Diodes
Annual Report 2000

Plain-text annual report

QUALITY PARTS Discrete Semiconductors MAKE Successful Solutions t r o p e R l a u n n A 0 0 0 2 d e t a r o p r o c n I s e d o i D FINANCIAL HIGHLIGHTS (in thousands except per share data) Net sales Gross profit Selling, general and administrative expenses Income from operations Interest expense, net Other income Income before taxes and minority interest Provision for income taxes Minority interest in joint venture earnings Net income Earnings per share: Basic Diluted 1999 2000 change $ 79,251 20,948 $118,462 37,427 +49.5% +78.7% 13,670 7,278 292 182 18,955 18,472 940 501 +38.7% +153.8% +221.9% +175.3% 7,168 (1,380) 18,033 (2,496) +151.6% +80.9% (219) 5,569 (642) 14,895 193.2% +167.5% $ $ 0.73 0.68 $ 1.85 1.62 $ +153.4% +138.2% Number of shares used in computation: Basic Diluted 7,625 8,204 8,071 9,222 +5.8% +12.4% 1999 2000 change Total assets Working capital Long-term debt Stockholders’ equity $ 62,407 $ 112,950 17,291 30,857 51,253 15,903 6,984 34,973 +80.9% +8.7% +341.8% +46.6% Diodes Incorporated (Nasdaq: DIOD) is a leading manufacturer and supplier of high-quality discrete semiconduc- tor products, serving the communications, computer, electronics and automotive markets. The Company operates two Far East subsidiaries, Diodes-China (QS-9000, ISO 9000 & ISO-14001 certified) in Shanghai and Diodes-Taiwan (ISO-9000 certified) in Taipei. Diodes-China's manufacturing focus is on surface-mount devices destined for wireless devices, notebook computers, pagers, PCMCIA cards and modems, among others. Diodes- Taiwan is our Asia-Pacific sales, logistics and distribution center. The Company's newly acquired 5” wafer foundry, FabTech (QS-9000 certified) located in Missouri, specializes in Schottky products. The Company’s ISO-9000 corporate sales, marketing, engineering and logistics headquarters is located in Southern California. Visit the Company’s website at www.diodes.com. Outlook To become a vertically integrated manufacturer and supplier of discrete semiconductors at the forefront of next-generation discrete technology, focused on providing solutions for emerging electronics products. Diodes Incorporated 2000 Annual Report 1 $118.5 $79.3 $67.0 $61.3 $57.7 1996 1997 1998 1999 2000 (CAGR) since 1996. (in millions) Net Sales have increased an average of 19.7% $1.62 $.62 $.68 $.37 $.33 1996 1997 1998 1999 2000 138.2% over last year. (diluted, adjusted for a three-for-two stock split in July 2000) Earnings Per Share set records by increasing $51.3 $35.0 $27.5 $24.5 $19.5 1996 1997 1998 1999 2000 increasing 46.6% from last year. (in millions) Stockholders’ Equity reached new highs, 2 Diodes Incorporated 2000 Annual Report to our shareholders The year 2000 was another year of record performance for Diodes Incorporated. Not only did we achieve record financial results, but we also made significant strides toward securing the foundation for our Company’s future success in the marketplace. At Diodes, Inc., we are committed to meeting the needs and exceeding the expectations of our customer base, achieving consistent manufacturing excellence and deploying our resources to generate the greatest value for the owners of this company, our share- holders. We would like to take this opportunity to share some of the year’s highlights with you. In 2000, revenues increased 50% to $118.5 million, as compared to $79.3 million in 1999. Net income increased by 168% to $14.9 million, or $1.62 per share, as compared to $5.6 million, or $0.68 per share last year. The fourth quarter of 2000 was our 43rd consecutively profitable quarter, an outstanding record in the semiconductor industry. Just as important, our Return on Equity (ROE) was 29.1% and Return on Assets (ROA) was 13.2%. Both of these ratios, which measure the effectiveness with which the Company deployed its resources to earn returns for our shareholders, are near the top range for our industry. One key to our record of profitability and product quality has been our investment of nearly $40 million in the expansion of our manufacturing facilities in Mainland China. We are justifiably proud of the industry certifications awarded our Diodes-China facilities for quality and environmental standards. In 2000, Diodes-China produced close to 2 billion units and is expected to achieve capacity of over 3 billion units by the end of this year. Contrast this with 21 million units produced in 1996 and you can see just how far we have progressed. Building up more manufacturing capacity than we sell allows us to rapidly respond to the demands of the marketplace and adjust our product mix accordingly. This in turn positively impacts our all-important gross margins, which have increased from 25.1% in 1998 to 31.6% for 2000. The acquisition of FabTech in December of 2000 will allow Diodes, Inc. to become a vertically integrated semiconductor supplier, the logical next step in building our company. By covering the full range of marketing, manufacturing and product development, we are now able to position Diodes, Inc. as a total solution provider in the discrete semiconductor industry. FabTech’s wafer foundry will provide us with communication • computer • electronic • automotive KEY MARKETS Diodes Incorporated 2000 Annual Report 3 the manufacturing base to establish a world-class Research and Development team charged with the task of developing innovative, higher-margin semiconductor products. This drive into proprietary new product lines is a multi-year initiative that will make a significant contribution toward establishing Diodes, Inc. at the forefront of next-generation discrete technology. In June of last year, we were pleased to announce that our stock would commence trading on the NASDAQ stock market. NASDAQ offers us an opportunity to align Diodes, Inc. with some of the world’s most innovative technology companies. In listing on NASDAQ, and in instituting the three-for-two stock split that accompanied the move, we demonstrated our continuing commitment to enhancing value and liquidity for you, our shareholders. We are also gratified that Diodes, Inc. was lauded by influential voices within the business community. We are honored that Forbes Magazine named us as one of the “200 Best Small Companies in the U.S.” for 2000 in their annual list. We view this as further validation of our long-term goals of generating shareholder value through the consistent application of innovation, flexibility and a singular dedication to satisfying the needs of our customers. Regarding year 2001, industry analysts remain sharply divided as to prospects for growth in the discrete semiconductor industry. Like many companies in the technology sector, Diodes, Inc. experienced a challenging 4th quarter in 2000 and an uncertain economic climate as we head into 2001. Whatever rate our industry grows next year, our goal will be to surpass it. History is on our side. In both up and down markets, this Company has been able to outgrow the discrete industry and win additional market share. Growth in the discrete industry has historically been driven by demand from the PC sector, but with computing and access to digital information moving beyond the traditional confines of the desktop, we are beginning to participate in a whole new growth sector in communications, wireless devices and Internet infrastructure. Major new markets are opening up in areas such as broadband technology, the wireless Internet, entertainment on demand, smart appliances and increasingly sophisticated automo- tive electronics. All of the devices being developed for these sectors, from set-top boxes to DSL modems, from wireless PDAs to Internet appliances, will require discrete semiconductors to function and in each of these categories, Diodes, Inc. has secured recent design wins with leading manufacturers, such as “...we are committed to meeting the needs and exceeding the expectations of our customer base...” > 4 Diodes Incorporated 2000 Annual Report Motorola, Nortel, Sony, and Microsoft. Indeed we believe that our innovative focus on advanced surface mount technology with sub-miniature packages and customized arrays allied to our competitive cost structures leaves us ideally placed to capitalize on and expand our share in these markets. In an industry that increasingly places a premium on fast turnaround and exceptional product reliability, we are proud of our achievement in establishing the reputation of Diodes, Inc. as a service-driven, highly flexible organization, committed to attaining and maintaining the highest levels of engineering and manufacturing expertise. It is these qualities that strengthen Company confidence in our continued ability to meet the evolving needs of a rapidly expanding customer base. Our strategic objectives for 2001, designed to position Diodes, Inc. to capture these emerging opportunities, include: Integration of FabTech’s Schottky wafer product lines into our tier-one sales and marketing organization. Leveraging our in-depth understanding of customer needs with FabTech’s existing technology and engineering staff to build an R&D organization dedicated to developing next-generation discrete technologies. Expansion of our sales and marketing organization in Taiwan to increase our presence in the growing Asian markets, while establishing our initial sales presence in Europe. Completing the implementation of a company-wide Oracle Enterprise Resource Planning (ERP) system that will allow us to integrate key business processes across the globe, contributing to improved financial controls, greater business efficiencies and manufacturing flexibility. Continuing to invest in the manufacturing excellence that has underlay our success over the past several years. > Diodes, Inc. is a company that has proven itself time and again in both favorable and adverse market conditions. The key to our success lies in our commitment first and foremost to the total satisfaction of our customers. However, the competitive nature of the semiconductor industry requires us to main- tain our exacting standards and continue to foster a culture of excellence within our organization. In our drive to become a world-class company, we are constantly striving to improve the efficiency of our operations, the innovation of our design and engineering, and the consistency of our customer service. If we continue to deliver quality products, quality service and quality management, we will ensure that we can maintain and build on our enviable record of robust growth and consistent profitability. Diodes Incorporated 2000 Annual Report 5 Raymond Soong Chairman of the Board C.H. Chen President and Chief Executive Officer We would like to thank all those who continue to contribute to Diodes, Inc.’s success: To our shareholders for the confidence and commitment you have demonstrated during a sometimes volatile year. To our customers for continued patronage and for driving us to provide yet higher levels of service and product innovation. To our distributors, employees, and suppliers, for continued dedication and hard work. We are optimistic about what the future holds for Diodes, Inc. and we look forward to the growth opportunities ahead as together we move forward to achieve our goals and objectives into Year 2001. Sincerely Raymond Soong Chairman of the Board C.H. Chen President and Chief Executive Officer 6 Diodes Incorporated 2000 Annual Report Fact: Quick delivery of quality parts at competitive prices is what our customers have come to expect. Now, through innovative product design and reliable manufacturing, we can produce the total customer solutions the market demands. The FabTech acquisition closes our technology loop. With its experienced engineering team, intellectual property, and broad range of technologies well-suited to our target markets, the 5-inch wafer foundry gives Diodes, Inc. the wafer fabrication capacity needed to control the full range of discrete device development and manufacturing. We can now innovate not only in packaging, but also in device development to offer our customers a more complete solution. FabTech Closing the Technology Loop DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES Marketing FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH Research and Development FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH Wafer Manufacturing FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH FABTECH DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA Package Development DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA DIODES-CHINA Assembly and Testing DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES Sales DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES DIODES Closing the Technology Loop The addition of FabTech positions Diodes, Inc. to become a vertically integrated discrete semiconductor manufacturer and supplier at the forefront of next-generation discrete technology. 