DIODES INCORPORATED ANNUAL REPORT 2005
intentionally discreet
dis·creet (d-skret) adj. Having or showing discernment or good judgement; prudent; wise.
This year, we could have gone big—inten-
tionally big. We could have produced an
annual report that would have said, at first
glance, that business here is good. Very
good. It could have been a book that
would have truly attested to our enviable
record of profitability for the past 15
consecutive years! We could have used
full color, dramatic photography and 3-D
graphics—all to suggest our rapidly
DIODES INCORPORATED
expanding manufacturing capacity, our
higher-margin products, our expanded
global sales…
Financial Highlights
$214.8
$185.7
$136.9
$115.8
$93.2
Net Sales
IN MILLIONS
01
02
03
04
05
Earnings Per Share1
DILUTED
$1.29
$1.10
$0.47
$0.29
$0.01
01 02 03 04 05
$225.5
$112.1
$71.5
$51.1 $57.7
Stockholders’ Equity
IN MILLIONS
01 02 03 04 05
(1) Adjusted for the effect of 3-for-2 stock splits in July 2000, November 2003, and December 2005.
(in thousands, except per share data)
Net Sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Non-reoccurring expenses
Total operating expenses
Income (loss) from operations
Interest income, net
Other Income (expense)
Income before taxes and minority interest
Income tax provision (benefit)
Minority interest
Net income
Earnings per share1:
Basic
Diluted
Number of shares1
Basic
Diluted
Total assets
Working capital
Long-term debt
Stockholders’ equity
Return on assets
Return on equity
But we didn’t. Instead, we went simple
and discreet—simple and discreet to truly
reflect our commitment to reduce costs in
order to maximize profit. It could have
been a big, beautiful, expensive annual
report. But we kept it simple, smart and...
discreet.
2001
2002
2003
2004
2005
93,210
14,179
13,711
592
8
14,311
(132)
(2,074)
785
(1,421)
(1,769)
(224)
115,821
26,710
16,228
1,472
43
17,743
8,967
(1,183)
67
7,851
1,729
(320)
136,905
36,528
19,586
2,049
1,037
22,672
13,856
(860)
(5)
12,991
2,460
(436)
185,703
60,735
23,503
3,422
14
26,939
33,796
(637)
(418)
32,741
6,514
(676)
214,765
74,377
30,285
3,713
(102)
33,896
40,481
221
406
41,108
6,685
(1,094)
124
5,802
10,095
25,551
33,329
$
$
0.01
0.01
18,324
19,982
$103,258
19,798
29,497
51,124
$
$
0.32
0.29
18,415
19,946
$105,010
20,831
18,417
57,678
$
$
0.53
0.47
19,096
21,609
$123,795
27,154
12,583
71,450
$
$
1.27
1.10
20,106
23,207
$167,801
49,571
11,347
112,148
0.1%
0.2%
5.6%
10.7%
8.8%
15.6%
17.5%
27.8%
$
$
1.44
1.29
23,168
25,894
$289,515
146,651
9,486
225,474
14.6%
19.7%
Intentionally innovative...
As a world-class manufacturer
and supplier of discrete semi-
conductor products, we supply
our clients with an impressive portfolio of high-
density diodes, transistors and application specific
arrays. But we’re not stopping here.
we’re continuing to position Diodes as an innova-
tion leader—having increased our research
and development investment to nearly
$4 million this past year alone!
Instead,
$3.7
$3.4
$2.0
$1.5
$0.6
R&D
IN MILLIONS
01
02
03
04
05
Intentionally productive...
As a result, we successfully intro-
duced over 200 new part numbers
in 2005, expanding our discrete product
offerings while extending our reach into adjacent
technologies such as analog and mixed signal. But
we’re not stopping here. Instead, we’re working
diligently to develop higher margin, differentiated
products—products that will deliver unimagined
performance for our customers’ next-generation
products as well as our bottom line!
Multi-Chip Packaging Products
(Application-Specific Multi-Chip Circuit “ASMCC”)
Consolidates 5 parts into 1
Intentionally responsive...
And just who are our customers?
At Diodes, we sell to an incredibly diverse
set of end users worldwide: market leaders in the
consumer electronics, computer, telecommunica-
tions, industrial and automotive industries. To
build relationships that enable us to offer service
through innovation and customization, we’re
strengthening our global presence. And, we’re not
stopping here. Instead, we’re doing more than
responding,... we're anticipating—by developing
next-generation products that will advance our
customers’ technologies—and increase our
profitability.
Global Presence
europe 3%
north america 32%
Revenue
asia 65%
intentionally
profitable
We are controlling our costs.
We have a sizable offering of
product. And we deliver superior,
experienced service by working
directly with our customer base.
But we’re not stopping here—not
by a long shot. Instead, ours is a
long-term strategy intended to
grow the company’s position as
a technology innovator and per-
formance leader for discrete and
analog semiconductors, while
growing more and more profitable
in the process. And that’s more
than just good intentions—that’s intentionally
innovative, productive, responsive, profitable, and
... intentionally discreet.
$33.3
$25.6
$10.1
$5.8
$0.1
01
02
03
04
05
Net Income
IN MILLIONS
Dear Shareholders
Letter from our Chairman of the Board
Fiscal 2005 was another remarkable year for
Diodes. Our market position, new products
and global distribution network delivered
positive results for our investors and cus-
tomers. When Dr. Keh-Shew Lu assumed the position of
President and CEO in June of 2005, he joined a team that had
consistently outperformed its competitors, and increased the
Company’s share of the discrete semiconductor market while
creating substantial shareholder value. Dr. Lu's charter was not
to change the direction of the Company, but rather to build on
the Company’s existing strengths to take Diodes to the next
level of success. We are pleased to say that we are on track
with this endeavor.
Our corporate strategy is designed to generate profitable
growth. Our philosophy balances the fundamental responsibility
to generate profits for our shareholders with the needs of our
customers.
By this measure, 2005 was an excellent year for Diodes, Inc.
■ Revenues increased 15.6% to $214.8 million from
$185.7 million in 2004.
■ Our gross margins improved by 190 basis points to 34.6% from
32.7%, a year ago.
■ Net income increased 30.4% to a Company record $33.3 million,
compared with $25.6 million a year ago, as earnings per share
increased to $1.29 from $1.10.
■ We generated $50.1 million in cash from operations versus
$29.3 million in 2004.
■ Our balance sheet strengthened with cash and short-term
investments of nearly $114 million versus $19.0 million last year.
■ And shareholder equity more than doubled to $225.9 million
compared with $112.1 million in 2004.
Just as importantly, 2005 was a year in which Diodes set the
stage for our next phase of corporate growth. We strengthened
our senior management team, significantly expanded our
manufacturing capacity, extended our global sales footprint,
and laid the groundwork to enter exciting new adjacent mar-
kets. Through our successful follow-on offering, we gained the
financial strength to aggressively pursue strategic initiatives.
In 2006, we intend to capitalize on those opportunities and
hope to enjoy further success.
Sincerely,
Raymond Soong
Chairman of the Board
Letter from our New President and CEO
It’s great to be at Diodes and I am excited to
be on this winning team. We expect to build on this
favorable momentum during fiscal 2006, as we continue to focus
on “Profitable Growth.” We plan to achieve Profitable Growth by
realizing cost efficiencies, developing innovative technology,
driving new products, and expanding our customer base.
Cost Reduction
Diodes’ modern, flexible, low-cost manufacturing in mainland
China provides us with a core strategic advantage as we
provide our customers with the highest quality devices at
competitive costs. In both our wafer fabrication and packaging
facilities, the Diodes’ team is focused on achieving continuous
improvements in quality, productivity and yield. During 2005,
we invested nearly $25 million in new manufacturing capacity,
and increased our total output by 52% to over 8 billion devices
a year. Our flexible, customer-centered approach means that
we can quickly reconfigure this capacity as dictated by cus-
tomer requirements. As a result, we are able to deliver devices
of outstanding reliability for high-volume applications within very
tight delivery schedules. All of these factors position Diodes as
a premier supplier with our OEM customers.
Technology Innovation
As a result of our R&D efforts over the past several years,
Diodes has established a reputation as an innovation leader in
discrete technologies. The ongoing miniaturization of consumer
electronics and computing devices has created tremendous
demand for products that can help our customers achieve
enhanced performance and energy efficiency, while shrinking
printed circuit board real estate. High performance, proprietary
platforms such as our PowerDI™123, PowerDI™5 and DFN
ultra-miniature Quad Flat No-Lead packages have set new
industry standards. And we continue to break new ground in
multi-chip integration with our ASMCC (Application Specific
Multi-Chip Circuit) devices and our recently introduced series
of Complex Arrays. These products extend our multi-chip inte-
gration capabilities with arrays that combine multiple functions
into one single, smaller, consolidated package. We have
achieved outsized returns from our investment in research and
development, and plan to increase that investment from 1.7%
of our sales in 2005 to approximately 2.5% in 2006. This will
enable us to extend our reach into analog and mixed signal
devices, which offer tremendous opportunities for profitable
growth.
