Diodes
Annual Report 1998

Plain-text annual report

A C O M P A N Y B U I L T O N D I O D E S I N C O R P O R A T E D 1 9 9 8 A N N U A L R E P O R T DISCRETE SEMICONDUCTORS is our focus business. PRODUCTS include small signal transistors and MOSFETs, transient voltage suppressors (TVSs), zeners, Schottkys, diodes, rectifiers and bridges, available in popular axial and surface-mount packages. INDUSTRIES SERVED include automotive, consumer electronics, computing, and telecommunications. manufacture and distribution of products. Marketed under this brand identity, DIODES INC benefits from its worldwide name recognition. SALES & MARKETING accomplished through an ISO 9002 certified corporate logistics center in Southern California, MANUFACTURING FACILITIES located in China and Taiwan, five regional U.S. sales offices, a sales office in Taiwan, and are ISO 9000 & QS-9000 certified to ensure products of the via a team of manufacturers’ representatives. highest quality at competitive prices. DISTRIBUTION is further enhanced through an extensive STRATEGIC ALLIANCE with Vishay Lite-On Power network of major distributors. Semiconductor Pte., Ltd. (VLPSC), a joint venture between Vishay Intertechnology and the Lite-On Group for the A COMPANY BUILT ON SERVICE dedicated to providing our customers with reliable availability of high-quality products at competitive prices. S E L E C T E D F I N A N C I A L D A T A (IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31 1994 1995 1996 1997 1998 INCOME STATEMENT DATA NET SALES GROSS PROFIT SELLING, GENERAL & ADMINISTRATIVE EXPENSES INCOME FROM OPERATIONS INTEREST EXPENSE, NET MINORITY INTEREST IN JOINT VENTURE OTHER INCOME INCOME BEFORE TAXES PROVISION FOR INCOME TAXES NET INCOME EARNINGS PER SHARE: BASIC DILUTED $ 38,275 $ 58,190 $ 56,019 $ 65,699 $ 60,261 10,697 7,563 3,134 6 – 437 3,565 1,202 2,363 16,463 9,522 6,941 144 – 513 7,310 2,610 4,700 14,842 10,386 4,456 351 238 295 4,638 1,673 2,965 18,343 11,137 7,206 62 (15) 627 7,756 2,631 5,125 14,944 11,016 3,928 281 (14) 551 4,184 1,511 2,673 $ $ 0.50 0.46 $ $ 0.96 0.90 $ $ 0.60 0.55 $ $ 1.03 0.93 $ $ 0.53 0.50 NUMBER OF SHARES USED IN COMPUTATION: 1 BASIC DILUTED BALANCE SHEET DATA TOTAL ASSETS WORKING CAPITAL STOCKHOLDERS’ EQUITY $ 70 60 50 40 30 20 10 4,753 5,137 4,881 5,220 4,959 5,362 4,971 5,482 5,029 5,371 $ 17,545 $ 29,363 $ 32,546 $ 38,354 $ 45,389 9,411 10,770 13,263 16,499 17,403 19,464 18,699 24,453 16,639 27,460 NET SALES (in millions) EARNINGS PER SHARE (diluted) STOCKHOLDERS’ EQUITY (in millions) $ 1.00 .80 .60 .40 .20 $ 30 20 10 94 95 96 97 98 94 95 96 97 98 94 95 96 97 98 To ur Shareholders Nineteen ninety-eight was a difficult year for the semiconductor industry TO SERVICE OUR CUSTOMERS BETTER, DIODES INC HAS... as a whole, just as it was a challenging year for Diodes Incorporated. Net sales declined to $60.3 million from $65.7 million in 1997, and net ...Expanded Manufacturing in More Favorable Cost Locations income, after a $512,000, or $0.10 per share tax provision for a At our Diodes-China manufacturing facility, we have significantly planned earnings distribution from its Taiwan subsidiary, was $2.7 million, enhanced our manufacturing capacity of surface mount device (SMD) or $0.50 per diluted share, compared to $5.1 million, or $0.93 per diluted semiconductor packages, for which demand continues to be strong. share, in the prior year. Recent changes in Taiwan income tax policies caused management to reconsider its investment strategies in the fourth quarter of 1998 for current and future earnings at DIODES INC’S Taiwan subsidiary (Diodes- 2 Taiwan). While a portion of its investment will remain in Taiwan, a distribution of approximately $4.5 million will be made by Diodes-Taiwan to the Company in 1999. The decision was made, in part, because the changes in Taiwan income tax policies made it less favorable to These SMD semiconductors are widely used across a broad spectrum of high-density applications including: portable and hand-held computing devices, communication equipment, PCMCIA cards, compact entertainment systems, automotive electronic control systems such as anti-lock braking, and DC to DC converters. With the new high-capacity equipment and more sophisticated operating systems, combined with a plentiful labor supply, our cost of production of these high-density packages is now, we believe, among the lowest in the industry. accumulate earnings at Diodes-Taiwan and, in part, to allow the ...Strengthened Sales & Marketing Company to redirect its financial resources from Diodes-Taiwan to the expansion of its KaiHong joint venture in Shanghai, China (Diodes-China). In addition to enhancing the capacity and efficiency of our manufac- turing operations, in 1998 we reorganized and strengthened our sales Last year’s results reflected a persistent industry-wide pressure on and marketing efforts in both North America and Asia. prices that offset increases in the Company’s unit sales – most notably in Asia, where our growing customer base includes manufacturers of computer motherboards, modems, and disk drives. As part of this reorganization, Mark King, the Company’s Vice President of Sales since 1992, was promoted to the position of Vice President of Sales and Marketing. We also appointed new Regional Sales Managers Although difficult, 1998 nonetheless marked the 9th consecutive year in the Northwest and Southeast United States, and we added sales and – and the 35th consecutive quarter – in which the Company has been support personnel at Diodes-Taiwan. profitable. We finished the year with $2.4 million in cash, $16.6 million in working capital, $6.0 million in long-term debt, and shareholders’ equity of $27.5 million – in addition to $14 million in an unused credit facility. This is one of the strongest balance sheets in DIODES INC’S history, and it provides the Company with a solid basis for growth. In 1998 we also continued to enhance our uniform brand identity, first announced in late 1997, under which the Company’s discrete semiconductor products are increasingly being marketed under the brand name Vishay/Lite-On Power Semiconductor. This brand name is a benefit DIODES INC receives from its affiliation with Vishay With the increase in computer and communication product demand, Intertechnology (Vishay) and the Lite-On Group. there seems to be a resumption of growth in the Asian market, although the pressure on pricing is still prevalent. A similar pattern is occurring in the North American market. DIODES INC’S management continues to position the Company for increased market share and participation in this future growth pattern and enhanced profitability. Another significant benefit from the affiliation with Vishay was the broadening of our distribution network to include major distributors such as Arrow, Future, Kent, Marshall and TTI, to complement our already strong channel. DIODES INC Customer Base 1998 OEM Sales Telecom 14% Automotive 11% Industrial 9% Consumer 16% Computer 31% Raymond Soong Chairman of the Board Michael A. Rosenberg President and Chief Executive Officer ...Enhanced Information Technology ON-TIME DELIVERY In a further boost to efficiency and improved customer support, we have begun efforts to install a new information technology (IT) software system to streamline and consolidate on a real-time basis the operations of Diodes-Taiwan and Diodes-China with our headquarters in The Company’s IT enhancements will facilitate further efficiencies in inventory control through its warehouses and distribution network and will help ensure immediate product availability and on- time delivery to satisfy built-to-order trends in the industry. Southern California. This new IT system will insure that all facilities are DEPENDABLE CUSTOMER SUPPORT linked together to improve our management of sales, manufacturing and A team of sales and marketing professionals supported by applications inventory control. We have also modified portions of our software to ensure that the Company’s computer systems used in managing inventory, financial and design engineers – dedicated to improving the match between DIODES INC’S products and our customers’ requirements – is providing a level of customer service that is a major key to our continued success. 3 data, and various internal operations – as well as those used in man- LOOKING AHEAD ufacturing and engineering – continue to function properly with respect Although the near-term outlook for selling prices remains to dates in the year 2000 (Y2K) and thereafter. The Company is also in uncertain, it seems clear that semiconductor sales will continue to be touch with its business partners to ensure that third-party operations driven by a strong demand for laptops, portable telephones, and other continue to be reliable with regard to Y2K issues. The total cost of the computer and communications devices. Y2K project has been expensed as incurred and was not considered to be a material expense. ...Focused on Growth through Service We have long felt that in putting our customers first we best With our expanded manufacturing, sales and marketing capabilities and the resources of Vishay/LPSC at our disposal, today we are in a better position than ever to assure our customers timely delivery of top-quality products at truly competitive prices. serve the interests of the Company and its shareholders, and the As ever, we thank you, our shareholders, for your continued management of DIODES INC believes that the following four major commitment to the Company’s success. We also thank our components will make your Company a world-class service company in customers and distributors for their continued patronage, and our the semiconductor industry: COMPETITIVE PRICES employees for their dedicated hard