10-K 1 form10k02mainb.txt 2002 FORM 10-K 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) 64 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