New Products
During 2005, we successfully introduced over 200 new part
numbers, which have been embraced by our customers and
constituted nearly 16% of total revenues for 2005. Our applica-
tions engineers worked with our customers to make sure they
understood how they could use our products to improve the
performance and efficiency of their next generation electronic
devices. In many cases, we were able to save our customers
money while enhancing Diodes’ margins, as we migrated them
to our next generation devices such as the ASMCC. For 2006,
we expect to continue to introduce a significant number of new
products that leverage our existing breakthrough discrete
packages, as well as other technologies that are under devel-
opment. In addition, we will soon be coming to market with a
range of new analog and power management products from
our internal development efforts and the new linear analog
capabilities that we gained with the January 2006 acquisition
of Anachip Corporation.
Expanded Customer Base
Diodes’ customer service culture and manufacturing excel-
lence have enabled us to build a customer base that spans
the industry leaders in computing, consumer electronics,
communications and automotive sectors. Roughly 70% of our
sales go directly to OEM customers, while the remaining 30%
of our sales go through our network of global distributors. This
closeness to the customer enables us to be more effective in
solving design issues, meeting tight turnaround requirements,
and anticipating our customers’ future needs. In fact, our
customers directly set the pace for our R&D focus. During
2005, we continued to expand our Asia sales and engineering
teams, while strengthening our distribution network in Europe.
Diodes’ global reach means that we can effectively work with
global manufacturers whose design, manufacturing and
logistics span multiple countries around the world. And our
move into adjacent technologies, such as analog and mixed
signal, will enable us to deliver even more value to them.
The Next Level of Success
So what is the next phase of Diodes' growth strategy?
Acquisitions of companies with adjacent technology to our
discrete products will be an important element of our strategy,
with an initial focus on standard analog product that would
leverage our strengths in cost efficient packaging and enable
us to rapidly build share with our existing customer base. Over
time, we intend to expand that reach into proprietary analog
and mixed signal products that will support continued margin
improvement.
The acquisition of Anachip fits dead center with this strategy.
Anachip’s main product focus is Power Management solutions.
They bring an excellent design team with strong capabilities
in a range of targeted analog and power management tech-
nologies. We expect significant synergies to be obtained as
we integrate Anachip with our operations. This includes
growth opportunities from offering their devices to our global
customer base and significant cost synergies as we transition
production from the current outsourced packaging to Diodes’
state-of-the art facilities.
Anachip is the first of what we expect will be several acquisi-
tions that enable us to accelerate our organic growth while
leveraging our innovative discrete component technology, our
world-class packaging capabilities and our sales and market-
ing channels. In broad terms, we intend to apply the same
strategy that has served us so well in the discrete market to
establish a presence and then rapidly grow our share in
the analog and mixed signal arena. Based on input from our
customers, we can see a wide range of opportunities for
growth in this arena in the years ahead.
PowerDI is a trademark of Diodes Incorporated.
Increasing Market Recognition
We are also pleased to report that Diodes’ market and finan-
cial success has received recognition during the past 12
months from leading publications and awards. These include:
■ Rising to 26th in Forbes Magazine’s 200 Best Small Companies
List for 2005.
■ Ranking 10th Among Fortune Small Business Magazine’s List
of Fastest Growing Small Companies.
■ Ranking 45th in Business 2.0 Magazine’s Fastest-Growing
Technology Companies.
■ Ranking 28th in BusinessWeek Magazine’s 2005 List of
100 Best Small Companies.
■ Opening bell ceremonies at Nasdaq Stock Market.
■ Ranking 14th in Electronic Business Magazine’s 30 Best
Small Electronics Companies.
■ Ranking 19th in Los Angeles Business Journal’s 2005 List of
L.A.’s Largest Technology Firms and 87th in their List of Largest
Public Companies.
We remain cognizant that such recognition is based on superior
financial results, and our management team is focused on
sustaining our achievements going forward.
As we head into 2006, demand for discrete semiconductors
continues to be robust and Diodes is well-positioned to capture
opportunities for future growth. We are putting our strategy
into action by aggressively introducing new products, leverag-
ing our strengths in next-generation multi-chip devices,
distinguishing ourselves through our intense customer service,
and expanding our manufacturing capacity. In the discrete
segment, we believe that we are positioned in the right markets,
with the right products, in order to fully exploit the growth
opportunities created by the ongoing miniaturization and
convergence of computing and consumer electronics devices.
As we move into the analog and mixed signal markets, we
expect to sustain our growth while gradually moving toward
higher margined products. In summary, we look forward to
“Profitable Growth” in 2006.
We would like to close by thanking all of Diodes’ shareholders,
customers and employees for making our success possible.
We are very pleased to make a contribution to this winning
team, and can assure our shareholders that your interests are
at the core of our philosophy for operating and growing
Diodes’ top- and bottom-line for the future.
Sincerely,
Dr. Keh-Shew Lu
President and
Chief Executive Officer
Corporate Governance Highlights
Investor confidence in public companies is essential to the
functioning of the global economy. To enlist and sustain
Investor confidence in Diodes Incorporated, we provide
public access to information about our corporate gover-
nance policies in the Investor section of our website at
www.diodes.com. These policies provide a framework for
the proper governance of our Company, consistent with
government requirements and in the best interests of you,
our Shareholders.
Key information about our corporate governance policies and commitments:
Our culture demands
integrity and an unyielding
commitment to strong
internal practices and
policies.
We thank you for the
confidence you have
placed in us.
- The Board adopted a
Code of Ethics for the Chief
Executive Officer and all
members of our finance
department, including the
principal financial/account-
ing officer
- Compensation Committee
makes recommendations
to the Board regarding
compensation, benefits and
incentive arrangements for
officers
- Nominating Committee
recommends director
nominees to be selected
by the Board
- Majority of Board mem-
bers and Board committee
members are independent
- Board adopted a Code of
Business Conduct
- Board committee charters
clearly establish respective
roles and responsibilities
- Audit Committee estab-
lished policies for auditor
independence
- Moss Adams LLP, our
independent registered
public accountant firm,
reports directly to the Audit
Committee, and any non-
audit services performed
do not interfere with their
independence
- Audit Committee conducts
an appropriate review of all
related party transactions
for potential conflict of inter-
est situations on an ongoing
basis and approves such
transactions
- Audit Committee mem-
bers meet regularly with
internal and external
auditors, without the pres-
ence of the Company’s
management
- Internal Audit Manager
reports directly to Audit
Committee
- Through internal audit
control function, we monitor
compliance with our global
financial policies and prac-
tices over critical areas,
including: internal controls,
financial accounting and
reporting, fiduciary account-
ability, and safeguarding of
our corporate assets
- A whistle-blower hotline
has been established as a
confidential means for
employees to address
issues to the Audit
Committee regarding our
Company’s accounting,
internal accounting controls
and auditing practices
2005
Form 10-K
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission file number: 1-5740
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3050 East Hillcrest Drive
Westlake Village, California
(Address of principal executive offices)
95-2039518
(I.R.S. Employer
Identification Number)
91362
(Zip Code)
Registrant’s telephone number, including area code: (805) 446-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.66 2/3
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Security Act. Yes [ ]
No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See Definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated filer [X]
Large accelerated filer [ ]
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the 12,692,093 shares of Common Stock held by non-affiliates of the registrant, based on the
closing price of $20.80 per share of the Common Stock on the Nasdaq National Market on June 30, 2005, the last business
day of the registrant’s most recently completed second quarter, was approximately $263,995,540. The number of shares of
the registrant’s Common Stock outstanding as of March 8, 2006 was 25,474,913.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the 2006 annual meeting of stockholders are incorporated by reference into Part III of
this Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the
registrant’s fiscal year ended December 31, 2005.
1
Item 1.
Business
GENERAL
PART I
We are a global supplier of discrete and analog semiconductor products. We design, manufacture and market these
semiconductors focused on diverse end-use applications in the consumer electronics, computing, industrial, communications
and automotive sectors. Discrete semiconductors, which provide electronic signal amplification and switching functions, are
basic building-block electronic components that are incorporated into almost every electronic device. We believe that our
focus on discrete and analog semiconductors provides us with a meaningful competitive advantage relative to broadline
semiconductor companies that provide a wider range of semiconductor products.
Our portfolio of discrete and analog semiconductors addresses the design needs of many advanced electronic
devices including high-volume consumer devices such as digital audio players, notebook computers, flat-panel displays,
mobile handsets, digital cameras and set-top boxes. We believe that we have particular strength in designing innovative
surface-mount discrete semiconductors for applications with critical need to minimize product size while maximizing power
efficiency and overall performance, and at a lower cost than alternative solutions. Our product portfolio includes over 4,000
products, and we shipped approximately 7.5 billion units in 2004 and approximately 10.2 billion units in 2005.