8 Diodes Incorporated 2000 Annual Report Fact: In a world enhanced by more and more computer electronics, we see remarkable growth opportunities for the deployment of discrete semiconductors, the essential components for success. In an industry that places a premium on fast turnaround and exceptional product reliability, we are proud of our commitment to engineering and manufacturing excellence. As a result, a range of high-quality diode and transistor arrays in sub-miniature surface-mount packages, primarily for the new generation of smaller, more powerful products are being manufactured at our QS-9000 and ISO-9002 certified world class manufacturing facility, Diodes-China. You’ll Find Our Products Everywhere You’ll Find Our Products Everywhere Our discrete semiconductors are integral to the performance and assembly of such popular consumer electronics products as the DIRECTV Receiver with TiVo® TV personalization and convenience services shown on the Sony SAT-T60 Digital Satellite Receiver/Recorder. TiVo—TV Your Way™ Sony SAT-T60, Courtesy of Sony Electronics Inc. DIRECTV and the Cyclone Design logo are trademarks of DIRECTV, Inc. 10 Diodes Incorporated 2000 Annual Report Fact: Increasingly, products are hitting the market to meet our demand for quick and easy access to global informa- tion. Power in small sizes for speed, efficiency and portability is critical, and miniaturization in discrete components is key. Today’s communications and computer electronics are becoming richer with features, yet smaller in size. All require discrete semiconductors to perform. As space and power constraints become more critical, Diodes, Inc. has the flexibility, agility, and willingness to respond to our customers’ needs. We believe that our innovative focus on advanced surface mount technology with sub-miniature packages and customized arrays can support our customers’ advancing technologies. Essential Ingredients for Success Essential Ingredients for Success Valued as building blocks of the electronics and communications industries, our components are used in everything from routers, modems, Internet appliances and laptops to the Palm™ VIIx Handheld. About Diodes Incorporated DISCRETE SEMICONDUCTORS are our focus business. PRODUCTS are marketed under the Diodes Incorporated brand and include: Schottky diodes and rectifiers, Switching diodes, Zener diodes, Transient Voltage Suppressors (TVSs), Standard, Fast, Ultra-fast and Super-fast recovery rectifiers, Bridge rectifiers, Small signal transistors and MOSFETs, and high-density diode and transistor arrays in ultra-miniature surface mount packages. MANUFACTURING FACILITIES, located in China and U.S.A. are ISO-9000 & QS-9000 certified to ensure products of the highest quality at competitive prices. INDUSTRIES SERVED include communications, computing, consumer, industrial, and automotive electronics. DIRECT SALES & MARKETING are accomplished through an ISO-9000 certified corporate office in Southern California, five regional U.S. sales offices, and a sales office in Taiwan. DISTRIBUTION is further enhanced through an extensive network of manufacturers’ representatives and major distributors. STRATEGIC ALLIANCE for manufacture and distribution with The Lite-On Group. A PUBLIC COMPANY dedicated to providing our customers with reliable availability of high-quality products at competitive prices. FINANCIAL STATEMENTS Management’s Discussion and Analysis Consolidated Balance Sheets Consolidated Statement of Income Consolidated Statement of Stockholders’ Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Independent Auditor’s Report 13 19 20 21 22 23 30 MANAGEMENT’S DISCUSSION & ANALYSIS Diodes Incorporated 2000 Annual Report 13 The following discussion of the Company’s financial condition and customers rather than a focused product line, silicon wafers will now be a results of operations should be read together with the consolidated financial focused product line supplied by FabTech to its current customer base, as well statements and the notes to consolidated financial statements included else- as to Diodes-China for use in its manufacturing process. where in this Form 10-K. Except for the historical information contained herein, the matters addressed in this Item 7 constitute “forward-looking statements” Reporting Segments within the meaning of Section 27A of the Securities Act of 1933, as amended, For financial reporting purposes, the Company is deemed to engage and Section 21E of the Securities Exchange Act of 1934, as amended. Such in two industry segments: North America and the Far East. Both segments focus forward-looking statements are subject to a variety of risks and uncertainties, on discrete semiconductor devices. The North American segment includes the including those discussed below under the heading "Cautionary Statement for corporate offices in California (Diodes-North America) as well as FabTech, Inc. Purposes of the “Safe Harbor” Provision of the Private Securities Litigation (“FabTech” or “Diodes-FabTech”), the newly acquired 5-inch wafer foundry Reform Act of 1995” and elsewhere in this Report on Form 10-K, that could located in Missouri. Diodes-North America procures and distributes products cause actual results to differ materially from those anticipated by the Company’s primarily throughout North America and provides management, warehousing, management. The Private Securities Litigation Reform Act of 1995 (the “Act”) engineering and logistics support. Diodes-FabTech manufactures silicon wafers provides certain “safe harbor” provisions for forward-looking statements. All for use by Diodes-China as well as for sale to its customer base. The Far East forward-looking statements made in this Annual Report on Form 10-K are made segment includes the operations of Diodes-Taiwan and Diodes-China. Diodes- pursuant to the Act. General China manufactures product for, and distributes product to, both the North American and Taiwan segments, as well as to trade customers. Diodes-Taiwan procures product from, and distributes product primarily to, customers in Diodes Incorporated (the “Company”) is a manufacturer and distributor Taiwan, Korea, Singapore, and Hong Kong. of high-quality discrete semiconductor devices to leading manufacturers in the com- munications, computer, electronics, and automotive industries, and to distributors Diodes-Taiwan of electronic components. The Company’s products include small signal transis- Until October 2000, Diodes-Taiwan also manufactured product for tors and MOSFETs, transient voltage suppressors (TVSs), zeners, diodes, rectifiers sale to Diodes-North America and to trade customers. The Company moved and bridges, as well as silicon wafers used in manufacturing these products. its Taiwan manufacturing to China because the Taiwan manufactured products Sales were lower technology products, fairly labor intensive, and the cost savings of moving the manufacturing to the Company’s qualified minority partner in The Company’s products are sold primarily in North America and the Far Diodes-China were attractive and necessary to meet market demand. In connec- East, both directly to end users and through electronic component distributors. tion with the manufacturing move, the Company sold approximately $150,000 In 2000, approximately 54% and 46% of the Company’s products were sold in of equipment to the minority partner of Diodes-China. Diodes-Taiwan continues North America and the Far East, respectively, compared to 56% and 44% in as the Company’s Asia-Pacific sales, logistics and distribution center. Diodes- 1999, respectively. See Note 11 of “Notes to Consolidated Financial Statements” China participates in final testing, inspection and packaging of these products, for a description of the Company’s adoption of SFAS No. 131, Disclosures about formerly manufactured by Diodes-Taiwan. Diodes-Taiwan also procures some Segments of an Enterprise and Related Information. The increase in the product for the Company’s North American operations. percentage of sales in the Far East is expected to continue as the Company believes there is greater potential to increase market share in that region Vishay/LPSC due to the expanding base of electronic product manufacturers. In July 1997, Vishay Intertechnology, Inc. (“Vishay”) and the Lite-On Group, a Taiwanese consortium, formed a joint venture — Vishay/Lite-On Power Beginning in 1998, the Company increased the amount of product Semiconductor Pte., Ltd. (“Vishay/LPSC”) — to acquire Lite-On Power Semicon- shipped to larger distributors. Although these sales were significant in terms ductor Corp. (“LPSC”), the Company’s largest shareholder and a member of The of total sales dollars and gross margin dollars, they generally were under agree- Lite-On Group of the Republic of China. The Lite-On Group, with worldwide sales ments that resulted in lower gross profit margins for the Company when com- of approximately $4.5 billion, is a leading manufacturer of power semiconductors, pared to sales to smaller distributors and OEM customers. As the consolidation computer peripherals, and communication products. The Vishay/LPSC joint venture of electronic component distributors continues, the Company anticipates that included the worldwide discrete power semiconductor business of LPSC and the a greater portion of its distributor sales will be to the larger distributors, and Asian passive component business of Vishay. Vishay held a 65% controlling thus may result in lower gross profit margins for this sales channel. interest in the joint venture, and The Lite-On Group held the other 35%. In March 2000, Vishay agreed to sell their 65% interest in Vishay/LPSC back to The In 1999, Diodes-Taiwan began purchasing silicon wafers, a new product Lite-On Group. In December 2000, LPSC merged with Dyna Image Corporation of line, from FabTech for resale to customers in the Far East. Silicon wafer sales Taipei, Taiwan, the world’s largest Contact Image Sensors (“CIS”) manufacturer. were $9,837,000 and $4,005,000 in 2000 and 1999, respectively. The gross CIS are primarily used in fax machines, scanners, and copy machines. C.H. Chen, margin percentage on sales of silicon wafers is currently far below that of the the Company’s President and CEO, remains Vice Chairman of the combined com- Company’s standard product line. Initially a complementary service for some pany now called Lite-On Semiconductor Corporation (“LSC”). 