorporated by reference.
(33) Previously filed with Company's Form 10-Q, filed with the Commission
on August 14, 2002, which is hereby incorporated by reference.
(34) Previously filed with Company's Form 10-Q, filed with the Commission
on November 14, 2002, which is hereby incorporated by reference.
* Constitute management contracts, or compensatory plans or arrangements,
which are required to be filed pursuant to Item 601 of Regulation S-K.
66