We serve over 150 direct customers worldwide, which consist of original equipment manufacturers (OEMs) and
electronic manufacturing services (EMS) providers. Additionally, we have 17 distributor customers worldwide, through
which we indirectly serve over 10,000 customers. Our customers include: (i) industry leading OEMs, in a broad range of
industries, such as Bose Corporation, Honeywell International, Inc., LG Electronics, Inc., Logitech, Inc., Motorola, Inc.,
Quanta Computer, Inc., Sagem Communication, Samsung Electronics Co., Ltd. and Thompson, Inc.; (ii) leading EMS
providers such as Celestica, Inc., Flextronics International, Ltd., Hon Hai Precision Industry Co., Ltd., Inventec Corporation,
Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation who build end-market products incorporating our
semiconductors for companies such as Apple Computer, Inc., Cisco Systems, Inc., Dell, Inc., EMC Corporation, Intel
Corporation, Microsoft Corporation and Roche Diagnostics; and (iii) leading distributors, such as Arrow Electronics, Inc.,
Avnet, Inc., Future Electronics and Yosun Industrial Corp. For 2004 and 2005, our OEM and EMS customers together
accounted for 66.3% and 69.5%, respectively, of our net sales.
We are headquartered in Westlake Village, California, near Los Angeles. We have two manufacturing facilities
located in Shanghai, China, and our wafer fabrication facility is in Kansas City, Missouri; and our sales and marketing and
logistical centers are located in Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong Kong. We also have regional
sales offices and/or representatives in: Derbyshire, England; Toulouse, France; Frankfurt, Germany; and in various cities
throughout the United States. From 1998 to 2005, our net sales grew from $60.1 million to $214.8 million, representing a
compound annual growth rate of 20.0%.
The diagram below shows the entities through which we conduct our business and the principal services provided
by each entity.
Diodes
Incorporated
(W estlake Village, CA)
* Headquarters
* Res earch and
development
* Sales and
marketing
FabTech, Inc.
(Kansas City)
100% owned
Shanghai Kaihong
Electronics , Co., Ltd.
(China)
95% owned (1)
Shanghai Kaihong
Technology
(China)
95% owned (1)
DII Taiwan, Co., Ltd.
(Taiwan)
100% owned
Diodes Hong Kong Ltd.
(Hong Kong)
100% owned
* W afer fabrication
* Res earch and development
* Engineering
* Sales and marketing
* Manufacturing
(packaging,
as sembly and tes t)
* Res earch and development * Research and development
* Engineering
* Manufacturing
(packaging,
as sembly and tes t)
* Engineering
(1) 5% owned by Keylink International.
* Sales and marketing
* Sales and marketing
* Logis tical center
2
As part of our growth strategy, in December 2005, we announced the acquisition of Anachip, a fabless Taiwanese
semiconductor company focused on analog ICs designed for specific applications. See “Our Strategy” for more discussion
of the Anachip acquisition.
SEGMENT FINANCIAL INFORMATION
An operating segment is defined as a component of an enterprise about which separate financial information is
available that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Our chief decision-making group consists of the President and Chief Executive
Officer, Chief Financial Officer, Senior Vice President of Operations, Senior Vice President of Sales and Marketing, and
Vice President, Asia Sales. We operate in a single segment, discrete semiconductor devices, through our various
manufacturing and distribution facilities.
Our operations include the domestic operations (Diodes, Inc. and FabTech) located in the United States and the
Asian operations (Diodes-Taiwan located in Taipei, Taiwan, Diodes-China and Diodes-Shanghai both located in Shanghai,
China, and Diodes-Hong Kong located in Hong Kong, China). For reporting purposes, European operations are
consolidated into the domestic (North America) operations. Information about our net revenues, assets and property, plant and
equipment is included in Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-
K.
OUR INDUSTRY
Semiconductors are critical components used in the manufacture of an increasing variety of electronic products and
systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor processes and design
technologies have led to smaller, more complex and more reliable devices at a lower cost per function. The availability of
low-cost semiconductors together with increased customer demand for sophisticated electronic systems has led to the
proliferation of semiconductors in diverse end-use applications in the consumer electronics, computing, industrial,
communications and automotive sectors. These factors have also led to an increase in the total number of semiconductor
components in individual electronic systems and an increase in value of these components as a percentage of the total cost of
the electronic systems in which they are incorporated.
OUR COMPETITIVE STRENGTHS
We believe our competitive strengths include the following:
Flexible, scalable and cost-effective manufacturing -- Our manufacturing operations are a core element of our success and we
have designed our manufacturing base to allow us to respond quickly to changes in demand trends in the end-markets we serve.
For example, we have structured our Shanghai assembly, test and packaging facilities to enable us to rapidly and efficiently
add capacity and adjust product mix to meet shifts in customer demand and overall market trends. As a result, for the past
three years we have operated our Shanghai facilities at near full capacity, while at the same time significantly expanding that
capacity. Additionally, the Shanghai location of our manufacturing operations provides us with access to a highly-skilled
workforce at a low overall cost base while enabling us to better serve our leading customers, many of which are located in
Asia.
Integrated packaging expertise -- We believe that we have particular expertise in designing and manufacturing innovative
and proprietary packaging solutions that integrate multiple separate discrete elements into a single semiconductor product
called an array. Our ability to design and manufacture highly integrated discrete semiconductor solutions provides our
customers with products of equivalent functionality with fewer individual parts, and at lower overall cost, than alternative
products. For example, one of our leading diode array products integrates eight discrete elements into a single highly
miniaturized package that provides four times the functionality, with less than 20% of the space requirements of the previous
solution. This combination of integration, functionality and miniaturization makes our products well suited for high-volume
consumer applications such as digital audio players, notebook computers and digital cameras.
Broad customer base and diverse end-markets -- Our customers include leading OEMs such as Bose Corporation,
Honeywell International, Inc., LG Electronics, Inc., Logitech, Inc., Motorola, Inc., Quanta Computer, Inc., Sagem
Communication, Samsung Electronics Co., Ltd. and Thompson, Inc., as well as leading EMS providers such as Celestica,
Inc., Flextronics International, Ltd., Hon Hai Precision Industry Co., Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-
SCI Corporation and Solectron Corporation. Overall, we serve over 150 direct customers and over 10,000 additional
customers through our distributors, including leading distributors such as Arrow Electronics, Inc., Avnet, Inc., Future
Electronics and Yosun Industrial Corp. Our products are ultimately used in end-products in a large number of markets
3
served by our broad base of customers, which we believe makes us less dependent on either specific customers or specific
end-use applications.
Customer focused product development -- Close collaboration with our customers and a high degree of customer service
are essential elements of our business. We believe focusing on dependable delivery of semiconductor solutions tailored to
specific end-user applications, has fostered deep customer relationships and created a key competitive advantage for us in the
highly fragmented discrete semiconductor marketplace. We believe our close relationships with our OEM and EMS
customers have provided us with deeper insight into our customers’ product needs. This results in differentiation in our
product designs and often provides us with insight into additional opportunities for new design wins in our customers’
products.
Management continuity and experience -- We believe that the continuity of our management team is a critical competitive
strength. The five members of our senior management team have an average of over 12 years of service at Diodes and the
length of their service with us has created significant institutional insight into our markets, our customers and our operations.
In June 2005, we appointed Dr. Keh-Shew Lu as President and Chief Executive Officer. Dr. Lu has served as a director of
Diodes since 2001 and has 30 years of relevant industry experience. Dr. Lu began his career at Texas Instruments, Inc. in
1974 and retired in 2001 as Senior Vice President and General Manager of Worldwide Analog, Mixed-Signal and Logic
Products. Our Chief Financial Officer, Carl Wertz, has been employed by us since 1993 and has over 20 years of financial
experience in manufacturing and distribution industries. Joseph Liu, our Senior Vice President, Operations, joined us in
1990 and has over 30 years of relevant industry experience having started his career in 1971 at Texas Instruments. Similarly,
Mark King, our Senior Vice President of Sales and Marketing, has been employed by us since 1991, as has Steven Ho, our
Vice President of Asia Sales.
OUR STRATEGY
Our strategy is to continue to enhance our position as a global supplier of discrete semiconductor products, and to add
analog IC capabilities, which compliment our current capabilities to the markets we serve, such as power management. The
principal elements of this strategy include the following:
Continue to rapidly introduce innovative discrete and analog semiconductor products -- We intend to maintain our rapid
pace of new discrete product introductions, especially for high-volume, growth applications with short design cycles, such as
digital audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras, set-top boxes and other
consumer electronics and computing devices. During 2005, we introduced 231 new devices in 32 different product families
and achieved new design wins with over 100 OEMs. We believe that continued introduction of new and differentiated
product solutions is critically important in maintaining and extending our market share in the highly competitive
semiconductor marketplace.