14 Diodes Incorporated 2000 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Manufacturing and Vendors FabTech purchases polished silicon wafers, and then by using the The Company’s Far East subsidiary, Diodes-China, manufactures product various technologies listed above, in conjunction with many chemicals and for sale primarily to North America and Asia. Diodes-China’s manufacturing gases, fabricates several layers on the wafers, including epitaxial silicon, ion focuses on SOT-23 and SOD-123 products, as well as sub-miniature packages implants, dielectrics, and metals, with various patterns. Depending upon these such as SOT-363, SOT-563, and SC-75. These surface-mount devices (“SMD”) layers and the die size (which is determined during the photolithography are much smaller in size and are used primarily in the computer and communi- process and completed at the customer’s packaging site where the wafer is cation industries, destined for cellular phones, notebook computers, pagers, sawed into square or rectangular die), different types of wafers with various PCMCIA cards and modems, as well as in garage door transmitters, among currents, voltages, and switching speeds are produced. 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 Recent Results and hand-held devices continue. Diodes-China purchases silicon wafers from Beginning in the second half of 1999, and continuing through the FabTech, however, the majority are currently purchased from other wafer vendors. first three quarters of 2000, industry demand exceeded industry capacity. The Company’s gross profit margins reached a peak of 34.4% in the third quarter Since 1997, the Company’s manufacturing focus has primarily been in of 2000. In addition, OEM customers and distributors increased their inventory the development and expansion of Diodes-China. To date, the Company and its levels. As semiconductor manufacturers, including the Company, increased minority partner have increased property, plant and equipment at the facility to capacity, the U.S. economy slowed causing a sharp decline in sales in the approximately $40 million. The equipment expansion allows for the manufac- fourth quarter of 2000. Although gross profit margins for year 2000 were ture of additional SOT-23 packaged components as well as other surface-mount 31.6%, the gross profit in the fourth quarter of 2000 decreased to 28.3%. packaging, including the smaller SOD packages. The excess capacity, coupled with the decreased demand and higher inventory levels, has continued into 2001 and the Company expects further deterioration The Company will continue its strategic plan of locating alternate of its gross profit margins until such a time as demand increases and the sources of its products and raw materials, including those provided by its major Company utilizes more of its available capacity. suppliers. Alternate sources include, but are not limited to, Diodes-China and other sourcing agreements in place, as well as those in negotiation. The The discrete semiconductor industry has been subject to severe pricing Company anticipates that the effect of the loss of any one of its major suppliers pressures, causing the Company’s gross profit margins to decline from 28.3% will not have a material adverse effect on the Company’s operations, provided in 1995 to 25.1% in 1998. Although manufacturing costs have been falling, that alternate sources remain available. The Company continually evaluates excess manufacturing capacity and over-inventory has caused selling prices to alternative sources of its products to assure its ability to deliver high-quality, fall to a greater extent than manufacturing cost. To compete in this highly cost-effective products. FabTech 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 Acquired on December 1, 2000, FabTech’s wafer foundry is located in focus on customer service, additional personnel and programs have been added. Lee’s Summit, Missouri. FabTech manufactures primarily 5-inch silicon wafers In order to meet customers’ needs at the design stage of end-product develop- which are the building blocks for semiconductors. FabTech has full foundry ment, the Company has employed additional applications engineers. These capabilities including processes such as silicon epitaxy, silicon oxidation, applications engineers work directly with customers to assist them in “designing photolithography and etching, ion implantation and diffusion, low pressure in” the correct products to produce optimum results. Regional sales managers, and plasma enhanced chemical vapor deposition, sputtered and evaporated working closely with manufacturers’ representative firms and distributors, have metal deposition, wafer backgrinding, and wafer probe and ink. also been added in the U.S. and the Far East to help satisfy customers’ require- ments. In addition, the Company has continued to develop relationships with The FabTech purchase price consisted of approximately $6 million in major distributors who inventory and sell the Company’s products. cash and an earnout of up to $30 million if FabTech meets specified earnings targets over a four-year period. In addition, FabTech is obligated to repay an Beginning late in the fourth quarter of 2000, the Company and the aggregate of approximately $19 million, consisting of (i) approximately $13.6 semiconductor industry as a whole experienced a sharp inventory correction million payable, together with interest at LIBOR plus 1%, to LSC through March primarily in two key markets, communications and computers. This downturn 31, 2002, (ii) approximately $2.6 million payable, together with interest at has continued into the first quarter of 2001. Although the Company’s market LIBOR plus 1.1%, to the Company through February 28, 2001 and (iii) approxi- share has remained stable, market conditions for its core product lines have not mately $3.0 million payable to a financial institution, which amount was repaid improved, while demand for silicon wafers, the fundamental raw materials used on December 4, 2000 with the proceeds of a capital contribution by the Com- in manufacturing discrete semiconductors, has deteriorated further. pany. The acquisition was financed internally and through bank credit facilities. MANAGEMENT’S DISCUSSION & ANALYSIS Diodes Incorporated 2000 Annual Report 15 The negative impact to earnings is largely attributable to reduced indications from the local taxing authority in Shanghai that the 0% tax holiday capacity utilization of the Company’s manufacturing assets and changes in may be extended beyond 2000, but currently, no assurances can be made product mix, both of which have had a negative impact on gross margins. Due regarding the preferential tax treatment extension. In addition, it is currently to market conditions, capacity utilization at Diodes’ FabTech subsidiary has not known whether the taxing authority for the central government of the decreased 45% as compared to the previous year, while Diodes-China’s utiliza- People’s Republic of China (“PRC”) will participate in this extended tax holiday tion has decreased 15%. arrangement. Based upon expected tax rates in the U.S., Taiwan and China, and the expected profitability of each of the Company’s four business segments The risks of becoming a fully integrated manufacturer are amplified in during the balance of the year, it is anticipated that for 2001 the provision an industry-wide slowdown because of the fixed costs associated with manufac- for income taxes should be in the range of 10% to 20% of pre-tax income. turing facilities. The Company has responded to this cyclical downturn by imple- menting programs to cut operating costs, including reducing its worldwide In accordance with tax treaty arrangements, the Company receives full workforce by 26%, primarily at the FabTech and Diodes-China manufacturing credit against its U.S. Federal tax liability for corporate taxes paid in Taiwan facilities. The Company will continue to actively adjust its cost structure as and China. The repatriation of funds from Taiwan and China to the Company dictated by market conditions. may be subject to state income taxes. In the years ending December 31, 1999 and 2000, Diodes-Taiwan distributed dividends of approximately $1.5 million Although no clear short-term change in market conditions exist, long and $2.6 million, respectively, which is included in Federal and state taxable term, the Company believes that it will continue to generate value for share- income. Deferred taxes have been provided for all remaining undistributed earn- holders and customers, not just from its expanded Diodes-China manufacturing ings. As of December 31, 2000, accumulated and undistributed earnings of and FabTech’s foundry assets, but also by the addition of a true technology Diodes-China is approximately $17 million. The Company has not recorded component to the Company. Although market conditions changed just as the deferred Federal or state tax liabilities (estimated to be $6.8 million) on these new initiative started, the Company will continue to pursue its goal of becom- earnings since the Company considers its investment in Diodes-China to be per- ing a total solution provider. This is a multi-year initiative that will increase the manent, and has no plans, intentions or obligation to distribute any part or all Company’s ability to serve its customers’ needs, while establishing the Company of that amount from China to the United States. at the forefront of the next generation of discrete technologies. Results of Operations The Company’s overall effective tax rate decreased to 13.8% in 2000 The following table sets forth, for the periods indicated, the percent- from 19.3% in 1999. The decrease in the Company’s effective tax rate is due age that certain items in the statement of income bear to net sales and the primarily to Diodes-China’s increased net income at a preferential tax rate of percentage dollar increase (decrease) of such items from period to period. 0%. From 2001 through 2003, the tax rate at Diodes-China should be 13.5% (one-half of the normal tax rate of 27%). The Company, however, has received Percent of Net Sales Year Ended December 31, Percentage Dollar Increase (Decrease) Year Ended December 31, 1996 1997 1998 1999 2000 ‘96 to ‘97 97 to ‘98 ‘98 to ‘99 ‘99 to ‘00 Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 16.1 % (8.5) % 29.2 % 49.5 % Cost of goods sold (73.9) (72.1) (74.9) (73.6) (68.4) Gross profit 26.1 27.9 25.1 26.4 31.6 Operating expenses (18.0) (16.6) (18.0) (17.2) (16.0) Income from operations Interest expense, net Other income Income before taxes and minority interest Income taxes Minority interest Net income 8.1 (0.6) 0.1 7.6 2.9 0.4 5.1 11.3 (0.1) 0.4 11.6 3.9 (0.1) 7.6 7.2 (0.5) 0.2 6.8 2.4 0.0 4.4 0.2 9.0 1.7 (0.3) 7.0 13.2 24.2 7.2 61.9 (4.9) (17.8) (1.1) (42.2) 9.2 15.6 (0.4) (0.8) (82.3) 353.2 0.4 279.7 (61.7) 26.9 36.0 24.1 65.9 3.9 95.7 39.0 78.7 38.7 153.8 221.9 175.3 15.2 2.1 76.6 57.3 (46.0) (42.6) 70.7 151.6 (8.7) 80.9 (0.5) (106.3) (6.7) (1,464.3) (193.2) 12.6 72.8 (47.8) 108.3 167.5 16 Diodes Incorporated 2000 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS The following discussion explains in greater detail the consolidated financial Other income for 2000 increased approximately $319,000 compared to condition of the Company. This discussion should be read in conjunction the same period last year, due primarily to currency exchange gains at the with the consolidated financial statements and notes thereto appearing Company’s subsidiaries in Taiwan and China. elsewhere herein. 