work. With state-of-the-art manufacturing equipment and access to a large labor pool, our expanded Diodes-China facility now has, we believe, among the lowest cost structures, thereby enabling us to assure our Sincerely, customers of consistently competitive prices. TOP QUALITY PRODUCTS At Diodes-China, Diodes-Taiwan and Vishay/LPSC, all of which meet ISO 9000 and/or QS-9000 standards, a staff of quality assurance engi- neers (backed by the Company’s testing laboratory at its Southern California ISO 9000 certified headquarters) continuously monitors production to ensure that products perform to customers’ specifications. Raymond Soong Michael A. Rosenberg Chairman of the Board President and Chief Executive Officer S E R V I C E M E A N S . . . D I O D E S I N C I S A C O M PA N Y B U I LT O N P R O V I D I N G S E R V I C E T O O U R C U S T O M E R S . T O T H AT E N D , W E P R O V I D E O U R C U S T O M E R S W I T H C O N S I S T E N T LY C O M P E T I T I V E P R I C E S . O N E WAY W E A R E A B L E T O AC H I E V E T H I S I S B Y M A N U FAC T U R I N G P R O D U C T S AT O U R S TAT E - O F - T H E - A R T Q S - 9 0 0 0 C E R T I F I E D FAC I L I T I E S I N T H E FA R E A S T : D I O D E S - C H I N A A N D D I O D E S - TA I WA N , A S W E L L A S AT O U R A F F I L I AT E D V L P S C FAC T O R I E S . A C O M P A N Y B U I L T O N S E R V I C E . . . teams from our corporate headquarters continually review the manufacturing methods as part of an ongoing commitment to delivering quality products to our customers. Our Diodes-Taiwan subsidiary manufactures such products as axial Schottkys and MELF rectifiers for use primarily in the auto- motive industry and for commercial applications. An integral part 5 of our sales force, Diodes-Taiwan’s sales office has received high As a result of our continuing commitment to our Diodes-China ratings from our customers in Asia. manufacturing facility, this QS-9000 and ISO 9002 certified facility is uniquely equipped with cutting-edge technology and produces In addition to our manufacturing facilities, we represent Vishay Lite-On Power Semiconductor (VLPSC) with its technological and some of the highest quality, most reliable products on the market. As industry trends to portable and hand-held devices continue, manufacturing capabilities. our customers require higher circuit density to provide increased Using the latest equipment, the VLPSC Shanghai, China manu- functionality at reduced sizes. Equipped to respond to the facturing facility produces new generation high-speed bridges product demand, this facility is supplying higher density and rectifiers, and supplements our wafer fabrication. surface mount device (SMD) packages, including SOT-23, SOD-123, SOD-323, SOT-323, SOT-363, and more, for applications such as cellular phones, notebook computers, pagers, PCMCIA cards, modems, and garage door transmitters. The VLPSC Keelung, Taiwan facility manufactures surface mount devices, such as SMA, SMB, and SMC; high-powered packages, including TO-220 and TO-3P; and other glass-passivated products, such as super-fast recovery and Schottky rectifiers. In addition, Using the latest technology, our production is rapid and precise. VLPSC Keelung provides special first-tier customer products and To achieve and maintain consistent product quality, well-trained wafer fabrication. technicians at Diodes-China use high-performance equipment for reliability testing and other operations. Quality assurance With a commitment to service, we provide our customers a broad line of high-quality discrete semiconductor devices that are paramount to their product development and business success. At DIODES INC, we believe that true quality requires a total quality 6 system, and that is what we have achieved. With rigorous quality standards and testing capabilities, we design and build quality into our products and into our entire product development and manufacturing process. For our total quality systems, we have been awarded the Quality assurance engineers in California and the Far East audit ISO 9002 certification at our DIODES INC headquarters and the our production facilities regularly to make sure that we produce QS-9000 certifications at our manufacturing facilities. These consistent components in volume that meet our quality certifications reflect and endorse the superior quality-control standards and our customers’ specifications. Well-trained techniques that we have established at DIODES INC. Based on technicians at our corporate headquarters employ state-of-the-art the premise that true product quality requires a total quality test equipment to further check and analyze our products before system, ISO certification is often required of vendors seeking to they reach our customers. establish relationships with OEM customers doing business in intensely competitive global markets. We find that our certification further enhances our credibility as a vendor-of-choice to customers increasingly concerned with quality and consistency. S E R V I C E M E A N S . . . AT D I O D E S I N C , Q U A L I T Y I S I N T R I N S I C T O T H E S E R V I C E W E P R O V I D E A N D I S T H E K E Y I N G R E D I E N T O U R C U S T O M E R S H AV E C O M E T O E X P E C T. Q U A L I T Y I S D E S I G N E D A N D B U I LT I N T O O U R D E V I C E S , W H I L E P R O D U C T I N T E G R I T Y I S C O N T R O L L E D B Y I N - P R O C E S S Q U A L I T Y A S S U R A N C E A N D P E R I O D I C A U D I T S P E R O U R I S O - 9 0 0 0 A N D Q S - 9 0 0 0 R E G I S T E R E D Q U A L I T Y S Y S T E M S . S E R V I C E M E A N S . . . I N T O D AY ’ S C O M P E T I T I V E G L O B A L M A R K E T P L AC E , O U R C U S T O M E R S R E Q U I R E P R O D U C T S A N D S E R V I C E S T H AT A L L O W T H E M T O B E “ F I R S T - T O - M A R K E T ” . AT D I O D E S I N C , W E H AV E T H E I N V E N T O R Y A N D P R O D U C T AVA I L A B I L I T Y F O R Q U I C K T U R N A R O U N D S O N P R O D U C T O R D E R S A N D S A M P L E S . I N A D D I - T I O N , W E U S E T H E L AT E S T I N F O R M AT I O N T E C H N O L O G I E S T O L I N K O U R O R G A N I Z AT I O N S F O R R E A L - T I M E C O M M U N I C AT I O N S A N D R E S P O N S I V E N E S S . In the semiconductor industry, time-to-market issues are critical to our customers’ success. Universally, product cycle times are decreasing. Recently, it took years to develop products to market; now it is months from product conception to completion. Because we firmly believe that our success depends on our 9 customers’ success, providing products and services that allow our customers to be “first-to-market” is a priority. At DIODES INC, Our Internet, fax-back, e-mail, and video-conferencing capabilities we have the inventory and product availability to provide our allow information to flow in real time between our corporate customers with quick turnarounds on product orders and samples. headquarters and our manufacturing plants. We span language To enhance our ability to be responsive, we have set up commu- nication systems that provide easy information-exchange and collaboration across geographic distances and time zones. and cultural differences to communicate with more people in less time at reduced rates, enabling us to conduct business efficiently and effectively in our global environment. Our websites at www.diodes.com and www.vishay-liteon.com are designed to give our current and prospective customers and our investors quick and easy access to the critical information they require. Whether it is to download product data sheets, contact a sales representative or distributor, or view our stock quotes and press releases, solutions are a click or two away. 10 market research and product development strategies, design engineers build in quality up front and applications engineers promote effective product applications, providing a platform of integrity and creating a level of trust on which our current and prospective customers can rely far into the future. Our sales and marketing team, along with more than two dozen manufacturers’ representatives, reaches approximately 300 OEMs At DIODES INC, we attend to our customers’ needs and anticipate that in 1998 accounted for approximately 54% of net sales. their opportunities to provide them with better solutions. DIODES INC further supplies approximately 30 stocking Through innovative marketing strategies and advanced and distributors who collectively reach approximately 10,000 sophisticated logistics, we assist our customers in advancing additional customers. DIODES INC estimates that it currently their technologies. Our dedicated team of applications engineers supplies approximately 5% of the North American discrete provides ongoing technical support to our customers and helps semiconductor market. We face the future with a sense of confidence, ready to meet the challenges of the global marketplace. Our priorities are clear, to focus on service and to remain profitable and strong. them in the proper application of our products to their particular circuit needs. Using high-tech equipment with its video-capture capabilities, our engineers do rapid onsite product evaluations and validations, and convey their findings to our manufacturing facilities overseas and our customers worldwide for real-time communications. Our infrastructure is designed to deliver the superior service our customers have come to expect and deserve. Through focused S E R V I C E M E A N S . . . T H R O U G H M A R K E T R E S E A R C H A N D P R O D U C T D E V E L O P M E N T, A S W E L L A S C L O S E C U S T O M E R C O N TA C T, D I O D E S I N C C O N T I N U E S T O P R O V I D E O U R C U S T O M E R S W I T H A D VA N C E D D E S I G N S O L U T I O N