Expand our available market opportunities -- We intend to aggressively maximize our opportunities in the discrete and
analog semiconductor market as well as in related markets where we can apply our semiconductor design and manufacturing
expertise. A key element of this is leveraging our highly integrated packaging expertise through our Application Specific
Multi-Chip Circuit (ASMCC) product platform, which consists of standard arrays, function specific arrays and end-
equipment specific arrays. We intend to achieve this by:
(cid:190) Continuing to focus on increasing packaging integration, particularly with our existing standard array and
customer-specific array products, in order to achieve products with increased circuit density, reduced
component count and lower overall product cost;
(cid:190) Expanding existing products and developing new products in our function specific array lines, which combine
multiple discrete semiconductor components to achieve specific common electronic device functionality at a
low cost; and
(cid:190) Developing new product lines, which we refer to as end-equipment specific arrays, which combine discrete
components with logic and/or standard analog circuits to provide system-level solutions for high-volume,
high-growth applications.
Maintain intense customer focus -- We intend to strengthen and deepen our customer relationships. We believe that
continued focus on customer service would increase our net sales, operating performance and overall market share. To
accomplish this, we intend to continue to closely collaborate with our customers to design products that meet their specific
needs. A critical element of this strategy is to continue to further reduce our design cycle time in order to quickly provide our
4
customers with innovative products. Additionally, to support our customer-focused strategy, we are continuing to expand
our sales force and field application engineers, particularly in Asia and Europe.
Enhance cost competitiveness -- A key element of our success is our overall low-cost base. While we believe that our
Shanghai manufacturing facilities are among the most efficient in the industry, we will continue to refine our proprietary
manufacturing processes and technology to achieve additional cost efficiencies. Additionally, we intend to continue to
operate our facilities at high utilization rates and to increase product yields in order to achieve meaningful economies of
scale.
Pursue selective strategic acquisitions -- As part of our strategy to expand our discrete and analog semiconductor product
offerings and to maximize our market opportunities, we may acquire discrete, analog or mixed-signal technologies, product
lines or companies in order to support our ASMCC product platform and enhance our standard and new product offerings.
As part of our growth strategy, in December 2005, we announced the acquisition of Anachip, a fabless Taiwanese
semiconductor company focused on analog ICs designed for specific applications, and headquartered in the Hsinchu Science
Park in Taiwan. This acquisition, which closed on January 10, 2006, fits in the center of our long-term strategy. Anachip’s
main product focus is Power Management ICs. The analog devices they produce are used in LCD monitor/TV's, wireless LAN
802.11 access points, brushless DC motor fans, portable DVD players, datacom devices, ADSL modems, TV/satellite set-top
boxes, and power supplies. Anachip brings a design team with strong capabilities in a range of targeted analog and power
management technologies.
FOLLOW-ON PUBLIC OFFERING
During 2005, we sold 2,125,000 shares of our Common Stock in a follow-on public offering, raising approximately
$71.7 million (net of commissions and expenses). We used approximately $30 million of the net proceeds in connection with
the Anachip acquisition and we intend to use the remaining net proceeds from this offering for working capital and other general
corporate purposes, including acquisitions.
OUR PRODUCTS
Our product portfolio includes over 4,000 products that are designed for use in high-volume consumer devices such
as digital audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras and set-top boxes. We
target and serve end-equipment market segments that we believe have higher growth rates than the overall semiconductor
industry.
Our broad product line includes:
(cid:190) Discrete semiconductor products, including performance Schottky rectifiers; performance Schottky diodes; Zener
diodes and performance Zener diodes, including tight tolerance and low operating current types; standard, fast,
super-fast and ultra-fast recovery rectifiers; bridge rectifiers; switching diodes; small signal bipolar transistors;
prebiased transistors; MOSFETs; and transient voltage suppressors;
(cid:190) Complex high-density diode, transistor and mixed technology arrays, in multi-pin ultra-miniature surface-mount
packages, including customer specific and function specific arrays;
(cid:190) Silicon wafers used in manufacturing these products; and
(cid:190) Analog and mixed-signal devices through our recent Anachip acquisition
Our discrete semiconductor products are an essential building-block of electronic circuit design and are available in
thousands of permutations varying according to voltage, current, power handling capability and switching speed.
Our complex diode and transistor arrays help bridge the gap between discrete semiconductors and integrated
circuits. Arrays consist of multiple discrete semiconductor devices housed in a single package. Our discrete surface-mount
devices, which are components that can be attached to the surface of a substrate with solder, target end-equipment categories
with critical needs to minimize size while maintaining power efficiency and performance.
5
The following table lists the end-markets and some of the applications in which our products are used:
End Markets
Consumer Electronics
Computing
Industrial
Communications
Automotives
Approximate
percentage of
our net sales for
the year ended
December 31,
2005
38%
34%
17%
7%
4%
End product applications
Set-top boxes, game consoles, digital audio players, digital
cameras, mobile handsets, flat-panel displays, personal medical
devices
Notebooks, flat-panel monitors, motherboards, PDAs, multi-
function printers, servers, network interface cards, hard disk
drives
Ballast
power
security/access systems, motor controls, HVAC
Gateways, routers, switches, hubs, fiber optics, DSL, cable and
standard modems, networking (wireless, ethernet, power/phone
line)
Comfort controls, audio/video players, GPS navigation, safety,
security, satellite radios, engine controls, HID lighting
supplies, DC-DC
conversion,
lighting,
PRODUCT PACKAGING
Our device packaging technology includes a wide variety of surface-mount and leaded types. Our focus on the
development of smaller, more thermally efficient, and increasingly integrated packaging, is an important component of our
product development. We provide a comprehensive offering of miniature and sub-miniature packaging, enabling us to fit
discrete components into smaller and more efficient packages, while maintaining the same device functionality and power
handling capabilities. Smaller packaging provides a reduction in the height and weight of, and in the board space required
for, our components and is well suited for battery-powered, hand-held and wireless consumer applications such as digital
audio players, notebook computers, flat-panel displays, mobile handsets, digital cameras and set-top boxes.
CUSTOMERS
We serve over 150 direct customers worldwide, which consist of OEMs and EMS providers. Additionally, we have
17 distributor customers worldwide, through which we indirectly serve over 10,000 customers. Our customers include:
(i) industry leading OEMs in a broad range of industries, such as Bose Corporation, Honeywell International, Inc., LG
Electronics, Inc., Logitech, Inc., Motorola, Inc., Quanta Computer, Inc., Sagem Communication, Samsung Electronics Co.,
Ltd. and Thompson, Inc.; (ii) leading EMS providers, such as Celestica, Inc., Flextronics International, Ltd., Hon Hai
Precision Industry Co., Ltd., Inventec Corporation, Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation,
who build end-market products incorporating our semiconductors for companies such as Apple Computer, Inc., Cisco
Systems, Inc., Dell, Inc., EMC Corporation, Intel Corporation, Microsoft Corporation and Roche Diagnostics; and
(iii) leading distributors such as Arrow Electronics, Inc., Avnet, Inc., Future Electronics and Yosun Industrial Corp. For 2004
and 2005, our OEM and EMS customers together accounted for 66.3% and 69.5%, respectively, of our net sales.
For the year ended December 31, 2004 and December 31, 2005, Lite-On Semiconductor Corporation (LSC), which
is also our largest stockholder, (owning approximately 22.9% of our Common Stock as of December 31, 2005), accounted
for approximately 11.1% and 9.6%, respectively, of our net sales. Additionally, other members of The Lite-On Group of
companies accounted for 3.3% and 4.2% of our net sales, respectively, in 2004 and 2005. No other customer accounted for
10% or more of our net sales in 2004 and 2005. Also, 17.2% and 14.7% of our net sales were from the subsequent sale of
products we purchased from LSC in 2004 and 2005, respectively. We believe each member of The Lite On Group of
companies makes independent purchasing decisions.
We believe that our close relationships with our OEM and EMS customers have provided us with deeper insight
into our customers’ product needs than other manufacturers who we believe depend to a greater extent on indirect sales
through distributors. In addition to seeking to expand relationships with our existing customers, our strategy is to pursue
new customers and diversify our customer base by focusing on leading global consumer electronics companies and their
EMS providers and distributors.
6
We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in
workmanship and materials and conform to our approved specifications. Subject to certain exceptions, our standard
warranty extends for a period of one year from the date of shipment. Warranty expense to date has not been significant.
Generally, our customers may cancel orders on short notice without incurring a significant penalty.
Many of our customers are based in Asia. Net sales by country consists of sales to customers assigned to that
country based on the country to which the product is shipped. For the year ended December 31, 2005, 31.7%, 27.9%, 25.6%
and 14.8% of our net sales were derived from China, Taiwan, the United States and all other markets, respectively, compared
to 23.9%, 27.3%, 28.7% and 20.1%, respectively for 2004.
SALES AND MARKETING
We market and sell our products worldwide through a combination of direct sales and marketing personnel,
independent sales representatives and distributors. We have direct sales personnel in the United States, United Kingdom,
France, Germany, Taiwan and China. We also have independent sales representatives in the United States, Japan, Korea,
and Europe. We currently have distributors in the United States, Europe and Asia.