2000 Compared to 1999 The Company’s overall effective tax rate decreased to 13.8% in 2000 from 19.3% in 1999. The decrease in the Company’s effective tax rate is due Net sales for 2000 increased approximately $39,211,000 to primarily to Diodes-China’s increased net income at a preferential tax rate of $118,462,000 from $79,251,000 for 1999. The 49.5% increase was due primari- 0%. From 2001 through 2003, the tax rate at Diodes-China should be 13.5% ly to (i) a 41.7% increase in units sold, as a result of an increased demand for (one-half of the normal tax rate of 27%). The Company, however, has received the Company’s products, primarily in the Far East and (ii) sales of silicon wafers indications from the local taxing authority in Shanghai that the 0% tax holiday totaling $9,837,000, versus $4,005,000 in 1999. Diodes-China’s trade sales in may be extended beyond 2000, but currently, no assurances can be made 2000 were $6,610,000, compared to $3,389,000 in the same period last year. A regarding the preferential tax treatment extension. In addition, it is currently 6.3% increase in the Company’s average selling price, primarily in the Far East, not known whether the taxing authority for the central government of the also contributed to increased sales. Due to an industry-wide slowdown that People’s Republic of China (“PRC”) will participate in this extended tax holiday began late in the fourth quarter, the Company anticipates pricing pressures will arrangement. Based upon expected tax rates in the U.S., Taiwan and China, and increase significantly in 2001. the expected profitability of each of the Company’s four business segments dur- Gross profit for 2000 increased 78.7% to $37,427,000 from income taxes should be in the range of 10% to 20% of pre-tax income. ing the balance of the year, it is anticipated that for 2001 the provision for $20,948,000 for 1999. Of the $16,479,000 increase, $10,365,000 was due to the 49.5% increase in net sales while $6,113,000 was due to the increase in For the years ended December 31, 1999 and 2000, Diodes-Taiwan dis- gross margin percentage from 26.4% in 1999 to 31.6% in 2000. Manufacturing tributed dividends of approximately $1.5 million and $2.6 million, respectively, profit at Diodes-China at higher gross profit margins was the primary contributor which is included in Federal and state taxable income for the respective years. to the increase, partially offset by an increase in the sale of wafers at a generally Deferred taxes have been provided for all remaining undistributed earnings in lower margin than then Company’s other products, as well as increased sales to excess of statutory permanent capital requirements of Diodes-Taiwan. As of larger distributors. Although gross profit margins strengthened in 2000, pricing December 31, 2000, accumulated and undistributed earnings of Diodes-China is pressures continue to exist on many of the Company’s product lines and gross approximately $17 million. The Company has not recorded deferred Federal or profit margin is expected to decrease in 2001. Average selling prices in 2000 state tax liabilities (estimated to be $6.8 million) on these earnings since the increased approximately 6.3%. As the trend of consolidation among electronic Company considers its investment in Diodes-China to be permanent, and has no component distributors continues, the Company anticipates that a greater plans, intentions or obligation to distribute any part or all of that amount from portion of its distributor sales will be to larger distributors, usually under China to the United States. agreements resulting in lower than historical gross profit margins. For 2000, selling, general and administrative expenses (“SG&A”) therefore, the $642,000 minority interest in joint venture represents the minority increased $5,285,000 to $18,955,000 from $13,670,000 for 1999. The 38.7% investor’s 5% share of the joint venture’s profit. The increase in the joint ven- increase in SG&A was due primarily to increases in management expenses at ture earnings for 2000 is primarily the result of increased sales. The joint ven- Diodes-China, higher Company-wide marketing and advertising expenses, ture investment is eliminated in consolidation of the Company’s financial state- increased sales commissions at Diodes-Taiwan, and additional sales and engi- ments and the activities of Diodes-China are included therein. As of December neering personnel. SG&A as a percentage of sales decreased to 16.0% from 31, 2000, the Company had a 95% controlling interest in the joint venture. In 2000, Diodes-China contributed to the Company’s profitability and, 17.2% in the comparable period last year, primarily due to the 49.5% increase in net sales. The Company generated net income of $14,895,000 (or $1.85 basic earnings per share, $1.62 diluted earnings per share) in 2000, as compared to Net interest expense for 2000 increased $940,000, due primarily to $5,569,000 (or $0.73 basic earnings per share, $0.68 diluted earnings per an increased use of the Company’s credit facility to support the expansion of share) for 1999. This $9,326,000 or 167.5% increase is due primarily to the Diodes-China versus the same period last year. The Company’s interest expense 49.5% sales increase at gross profit margins of 31.6% compared to gross profit is primarily the result of the term loan by which the Company is financing (i) margins of 26.4% in 1999. the investment in Diodes-China’s manufacturing facility and (ii) the acquisition of FabTech. Interest income is primarily the interest charged to FabTech for the 1999 Compared to 1998 first 11 months of 2000, under the Company’s formal loan agreement, as well Net sales for 1999 increased approximately $17,923,000 to as earnings on its cash balances. $79,251,000 from $61,328,000 for 1998. The 29.2% increase was due primarily to (i) a 36.0% increase in units sold, as a result of an increased demand for the Company’s products, primarily in the Far East and (ii) $4,005,000 sales of MANAGEMENT’S DISCUSSION & ANALYSIS Diodes Incorporated 2000 Annual Report 17 silicon wafers, a new product line. Diodes-China’s trade sales in 1999 were The Company’s overall effective federal, state, and foreign tax rate $3,389,000, compared to $280,000 in the same period last year. The increase in decreased to 19.3% in 1999 from 36.0% in 1998. This decrease is due primarily units sold was partly offset by a 7.1% decrease in the Company’s average sell- to Diodes-China’s increase in net income at a tax rate of 0%. Through December ing price, primarily in the Far East. In the fourth quarter of 1999, average sell- 31, 1997, the Company had undistributed earnings at Diodes-Taiwan for which ing prices rose 3.6% and 5.0%, compared to the fourth quarter 1998 and the no deferred income tax liability had been recorded since, at that time, manage- third quarter 1999, respectively. The Company anticipates pricing pressures ment considered this investment to be permanent, and no plans or intentions could continue, though the severity may slowly diminish. existed to distribute the capital of its Taiwan subsidiary. Changes in Taiwan In 1999, Diodes-Taiwan began purchasing silicon wafers, a new product strategies in the fourth quarter of 1998 for current and future earnings at line, from FabTech for resale to customers in the Far East. The gross margin per- Diodes-Taiwan. While a portion of its investment will remain in Taiwan, a centage on sales of silicon wafers, though still profitable, is far below that of distribution of approximately $4.5 million will be made by Diodes-Taiwan to the Company’s standard product line. Silicon wafer sales are a complementary the Company. Approximately $1.5 million was distributed in 1999, and the service for some customers, rather than a focused product line. remaining is scheduled to be distributed in 2000. The decision was made, in income tax policies in 1998 caused management to reconsider its investment part, because the changes in Taiwan income tax policies made it less favorable Gross profit for 1999 increased $5,546,000 to $20,948,000 from to accumulate earnings at Diodes-Taiwan and, in part, to allow the Company $15,402,000 for 1998. The 36.0% increase was due primarily to the 29.2% to redirect its financial resources from Diodes-Taiwan to its expansion of increase in net sales. Manufacturing profit at Diodes-China at higher gross profit Diodes-China. margins contributed to an increase in gross margin percentage to 26.4% for 1999 compared to 25.1% for 1998. Although gross profit margins strengthened In 1999, Diodes-China contributed to the Company’s profitability in the third and fourth quarters of 1999, pricing pressures continue to exist and, therefore, the $219,000 minority interest in joint venture represents the on many of the Company’s product lines, and there can be no guarantee that minority investor’s 5% share of the joint venture’s profit. The increase in the margins will continue to improve. Average selling prices in 1999 decreased joint venture earnings for 1999 is primarily the result of increased sales. The approximately 7.1%, which represents decreases in average selling prices in joint venture investment is eliminated in consolidation of the Company’s the Far East and North America of approximately 18.3% and 7.9%, respectively, financial statements and the activities of Diodes-China are included therein. compared to 1998. In addition, as the trend of consolidation among electronic As of December 31, 1999, the Company had a 95% controlling interest in the component distributors continues, the Company anticipates that a greater joint venture. portion of its distributor sales will be to larger distributors, usually under agreements resulting in lower than historical gross profit margins. The Company generated net income of $5,569,000 (or $0.73 basic earnings per share, $0.68 diluted earnings per share), as compared to For 1999, selling, general and administrative expenses (“SG&A”) $2,673,000 (or $0.35 basic earnings per share, $0.33 diluted earnings per increased $2,654,000 to $13,670,000 from $11,016,000 for 1998. The 24.1% share) for 1998. This $2,896,000 or 108.3% increase is due primarily to the increase in SG&A was due primarily to increases in management expenses at 29.2% sales increase at gross profit margins of 26.4% compared to gross Diodes-China, higher Company-wide marketing and advertising expenses, profit margins of 25.1% in 1998. increased sales commissions at Diodes-Taiwan, and additional sales and engineering personnel. SG&A as a percentage of sales decreased to 17.2% Financial Condition from 18.0% in the comparable period last year, primarily due to the 29.2% increase in net sales. Liquidity and Capital Resources Cash provided by operating activities in 2000 was $10.2 million com- Net interest expense for 1999 increased $11,000, due primarily to pared to $8.0 million in 1999 and $5.5 million in 1998. The primary sources of an increased use of the Company’s credit facility to support the expansion of cash flows from operating activities in 2000 were net income of $14.9 million Diodes-China versus the same period last year. The Company’s interest expense and depreciation of $5.0 million. The primary sources of cash flows from operat- is primarily the result of the term loan by which the Company is financing (i) ing activities in 1999 were net income of $5.6 million and an increase in the investment in Diodes-China’s manufacturing facility and (ii) the $2.6 million accounts payable of $5.3 million. The primary use of cash flows from operating receivable, including accrued interest, advanced to FabTech. Interest income is activities in 2000 was an increase in inventories of $9.3 million and an increase primarily the interest charged to FabTech, a related party, under the Company’s in accounts receivable of $2.2 million. The primary use of cash flows from oper- formal loan agreement, as well as earnings on its cash balances. ating activities in 1999 was an increase in accounts receivable of $5.4 million Other income for 1999 increased approximately $89,000 compared to flows from operating activities in 1998 were net income of $2.7 million and the same period last year, due primarily to currency exchange gains at the a decrease in accounts receivable of $1.8 million. The primary use of cash Company’s subsidiaries in Taiwan and China. flows from operating activities in 1998 was a decrease in accounts payable and an increase in inventories of $2.8 million. The primary sources of cash of $1.3 million. 