S . N E V E R B E F O R E I N T H E F O R T Y - Y E A R H I S T O R Y O F D I O D E S I N C H AV E W E AC H I E V E D T H E L E V E L O F E L E VAT E D C H A N N E L D I S T R I B U T I O N T H AT W E H AV E T O D AY. T H R O U G H I N N O VAT I V E M A R K E T I N G S T R AT E G I E S A N D A D VA N C E D A N D S O P H I S T I C AT E D L O G I S T I C S , W E W O R K W I T H W O R L D - C L A S S D I S T R I B U T O R S T O A S S I S T O U R C U S T O M E R S I N A D VA N C I N G T H E I R T E C H N O L O G I E S . Financial Review D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Statement of Income Consolidated Balance Sheets Consolidated Statement of Stockholders’ Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors 14 -18 19 20 21 22 23-29 30 D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion & Analysis M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S Except for the historical information contained herein, the matters addressed herein constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed below under the heading “Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation Reform Act of 1995” and elsewhere in this 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. G E N E R A L Diodes Incorporated (the “Company”) is a provider of high-quality discrete semiconductor devices to leading manufacturers in the automotive, elec- tronics, computing and telecommunications industries. The Company’s products include small signal transistors and MOSFETs, transient voltage suppressors (TVSs), zeners, Schottkys, diodes, rectifiers and bridges. The Company’s products are sold primarily in North America and Asia, both directly to end-users and through electronic component distributors. In 1998, approximately 72% and 28% of the Company’s products were sold in North America and the Far East, respectively, compared to 75% and 25% in 1997, respectively. The increase in the percentage of sales in the Far East to total sales is expected to continue as the Company believes there is greater potential to increase market share in that region. 14 For financial reporting purposes, the Company is deemed to engage in three industry segments: North America, Taiwan, and China. All three segments focus on discrete semiconductor devices. The North American segment procures and distributes products primarily throughout North America and pro- vides management, warehousing and engineering support to the other two segments. The Taiwan segment procures product from, and manufactures and distributes product primarily to, companies in Taiwan, Korea, Singapore, and Hong Kong. This segment also procures product for, and manufactures and distributes product to the Company’s North American operations. The China segment manufactures product for, and distributes product to, both the North American and Taiwan segments. In 1997, the China segment began manufacturing product for, and distributing product to, customers in China, the U.S. and Europe. See Note 11 of “Notes to Consolidated Financial Statements” for a description of the Company’s adoption of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. 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”), the Company’s largest shareholder and a member of the Lite-On Group of the Republic of China. Vishay, with worldwide sales exceeding $1.5 billion, is the largest U.S. and European manufacturer of passive electronic components and a major producer of discrete semiconductors, and power integrated circuits. The Lite-On Group, with worldwide sales of almost $2 billion, is a leading manufacturer of power semiconductors, computer peripherals, and communication products. The Vishay/LPSC joint venture includes the worldwide discrete power semiconductor business of LPSC and the Asian passive component business of Vishay. Vishay holds a 65% controlling interest in the joint venture, and the Lite-On Group holds the other 35%. Products are sold under several brand names such as Diodes, Lite-On, ITT and most recently, Vishay/Lite-On Power Semiconductor. The Company is unifying product lines under a limited number of brand names in order to establish brand name unity and consistency of product, and to capitalize on brand name recognition, where possible. The Company’s Far East subsidiaries, Diodes-Taiwan and Diodes-China, both manufacture product for sale to North America and the Far East. Diodes- Taiwan manufacturing focuses on products such as axial Schottky and MELF rectifiers, to name a few. These “general use” products are destined for end products in the automotive industry as well as for use in commercial appliances, household lighting, and electric hand tools, among others. Diodes-China manufacturing, for the most part, focuses on SOT-23 and SOD-123 products. These surface mount devices (“SMD”) are used in the com- puter and telecommunication industries and are 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. The discrete semiconductor industry has, for the last few years, been subject to severe pricing pressures compounded by the Asian economic situation. Although manufacturing costs have been falling, excess manufacturing capacity and over-inventory has caused selling prices to fall at a greater extent D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion & Analysis (continued) than manufacturing cost. Because of this competitive environment, gross profit margins have declined from 27.9 % in 1997 to 24.8% in 1998. To compete in this highly competitive industry, in recent years, the Company has committed substantial resources to the development and implementation of two areas of operation: (i) sales and marketing, and (ii) manufacturing. Emphasizing the Company’s focus on customer service, additional personnel and programs have been added. In order to meet customers’ needs at the design stage of end-product development, the Company has employed addi- tional applications engineers. These applications engineers work directly with customers to assist them in “designing in” the correct products to produce optimum results. Regional sales managers, working closely with manufacturers’ representative firms and distributors, have also been added in the U.S. and the Far East to help satisfy customers’ requirements. In addition, the Company has developed relationships with major distributors who inventory and sell the Company’s products. The relationship with Vishay has provided additional opportunities for the Company to have its products offered by some of the world’s largest distributors. In 1998, the Company increased the amount of product shipped to larger distributors. Although these sales were significant in terms of total sales dollars and gross margin dollars, they generally were under agreements that resulted in lower gross profit margins for the Company when compared to sales to smaller distributors and OEM customers. As the consolidation of electronic component distributors continues, the Company anticipates that a greater portion of its distributor sales will be to the larger distributors, and thus may result in lower gross profit margins. Since 1997, the Company’s manufacturing focus has primarily been in the development and expansion of Diodes-China. To date, the Company has invested over $14 million in the manufacturing facility, which supplies product for sale primarily in North America and the Far East. The equipment expansion allows for the manufacture of additional SOT-23 packaged components as well as other surface-mount packaging, including the smaller SOD packages. Approximately $8.0 million of the Company’s existing credit facility has been used to finance the additional manufacturing capacity. The Company will continue its strategic plan of locating alternate sources of its products, including those provided by its major suppliers. Alternate sources include, but are not limited to, Diodes-China and other sourcing agreements in place, as well as those in negotiations. The Company antici- pates that the effect of the loss of any one of its major suppliers will not have a material adverse effect on the Company’s operations, provided that alternate sources remain available. The Company continually evaluates alternative sources of its products to assure its ability to deliver high-quality, cost-effective products. 15 Products from foreign suppliers are purchased primarily in United States dollars. To a limited extent, and from time to time, the Company contracts in foreign currencies (e.g., a portion of the equipment purchases for the Diodes-China expansion), 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 com- plexities of currency hedges, the Company has not engaged in hedging to date. If the volume of contracts written in foreign currencies increases, and the Company does not engage in currency hedging, any substantial increase in the value of such currencies could have a material adverse effect on the Company’s results of operations. Management believes that the current contracts written in foreign currencies are not significant enough to justify the costs inherent in currency hedging. The Company’s effective tax rate increased to 36.1% in 1998 from 33.9% in 1997. Changes in Taiwan income tax policies in 1998 caused management to reconsider its investment strategies in the fourth quarter of 1998 for current and future earnings at Diodes-Taiwan, resulting in a distribution of approximately $4.5 million made by Diodes-Taiwan to the Company in 1999. The decision was made, in part, because the changes in Taiwan income tax policies made it less favorable to accumulate earnings at Diodes-Taiwan and, in part, to allow the Company to redirect its financial resources from Diodes-Taiwan to its expansion of the Diodes-China joint venture. See “Results of Operations - 1998 Compared to 1997” for a more detailed explanation. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue (“Y2K”) and has developed an implementation plan to resolve the issue. Y2K is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company’s programs that have time-sensitive software may recognize a date using “00” as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems for Y2K compliance. Confirmation has been received from the Company’s primary pro- cessing vendors and major customers that plans are being developed to address processing of transactions in the year 2000. The total cost of Y2K compliance was not considered a material expense. All internal critical systems have been tested and the Company believes that, with its modifications to existing software and its upgrades to Y2K compliant software, Y2K will not pose significant operational problems for the Company’s computer systems. However, if (i) problems surface that have not yet been identified that will require substantial time and resources to remedy, or (ii) such modifications and upgrades are not completed timely by the Company’s business partners, they could have a material adverse effect on the Company’s business. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion & Analysis (continued) R E S U L T S O F O P E R A T I O N S 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 YEAR ENDED DECEMBER 31, PERCENTAGE DOLLAR INCREASE (DECREASE) YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998 ‘94 TO ‘95 ‘95 TO ‘96 ‘96 TO ‘97 ‘97 TO ‘98 NET SALES COST OF GOODS SOLD GROSS PROFIT OPERATING EXPENSES INCOME FROM OPERATIONS INTEREST EXPENSE, NET OTHER INCOME INCOME BEFORE TAXES INCOME TAXES 16 NET INCOME 100.0% (72.1) 27.9 (19.8) 8.2 (0.0) 1.1 9.3 3.1 6.2 100.0% (71.7) 28.3 (16.4) 11.9 (0.2) 0.9 12.6 4.5 8.1 100.0% (73.5) 26.5 (18.5) 8.0 (0.6) 0.9 8.3 3.0 5.3 100.0% (72.1) 27.9 (16.9) 11.0 (0.1) 0.9 11.8 4.0 7.8 100.0% (75.2) 24.8 (18.3) 6.5 (0.5) 0.9 6.9 2.5 4.4 52.0% (3.7)% 17.3% (8.3)% 51.3 53.9 25.9 121.5 2,300.0 17.6 105.1 117.1 99.0 (1.3) (9.8) 9.1 (35.8) 143.8 3.9 (36.6) (35.9) (36.9) 15.0 23.6 7.2 61.7 (4.3) (18.5) (1.1) (45.5) (82.3) 353.2 14.8 67.2 57.3 72.8 (12.1) (46.1) (42.6) (47.8) 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. 1 9 9 8 C O M P A R E D T O 1 9 9 7 Net sales for 1998 compared to 1997 decreased $5,438,000, or approximately 8.3%. The decrease in net sales was due primarily to industry-wide pricing pressures that offset increased unit sales of approximately 3.3%. The increase in unit sales is comprised of an increase in unit sales in the Far East of approximately 36.9%, offset by a decrease of approximately 3.8% in North America. Also contributing to lower sales in 1998 was the loss of approximately $3.0 million in supplier-specific business due to the previously announced acquisition of a major supplier by a competitor. The Company anticipates that a portion of this supplier-specific business will be recovered as the Diodes-China manufacturing facility develops additional product types. The decrease in gross profit for 1998 compared to 1997 of $3,399,000, or approximately 18.5%, was due primarily to the 8.3% decrease in net sales. Pricing pressures within the industry resulting from decreased demand and excess on-hand inventory contributed to a decrease in gross margin percentage to 24.8% in 1998 from 27.9% in 1997. Average selling prices in 1998 decreased approximately 11.6%, which represents decreases in average selling prices in the Far East and North America of approximately 24.5% and 9.0%, respectively, compared to 1997. In addition, as the consolidation of electronic component distributors continues, the Company anticipates that a greater portion of its distributor sales will be to larger distributors, usually under agreements resulting in lower gross profit margins. For 1998, selling, general and administrative expenses (“SG&A”) decreased $121,000, or approximately 1.1%, compared to 1997. The decrease in SG&A was due primarily to a decrease in sales commissions due to the 8.3% decrease in net sales, partly offset by an increase in wages due to additional sales, engineering and customer service personnel. SG&A for 1998, as a percentage of net sales, increased to 18.3% from 16.9% for 1997, primarily due to the 8.3% decease in net sales. Net interest expense for 1998 compared to 1997 increased $219,000, or approximately 353.2%, due primarily to an increased use of the Company’s credit facility. The Company’s interest expense is primarily the result of the term loan by which the Company is financing (i) the investment in the Diodes-China manufacturing facility and (ii) the $3.0 million, including accrued interest, advanced to FabTech. Interest income is primarily the interest charged to FabTech, a related party, under the Company’s formal loan agreement, as well as earnings on its cash balances. In 1998, the Diodes-China joint venture contributed to the Company’s profitability and, therefore, the $14,000 minority interest in joint venture repre- sents the minority investor’s 5% share of the joint ventures’ profit. During the fourth quarter of 1997, through an arrangement in accordance with the original joint venture agreement, the Company increased its controlling interest in Diodes-China from 70% to 95% through the purchase of an additional 25% from the minority investor. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion & Analysis (continued) Commissions and other income decreased $76,000, or approximately 12.1%, from 1997 to 1998. This decrease was primarily due to a decrease in cur- rency exchange gains at Diodes-Taiwan of $167,000, or approximately 55.7%. Partly offsetting the decrease in currency exchange gains was an increase in sales commission income of $74,000, or approximately 19.2%, earned by Diodes-Taiwan on drop shipments in the Far East. The Company’s overall effective federal, state, and foreign tax rate increased to 36.1% in 1998 from 33.9% in 1997. Through December 31, 1997, the Company had undistributed earnings at Diodes-Taiwan for which no deferred income tax liability had been recorded since, at that time, management considered this investment to be permanent, and no plans or intentions existed to distribute the capital of its Taiwan subsidiary. Changes in Taiwan income tax policies in 1998 caused management to reconsider its investment strategies in the fourth quarter of 1998 for current and future earnings at Diodes-Taiwan. While a portion of its investment will permanently remain in Taiwan, a distribution of approximately $4.5 million will be made by Diodes-Taiwan to the Company in 1999. The decision was made, in part, because the changes in Taiwan income tax policies made it less favorable to accumulate earnings at Diodes-Taiwan and, in part, to allow the Company to redirect its financial resources from Diodes-Taiwan to its expansion of the Diodes-China joint venture. Accordingly, deferred income tax liabilities amounting to $512,000 have been recorded. Income tax rates vary among the U.S., Taiwan, and China, therefore, income tax expense may fluctuate depending upon the separate profitability of the three business segments. Tax rates vary from 0% at Diodes-China for the next three years, to rates between 25-35% at Diodes-Taiwan, to 41% in the U.S. For 1998, the Company generated net income of $2,673,000 (or $0.53 basic earnings per share, $0.50 diluted earnings per share), as compared to $5,125,000 (or $1.03 basic earnings per share, $0.93 diluted earnings per share) for 1997. This 47.8% decrease is due primarily to the 8.3% sales decrease at gross profit margins of 24.8% compared to gross profit margins of 27.9% in 1997 as well as to the tax effect of the Diodes-Taiwan earnings distribution. 1 9 9 7 C O M P A R E D T O 1 9 9 6 The increase in net sales in 1997 compared to 1996 of $9,680,000, or approximately 17.3%, was due primarily to an increase in customer demand mainly in Asian markets resulting in an increase in the number of units shipped. Throughout most of 1996, the industry experienced a substantial decrease in demand, combined with excess inventory among the Company’s customers, which negatively affected the Company’s net sales and gross profit margins in 1996. The Company’s business in 1997 was not materially affected by the widespread weakness in Asian currencies. Gross profit in 1997 increased $3,501,000, or approximately 23.6%, compared to 1996, primarily due to the 17.3% increase in net sales, as well as from an increase of approximately $600,000 in gross profit contribution from the Diodes-China joint venture. Gross profit margin increased to 27.9% in 1997 compared to 26.5% in 1996. The Company’s SG&A for the year ended 1997 increased $751,000, or approximately 7.2%, compared to 1996, primarily due to sales commissions on the $9,680,000 increase in sales, as well as to additional customer applications engineers and quality assurance personnel at its U.S. headquarters, providing customers and vendors improved service. Fourth quarter 1996 results include a one-time charge of $660,000 for pre-operating costs associated with Diodes-China. These costs had been capitalized during start-up phases through the joint venture’s first six months of operations, and were fully amortized upon commencement of full-scale operations in the fourth quarter. SG&A for 1997, as a percentage of net sales, decreased to 16.9% from 18.5% for 1996, primarily due to the 17.3% increase in net sales. For 1997, net interest expense decreased $289,000, or approximately 82.3%, compared to 1996, primarily due to debt reduction as well as interest earned on higher cash balances. The Company’s interest expense is primarily the result of the term loan by which the Company is financing (i) the investment in the Diodes-China