As of December 31, 2005, our direct global sales and marketing organization consisted of over 90 employees
operating out of 14 offices. We have sales and marketing offices or representatives in Taipei, Taiwan; Shanghai and
Shenzhen, China; Hong Kong; Derbyshire, England; Toulouse, France; Frankfurt, Germany; and we have five regional sales
offices in the United States. As of December 31, 2005, we also had 25 independent sales representative firms marketing our
products.
Our marketing group focuses on our product strategy, product development road map, new product introduction
process, demand assessment and competitive analysis. Our marketing programs include participation in industry tradeshows,
technical conferences and technology seminars, sales training and public relations. The marketing group works closely with
our sales and research and development groups to align our product development road map. The marketing group
coordinates its efforts with our product development, operations and sales groups, as well as with our customers, sales
representatives and distributors. We support our customers through our field application engineering and customer support
organizations.
To support our global customer-base, our website is language-selectable into English, Chinese, and Korean, giving
us an effective marketing tool for worldwide markets. With its extensive online product catalog with advanced search
capabilities, our website facilitates quick and easy product selection. Our website provides easy access to our worldwide
sales contacts and customer support, and incorporates a distributor-inventory check to provide component inventory
availability and a small order desk for overnight sample fulfillment. Our website also provides access to investor financial
information and our corporate governance information.
MANUFACTURING OPERATIONS AND FACILITIES
We operate three manufacturing facilities, two of which are located in Shanghai, China. The third is located in
Kansas City, Missouri. Our facilities in Shanghai perform packaging, assembly and testing functions, and our Kansas City
facility is a 5-inch wafer foundry.
As of December 31, 2005, we had invested approximately $95.7 million in plant and state-of-the-art equipment in
China. Both of our Chinese factories manufacture product for sale by our U.S. and Asian operations, and also sell to external
customers as well. Silicon wafers are received and inspected in a highly controlled “clean room” environment awaiting the
assembly operation. At the first step of assembly, the wafers are sawn with very thin, high speed diamond blades into tiny
semiconductor “dice”, numbering as many as 170,000 per 5-inch diameter wafer. Dice are then loaded onto a handler, which
automatically places the dice, one by one, onto lead frames, which are package specific, where they are bonded to the lead-
frame pad. Next, automatic wire bonders make the necessary electrical connections from the die to the leads of the lead-
frame, using micro-thin gold wire. Our fully automated assembly machinery then molds the epoxy case around the die and
lead-frame to produce the desired semiconductor product. After a trim, form, test, mark and re-test operation, the parts are
placed into special carrier housings and a cover tape seals the parts in place. The taped parts are then spooled onto reels and
boxed for shipment.
Our manufacturing processes use many raw materials, including silicon wafers, copper lead frames, gold wire and
other metals, molding compound, ceramic packages and various chemicals and gases. We have no material agreements with
any of our suppliers that impose minimum or continuing supply obligations. From time to time, suppliers may extend lead
times, limit supplies or increase prices due to capacity constraints or other factors. Although we believe that supplies of the
7
raw materials we use are currently and will continue to be available, shortages could occur in various essential materials due
to interruption of supply or increased demand in the industry.
In the United States, our corporate headquarters are located in a leased facility in Westlake Village, California,
approximately 30 miles from Los Angeles. We also lease or own properties around the world for use as sales offices,
research and development labs, warehouses and logistic centers. The size and/or location of these properties change from
time to time based on business requirements. Our current properties are as follows:
Location
Use
Westlake Village, CA
Global headquarters, warehouse
Manufacturing:
Shanghai, China (Plant 1)
Shanghai, China (Plant 2)
Kansas City, MO
Others:
Taipei, Taiwan
Taipei, Taiwan
Shanghai, China
Shenzhen, China
Kowloon, Hong Kong
Toulouse, France
Amherst, NH
Lemont, IL
Fountain Valley, CA
Brookline, NH
Manufacturing (packaging, assembly and test), research and development,
engineering
Manufacturing (packaging, assembly and test) research and development,
engineering
Wafer fabrication (5”), research and development, engineering, sales and
marketing
Warehouse
Sales and administrative offices
Regional offices
Regional offices
Sales, warehousing and logistics office
Regional sales office
Regional sales office
Regional sales office
Regional sales office
Regional sales office
Approximate
size (sq. ft.)
30,900
145,300
74,300
70,000
9,000
7,000
*
*
*
*
*
*
*
*
* Less than 1,000 square feet.
BACKLOG
The amount of backlog to be shipped during any period is dependent upon various factors, and all orders are subject
to cancellation or modification, usually with no penalty to the customer. Orders are generally booked from one to twelve
months in advance of delivery. The rate of booking of new orders can vary significantly from month to month. We, and the
industry as a whole, are experiencing a trend towards shorter lead-times. The amount of backlog at any date depends upon
various factors, including the timing of the receipt of orders, fluctuations in orders of existing product lines, and the
introduction of any new lines. Accordingly, we believe that the amount of our backlog at any date is not a particularly useful
measure of our future sales. We strive to maintain proper inventory levels to support our customers’ just-in-time order
expectations.
PATENTS, TRADEMARKS AND LICENSES
Although patents and trademarks have not been material to our business to date, they may become more significant
in the future, particularly as they relate to our packaging and analog technologies.
Currently, we do not license our patents or products. We do, however, license certain product technology from other
companies, but we do not consider any of the licensed technology to be material in terms of royalties. We believe the
duration and other terms of the licenses are appropriate for our current needs.
8
COMPETITION
Numerous semiconductor manufacturers and distributors serve the discrete semiconductor components market,
making competition intense. Some of our larger competitors include Fairchild Semiconductor Corporation, Infineon
Technologies A.G., International Rectifier Corporation, ON Semiconductor Corporation, Philips Electronics N.V., Rohm
Electronics USA, LLC, Toshiba Corporation and Vishay Intertechnology, Inc., many of which have greater financial,
marketing, distribution and other resources than us. Accordingly, in response to market conditions, we from time to time
may reposition product lines or decrease prices, which may affect our sales of, and profit margins on, such product lines.
The price and quality of the product, and our ability to design products and deliver customer service in keeping with the
customers’ needs, determine the competitiveness of our products. We believe that our product focus and our flexibility and
ability to quickly adapt to customer needs affords us competitive advantages. Nevertheless, we expect that competition with
larger rivals will continue to be a challenge.
ENGINEERING AND RESEARCH AND DEVELOPMENT
Our engineering and research and development groups consist of customer and applications engineers and product
development engineers who assist in determining the direction of our future product lines. Their primary function is to work
closely with market-leading customers to further refine, expand and improve our product range within our product types and
packages. In addition, customer requirements and acceptance of new package types are assessed and new, higher-density
and more energy-efficient packages are developed to satisfy customers’ needs. Working with customers to integrate multiple
types of technologies within the same package, our applications engineers strive to reduce the required number of
components and, thus, circuit board size requirements of a device, while increasing the functionality of the component
technology.
Product engineers work directly with our semiconductor wafer design and process engineers who craft die designs
needed for products that precisely match our customers’ requirements. Direct contact with our manufacturing facilities
allows the manufacturing of products that are in line with current technical requirements. We have the capability to capture
the customer’s electrical and packaging requirements through their product development engineers, and then transfer those
requirements to our research and development and engineering department, so that the customer’s requirements can be
translated, designed, and manufactured with full control, even to the elemental silicon level.
For the years ended December 31, 2004 and 2005, investment in research and development was $3.4 million and
$3.7 million, respectively. As a percentage of net sales, research and development expense was 1.8% and 1.7% for 2004 and
2005, respectively. We anticipate research and development in absolute dollars and as a percentage of net sales to increase
as we further develop proprietary technology.
EMPLOYEES
As of December 31, 2005, we employed a total of 1,621 employees, of which 1,322 of our employees were in Asia,
293 were in the United States and six were in Europe. None of our employees is subject to a collective bargaining
agreement. We consider our relations with our employees to be good.
ENVIRONMENTAL MATTERS
We are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to
the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in our
manufacturing process both in the United States where our wafer fabrication facility is located, and in China where our
assembly, test and packaging facilities are located. Any of these regulations could require us to acquire equipment or to incur
substantial other expenses to comply with environmental regulations. As of December 31, 2005, there were no known
environmental claims or recorded liabilities.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We conduct business with two related party companies, LSC (and its subsidiaries and affiliates) and Keylink
International (formerly Xing International) (and its subsidiaries). LSC is our largest stockholder and owned 22.9% of our
outstanding Common Stock as of December 31, 2005. Keylink International is our 5% joint venture partner in Diodes-China
and Diodes-Shanghai. C.H. Chen, our previous President and Chief Executive Officer, and Vice Chairman of our Board of
Directors, is also Vice Chairman of LSC. M.K. Lu, a member of our Board of Directors, is President of LSC, while Dr.