18 Diodes Incorporated 2000 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Since December 31, 1999, accounts receivable from customers has The working capital line of credit expires July 1, 2002. During 2000, increased 31.8% due to a slowing trend in payments from major distributors, average and maximum borrowings outstanding on the line of credit were as well as from the 49.5% increase in sales. The Company does not expect $3,645,000 and $6,691,000, respectively. The weighted average interest rate this trend to result in additional bad debt expense. The Company continues on outstanding borrowings was 8.9% for the year ended December 31, 2000. to closely monitor its credit policies, while at times providing more flexible terms, primarily to its Far East customers, when necessary. The ratio of the In addition, Diodes-China operates with two unsecured working capital Company’s current assets to current liabilities on December 31, 2000 was 1.4 credit facilities. One credit facility provides for advances of up to $3 million to 1, compared to a ratio of 1.7 to 1 and 2.6 to 1 as of December 31, 1999 with interest at 7.0% per annum. The second credit facility provides for and 1998, respectively. advances of RMB$9.3 million ($1,002,000 as of December 31, 2000) with inter- est of 5.6% to 6.7% per annum. As of December 31, 2000 the balance on these Cash used by investing activities was $21.4 million in 2000, compared notes was $4,003,000. to $9.3 million in 1999 and $9.8 million in 1998. The primary investment in all three years was for additional manufacturing equipment and expansion at the The Company has used its credit facility primarily to fund the expan- Diodes-China manufacturing facility. sion at Diodes-China and for the FabTech acquisition, as well as to support its On December 1, 2000, the Company purchased all the outstanding facility, together with internally generated funds, will be sufficient to meet the capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee’s Company’s current foreseeable operating cash requirements. operations. The Company believes that the continued availability of this credit Summit, Missouri from Lite-On Semiconductor Corporation (“LSC”), the Company’s largest shareholder. The purchase price consisted of approximately Total working capital increased approximately 8.7% to $17.3 million $6 million in cash and an earnout of up to $30 million if FabTech meets speci- as of December 31, 2000, from $15.9 million as of December 31, 1999. The fied earnings targets over a four-year period. In addition, FabTech is obligated Company believes that such working capital position will be sufficient for fore- to repay an aggregate of approximately $19 million, consisting of (i) approxi- seeable growth opportunities. The Company’s debt to equity ratio increased to mately $13.6 million payable, together with interest at LIBOR plus 1%, to LSC 1.20 at December 31, 2000, from 0.78 at December 31, 1999. It is anticipated through March 31, 2002, (ii) approximately $2.6 million payable, together with that this ratio may increase as the Company continues to use its credit facili- interest at LIBOR plus 1.1%, to the Company through February 28, 2001 and ties to fund additional inventory sourcing opportunities. (iii) approximately $3.0 million payable to a financial institution, which amount was repaid on December 4, 2000 with the proceeds of a capital contri- As of December 31, 2000, the Company has no material plans or com- bution by the Company. The acquisition was financed internally and through mitments for capital expenditures other than in connection with the expansion bank credit facilities. at Diodes-China and the Company’s implementation of an Oracle Enterprise Resource Planning software package, planned for late 2001. However, to ensure Cash provided by financing activities was $12.1 million in 2000, that the Company can secure reliable and cost effective inventory sourcing to compared to $2.4 million in 1999 and $4.3 million in 1998. Diodes has a support and better position itself for growth, the Company is continuously $26.6 million credit agreement with a major bank providing a working capital evaluating additional internal manufacturing expansion, as well as additional line of credit up to $9 million, term commitment notes up to $10 million for outside sources of products. The Company believes its financial position will plant expansion and financing the acquisition of FabTech, and $7.6 million for provide sufficient funds should an appropriate investment opportunity arise Diodes-China operations. Interest on outstanding borrowings under the credit and thereby, assist the Company in improving customer satisfaction and in agreement is payable monthly at LIBOR plus a negotiated margin. Fixed bor- maintaining or increasing market share. rowings require fixed principal plus interest payments for sixty months there- after. The agreement has certain covenants and restrictions, which, among Inflation did not have a material effect on net sales or net income in other matters, requires the maintenance of certain financial ratios and operat- fiscal years 1998, 1999 or 2000. A significant increase in inflation would affect ing results, as defined in the agreement. The Company was in compliance with future performance. the covenants as of December 31, 2000. 18 Diodes Incorporated 2000 Annual Report MANAGEMENT’S DISCUSSION & ANALYSIS Since December 31, 1999, accounts receivable from customers has The working capital line of credit expires July 1, 2002. During 2000, increased 31.8% due to a slowing trend in payments from major distributors, average and maximum borrowings outstanding on the line of credit were as well as from the 49.5% increase in sales. The Company does not expect $3,645,000 and $6,691,000, respectively. The weighted average interest rate this trend to result in additional bad debt expense. The Company continues on outstanding borrowings was 8.9% for the year ended December 31, 2000. to closely monitor its credit policies, while at times providing more flexible terms, primarily to its Far East customers, when necessary. The ratio of the In addition, Diodes-China operates with two unsecured working capital Company’s current assets to current liabilities on December 31, 2000 was 1.4 credit facilities. One credit facility provides for advances of up to $3 million to 1, compared to a ratio of 1.7 to 1 and 2.6 to 1 as of December 31, 1999 with interest at 7.0% per annum. The second credit facility provides for and 1998, respectively. advances of RMB$9.3 million ($1,002,000 as of December 31, 2000) with inter- est of 5.6% to 6.7% per annum. As of December 31, 2000 the balance on these Cash used by investing activities was $21.4 million in 2000, compared notes was $4,003,000. to $9.3 million in 1999 and $9.8 million in 1998. The primary investment in all three years was for additional manufacturing equipment and expansion at the The Company has used its credit facility primarily to fund the expan- Diodes-China manufacturing facility. sion at Diodes-China and for the FabTech acquisition, as well as to support its On December 1, 2000, the Company purchased all the outstanding facility, together with internally generated funds, will be sufficient to meet the capital stock of FabTech Incorporated, a 5-inch wafer foundry located in Lee’s Company’s current foreseeable operating cash requirements. operations. The Company believes that the continued availability of this credit Summit, Missouri from Lite-On Semiconductor Corporation (“LSC”), the Company’s largest shareholder. The purchase price consisted of approximately Total working capital increased approximately 8.7% to $17.3 million $6 million in cash and an earnout of up to $30 million if FabTech meets speci- as of December 31, 2000, from $15.9 million as of December 31, 1999. The fied earnings targets over a four-year period. In addition, FabTech is obligated Company believes that such working capital position will be sufficient for fore- to repay an aggregate of approximately $19 million, consisting of (i) approxi- seeable growth opportunities. The Company’s debt to equity ratio increased to mately $13.6 million payable, together with interest at LIBOR plus 1%, to LSC 1.20 at December 31, 2000, from 0.78 at December 31, 1999. It is anticipated through March 31, 2002, (ii) approximately $2.6 million payable, together with that this ratio may increase as the Company continues to use its credit facili- interest at LIBOR plus 1.1%, to the Company through February 28, 2001 and ties to fund additional inventory sourcing opportunities. (iii) approximately $3.0 million payable to a financial institution, which amount was repaid on December 4, 2000 with the proceeds of a capital contri- As of December 31, 2000, the Company has no material plans or com- bution by the Company. The acquisition was financed internally and through mitments for capital expenditures other than in connection with the expansion bank credit facilities. at Diodes-China and the Company’s implementation of an Oracle Enterprise Resource Planning software package, planned for late 2001. However, to ensure Cash provided by financing activities was $12.1 million in 2000, that the Company can secure reliable and cost effective inventory sourcing to compared to $2.4 million in 1999 and $4.3 million in 1998. Diodes has a support and better position itself for growth, the Company is continuously $26.6 million credit agreement with a major bank providing a working capital evaluating additional internal manufacturing expansion, as well as additional line of credit up to $9 million, term commitment notes up to $10 million for outside sources of products. The Company believes its financial position will plant expansion and financing the acquisition of FabTech, and $7.6 million for provide sufficient funds should an appropriate investment opportunity arise Diodes-China operations. Interest on outstanding borrowings under the credit and thereby, assist the Company in improving customer satisfaction and in agreement is payable monthly at LIBOR plus a negotiated margin. Fixed bor- maintaining or increasing market share. rowings require fixed principal plus interest payments for sixty months there- after. The agreement has certain covenants and restrictions, which, among Inflation did not have a material effect on net sales or net income in other matters, requires the maintenance of certain financial ratios and operat- fiscal years 1998, 1999 or 2000. A significant increase in inflation would affect ing results, as defined in the agreement. The Company was in compliance with future performance. the covenants as of December 31, 2000. CONSOLIDATED BALANCE SHEETS Diodes Incorporated 2000 Annual Report 19 December 31, (in thousands, except per share data) 1999 2000 ASSETS CURRENT ASSETS Cash Accounts receivable Customers Related parties Other Allowance for doubtful accounts Inventories Deferred income taxes, current Prepaid expenses and other Total current assets