manufacturing facility and (ii) the $3.0 million (including accrued interest) advance to FabTech. Interest income is primarily the interest charged to FabTech, a related party, under the Company’s loan agreement, as well as earnings on its cash balances. In 1997, the Diodes-China joint venture contributed to the Company’s profitability and, therefore, the $15,000 minority interest in joint venture repre- sents the minority investor’s 5% share of the joint venture’s profit. During the fourth quarter of 1997, through an arrangement in accordance with the original joint venture agreement, the Company increased its controlling interest in Diodes-China from 70% to 95% through the purchase of an additional 25% from the minority investor. Commissions and other income increased $332,000, or approximately 112.5%, from 1996 to 1997. This increase was primarily due to an increase in currency exchange gains at Diodes-Taiwan of $280,000, as well as to an increase in sales commission income of $153,000 or approximately 66.1%, earned by Diodes-Taiwan on drop shipments in the Far East. The Company’s overall effective federal, state, and foreign tax rate decreased to 33.9% in 1997 from 36.1% in 1996. Due to tax rates that vary from 0% at Diodes-China for the next three years to rates between 25% and 41% between the Far East and the U.S., effective tax rates may fluctuate greatly, depending upon the profit contribution of the Company’s U.S. and Far East operations. 17 D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Management’s Discussion and Analysis (continued) For 1997, the Company generated net income of $5,125,000 (or $1.03 basic earnings per share, $0.93 diluted earnings per share), as compared to $2,965,000 (or $0.60 basic earnings per share, $0.55 diluted earnings per share) for 1996. This 72.8% increase is due primarily to the 17.3% sales increase at gross profit margins of 27.9% compared to gross profit margins of 26.5% in 1996. F I N A N C I A L C O N D I T I O N L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S Cash provided by operating activities in 1998 was $5.5 million compared to $4.0 million in 1997 and $3.6 million in 1996. The primary sources of cash flows from operating activities in 1998 were net income of $2.7 million and a decrease in accounts receivable of $1.8 million. The primary use of cash flows from operating activities in 1998 was a decrease in accounts payable of $1.3 million. In 1997, the primary sources of cash flows from operating activities were net income of $5.1 million and an increase in accounts payable of $966,000, while the primary use was a $3.0 million increase in accounts receivable. In 1996, the primary sources of cash flows from operating activities were net income of $3.0 million and a decrease in inventories of $3.0 million, while the primary use was a $1.5 million decrease in accounts payable. Due to the slowdown in the semiconductor industry, the Company is directing its efforts into reducing inventory levels, while still providing the service and delivery that customers demand. The Company continues to closely monitor its credit policy, while at times, providing more flexible terms, primarily to its Asian customers, when necessary. The ratio of the Company’s current assets to current liabilities on December 31, 1998 was 2.6 to 1, compared to a ratio of 2.8 to 1 and 3.2 to 1 as of December 31, 1997 and 1996, respectively. 18 Cash used by investing activities was $9.4 million in 1998, compared to $3.5 million in 1997 and $3.3 million in 1996. The primary investment in 1998 was for additional manufacturing equipment at the Diodes-China manufacturing facility. Cash provided by financing activities was $3.9 million in 1998, compared to $77,000 in 1997 and $1.0 million in 1996. In March 1998, the Company amended an August 1996 loan agreement whereby the Company obtained a $23.1 million credit facility with a major bank consisting of a working capital line of credit up to $9 million and term commitment notes providing up to $14 million for plant expansion, advances to vendors, and letters of credit for Diodes-China. Interest on outstanding borrowings under the credit agreement is payable monthly at LIBOR plus a negotiated margin. Fixed borrowings require fixed principal plus interest payments for sixty months thereafter. The agreement has certain covenants and restrictions, which, among other matters, require the maintenance of certain financial ratios and operating results, as defined in the agreement. The Company was in compliance as of December 31, 1998. The working capital line of credit expires June 30, 2000 and contains a sublimit of $3.0 million for issuance of commercial and stand-by letters of credit. During 1998, average and maximum borrowings outstanding on the line of credit were $920,000 and $4,098,000, respectively. As of December 31, 1998, approximately $8.0 million is outstanding under the term note commitment, and the weighted average interest rate on outstanding borrowings was approximately 8.0%. The Company uses its credit facility primarily to fund the advances to Diodes-China and FabTech as well as to support its operations. At December 31, 1998, amounts due from FabTech, including accrued interest, are approximately $3.0 million, and the entire amount is due February 2001. The Company believes that the continued availability of this credit facility, together with internally generated funds, will be sufficient to meet the Company’s currently foreseeable operating cash requirements. In July 1998, the Company replaced two previously filed guarantees to Shanghai Kaihong Electronics Co., Ltd. and the minority investor of the Diodes- China joint venture for $1.0 million and $850,000, respectively, as well as a $1.0 million letter of credit, with a $3.0 million guaranty. The Company reserves the right, at any time or from time to time, on one month’s prior written notice to the bank, to reduce the maximum amount guaranteed hereunder or to terminate this guaranty provided, however, that the Company shall in any event remain liable as guarantor for all obligations of the borrower outstanding at the effective date of any such notice to the bank. Total working capital decreased approximately 11.0% to $16.6 million as of December 31, 1998, from $18.7 million as of December 31, 1997. The Company believes that such working capital position will be sufficient for growth opportunities. The Company’s debt to equity ratio increased to 0.63 at December 31, 1998, from 0.56 at December 31, 1997. It is anticipated that this ratio may increase as the Company continues to use its credit facilities to fund additional sourcing opportunities. As of December 31, 1998, the Company has no material plans or commitments for capital expenditures other than as previously announced in connection with the expansion at Diodes-China. However, to ensure that the Company can secure reliable and cost-effective sourcing to support and better position itself for growth, the Company is continuously evaluating additional sources of products. The Company believes its 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. Inflation did not have a material effect on net sales or net income in fiscal years 1996, 1997, or 1998. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Consolidated Statement of Income YEARS ENDED DECEMBER 31, 1996 1997 1998 NET SALES COST OF GOODS SOLD GROSS PROFIT $ 56,019,000 $ 65,699,000 $ 60,261,000 41,177,000 47,356,000 45,317,000 14,842,000 18,343,000 14,944,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,386,000 11,137,000 11,016,000 INCOME FROM OPERATIONS 4,456,000 7,206,000 3,928,000 OTHER INCOME (EXPENSES) INTEREST INCOME INTEREST EXPENSE MINORITY INTEREST IN EARNINGS OF JOINT VENTURE COMMISSIONS AND OTHER 187,000 343,000 304,000 (538,000) (405,000) (585,000) 238,000 295,000 (15,000) 627,000 (14,000) 551,000 19 INCOME BEFORE INCOME TAXES 4,638,000 7,756,000 4,184,000 INCOME TAX PROVISION NET INCOME EARNINGS PER SHARE BASIC DILUTED NUMBER OF SHARES USED IN COMPUTATION BASIC DILUTED (1,673,000) (2,631,000) (1,511,000) $ 2,965,000 $ 5,125,000 $ 2,673,000 $ 0.60 $ 0.55 $ $ 1.03 0.93 $ $ 0.53 0.50 4,958,658 4,970,705 5,029,064 5,362,027 5,481,680 5,370,952 The accompanying notes are an integral part of these financial statements. Consolidated Balance Sheets DECEMBER 31, ASSETS CURRENT ASSETS CASH ACCOUNTS RECEIVABLE CUSTOMERS RELATED PARTY OTHER ALLOWANCE FOR DOUBTFUL ACCOUNTS INVENTORIES DEFERRED INCOME TAXES PREPAID EXPENSES AND OTHER TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUIPMENT, NET 20 ADVANCES TO RELATED PARTY VENDOR OTHER ASSETS TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES DUE TO BANK ACCOUNTS PAYABLE TRADE RELATED PARTY ACCRUED LIABILITIES INCOME TAXES PAYABLE CURRENT PORTION OF LONG-TERM DEBT TOTAL CURRENT LIABILITIES DEFERRED COMPENSATION DEFERRED INCOME TAXES LONG-TERM DEBT, NET OF CURRENT PORTION MINORITY INTEREST IN JOINT VENTURE STOCKHOLDERS’ EQUITY CLASS A CONVERTIBLE PREFERRED STOCK - D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S 1997 1998 $ 2,325,000 $ 2,415,000 10,342,000 213,000 916,000 9,107,000 125,000 496,000 11,471,000 9,728,000 74,000 110,000 11,397,000 9,618,000 13,525,000 1,096,000 806,000 13,777,000 1,098,000 448,000 29,149,000 27,356,000 5,165,000 13,750,000 2,821,000 1,219,000 3,024,000 1,259,000 $ 38,354,000 $ 45,389,000 $ 1,000,000 $ 812,000 4,567,000 952,000 1,988,000 912,000 1,031,000 2,991,000 1,213,000 3,421,000 169,000 2,111,000 10,450,000 10,717,000 – – 3,226,000 225,000 56,000 521,000 5,991,000 644,000 PAR VALUE $1 PER SHARE; 1,000,000 SHARES AUTHORIZED; NO SHARES ISSUED – – COMMON STOCK - PAR VALUE $.66 2/3 PER SHARE; 9,000,000 SHARES AUTHORIZED; 5,764,352 SHARES IN 1998 AND 5,701,019 SHARES IN 1997 ISSUED AND OUTSTANDING ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS LESS: TREASURY STOCK - 717,115 SHARES OF COMMON STOCK, AT COST TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY The accompanying notes are an integral part of these financial statements. 