Shing Mao, who is one of our directors, retired in 2000 as Chairman of the board of Lite-On Milpitas, a wholly-owned
subsidiary of Taiwan Lite-On which merged with Lite-On Technology Corporation in 2002. Dr. Mao was also a director of
9
LSC from 1989 to 2000. In addition, Raymond Soong, the Chairman of our Board of Directors, is the Chairman of Lite-On
Technology Corporation, a significant shareholder of LSC, as well as Chairman of LSC. In connection with our 2005
follow-on public offering, LSC sold 750,000 shares (1,125,000 split-adjusted shares at December 1, 2005), reducing its
holdings of our Common Stock to 5,777,187 shares (split adjusted). We did not receive any of the proceeds from their sale
of our Common Stock.
The Audit Committee of our Board of Director reviews all related party transactions for potential conflict of interest
situations, and approves all such transactions, in accordance with such procedures as it may adopt from time to time. We
believe that all related party transactions are on terms no less favorable to us than would be obtained from unaffiliated third
parties.
In 2005, we sold silicon wafers to LSC totaling 9.6% (11.1% in 2004 and 10.7% in 2003) of our sales, making LSC
our largest customer. Also for 2005, 14.7% (17.2% in 2004 and 17.3% in 2003) of our sales were from discrete
semiconductor products purchased from LSC for subsequent sale by us, making LSC our largest outside supplier. In
addition, companies affiliated with LSC, which we refer to collectively as The Lite-On Group, accounted for 2.5%, 3.3% and
4.2% of our net sales, respectively, in 2003, 2004 and 2005. We also rent warehouse space in Hong Kong from a member of
The Lite-On Group, which also provides us with warehousing services at that location. For 2003, 2004 and 2005 we
reimbursed this entity in aggregate amounts of $112,000, $190,000 and $288,000, respectively, for these items. Such
transactions are on terms no less favorable to us than could be obtained from unaffiliated third parties. The Audit Committee
of the Board of Directors has approved the arrangements we have with these related party transactions.
In December 2000, we acquired a wafer foundry, FabTech, Inc., from LSC. As part of the purchase price, LSC
received a subordinated, interest-bearing note receivable in a principal amount of $13.5 million, of which approximately $2.5
million and $0, respectively, was outstanding as of December 31, 2004 and December 31, 2005. In May 2002, we
renegotiated the terms of the note to extend the payment period from two years to four years, and, as a result, monthly
payments of approximately $208,000 plus interest began in July 2002. In connection with the acquisition, LSC entered into
a volume purchase agreement to purchase wafers from FabTech. In addition, in accordance with the terms of the acquisition,
we also entered into several management incentive agreements with members of FabTech’s management. The agreements
provided members of FabTech’s management with guaranteed annual payments as well as contingent bonuses based on the
annual profitability of FabTech, subject to a maximum annual amount. Any portion of the guaranteed and contingent
liability paid by FabTech was reimbursed by LSC. The final year of the management incentive agreements was 2004, with
final payment made on March 31, 2005. LSC reimbursed us in the amount of $375,000 for each of 2002, 2003 and 2004, for
bonuses paid by us under these management incentive agreements.
In 2005, we sold silicon wafers to companies owned by Keylink International totaling 0.6% (0.9% in 2004 and
1.1% in 2003) of our sales. Also for 2005, 3.0% (3.5% in 2004 and 4.6% in 2003) of our sales were from discrete
semiconductor products purchased from companies owned by Keylink International. In addition, Diodes-China and Diodes-
Shanghai lease their manufacturing facilities from, and subcontract a portion of their manufacturing process (metal plating
and environmental services) to, Keylink International. We also pay a consulting fee to Keylink International. In 2003, 2004
and 2005, we paid Keylink International an aggregate of $3.5 million, $4.8 million and $6.6 million, respectively, with
respect to these items. We believe such transactions are on terms no less favorable to us than could be obtained from
unaffiliated third parties. The Audit Committee of the Board of Directors has approved the contracts associated with these
related party transactions.
On December 20, 2005, we announced we signed a definitive stock purchase agreement to acquire Anachip Corporation,
a Taiwanese fabless analog IC company, and headquartered in the Hsinchu Science Park in Taiwan. The selling shareholders
included LSC (which owned approximately 60% of Anachip’s outstanding capital stock), and two Taiwanese venture capital firms
(together owning approximately 20% of Anachip’s stock), as well as current and former Anachip employees.
At December 31, 2005, we had purchased an aggregate of 9,433,613 shares (or approximately 18.9%) of the 50,000,000
outstanding shares of the capital stock of Anachip. On January 10, 2006, (the closing date of the acquisition) we purchased an
additional 40,470,212 shares and therefore, we now hold approximately 99.81% of the Anachip capital stock.
REPORTING SEGMENT
For financial reporting purposes, the Company is deemed to engage in one industry segment: discrete semiconductors.
See Note 11 of “Notes to Consolidated Financial Statements” for a more detailed discussion.
10
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We sell product primarily through our operations in North America, Asia and Europe. See Note 11 of “Notes to
Consolidated Financial Statements” for a description of our geographic information.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
With respect to foreign operations, see Notes 1 and 11 of “Notes to Consolidated Financial Statements.”
AVAILABLE INFORMATION
Our website address is http://www.diodes.com. We make available, free of charge through our website, our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).
Our filings may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-
0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
To support our global customer base, our website is language-selectable into English, Chinese, and Korean, giving us
an effective marketing tool for worldwide markets. With its extensive online Product (Parametric) Catalog with advanced search
capabilities, our website facilitates quick and easy product selection. Our website provides easy access to world-wide sales
contacts and customer support, and incorporates a distributor-inventory check to provide component inventory availability and a
small order desk for overnight sample fulfillment. Our website also provides access to current and complete investor financial
information and corporate governance information including our Code of Business Conduct, as well as SEC filings and press
releases, and stock quotes.
Cautionary Statement for Purposes of the “Safe Harbor” Provision of the Private Securities Litigation
Reform Act of 1995
Many of the statements included in this Annual Report on Form 10-K contain forward-looking statements and
information relating to our company. We generally identify forward-looking statements by the use of terminology such as
“may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,”
“project,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions
we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions,
including those identified in “Risk Factors,” as well as other matters not yet known to us or not currently considered material
by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties,
prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking
statements do not guarantee future performance and should not be considered as statements of fact.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking
statements to reflect new information or future events or otherwise. The Private Securities Litigation Reform Act of 1995
(the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made
on this Annual Report on Form 10-K are made pursuant to the Act.
Item 1A.
Risk Factors
RISKS RELATED TO OUR BUSINESS
Downturns in the highly cyclical semiconductor industry or changes in end-market demand could affect our operating
results and financial condition.
The semiconductor industry is highly cyclical, and periodically experiences significant economic downturns
characterized by diminished product demand, production overcapacity and excess inventory, which can result in rapid erosion in
average selling prices. For example, beginning in the fourth quarter of 2000 and continuing into 2003, the semiconductor
industry experienced order cancellations and reduced demand for products, resulting in significant revenue declines, due to
11
excess inventories at computer and telecommunications equipment manufacturers and general economic conditions, especially in
the technology sector. The market for semiconductors may experience renewed, and possibly more severe and prolonged
downturns in the future, which may harm our results of operations and reduce the value of our business.
In addition, we operate in the discrete (and now analog) semiconductor segment of the broader semiconductor market
and, as a result, cyclical fluctuations may affect this segment to a greater extent than they do the broader semiconductor market.
This may cause us to experience greater fluctuations in our results of operations than compared to some of our broadline
semiconductor manufacturer competitors. In addition, we may experience significant changes in our profitability as a result of
variations in sales, changes in product mix, changes in end-user markets and the costs associated with the introduction of new
products. The markets for our products depend on continued demand in the consumer electronics, computer, industrial,
communications and automotive sectors. These end-user markets also tend to be cyclical and may also experience changes in
demand that could adversely affect our operating results and financial condition.
The semiconductor business is highly competitive, and increased competition may harm our business and our operating
results.
The semiconductor segments of the semiconductor industry in which we operate are highly competitive. We expect
intensified competition from existing competitors and new entrants. Competition is based on price, product performance, product
availability, quality, reliability and customer service. We compete in various markets with companies of various sizes, many of
which are larger and have greater resources or capabilities as it relates to financial, marketing, distribution, brand name
recognition, research and development, manufacturing and other resources than we have. As a result, they may be better able to
develop new products, market their products, pursue acquisition candidates and withstand adverse economic or market
conditions. Most of our current major competitors are broadline semiconductor manufacturers who often have a wider range of
product types and technologies than we do. In addition, companies not currently in direct competition with us may introduce
competing products in the future. Some of our current major competitors are Fairchild Semiconductor Corporation, International
Rectifier Corporation, ON Semiconductor Corporation, Philips Electronics N.V., Rohm Electronics USA LLC, and Vishay
Intertechnology, Inc. We may not be able to compete successfully in the future, and competitive pressures may harm our
financial condition or our operating results.