PROPERTY, PLANT AND EQUIPMENT, net ADVANCES TO RELATED PARTY VENDOR DEFERRED INCOME TAXES, non-current OTHER ASSETS Goodwill, net Miscellaneous Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Line of credit Accounts payable Trade Related parties Accrued liabilities Income taxes payable Current portion of long-term debt Related party Other Total current liabilities DEFERRED COMPENSATION LONG-TERM DEBT, net of current portion Related party Other MINORITY INTEREST IN JOINT VENTURE 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; 9,008,282 shares in 1999 and 9,201,704 shares in 2000 issued and outstanding Additional paid-in capital Retained earnings Less: Treasury stock - 1,075,672 shares of common stock, at cost Total liabilities and stockholders’ equity The accompanying notes are an integral part of these financial statements. $ 3,557 $ 4,476 14,962 90 300 15,352 297 15,055 16,575 1,700 762 37,649 20,909 2,561 146 969 173 19,723 615 26 20,364 311 20,053 31,788 4,387 686 61,390 45,129 - 616 5,318 497 $ 62,407 $112,950 $ 3,237 $ 7,750 7,716 1,821 5,782 878 - 2,312 21,746 10,710 1,008 8,401 1,370 11,049 3,811 44,099 57 - - 4,672 2,500 13,497 959 1,601 - - 6,006 5,886 24,863 36,755 1,782 34,973 6,134 7,143 39,758 53,035 1,782 51,253 $ 62,407 $112,950 20 Diodes Incorporated 2000 Annual Report CONSOLIDATED STATEMENT OF INCOME Years Ended December 31, (in thousands, except per share data) 1998 1999 2000 NET SALES COST OF GOODS SOLD Gross profit SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Income from operations OTHER INCOME (EXPENSES) Interest income Interest expense Other Income before income taxes and minority interest INCOME TAX PROVISION Income before minority interest MINORITY INTEREST IN JOINT VENTURE NET INCOME EARNINGS PER SHARE Basic Diluted Number of shares used in computation Basic Diluted The accompanying notes are an integral part of these financial statements. $ 61,328 $ 79,251 $118,462 45,926 15,402 58,303 20,948 81,035 37,427 11,016 4,386 13,670 7,278 18,955 18,472 304 (585) 93 316 (608) 182 392 (1,332) 501 4,198 7,168 18,033 (1,511) (1,380) (2,496) 2,687 5,788 15,537 (14) (219) (642) $ 2,673 $ 5,569 $ 14,895 $ $ 0.35 $ 0.73 $ 1.85 0.33 $ 0.68 $ 1.62 7,544 8,056 7,625 8,204 8,071 9,222 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Diodes Incorporated 2000 Annual Report 21 Years Ended December 31, 1998, 1999, and 2000 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 Exercise of stock options including $961,000 income tax benefit Net income for the year ended December 31, 1999 BALANCE, December 31, 1999 Exercise of stock options including $1,048,000 income tax benefit Net income for the year ended December 31, 2000 BALANCE, December 31, 2000 Common stock Shares in Treasury Shares Amount Additional paid-in capital Retained earnings Common stock in treasury 8,551,529 1,075,672 $ 5,701,000 $ 3,811,000 $ 16,621,000 $ 1,782,000 95,000 - - - 63,000 292,000 - - - 2,673,000 - - 8,646,529 1,075,672 5,764,000 4,103,000 19,294,000 1,782,000 361,753 - - - 242,000 1,783,000 - - - 5,569,000 - - 9,008,282 1,075,672 6,006,000 5,886,000 24,863,000 1,782,000 193,422 - - - 128,000 1,257,000 - - - 14,895,000 - - 9,201,704 1,075,672 $ 6,134,000 $ 7,143,000 $ 39,758,000 $ 1,782,000 The accompanying notes are an integral part of these financial statements. 22 Diodes Incorporated 2000 Annual Report CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended December 31, (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Minority interest earnings Loss on disposal 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 Deferred income taxes Accounts payable Accrued liabilities Income taxes payable Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Collection of advances to related party vendor Investment in subsidiary, net of cash acquired Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Net cash used by investing activities CASH FLOWS FROM FINANCING ACTIVITIES Advances (repayments) on line of credit, net Net proceeds from the issuance of common stock Proceeds from long-term debt Repayments of long-term debt Minority interest of joint venture investment Net cash provided by financing activities 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 Activities: Tax benefit related to stock options credited to paid-in capital Assets acquired in purchase of FabTech: Cash Accounts receivable Inventory Prepaid expenses and other Deferred tax asset Plant and equipment Liabilities assumed in purchase of FabTech: Line of credit Accounts payable Accrued liabilities Income tax payable Long-term debt The accompanying notes are an integral part of these financial statements. 1998 1999 2000 $ 2,673 $ 5,569 $ 14,895 1,168 14 53 (203) 1,779 (252) 278 519 (1,315) 1,480 (665) 5,529 - - (9,793) 27 (9,766) (188) 256 10,388 (6,534) 405 4,327 90 2,325 $ 2,415 $ 2,787 219 45 (195) (5,437) (2,798) (240) (1,269) 5,333 2,361 1,670 5,003 642 13 - (2,161) (9,277) 38 (1,195) 445 267 1,538 8,045 10,208 658 - (9,942) 1 - (4,709) (16,968) 288 (9,283) (21,389) 2,425 983 1,000 (2,124) 96 2,380 1,142 2,415 3,557 1,496 337 12,801 (2,534) - 12,100 919 3,557 $ 4,476 $ $ $ 584 $ 602 $ 1,243 1,658 $ 1,171 $ 2,151 78 $ 961 $ 1,048 $ 441 2,837 5,936 286 1,962 12,510 $ 23,972 $ 3,017 1,736 2,352 2 13,549 $ 20,656 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diodes Incorporated 2000 Annual Report 23 NOTE 1 SUMMARY OF OPERATIONS AND SIGNIFICANT Income taxes - Income taxes are accounted for using an ACCOUNTING POLICIES asset and liability approach whereby deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax Nature of operations - Diodes Incorporated and its sub- bases of the Company’s assets and liabilities. Income taxes are further sidiaries manufacture and distribute discrete semiconductor devices explained in Note 7. to manufacturers in the communications, computing, electronics and automotive industries. The Company’s products include small signal Concentration of credit risk - Financial instruments transistors and MOSFETs, transient voltage suppressers (TVSs), zeners, which potentially subject the Company to concentrations of credit Schottkys, diodes, rectifiers and bridges. The products are sold prima- risk include trade accounts receivable. Credit risk is limited by the rily throughout North America and Asia. dispersion of the Company’s customers over various geographic areas, operating primarily in the electronics manufacturing and distribution Principles of consolidation - The consolidated financial industries. The Company performs on-going credit evaluations of its statements include the accounts of the parent company, Diodes customers and generally requires no collateral from its customers. Incorporated (Diodes), its wholly-owned subsidiaries; Diodes Taiwan Historically, credit losses have not been significant. Corporation, Ltd. (Diodes-Taiwan) and FabTech, Inc. (FabTech or Diodes-FabTech); and its majority (95%) owned subsidiary, Shanghai The Company maintains cash balances at major financial insti- KaiHong Electronics Co., Ltd. (Diodes-China). Diodes acquired FabTech tutions in the United States, Taiwan, and China. Accounts at each on December 1, 2000. See Note 15 for a summary of the acquisition institution in the United States are insured by the Federal Deposit and proforma financial information. Insurance Corporation up to $100,000. Accounts at each institution in Taiwan are insured by the Central Deposit Insurance Company up to All significant intercompany balances and transactions have NT$1,000,000 (approximately US$30,000 as of December 31, 2000). been eliminated in consolidation. Foreign operations - Through its subsidiaries, the Revenue recognition - Revenue is recognized when the Company maintains operations in Taiwan and China for which the product is shipped to both end users and electronic component dis- functional currency is the U.S. dollar. Assets and liabilities of its tributors. The Company reduces revenue in the period of sale for foreign operations which are denominated in currency other than estimates of product returns and other allowances. the U.S. dollar are not hedged and therefore are subject to fluctua- Product warranty - The Company generally warrants its foreign currencies (primarily NT dollar and Renminbi Yuan). Monetary products for a period of one year from the date of sale. Warranty assets and liabilities denominated in foreign currencies are translated expense historically has not been significant. at the year-end exchange rates. Included in net income are foreign tions in the currency exchange rate between the U.S. dollar and Inventories - Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first- and $266,000 for the years ended December 31, 1998, 1999 and 2000, respectively. currency exchange gains (losses) of approximately $111,000, ($3,000) out method. Property, plant and equipment - Property, plant and the weighted average number of shares of common stock and com- equipment are depreciated using straight-line and accelerated meth- mon stock equivalents outstanding, net of common stock held in ods over the estimated useful lives, which range from 20 to 55 years treasury. Earnings per share is computed using the “treasury stock for buildings and 1 to 10 years for machinery and equipment. method” under Financial Accounting Standards Board Statement No. 128. Earnings per share - Earnings per share are based upon Leasehold improvements are amortized using the straight-line method over 1 to 5 years. Options exercisable for 502,000 shares of common stock have been excluded from the computation of diluted earnings per share Goodwill - The excess of the cost of purchased companies because their effect is currently anti-dilutive. over the fair value of the net assets at the dates of acquisition com- prises goodwill. Goodwill is amortized using the straight-line method Stock split - On July 14, 2000, the Company effected a over 20 to 25 years. Amortization expense for the year ended three-for-two stock split for shareholders of record as of June 28, December 31, 2000 was $62,000, and for each of the years ended 2000 in the form of a 50% stock dividend. All share and per share December 31, 1998 and 1999 was $44,000. As of December 31, 1999 amounts in the accompanying financial statements and footnotes and 2000, accumulated amortization is $176,000 and $194,000, reflect the effect of this stock split. respectively. 