3,801,000 5,813,000 16,621,000 26,235,000 1,782,000 3,843,000 6,105,000 19,294,000 29,242,000 1,782,000 24,453,000 27,460,000 $ 38,354,000 $ 45,389,000 D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Consolidated Statement of Stockholders’ Equity YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 COMMON STOCK SHARES IN TREASURY SHARES ADDITIONAL AMOUNT PAID-IN CAPITAL RETAINED EARNINGS COMMON STOCK IN TREASURY BALANCE, DECEMBER 31, 1995 EXERCISE OF STOCK OPTIONS NET INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 BALANCE, DECEMBER 31, 1996 5,675,619 717,115 $ 3,784,000 $ 5,768,000 $ 8,729,000 $ 1,782,000 175 – – – – – – – – 2,965,000 – – 5,675,794 717,115 $ 3,784,000 $ 5,768,000 $ 11,694,000 $ 1,782,000 21 INCREASE IN OWNERSHIP OF SUBSIDIARY JOINT VENTURE – EXERCISE OF STOCK OPTIONS 25,225 NET INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 – – – – – – (198,000) 17,000 45,000 – – – 5,125,000 – – – BALANCE, DECEMBER 31, 1997 EXERCISE OF STOCK OPTIONS INCLUDING $78,000 INCOME TAX BENEFIT NET INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 BALANCE, DECEMBER 31, 1998 5,701,019 717,115 $ 3,801,000 $ 5,813,000 $ 16,621,000 $ 1,782,000 63,333 – – – 42,000 292,000 – – – 2,673,000 – – 5,764,352 717,115 $ 3,843,000 $ 6,105,000 $ 19,294,000 $ 1,782,000 The accompanying notes are an integral part of these financial statements. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Consolidated Statement of Cash Flows YEARS ENDED DECEMBER 31, 1996 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION MINORITY INTEREST EARNINGS LOSS (GAIN) ON SALE OF PROPERTY, PLANT AND EQUIPMENT INTEREST INCOME ACCRUED ON ADVANCES TO VENDOR CHANGES IN OPERATING ASSETS AND LIABILITIES ACCOUNTS RECEIVABLE INVENTORIES PREPAID EXPENSES AND OTHER ASSETS DEFERRED INCOME TAXES ACCOUNTS PAYABLE ACCRUED LIABILITIES INCOME TAXES PAYABLE $ 2,965,000 $ 5,125,000 $ 2,673,000 656,000 (238,000) (41,000) (131,000) (332,000) 3,027,000 (18,000) (533,000) (1,522,000) 148,000 (414,000) 1,004,000 15,000 (3,000) (190,000) (3,021,000) (257,000) (572,000) 330,000 966,000 (114,000) 689,000 1,168,000 14,000 53,000 (203,000) 1,779,000 (252,000) 278,000 519,000 (1,315,000) 1,480,000 (665,000) 22 NET CASH PROVIDED BY OPERATING ACTIVITIES 3,567,000 3,972,000 5,529,000 CASH FLOWS FROM INVESTING ACTIVITIES INVESTMENT IN JOINT VENTURE AND ADVANCES TO VENDORS MINORITY INTEREST OF JOINT VENTURE INVESTMENT PURCHASE OF PROPERTY, PLANT AND EQUIPMENT PROCEEDS FROM SALES OF PROPERTY, PLANT AND EQUIPMENT (2,631,000) 1,200,000 (1,848,000) 10,000 (2,050,000) – (1,495,000) 1,000 – 405,000 (9,793,000) 27,000 NET CASH USED BY INVESTING ACTIVITIES (3,269,000) (3,544,000) (9,361,000) CASH FLOWS FROM FINANCING ACTIVITIES ADVANCES (REPAYMENTS) ON LINE OF CREDIT, NET NET PROCEEDS FROM THE ISSUANCE OF CAPITAL STOCK PROCEEDS FROM LONG-TERM DEBT REPAYMENTS OF LONG-TERM DEBT (3,916,000) – 5,000,000 (40,000) 1,000,000 62,000 – (985,000) (188,000) 256,000 10,388,000 (6,534,000) NET CASH PROVIDED BY FINANCING ACTIVITIES 1,044,000 77,000 3,922,000 INCREASE IN CASH CASH, BEGINNING OF YEAR CASH, END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: INTEREST INCOME TAXES NON-CASH FINANCING ACTIVITY: TAX BENEFIT RELATED TO EXERCISE OF STOCK OPTIONS CREDITED 1,342,000 505,000 90,000 478,000 1,820,000 2,325,000 $ 1,820,000 $ 2,325,000 $ 2,415,000 $ 575,000 $ 2,597,000 $ 405,000 $ 1,908,000 $ 584,000 $ 1,658,000 TO PAID-IN CAPITAL $ – $ – $ 78,000 The accompanying notes are an integral part of these financial statements. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes To Consolidated Financial Statements N O T E 1 - S U M M A R Y O F O P E R A T I O N S A N D S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Nature of operations - Diodes Incorporated and its subsidiaries manufacture and distribute discrete semiconductor devices to manufacturers in the automotive, electronics, computing and telecommunications industries. The Company’s products include small signal transistors and MOSFETs, transient voltage suppressers (TVSs), zeners, Schottkys, diodes, rectifiers and bridges. The products are sold primarily throughout North America and Asia. Principles of consolidation - The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, DII Taiwan Corporation, Ltd., and its majority owned subsidiary Shanghai KaiHong Electronics Co., Ltd. (both foreign subsidiaries, Notes 10 and 11). All significant intercompany balances and transactions have been eliminated. Revenue recognition - Revenue is recognized when the product is shipped. Inventories - Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out basis. Depreciation and amortization - Property, plant and equipment are depreciated using straight-line and accelerated methods over the estimated useful lives, which range from 20 to 53 years for buildings and 1 to 10 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over 1 to 5 years. Income taxes - Income taxes are accounted for using an asset and liability approach whereby deferred tax assets and liabilities are recorded for the differences in the financial reporting bases and tax bases of the Company’s assets and liabilities. Income taxes are further explained in Note 7. 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. 23 The Company and its subsidiaries maintain 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. Accounts at each institution in Taiwan are insured by the Central Deposit Insurance Company up to NT$1,000,000 (approximately US$30,000 as of December 31, 1998). Foreign operations - Through its subsidiaries, the Company maintains operations in Taiwan and China for which the functional currency is the U.S. dollar. Assets and liabilities of its foreign operations which are denominated in currency other than the U.S. dollar are not hedged and therefore are subject to fluctuations in the currency exchange rate between the U.S. dollar and foreign currencies (NT dollar and Renminbi Yuan). Monetary assets and liabilities denominated in foreign currencies are translated at the year-end exchange rate. Non-monetary assets and liabilities are converted at historical rates. Income and expense accounts are translated using an average exchange rate for the year, except that cost of goods sold and depreciation expense are remeasured using historical rates. Included in net income are net monetary exchange and translation gains of approximately $21,000, $300,000 and $133,000 for the years ended December 31, 1996, 1997, and 1998, respectively. 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. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standard No. 128 Earnings Per Share (SFAS No. 128) effective for years ending after December 15, 1997. Earnings per share in the accompanying financial statements are calculated in accordance with SFAS No. 128. Earnings per share for 1996 and 1997, including 1997 unaudited quarterly data in Note 14, have been restated to reflect earnings per share calculated in accordance with SFAS No. 128. SFAS No. 128 requires basic earnings per share be calculated based on weighted average shares outstanding for the period without giving effect to outstanding common stock equivalents while diluted earnings per share considers the effect of common stock equivalents on weighted average shares outstanding. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-based compensation - The Company has elected not to adopt SFAS 123, Accounting for Stock-Based Compensation and continues to apply APB Opinion No. 25 (APB 25) and related Interpretations in accounting for its option plans. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under APB 25, compensation cost is the excess, if any, of the quoted market price of the stock at the measurement date over the amount that must be paid to acquire the stock. The new standard allows the Company to continue to account for stock-based compensation under APB 25, with disclo- sure of the effects of the new standard. The proforma effect on income as if the Company had adopted SFAS 123 is disclosed in Note 8. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes (continued) New Accounting Pronouncements – During 1998, the Financial Accounting Standards Board issued Statements of Financial Accounting Standard No. 132 (“Disclosures about Pensions and other Postretirement Benefits”), No. 133 (“Accounting for Derivative Instruments and Hedging Activities”) and No. 134 (“Accounting for Mortgage-Backed Securities”) which are effective for years after 1998. Management believes these pronouncements will not have a material effect on the Company’s financial statements or disclosures. N O T E 2 - I N V E N T O R I E S FINISHED GOODS WORK-IN-PROGRESS RAW MATERIALS N O T E 3 - P R O P E R T Y , P L A N T A N D E Q U I P M E N T BUILDING LEASEHOLD IMPROVEMENTS MACHINERY AND EQUIPMENT 24 LESS ACCUMULATED DEPRECIATION AND AMORTIZATION LAND 1997 1998 $ 11,920,000 370,000 1,235,000 $ 12,968,000 259,000 550,000 $ 13,525,000 $ 13,777,000 1997 1998 $ 893,000 198,000 6,393,000 $ 1,238,000 224,000 15,289,000 7,484,000 16,751,000 (2,642,000) (3,324,000) 4,842,000 323,000 13,427,000 323,000 $ 5,165,000 $ 13,750,000 N O T E 4 - B A N K C R E D I T A G R E E M E N T A N D L O N G - T E R M D E B T The Company has a $23.1 million credit agreement with a major bank providing a working capital line of credit up to $9 million, term commitment notes providing up to $10 million for plant expansion and advances to vendors, and letters of credit of $4.1 million for KaiHong operations. Interest