We receive a significant portion of our net sales from a single customer. In addition, this customer is also our largest
external supplier and is a related party. The loss of this customer or supplier could harm our business and results of
operations.
In 2004 and 2005, LSC, our largest stockholder and our largest customer, accounted for 11.1% and 9.6%, respectively,
of our net sales. LSC is also our largest supplier, providing us with discrete semiconductor products for subsequent sale by us,
which represented approximately 14.7% and 17.2%, respectively, of our net sales, in 2004 and 2005. The loss of LSC as either a
customer or a supplier, or any significant reduction in either the amount of product it supplies to us, or the volume of orders it
places with us, could materially harm our business and results of operations.
Delays in initiation of production at new facilities, implementing new production techniques or resolving problems
associated with technical equipment malfunctions could adversely affect our manufacturing efficiencies.
Our manufacturing efficiency has been and will be an important factor in our future profitability, and we may not be
able to maintain or increase our manufacturing efficiency. Our manufacturing and testing processes are complex, require
advanced and costly equipment and are continually being modified in our efforts to improve yields and product performance.
Difficulties in the manufacturing process can lower yields. Technical or other problems could lead to production delays, order
cancellations and lost revenue. In addition, any problems in achieving acceptable yields, construction delays, or other problems
in upgrading or expanding existing facilities, building new facilities, problems in bringing other new manufacturing capacity to
full production or changing our process technologies, could also result in capacity constraints, production delays and a loss of
future revenues and customers. Our operating results also could be adversely affected by any increase in fixed costs and
operating expenses related to increases in production capacity if net sales do not increase proportionately, or in the event of a
decline in demand for our products.
Our wafer fabrication facility is located in Kansas City, Missouri, while our facilities in Shanghai, China provide
assembly, test and packaging capabilities. Any disruption of operations at these facilities could have a material adverse effect on
our business, financial condition and results of operations.
12
We are and will continue to be under continuous pressure from our customers and competitors to reduce the price of our
products, which could adversely affect our growth and profit margins.
Prices for our products tend to decrease over their life cycle. There is substantial and continuing pressure from
customers to reduce the total cost of purchasing our products. To remain competitive and retain our customers and gain new
ones, we must continue to reduce our costs through product and manufacturing improvements. We must also strive to minimize
our customers’ shipping and inventory financing costs and to meet their other goals for rationalization of supply and production.
We experienced an annual decrease in average selling prices for our products of 3.1% and 15.0% for 2004 and 2005,
respectively. At times, average selling prices for some of our standard discrete semiconductors have been below our costs. Our
growth and the profit margins of our products will suffer if we cannot effectively continue to reduce our costs and keep our
product prices competitive.
Our customer orders are subject to cancellation or modification usually with no penalty. High volumes of order
cancellation or reductions in quantities ordered could adversely affect our results of operations and financial condition.
All of our customer orders are subject to cancellation or modification, usually with no penalty to the customer. Orders
are generally made on a purchase order basis, rather than pursuant to long-term supply contracts, and are booked from one to
twelve months in advance of delivery. The rate of booking new orders can vary significantly from month to month. We, and the
semiconductor industry as a whole, are experiencing a trend towards shorter lead-times, which is the amount of time between the
date a customer places an order and the date the customer requires shipment. Furthermore, our industry is subject to rapid
changes in customer outlook and periods of excess inventory due to changes in demand in the end markets our industry serves.
As a result, many of our purchase orders are revised, and may be cancelled, with little or no penalty and with little or no notice.
However, we must still commit production and other resources to fulfilling these orders even though they may ultimately be
cancelled. If a significant number of orders are cancelled or product quantities ordered are reduced, and we are unable to timely
generate replacement orders, we may build up excess inventory and our results of operations and financial condition may suffer.
New technologies could result in the development of new products by our competitors and a decrease in demand for our
products, and we may not be able to develop new products to satisfy changes in demand, which could result in a decrease
in net sales and loss of market share.
Our product range and new product development program is focused on discrete and analog semiconductor products.
Our failure to develop new technologies, or anticipate or react to changes in existing technologies, either within or outside of the
discrete semiconductor market, could materially delay development of new products, which could result in a decrease in our net
sales and a loss of market share to our competitors. The semiconductor industry is characterized by rapidly changing
technologies and industry standards, together with frequent new product introductions. This includes the development of new
types of technology or the improvement of existing technologies, such as analog and digital technologies that compete with, or
seek to replace discrete semiconductor technology. Our financial performance depends on our ability to design, develop,
manufacture, assemble, test, market and support new products and product enhancements on a timely and cost-effective basis.
New products often command higher prices and, as a result, higher profit margins. We may not successfully identify new
product opportunities or develop and bring new products to market or succeed in selling them into new customer applications in
a timely and cost-effective manner.
Products or technologies developed by other companies may render our products or technologies obsolete or
noncompetitive and, since we operate primarily in the discrete segment of the broader semiconductor industry, this may have a
greater effect on us than it would if we were a broad-line semiconductor manufacturer with a wider range of product types and
technologies. Many of our competitors are larger and more established international companies with greater engineering and
research and development resources than us. Our failure to identify or capitalize on any fundamental shifts in technologies in
our product markets, relative to our competitors, could harm our business, have a material adverse effect on our competitive
position within our industry and harm our relationships with our customers. In addition, to remain competitive, we must continue
to reduce package sizes, improve manufacturing yields and expand our sales. We may not be able to accomplish these goals,
which could harm our business.
We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-
party technology, which could result in significant expense and reduction in our intellectual property rights.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From
time to time, third parties have asserted, and may in the future assert, patent, copyright, trademark and other intellectual property
rights to technologies that are important to our business and have demanded, and may in the future demand, that we license their
patents and technology. Any litigation to determine the validity of allegations that our products infringe or may infringe these
rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of
13
our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and
technical personnel. We may not prevail in litigation given the complex technical issues and inherent uncertainties in intellectual
property litigation. If litigation results in an adverse ruling we could be required to:
(cid:190) pay substantial damages for past, present and future use of the infringing technology;
(cid:190) cease the manufacture, use or sale of infringing products;
(cid:190) discontinue the use of infringing technology;
(cid:190) expend significant resources to develop non-infringing technology;
(cid:190) pay substantial damages to our customers or end-users to discontinue use or replace infringing technology with non-
infringing technology;
(cid:190) license technology from the third party claiming infringement, which license may not be available on commercially
reasonable terms, or at all; or
(cid:190) relinquish intellectual property rights associated with one or more of our patent claims, if such claims are held
invalid or otherwise unenforceable.
We depend on third-party suppliers for timely deliveries of raw materials, parts and equipment, as well as finished
products from other manufacturers, and our results of operations could be adversely affected if we are unable to obtain
adequate supplies in a timely manner.
Our manufacturing operations depend upon obtaining adequate supplies of raw materials, parts and equipment on a
timely basis from third parties. Our results of operations could be adversely affected if we are unable to obtain adequate supplies
of raw materials, parts and equipment in a timely manner or if the costs of raw materials, parts or equipment were to increase
significantly. Our business could also be adversely affected if there is a significant degradation in the quality of raw materials
used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which could
lead to an increase in customer returns or product warranty claims. Although we maintain rigorous quality control systems,
errors or defects may arise from a supplied raw material and be beyond our detection or control. Any interruption in, or change
in quality of, the supply of raw materials, parts or equipment needed to manufacture our products could adversely affect our
business and harm our results of operations and our reputation with our customers.
In addition, we sell finished products from other manufacturers. Our business could also be adversely affected if there
is a significant degradation in the quality of these products. From time to time, such manufacturers may extend lead-times, limit
supplies or increase prices due to capacity constraints or other factors. We have no long-term purchase contracts with any of
these manufacturers and, therefore, have no contractual assurances of continued supply, pricing or access to finished products
that we sell, and any such manufacturer could discontinue supplying to us at any time. Additionally, some of our suppliers of
finished products or wafers compete directly with us and may in the future choose not to supply products to us.
If we do not succeed in continuing to vertically integrate our business, we will not realize the cost and other efficiencies
we anticipate and our ability to compete, profit margins and results of operations may suffer.
We are continuing to vertically integrate our business. Key elements of this strategy include continuing to expand the
reach of our sales organization, expand our manufacturing capacity, expand our wafer foundry and research and development
capability and expand our marketing, product development, package development and assembly/testing operations in company-
owned facilities or through the acquisition of established contractors. There are certain risks associated with our vertical
integration strategy, including:
(cid:190) difficulties associated with owning a manufacturing business, including, but not limited to, the maintenance and
management of manufacturing facilities, equipment, employees and inventories and limitations on the flexibility of
controlling overhead;
(cid:190) difficulties in continuing expansion of our operations in Asia and Europe, because of the distance from our
U.S. headquarters and differing regulatory and cultural environments;
(cid:190) the need for skills and techniques that are outside our traditional core expertise;
(cid:190) less flexibility in shifting manufacturing or supply sources from one region to another;
(cid:190) even when independent suppliers offer lower prices, we would continue to acquire wafers from our captive
manufacturing facility, which may result in us having higher costs than our competitors;
(cid:190) difficulties developing and implementing a successful research and development team; and
(cid:190) difficulties developing, protecting, and gaining market acceptance of, our proprietary technology.