24 Diodes Incorporated 2000 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF OPERATIONS AND SIGNIFICANT NOTE 2 INVENTORIES ACCOUNTING POLICIES (Continued) (in thousands) Finished goods Work-in-progress Use of estimates - The preparation of financial state- Raw materials ments in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the amounts reported in the financial statements and accom- 1999 2000 $ 10,176 $ 18,603 2,683 10,502 5,513 886 $ 16,575 $ 31,788 panying notes. Actual results could differ from those estimates. NOTE 3 PROPERTY, PLANT AND EQUIPMENT Stock-based compensation - As permitted by SFAS 123, (in thousands) Buildings Accounting for Stock-Based Compensation, the Company continues to Leasehold improvements apply APB Opinion No. 25 (APB 25) and related interpretations in Construction in-progress accounting for its stock option plans. Under SFAS 123, a fair value Machinery and equipment method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant Less accumulated depreciation date and is recognized over the service or vesting period. Under APB and amortization 25, compensation cost is the excess, if any, of the quoted market price of the stock at the measurement date over the amount that Land must be paid to acquire the stock. The new standard requires disclo- sure of the pro forma effect on income as if the Company had adopted SFAS 123 (see Note 8). $ 1999 2000 1,539 $ 2,002 5,901 3,026 465 46,934 55,302 - 21,737 26,302 (5,716) 20,586 323 (10,496) 44,806 323 $ 20,909 $ 45,129 Recently issued accounting pronouncements and proposed accounting changes – During 2000, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standard No. 140 (“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement 125”), No. 139 (“Rescission of FASB Statement No. 53 Financial Reporting by Producers and Distributors of Motion Picture Films and amendments to FASB Statements No. 63, 89, and 121”) and No. 138 (“Accounting for Derivative Instruments and Hedging Activities—an amendment of Financial Accounting Standard Statement No. 133”) which are effective for years after 2000. Management believes these pronouncements will not have a material effect on the Company’s financial statements or disclosures. A recently issued Proposed Statement of Financial Accounting Standards pertaining to “Business Combinations and Intangible Assets – Accounting for Goodwill” is currently in exposure draft form. Among other matters, statement proposes to eliminate amortization of goodwill, but subject goodwill to a periodic impairment test. It is unknown at this time what accounting changes, if any, will be included in the final statement on this issue, which is expected to be released in 2001. Reclassifications - Certain 1999 and 1998 amounts as well as unaudited quarterly financial data presented in the accompa- nying financial statements have been reclassified to conform with 2000 financial statement presentation. NOTE 4 BANK CREDIT AGREEMENT AND LONG-TERM DEBT Bank credit agreement - Diodes has a $26.6 million credit agreement with a major bank providing a working capital line of credit up to $9 million, term commitment notes up to $10 million for plant expansion and financing the acquisition of FabTech, and $7.6 million for Diodes-China 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, 2000. The working capital line of credit expires July 1, 2002. During 2000, average and maximum borrowings outstanding on the line of credit were $3,645,000 and $6,691,000, respectively. The weighted average interest rate on outstanding borrowings was 8.9% for the year ended December 31, 2000. Diodes-China operates with two unsecured working capital credit facilities. One credit facility provides for advances of up to $3 million with interest at 7.0% per annum. The second credit facility provides for advances of RMB $9.3 million ($1,002,000 as of December 31, 2000) with interest of 5.6% to 6.7% per annum. As of December 31, 2000 the balance on these notes is $4,003,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diodes Incorporated 2000 Annual Report 25 NOTE 4 BANK CREDIT AGREEMENT AND LONG-TERM DEBT NOTE 6 VALUATION OF FINANCIAL INSTRUMENTS (Continued) Long-term debt - Long-term debt as of December 31 is receivable, accounts payable, working capital line of credit, and long The Company’s financial instruments include cash, accounts 1999 2000 instruments and estimates the carrying amounts of all financial term debt. The Company does not hold or issue derivative financial $ 116 $ 79 instruments described above with the exception of interest-free debt, to approximate fair value based upon current market conditions, maturity dates, and other factors. The fair value of interest-free debt of $2,458,000 as of December 31, 2000 is approximately $2,025,000. NOTE 7 INCOME TAXES - 2,458 The components of the income tax provisions are as follows: comprised of the following: (in thousands) Loan payable to bank secured by buildings and land, monthly principal payments of NT$84 (approximately $3 U.S.) plus interest at 7% per annum through November 2003 Note payable to a customer for advances made to the Company. Amount to be repaid quarterly by price concessions, with any remaining balance due by February 2003, unsecured and interest-free. Note payable to LPSC, a major stockholder of the Company (Note 10), due in an initial installment of $3,549 plus interest on March 31, 2001 and in equal quarterly installments of $2,500 plus interest thereafter through March 31, 2002. The note bears interest at LIBOR plus 1% and is subordinated to the interest of the Company’s primary lender, unsecured. Loans payable to bank secured by substantially all assets, due in aggregate monthly principal payments of $518 plus interest at LIBOR plus 1.5% through February 2005 Current portion - 13,549 6,868 14,771 6,984 2,312 30,857 14,860 $ 4,672 $ 15,997 The aggregate maturities of long-term debt for future years ending December 31 are: (in thousands) 2001 2002 2003 2004 2005 $ 14,860 9,504 4,765 1,405 323 $ 30,857 (in thousands) Current tax provision (benefit) Federal Foreign State Deferred tax provision (benefit) 1998 1999 2000 $ (82) $ 1,089 (15) 992 1,845 804 $ 1,376 2,314 1 - 2,649 3,691 519 (1,269) (1,195) $ 1,511 $ 1,380 $ 2,496 A reconciliation between the effective tax rate and the statu- tory tax rates for the years ended December 31, 1998, 1999 and 2000 are as follows: 1998 1999 2000 (in thousands) Federal tax Amount $ 1,422 Percent of pretax earnings Amount 34.0 $ 2,363 Percent of pretax earnings Amount 34.0 $ 6,131 Percent of pretax earnings 34.0 State franchise tax, net of federal benefit Foreign income taxed at lower rates Other 242 5.8 403 5.8 1,046 5.8 (145) (8) (3.5) (0.2) (1,416) 30 (20.4) (4,572) (109) 0.4 (25.4) (0.6) Income tax provision $ 1,511 36.1 $ 1,380 19.8 $ 2,496 13.8 NOTE 5 ACCRUED LIABILITIES In accordance with the current taxation policies of the Peoples Republic of China (PRC), Diodes-China was granted a tax holi- (in thousands) 1999 2000 day for the years ended December 31, 1999 through 2003. Earnings Employee compensation and payroll taxes Sales commissions Refunds to product distributors Other Equipment purchases $ 1,552 $ 3,937 1,001 491 2,045 927 553 347 1,824 1,506 were subject to 0% tax rates in 1999 and 2000, and earnings in 2001 through 2003 will be taxed at 13.5% (one half the normal rate of the combined local and central government tax rate of 27%), and at normal rates thereafter. The Company has received indications from the local taxing authority in Shanghai that the tax holiday may be extended beyond 2003. It is not known whether the taxing authority for the central government of the PRC will participate in this extended $ 5,782 $ 8,401 tax holiday arrangement. 26 Diodes Incorporated 2000 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 INCOME TAXES (Continued) Approximately 226,000 shares were available for future grants under the plans as of December 31, 2000. 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 thousands) Number Outstanding Options Exercise Price Per Share Weighted Average Range Balance, December 31, 1997 1,487 $ .58-7.00 In accordance with tax treaty arrangements, the Company receives full 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 Granted Exercised Canceled taxes. In the years ending December 31, 1999 and 2000, Diodes- Balance, December 31, 1998 Taiwan distributed dividends of approximately $1.5 million and $2.6 million, respectively, which is included in Federal and state taxable income. Deferred taxes have been provided for all remaining undis- Granted Exercised Canceled 600 (95) (70) 1,922 176 (362) (74) 3.33-6.67 1.25-4.00 4.00 .58-7.50 4.50-8.50 .58-4.00 3.33-6.67 3.42 5.01 2.70 4.00 3.94 5.01 2.72 4.79 tributed earnings. As of December 31, 2000, accumulated and undistributed earnings of Diodes-China is approximately $17 million. The Company has not recorded deferred Federal or state tax liabilities (estimated to be $6.8 million) on these earnings since the Company considers its investment in Diodes-China to be permanent, and has Balance, December 31, 1999 1,662 1.25-8.50 4.28 Granted Exercised Canceled 512 14.88-23.92 22.16 (194) (34) 1.25-5.00 3.43 5.00-23.92 10.30 no plans, intentions or obligation to distribute any part or all of that Balance, December 31, 2000 1,946 $1.25-$23.92 $ 8.95 amount from China to the United States. At December 31, 1999 and 2000, the Company’s deferred tax shares of stock for issuance to key employees. As of December 31, assets and liabilities are comprised of the following items: 2000, 186,000 shares remain available for issuance under this plan. The Company also has an incentive bonus plan which reserves (in thousands) Deferred tax assets, current Inventory cost Accrued expenses and accounts receivable Net operating loss 1999 2000 ended December 31, 1998 through 2000. No shares were issued under this incentive bonus plan for years $ 1,008 $ 1,653 325 1,039 Had compensation cost for the Company’s 1998, 1999, and 2000 options granted been determined consistent with SFAS 123, the Company’s net income and diluted earnings per share would approxi- mate the pro forma amounts below: carryforwards and other 367 1,695 $ 1,700 $ 4,387 Deferred tax assets, non-current Plant, equipment and intangible assets Net operating loss carryforwards and other $ $ 146 $ (3,128) - 3,744 146 $ 616 NOTE 8 STOCK OPTION PLANS The Company has stock option plans for directors, officers, and 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. (in thousands) 1998 Net income Diluted earnings per share 1999 Net income Diluted earnings per share 2000 Net income Diluted earnings per share As Reported Pro Forma $ $ 2,673 $ .33 5,569 $ .68 1,813 .23 5,040 .61 $ 14,895 $ 11,797 1.28 1.62 NOTE 9 MAJOR SUPPLIERS The Company purchases a significant amount of its inventory from two suppliers, one of which is a related party (Note 10). During 1998, 1999, and 2000, purchases from these suppliers amounted to approximately 43%, 28%, and 23%, respectively, of total inventory purchases including 27%, 19%, and 16%, respectively, from the relat- ed party. There is a limited number of suppliers for these materials. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diodes Incorporated 2000 Annual Report 27 NOTE 10 RELATED PARTY TRANSACTIONS Accounts receivable from and accounts payable to related parties were Lite-On Power Semiconductor Corporation - In July 1997, Vishay Intertechnology, Inc. (“Vishay”) and the Lite-On Group, (in thousands) 1999 2000 as follows as of December 31: a Taiwanese consortium, formed a joint venture - Vishay/Lite-On Accounts receivable Power Semiconductor Pte., LTD. (“Vishay/LPSC”) - to acquire Lite-On Power Semiconductor Corp. (“LPSC”), a 38% shareholder of the Company and a member of the Lite-On Group of the Republic of China. Vishay is one of the largest U.S. and European manufacturers LPSC Other of passive electronic components and a major producer of discrete Accounts payable semiconductors and power integrated circuits. The Lite-On Group is a leading manufacturer of power semiconductors, computer peripherals, LPSC Other and communication products. $ $ $ $ 90 $ - 490 125 90 $ 615 1,680 $ 141 712 296 1,821 $ 1,008 In March 2000, Vishay agreed to sell its 65% interest in the Vishay/LPSC joint venture to the Lite-On Group, the 35% owner. NOTE 11 SEGMENT INFORMATION Because of this transaction, the Lite-On Group, through LPSC, its wholly-owned subsidiary, indirectly owns approximately 38% of the Information about the Company’s operations in the United Company’s common stock. The Company considers its relationship States and Asia are presented herein. Items transferred among the with LPSC to be mutually beneficial and the Company and LPSC will Company and its subsidiaries are transferred at prices to recover continue its strategic alliance as it has since 1991. The Company’s costs plus an appropriate mark up for profit. Inter-company subsidiaries buy product from and sell product to LPSC. Net sales to revenues, profits and assets have been eliminated to arrive at and purchases from LPSC were as follows for years ended December 31: the consolidated amounts. (in thousands) 1998 1999 2000 Operating segments are defined as components of an Net sales $ 905 $ Gross profit on sales 180 1,064 $ 200 Purchases 13,320 10,844 633 120 12,898 As a result of the acquisition of FabTech from LPSC (See Note 15), the Company is indebted to LPSC in the amount of $13,549,000 as of December 31, 2000. Terms of the debt are indicated in Note 4. Interest expense accrued for the year ended December 31, 2000 on this debt was $87,000. FabTech has entered into a volume purchase agreement with LPSC pursuant to which LPSC is obligated to purchase from FabTech, and FabTech is obligated to manufacture and sell to LPSC, minimum and maximum purchase quantities of wafers through December 2003. Minimum monthly quantities range from 16,000 wafers in the first year to 30,000 wafers in the final year of the agreement. Other related parties- For the years ended December 31, 1999 and 2000, Diodes-China purchased approximately $1,810,000 and $1,970,000, respectively, of its inventory purchases from compa- nies owned by its 5% minority shareholder. 