on outstanding borrowings under the complete credit agreement is payable monthly at LIBOR plus a negotiated margin. Fixed borrowings require fixed principal plus interest payments for sixty months thereafter. The agreement has certain covenants and restrictions which, among other matters requires the maintenance of certain financial ratios and operating results, as defined in the agreement. The Company was in compliance with the covenants as of December 31, 1998. The working capital line of credit expires June 30, 2000. The line contains a sublimit of $3 million for issuance of commercial and stand-by letters of credit. During 1998, average and maximum borrowings outstanding on the line of credit were $920,000 and $4,098,000, respectively. The weighted average interest rate on outstanding borrowings was 8% for the year ended December 31, 1998. Long-term debt as of December 31 is comprised of the following: LOAN PAYABLE TO BANK SECURED BY BUILDINGS AND LAND, MONTHLY PRINCIPAL PAYMENTS OF NT$84,000 (APPROXIMATELY $3,000 U.S.) PLUS INTEREST AT 7% PER ANNUM THROUGH NOVEMBER 2003 LOANS PAYABLE TO BANK SECURED BY SUBSTANTIALLY ALL ASSETS, DUE IN AGGREGATE MONTHLY PRINCIPAL PAYMENTS OF $173,000 PLUS INTEREST AT LIBOR PLUS 1.1% THROUGH DECEMBER 31, 2003 CURRENT PORTION 1997 1998 $ 174,000 $ 144,000 4,083,000 7,958,000 4,257,000 1,031,000 8,102,000 2,111,000 $ 3,226,000 $ 5,991,000 Notes (continued) The aggregate maturities of long-term debt for future years ending December 31 are: N O T E 5 - A C C R U E D L I A B I L I T I E S EMPLOYEE COMPENSATION AND PAYROLL TAXES SALES COMMISSIONS REFUNDS TO PRODUCT DISTRIBUTORS OTHER D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S 1999 2000 2001 2002 2003 $ 2,111,000 2,111,000 2,111,000 1,194,000 575,000 $ 8,102,000 1997 1998 $ 894,000 303,000 – 791,000 $ 780,000 313,000 424,000 1,904,000 $ 1,988,000 $ 3,421,000 N O T E 6 - V A L U A T I O N O F F I N A N C I A L I N S T R U M E N T S Statement of Financial Accounting Standard No. 107 “Disclosures About Fair Value of Financial Instruments” (SFAS 107) requires disclosure of the fair market value of financial instruments for which it is practicable to estimate fair value. The Company’s financial instruments include cash, accounts receiv- able, accounts payable, working capital line of credit, and long term debt. The Company considers the carrying amounts of all financial instruments to approximate fair value. 25 N O T E 7 - I N C O M E T A X E S The components of the income tax provisions are as follows: CURRENT TAX PROVISION (BENEFIT) FEDERAL FOREIGN STATE DEFERRED TAX PROVISION (BENEFIT) 1996 1997 1998 $ 982,000 678,000 322,000 $ 1,268,000 1,252,000 330,000 $ (82,000) 1,089,000 (15,000) 1,982,000 (309,000) 2,850,000 (219,000) 992,000 519,000 $ 1,673,000 $ 2,631,000 $ 1,511,000 A reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 1996, 1997 and 1998 are as follows: 1996 1997 1998 AMOUNT PERCENT OF PRETAX EARNINGS AMOUNT PERCENT OF PRETAX EARNINGS AMOUNT PERCENT OF PRETAX EARNINGS FEDERAL TAX AT 34% STATE FRANCHISE TAX, NET OF FEDERAL BENEFIT FOREIGN INCOME TAXED AT LOWER RATES OTHER $ 1,577,000 34.0% $ 2,637,000 34.0% $ 1,422,000 284,000 (257,000) 69,000 6.1 (5.5) 1.5 453,000 (428,000) (31,000) 5.8 (5.5) (.4) 242,000 (145,000) (8,000) INCOME TAX PROVISION $ 1,673,000 36.1% $ 2,631,000 33.9% $ 1,511,000 34.0% 5.8 (3.5) (.2) 36.1% D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes (continued) At December 31, 1997 and 1998, the Company’s deferred tax assets and liabilities are comprised of the following items: DEFERRED TAX ASSETS INVENTORY COST ACCRUED EXPENSES AND ACCOUNTS RECEIVABLE STATE INCOME TAXES AND OTHER DEFERRED TAX LIABILTIES UNDISTRIBUTED FOREIGN EARNINGS 1997 1998 $ 692,000 225,000 179,000 $ 769,000 83,000 246,000 $ 1,096,000 $ 1,098,000 $ – $ 521,000 Under Federal tax law, foreign earnings are taxed when funds are distributed by foreign subsidiaries to the parent Company. A temporary difference between financial and tax reporting exists for profits earned at the foreign subsidiary level not distributed to the parent. A deferred tax liability of $521,000 is reflected in the balance sheet for a dividend of approximately $4.5 million expected to be issued from the Taiwanese subsidiary to the parent Company in 1999. The Company has not established a deferred tax liability for the remaining undistributed earnings of this subsidiary of approximately $5 million since the Company views this amount as a permanent investment and has no current plans, intentions or obligation to distribute all or part of that amount from Taiwan to the United States. 26 The R.O.C. taxing authorities assessed the Company’s Taiwanese subsidiary approximately $370,000 in 1997 related to an examination of tax returns through 1995. This assessment pertained specifically to a tax on excessive accumulated earnings through 1995. The earnings accumulated in 1996 through 1998 in excess of amounts distributed to the parent company may be subjected to tax assessments should the subsidiary’s accumulated earnings in relation to permanent capital, at the time of the examination, fail to comply with the statutory level required by the taxing authorities in the R.O.C. N O T E 8 - S T O C K O P T I O N P L A N S The Company has stock option plans for directors, officers, and employees, which provide for nonqualified 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. At December 31, 1998, options for 769,512 shares were vested and exercisable and 1,369,951 shares were available for future grants under the plans. Balance, December 31, 1995 Granted Exercised Canceled Balance, December 31, 1996 Exercised Canceled Balance, December 31, 1997 Granted Exercised Canceled OUTSTANDING OPTIONS PRICE PER SHARE NUMBER RANGE 431,567 605,000 (175) (10,000) 1,026,392 (25,225) (10,000) 991,167 400,000 (63,333) (46,667) $ .875-11.25 6.00 2.63 6.00 .875-11.25 1.88-6.00 6.00 .875-11.25 5.00-10.00 1.88-6.00 6.00 WEIGHTED AVERAGE $ 3.84 6.00 2.63 6.00 5.09 2.43 6.00 5.15 7.51 4.05 6.00 Balance, December 31, 1998 1,281,167 $.875-11.25 $ 5.15 The Company also has an incentive bonus plan which reserves shares of stock for issuance to key employees. As of December 31, 1998, 124,000 shares remain available for issuance under this plan. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes (continued) Had compensation cost for the Company’s 1996, 1997 and 1998 options granted been determined consistent with SFAS 123, the Company’s net income and diluted earnings per share would approximate the proforma amounts below: 1996 NET INCOME DILUTED EARNINGS PER SHARE 1997 NET INCOME DILUTED EARNINGS PER SHARE 1998 NET INCOME DILUTED EARNINGS PER SHARE N O T E 9 - M A J O R S U P P L I E R S AS REPORTED PRO FORMA $ 2,965,000 $ 2,318,000 $ .55 $ .43 $ 5,125,000 $ 4,478,000 $ .93 $ .82 $ 2,673,000 $ 1,719,000 $ .50 $ .32 The Company purchases a significant amount of its inventory from two suppliers, one of which is a related party (Note 10). During 1996, 1997, and 1998, purchases from these suppliers amounted to approximately 59%, 49%, and 43%, respectively, of total inventory purchases including 28%, 32% and 25%, respectively, from the related party. There are a limited number of suppliers for these materials. N O T E 1 0 - R E L A T E D P A R T Y T R A N S A C T I O N S Lite-On Power 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”), the Company’s 41% shareholder and a member of the Lite-On Group of the Republic of China. The Vishay/LPSC joint venture includes the worldwide discrete power semiconductor business of LPSC and the Asian passive component business of Vishay. Vishay holds a 65% controlling interest in the joint venture, and the Lite-On Group holds the remaining 35%. The Company’s subsidiaries buy product from and sell product to Vishay/LPSC. Transactions with Vishay/LPSC and LPSC for the years ended December 31 and outstanding balances as of December 31 are as follows: 27 NET SALES PURCHASES ACCOUNTS RECEIVABLE ACCOUNTS PAYABLE 1996 1997 1998 $ 1,895,000 $ 2,224,000 $ 905,000 $ 10,403,000 $ 15,630,000 $ 12,320,000 $ $ 376,000 2,250,000 $ $ 213,000 952,000 $ $ 126,000 902,000 Shanghai KaiHong Electronics, Co. Ltd. - The Company owns 95% of the outstanding capital stock of Shanghai KaiHong Electronics Co., Ltd. (KaiHong) an entity located in Shanghai, China which produces diodes and transistors, primarily for sale to the Company. During 1997, the Company increased its ownership from 70% to 95% in a cash transaction with the minority shareholder of KaiHong. The excess of the purchase price over the book value was approximately $1,100,000. KaiHong purchases some of its inventory from two companies owned by the 5% minority interest holder of Shanghai KaiHong Electronics, Co. Ltd. As of December 31, 1998 approximately $346,000 was payable to the minority interest holder and these two suppliers. FabTech Incorporated - Under a compensation-trade agreement the Company has advanced $2.5 million in cash and equipment to a related party vendor, FabTech Incorporated, a wholly owned subsidiary of Vishay/LPSC. Interest accrues monthly at the Company’s borrowing rate with total accrued interest of $524,000 as of December 31, 1998. Amounts advanced, including interest, are payable beginning February 1999 through February 2001 when any out- standing balances become due on demand. The compensation-trade agreement allows the Company to recover interest and principal due by deducting a fixed amount per unit for product purchased from the vendor. D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes (continued) N O T E 1 1 - S E G M E N T I N F O R M A T I O N Information about the Company’s operations in the United States, Taiwan, and China are presented below. Items transferred among the Company and its subsidiaries are transferred at prices to recover costs plus an appropriate mark up for profit. Inter-company revenues, profits and assets have been eliminated to arrive at the consolidated amounts. The Company adopted Statement of Financial Accounting Standard No. 131 (SFAS No. 131), Disclosures about Segments of an Enterprise and Related Information, in 1998. Operating segments are defined as components 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, Chief Financial Officer, and Vice President of Far East Operations. The operating segments are managed separately because each operating segment represents a strategic business unit whose function and purpose differs from the other segments. The Company’s reportable operating segments include Diodes Incorporated, located in the United States; DII Taiwan Corporation, Ltd., located in Taiwan, and Shanghai KaiHong Electronics Co., Ltd. located in China. Diodes Incorporated markets discrete semiconductor devices to manufacturers in North America. DII Taiwan Corporation, Ltd. manufactures discrete semiconductor devices and markets and sells discrete semiconductor devices throughout Asia and to Diodes Incorporated. Shanghai KaiHong Electronics Co., Ltd. manufacturers discrete semiconductor devices primarily for sale to Diodes Incorporated. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates per- formance based on stand-alone operating segment income. Revenues are attributed to geographic areas based on the location of the market producing the revenues. 28 1998 TOTAL SALES INTERSEGMENT SALES NET SALES DEPRECIATION AND AMORTIZATION INTEREST EXPENSE INCOME TAX PROVISION NET INCOME (LOSS) SEGMENT ASSETS EXPENDITURES FOR PROPERTY 1997 TOTAL SALES INTERSEGMENT SALES NET SALES DEPRECIATION AND AMORTIZATION INTEREST EXPENSE INCOME TAX PROVISION NET INCOME SEGMENT ASSETS EXPENDITURES FOR PROPERTY 1996 TOTAL SALES INTERSEGMENT SALES NET SALES DEPRECIATION AND AMORTIZATION INTEREST EXPENSE INCOME TAX PROVISION NET INCOME (LOSS) SEGMENT ASSETS EXPENDITURES FOR PROPERTY SHANGHAI KAIHONG ELECTRONICS (CHINA) DII TAIWAN CORPORATION LTD. (TAIWAN) DIODES INCORPORATED (UNITED STATES) CONSOLIDATED SEGMENTS $ $ 3,773,000 (3,493,000) $ 27,029,000 (10,423,000) $ 45,600,000 (2,225,000) $ 76,402,000 (16,141,000) 280,000 $ 16,606,000 $ 43,375,000 $ 60,261,000 799,000 $ 62,000 $ – $ $ 273,000 $ 13,880,000 9,647,000 $ 50,000 $ 11,000 $ 912,000 $ $ 2,786,000 $ 10,315,000 11,000 $ 319,000 $ 512,000 $ 599,000 $ $ (386,000) $ 21,194,000 135,000 $ 1,168,000 $ 585,000 $ 1,511,000 $ $ 2,673,000 $ 45,389,000 9,793,000 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 5,129,000 (4,850,000) $ 28,804,000 (12,715,000) $ 50,493,000 (1,162,000) $ 84,426,000 (18,727,000) 279,000 $ 16,089,000 $ 49,331,000 $ 65,699,000 589,000 66,000 – 290,000 6,925,000 1,117,000 $ $ $ $ $ $ 64,000 18,000 1,252,000 2,659,000 7,157,000 18,000 351,000 $ 321,000 $ 1,379,000 $ $ 2,176,000 $ 24,272,000 360,000 $ 1,004,000 $ 405,000 $ 2,631,000 $ $ 5,125,000 $ 38,354,000 1,495,000 $ 1,502,000 (1,502,000) $ 19,961,000 (11,863,000) $ 48,876,000 (955,000) $ 70,339,000 (14,320,000) – 311,000 17,000 – (555,000) 3,998,000 1,504,000 $ $ $ $ $ $ $ 8,098,000 $ 47,921,000 $ 56,019,000 63,000 18,000 655,000 1,785,000 4,625,000 139,000 282,000 $ 503,000 $ 1,018,000 $ $ 1,735,000 $ 23,923,000 205,000 $ 656,000 $ 538,000 $ 1,673,000 $ $ 2,965,000 $ 32,546,000 1,848,000 $ D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Notes (continued) N O T E 1 2 - C O M M I T M E N T S The Company leases its main office and warehouse under an operating lease agreement which expires in December 2001. The Company may at its option, extend the lease for a five year term upon termination. Rent expense amounted to approximately $148,000, $162,000, and $269,000, for the years ended December 31, 1996, 1997 and 1998, respectively. Future minimum lease payments under non-cancelable operating leases for years ending December 31 are: 1999 2000 2001 $ 323,000 307,000 259,000 $ 889,000 N O T E 1 3 - E M P L O Y E E B E N E F I T P L A N The Company maintains a 401(k) profit sharing plan (the Plan) for the benefit of qualified employees. Employees who participate may elect to make salary deferral contributions to the Plan up to 6% of the employees’ eligible payroll. The Company makes a contribution of $1 for every $2 contributed by the participant. 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, 1996, 1997, and 1998, the Company contributed approximately $120,000, $110,000, and $161,000, respectively, to the Plan. N O T E 1 4 - S E L E C T E D Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D ) 29 Fiscal 1998 Net Sales Gross profit Net Income Basic earnings per share Diluted earnings per share Fiscal 1997 Net Sales Gross profit Net Income Basic earnings per share Diluted earnings per share Quarter Ended March 31 June 30 Sept. 30 Dec. 31 $ 16,804,000 $ 14,333,000 $ 14,646,000 $ 14,478,000 4,392,000 1,186,000 .24 .22 3,606,000 521,000 .10 .10 3,614,000 554,000 .11 .11 3,332,000 412,000 .08 .08 $ 16,490,000 $ 15,541,000 $ 16,939,000 $ 16,729,000 4,701,000 1,184,000 .24 .22 4,687,000 1,229,000 .25 .23 4,422,000 1,341,000 .27 .24 4,533,000 1,371,000 .28 .25 D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S Independent Auditors’ Report B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S Diodes Incorporated and Subsidiaries We have audited the accompanying consolidated balance sheet of Diodes Incorporated and Subsidiaries as of December 31, 1998 and 1997 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, 1998. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial state- ments based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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. 30 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, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the years in the three year period ended December 31, 1998, in conformity with generally accepted accounting principles. MOSS ADAMS LLP MOSS ADAMS LLP Los Angeles, California January 15, 1999 D I O D E S I N C O R P O R A T E D A N D S U B S I D I A R I E S COMPANY PREFERRED AND COMMON STOCK DIRECTORS AND OFFICERS The number of authorized Preferred Stock is 1,000,000 shares of which no shares were issued and outstanding on March 19, 1999. The number of authorized Common Stock is 9,000,000 shares of which 5,764,352 shares, including 717,115 treasury shares, were issued and outstanding on March 19, 1999. The Company’s Common Stock is listed and traded on the American Stock Exchange under the symbol “DIO”. The following table shows the range of high and low sales prices per share for the Company’s Common Stock for each quarter of the fiscal years ended December 31, 1998 and December 31, 1997. Raymond Soong Chairman of the Board, Diodes, Inc. Chairman of the Board, Silitek Corporation Michael A. Rosenberg 1 President and Chief Executive Officer, Diodes, Inc. Independent Consultant, Vishay Intertechnology, Inc. Director Eugene R. Conahan 1 Vice President, Sales, Vishay Intertechnology, Inc. Director FYE December 31, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter FYE December 31, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High $ 11 1/2 10 3/16 7 1/8 6 1/2 Low $ 8 1/4 6 5/8 4 4 High $ 9 1/8 10 3/4 13 15/16 16 3/4 Low $ 6 3/4 7 3/4 8 3/4 6 3/4 On March 19, 1999, there were approximately 1,000 registered holders of record of the Company’s Common Stock. The Company has not paid dividends on its Common Stock. Form 10-K A copy of the Company’s Form 10-K, as filed with the Securities and Exchange Commission is available upon request to: Investor Relations Silverman Heller Associates 1100 Glendon Avenue, Suite 1801 Los Angeles, California 90024 (310) 208-2550 or via eMail to diodes-fin@diodes.com a i n r o f i l a C , s k a O d n a s u o h T , y n a p m o C & y t l u N c M y b d e n g i s e D Michael R. Giordano 1,2,3 Senior Vice President, Paine Webber, Inc. Director David Lin President, Silitek Corporation Director M.K. Lu Group Vice President, Lite-On Group Chief Executive Officer, Actron Technology Corp. Director Dr. Shing Mao 1,2,3 Chairman of the Board, Lite-On, Inc. Director Erich E. Schaedlich Senior Vice President, Worldwide Sales, Vishay Europe GmbH Director Dr. Leonard M. Silverman 1,2,3 Dean of Engineering, USC Director William J. Spires 2 Vice President and Secretary, Vishay Intertechnology, Inc. Director Joseph Liu Vice President, Far East Operations, Diodes, Inc. President, Vishay/Lite-On Power Semiconductor Pte., Ltd. Carl Wertz Chief Financial Officer, Secretary and Treasurer, Diodes, Inc. 1 - Member, Executive Committee 2 - Member, Compensation & Stock Options Committee 3 - Member, Audit Committee Subsidiaries Diodes-Taiwan Diodes Incorporated Taiwan Company, Ltd. 2 Fl. 501-15 Chung-Cheng Road Hsin-Tien City, Taipei, Taiwan Diodes-China Shanghai KaiHong Electronics Co., Ltd. No. 61 Xinnan Street Xingqiao Town, Songjiang County Shanghai, China Independent Accountants Moss Adams LLP Los Angeles, California Transfer Agent and Registrar Continental Stock Transfer and Trust Company New York, New York Legal Council Sheppard, Mullin, Richter & Hampton Los Angeles, California Financial Information Online World Wide Web users can access Company infor- mation on the DIODES INC home page, located at www.diodes.com DIODES INC Corporate Headquarters Los Angeles, California, U.S.A. Diodes-China Sales & Manufacturing Facility Shanghai, China Diodes-Taiwan Sales & Manufacturing Facility Taipei, Taiwan Vishay/LPSC Sales & Manufacturing Facility Keelung, Taiwan DIODES INCORPORATED 3050 East Hillcrest Drive Westlake Village, CA 91362-3154 (805) 446-4800 phone (805) 446-4850 fax www.diodes.com www.vishay-liteon.com 

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