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 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 the domestic operations (Diodes and FabTech) located in the United States and the Asian operations (Diodes-Taiwan located in Taipei, Taiwan; and Diodes-China located in Shanghai, China). Diodes Incorporated markets discrete semiconductor devices to manufac- turers and distributors in North America. FabTech manufactures and distributes 5-inch silicon wafers for use in the Company’s internal manufacturing processes at Diodes-China, as well as to trade customers. Diodes-Taiwan markets and sells discrete semiconductor devices throughout Asia and to Diodes Incorporated. Diodes-China manufactures discrete semiconductor devices for sale to Diodes Incorporated, Diodes-Taiwan and third-party customers in Asia. 28 Diodes Incorporated 2000 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 SEGMENT INFORMATION (Continued) Future minimum lease payments under non-cancelable operat- ing leases for years ending December 31 are: The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on stand-alone operating segment income. Revenues are attributed to geographic areas based on the location of the market producing the revenues. (in thousands) Asia U.S.A. Segments Consolidated (in thousands) 2001 2002 2003 2004 2005 Thereafter $ 2,325 2,343 2,369 2,402 1,770 5,905 $ 17,114 2000 Total sales Intersegment sales Net sales Depreciation and amortization Operating income Assets Capital expenditures 1999 Total sales $104,815 (50,781) $ 54,034 $ 67,127 $171,942 (53,480) $ 64,428 $118,462 (2,699) $ 4,405 18,699 61,149 16,177 $ 598 $ 5,003 18,472 112,950 16,968 (227) 51,801 791 Other matter - 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 manufac- turing from 1967 to 1973. The landlord has alleged that the Company may have some responsibility for cleanup costs. Investigations into the landlord’s allegations are ongoing and in the early stages. The Company does not anticipate that the ultimate outcome of this matter will have a material adverse effect on its financial condition. $ 58,932 $ 47,688 $ 106,620 NOTE 13 EMPLOYEE BENEFIT PLANS Intersegment sales (23,903) (3,466) (27,369) Net sales $ 35,029 $ 44,222 $ 79,251 The parent company maintains a 401(k) profit sharing Depreciation and amortization Operating income Assets Capital expenditures 1998 $ 2,448 $ 339 $ 8,783 35,824 9,438 (1,505) 26,583 504 2,787 7,278 62,407 9,942 Total sales Intersegment sales $ 31,869 (13,916) $ 45,600 (2,225) $ 77,469 (16,141) Net sales $ 17,953 $ 43,375 $ 61,328 Depreciation and amortization Operating income Assets Capital expenditures $ 849 $ 3,647 24,195 9,658 319 739 21,194 135 $ 1,168 4,386 45,389 9,793 NOTE 12 COMMITMENTS and CONTINGENCIES Operating leases - The Company leases its offices, manu- facturing 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 $269,000, $327,000, and $503,000, for the years ended December 31, 1998, 1999 and 2000, respectively. plan (the Plan) for the benefit of qualified employees at the parent company’s location. Employees who participate may elect to make salary deferral contributions to the Plan up to 15% of the employees’ eligible payroll. The parent 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 parent company may make a discre- tionary contribution to the entire qualified employee pool, in accordance with the Plan. For the years ended December 31, 1998, 1999, and 2000, the parent company’s total contribution to the Plan was approximately $161,000, $204,000, and $307,000, respectively. FabTech maintains a 401(k) profit sharing plan (the FabTech Plan) for the benefit of qualified employees. Employees may con- tribute up to 20% of their eligible compensation, subject to annual Internal Revenue Code maximum limitations. FabTech may make discretionary contributions up to 40% of the first 5% of each employee’s annual contributions. FabTech’s matching contributions for the month of December 2000 was approximately $6,000. NOTE 14 MANAGEMENT INCENTIVE AGREEMENTS The Company has entered into several management incentive agreements with various members of FabTech’s management. The agreements provide members of management guaranteed annual NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diodes Incorporated 2000 Annual Report 29 NOTE 14 MANAGEMENT INCENTIVE AGREEMENTS (Continued) (in thousands, except for share data) Year Ended December 31, 1999 2000 compensation as well as contingent compensation based on the annual profitability of FabTech and subject to a maximum annual amount. Guaranteed and contingent compensation is applicable only to individuals participating in management as of the last day of each fiscal year. Future minimum payments provided for by the manage- ment incentive agreements for the years ended December 31, are: Net sales Net income Earnings per share Basic Diluted $ 95,829 $138,821 4,487 14,211 $ 0.59 $ 0.55 1.76 1.54 (in thousands) Guaranteed Contingent Maximum 2001 2002 2003 2004 $ 375 $ 375 375 375 125 437 750 938 $ Total 500 812 1,125 1,313 The pro forma results do not represent the Company’s actual operating results had the acquisition been made at the beginning of 1999 or 2000, or the results which may be expected in the future. NOTE 16 SELECTED QUARTERLY FINANCIAL DATA $ 1,500 $ 2,250 $ 3,750 (Unaudited) Quarter Ended March 31 June 30 Sept. 30 Dec. 31 (in thousands, except for share data) Fiscal 2000 $ 27,437 $ 32,600 $ 32,332 $ 26,093 7,380 2,785 10,489 4,320 11,121 4,650 8,437 3,140 Net sales Gross profit Net income Earnings per share Basic Diluted $ 0.39 $ 0.34 0.54 $ 0.46 0.57 $ 0.50 0.34 0.31 Quarter Ended March 31 June 30 Sept. 30 Dec. 31 (in thousands, except for share data) Fiscal 1999 Net sales $ 16,032 $ 18,229 $ 21,750 $ 23,240 3,910 690 4,429 825 5,888 1,684 6,721 2,370 Gross profit Net income Earnings per share $ Basic Diluted $ 0.09 0.09 $ 0.11 0.10 $ 0.22 0.21 0.30 0.27 NOTE 15 BUSINESS ACQUISITION On December 1, 2000, Diodes purchased all of the outstand- ing capital stock of FabTech from LPSC (a 38% shareholder of Diodes, Inc.) 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 pur- chase required an initial cash payment of approximately $5,150,000, including acquisition costs. 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. As a condition to the purchase agreement, certain officers and management of FabTech will receive a total of $2,475,000. 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 fol- lowing the acquisition, subject to continued employment with the Company (see Note 14). The amount of cash paid to the seller at closing was reduced by $975,000, and any portion of the $1,500,000 contingent liability paid by the Company in the future will be reimbursed by the seller. The excess of the purchase price over the fair value of assets acquired (goodwill) amounted to approximately $4,410,000, which is being amortized on the straight-line method over 20 years. The results of operations of FabTech are included in the consolidated financial statements from the date of acquisition. The following represents the unaudited pro forma results of operations as if FabTech had been acquired at the beginning of 1999 and 2000. 30 Diodes Incorporated 2000 Annual Report 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, 2000 and 1999 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, 2000. 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 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. 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, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the years in the three year period ended December 31, 2000, in conformity with generally accepted accounting principles. Moss Adams, LLP Los Angeles, California January 30, 2001 DISTRIBUTION NETWORK Through innovative marketing strategies and advanced and sophisticated logistics, we work with world-class distributors to assist our customers in advancing their technologies. DIRECTORS RAYMOND SOONG Chairman of the Board, Diodes, Inc. Chairman of the Board, The Lite-On Group C.H. CHEN 3C President and Chief Executive Officer, Diodes, Inc. Vice Chairman, Lite-On Semiconductor Corporation EXECUTIVE OFFICERS C.H. CHEN President and Chief Executive Officer JOSEPH LIU Vice President, Far East Operations MARK A. KING Vice President, Sales and Marketing MICHAEL R. GIORDANO 1C,2C,3 Senior Vice President, PaineWebber, Inc. Chief Financial Officer, Treasurer and Secretary CARL WERTZ DAVID LIN Chief Executive Officer, The Lite-On Group M.K. LU 3 President, Lite-On Semiconductor Corporation DR. SHING MAO 2,3 Retired Chairman of the Board, Lite-On Incorporated DR. LEONARD M. SILVERMAN 1,2,3 Dean of Engineering, USC JOHN M. STICH 1,3 President & Chief Executive Officer, The Asian Network 1 - Member, Executive Committee 2 - Member, Compensation and Stock Options Committee 3 - Member, Audit Committee C - Committee Chairman ® SHAREHOLDER INFORMATION Diodes Incorporated common stock is listed and traded on the Nasdaq National Market (Nasdaq: DIOD). No cash dividends have been declared or paid. The Company currently intends to retain any earnings for use in its businesses. 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 Coffin Communications Group 15300 Ventura Blvd., Suite 303 Sherman Oaks, California 91403-5866 tel: 818.789.0100 fax: 818.789.1152 email: crocker.coulson@coffincg.com diodes-fin@diodes.com 2000 1999 High 1st Quarter $ 25.58 33.00 2nd Quarter 28.33 3rd Quarter 17.75 4th Quarter Low $ 11.67 17.00 15.00 8.56 High 1st Quarter $ 4.58 5.96 2nd Quarter 3rd Quarter 6.42 14.33 4th Quarter Low $ 2.83 2.71 3.83 4.00 On July 14, 2000 the Company effected a 50% dividend in the form of a three-for-two stock split. 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 information on the DIODES Inc Investor page, located at www.diodes.com a i n r o f i l a C , s k a O d n a s u o h T , . o C & y t l u N c M : d e n g i s e D DIODES INCORPORATED — Corporate Offices 3050 East Hillcrest Drive Westlake Village, CA 91362-3154 tel: 805.446.4800 fax: 805.446-4850 DIODES — CHINA Shanghai KaiHong Electronic Co., Ltd., No. 1 Chenchun Road, Xingqiao Town Songjiang, Shanghai, P.R.C. 201612 DIODES — TAIWAN Diodes Incorporated Taiwan Company, Ltd. 2nd Fl, 501-15 Chung–Cheng Road Hsin–Tien, Taipei, Taiwan, R.O.C. FABTECH — A Diodes, Inc. company 777 N.W. Blue Parkway Lee's Summit, MO 64086 W W W. D I O D E S . C O M DIODES INCORPORATED REGISTERED TO ISO 9002 FILE NUMBER A5109 

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