The risks of becoming a fully integrated manufacturer are amplified in an industry-wide slowdown because of the fixed
costs associated with manufacturing facilities. In addition, we may not realize the cost, operating and other efficiencies that we
14
expect from continued vertical integration. If we fail to successfully vertically integrate our business, our ability to compete,
profit margins and results of operations may suffer.
Part of our growth strategy involves identifying and acquiring companies with complementary product lines or customers.
We may be unable to identify suitable acquisition candidates or consummate desired acquisitions and, if we do make any
acquisitions, we may be unable to successfully integrate any acquired companies with our operations.
A significant part of our growth strategy involves acquiring companies with complementary product lines, customers or
other capabilities. For example, (i) in fiscal year 2000, we acquired FabTech, a wafer fabrication company, in order to have our
own wafer manufacturing capabilities, and (ii) in January 2006, we acquired Anachip as an entry into standard logic markets.
While we do not currently have any agreements in place, or any active negotiations underway, with respect to any acquisition,
we intend to continue to expand and diversify our operations by making further acquisitions. However, we may be unsuccessful
in identifying suitable acquisition candidates, or we may be unable to consummate a desired acquisition. To the extent we do
make acquisitions, if we are unsuccessful in integrating these companies or their operations or product lines with our operations,
or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse effect on our
business, financial condition and results of operations. In addition, we may not realize all of the benefits we anticipate from any
such acquisitions. Some of the risks that may affect our ability to integrate or realize any anticipated benefits from acquisitions
that we may make include those associated with:
(cid:190) unexpected losses of key employees or customers of the acquired company;
(cid:190) bringing the acquired company’s standards, processes, procedures and controls into conformance with our
operations;
(cid:190) coordinating our new product and process development;
(cid:190) hiring additional management and other critical personnel;
(cid:190) increasing the scope, geographic diversity and complexity of our operations;
(cid:190) difficulties in consolidating facilities and transferring processes and know-how;
(cid:190) difficulties in reducing costs of the acquired entity’s business;
(cid:190) diversion of management’s attention from the management of our business; and
(cid:190) adverse effects on existing business relationships with customers.
We are subject to many environmental laws and regulations that could affect our operations or result in significant
expenses.
We are subject to a variety of U.S. federal, state, local and foreign governmental laws, rules and regulations related to
the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals used in our
manufacturing process both in the United States where our wafer fabrication facility is located, and in China where our
assembly, test and packaging facilities are located. Some of these regulations in the United States include the Federal Clean
Water Act, Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation,
and Liability Act and similar state statutes and regulations. Any of these regulations could require us to acquire equipment or to
incur substantial other expenses to comply with environmental regulations. If we were to incur such additional expenses, our
product costs could significantly increase, materially affecting our business, financial condition and results of operations. Any
failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production
or cessation of operations, any of which could have a material adverse effect on our business, financial condition and results of
operations. Our operations affected by such requirements include, among others: the disposal of wastewater containing residues
from our manufacturing operations through publicly operated treatment works or sewer systems, and which may be subject to
volume and chemical discharge limits and may also require discharge permits; and the use, storage and disposal of materials that
may be classified as toxic or hazardous. Any of these may result in, or may have resulted in, environmental conditions for which
we could be liable.
Some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on,
or emanating from, our currently or formerly owned, leased or operated properties, as well as for damages to property or natural
resources and for personal injury arising out of such contamination. Such liability may also be joint and several, meaning that
we could be held responsible for more than our share of the liability involved, or even the entire share. In addition, the presence
of environmental contamination could also interfere with ongoing operations or adversely affect our ability to sell or lease our
properties. Environmental requirements may also limit our ability to identify suitable sites for new or expanded plants.
Although we conduct environmental due diligence on properties that we operate, our diligence may not have revealed all
environmental conditions on those properties. Discovery of additional contamination for which we are responsible, the
enactment of new laws and regulations, or changes in how existing requirements are enforced, could require us to incur
additional costs for compliance or subject us to unexpected liabilities.
15
Our products may be found to be defective and, as a result, product liability claims may be asserted against us, which may
harm our business and our reputation with our customers.
Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in
which they are incorporated. For example, our products that are incorporated into a personal computer may be sold for several
cents, whereas the computer maker might sell the personal computer for several hundred dollars. Although we maintain rigorous
quality control systems, we shipped approximately 10.2 billion individual semiconductor devices in 2005 to customers around
the world, and in the ordinary course of our business, we receive warranty claims for some of these products that are defective,
or that do not perform to published specifications. Since a defect or failure in our products could give rise to failures in the end
products that incorporate them (and consequential claims for damages against our customers from their customers), we may face
claims for damages that are disproportionate to the revenues and profits we receive from the products involved. In addition, our
ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do
business. Even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain
a customer’s business or goodwill or to settle claims to avoid protracted litigation. Our results of operations and business could
be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay
for the damages that result. Although we currently have product liability insurance, we may not have sufficient insurance
coverage, and we may not have sufficient resources, to satisfy all possible product liability claims. In addition, any perception
that our products are defective would likely result in reduced sales of our products, loss of customers and harm to our business
and reputation.
We may fail to attract or retain the qualified technical, sales, marketing and management personnel required to operate
our business successfully.
Our future success depends, in part, upon our ability to attract and retain highly qualified technical, sales, marketing and
managerial personnel. Personnel with the necessary expertise are scarce and competition for personnel with these skills is
intense. We may not be able to retain existing key technical, sales, marketing and managerial employees or be successful in
attracting, assimilating or retaining other highly qualified technical, sales, marketing and managerial personnel in the future. For
example, we have faced, and continue to face, intense competition for qualified technical and other personnel in Shanghai,
China, where our assembly, test and packaging facilities are located. A number of U.S. and multi-national corporations, both in
the semiconductor industry and in other industries, have recently established and are continuing to establish factories and plants
in Shanghai, China, and the competition for qualified personnel has increased significantly as a result. If we are unable to retain
existing key employees or are unsuccessful in attracting new highly qualified employees, our business, financial condition and
results of operations could be materially and adversely affected.
We may not be able to maintain our growth or achieve future growth and such growth may place a strain on our
management and on our systems and resources.
Our ability to successfully grow our business within the discrete and analog semiconductor markets requires effective
planning and management. Our past growth, and our targeted future growth, may place a significant strain on our management
and on our systems and resources, including our financial and managerial controls, reporting systems and procedures. In
addition, we will need to continue to train and manage our workforce worldwide. If we are unable to effectively plan and
manage our growth effectively, our business and prospects will be harmed and we will not be able to maintain our profit growth
or achieve future growth.
Our business may be adversely affected by obsolete inventories as a result of changes in demand for our products and
change in life cycles of our products.
The life cycles of some of our products depend heavily upon the life cycles of the end products into which devices are
designed. These types of end-market products with short life cycles require us to manage closely our production and inventory
levels. Inventory may also become obsolete because of adverse changes in end-market demand. We may in the future be
adversely affected by obsolete or excess inventories which may result from unanticipated changes in the estimated total demand
for our products or the estimated life cycles of the end products into which our products are designed. In addition, some
customers restrict how far back the date of manufacture for our products can be, and therefore some of our products inventory
may become obsolete, and thus, adversely affect our results of operations.
16
If OEMs do not design our products into their applications, a portion of our net sales may be adversely affected.
We expect an increasingly significant portion of net sales will come from products we design specifically for our
customers. However, we may be unable to achieve these design wins. In addition, a design win from a customer does not
necessarily guarantee future sales to that customer. Without design wins from OEMs, we would only be able to sell our products
to these OEMs as a second source, which usually means we are only able to sell a limited amount of product to them. Once an
OEM designs another supplier’s semiconductors into one of its product platforms, it is more difficult for us to achieve future
design wins with that OEM’s product platform because changing suppliers involves significant cost, time, effort and risk to an
OEM. Achieving a design win with a customer does not ensure that we will receive significant revenues from that customer and
we may be unable to convert design into actual sales. Even after a design win, the customer is not obligated to purchase our
products and can choose at any time to stop using our products, if, for example, its own products are not commercially
successful.
We rely heavily on our internal electronic information and communications systems, and any system outage could
adversely affect our business and results of operations.
All of our operations, other than FabTech and Anachip, operate on a single technology platform. To manage our
international operations efficiently and effectively, we rely heavily on our Enterprise Resource Planning (ERP) system, internal
electronic information and communications systems and on systems or support services from third parties. Any of these systems
are subject to electrical or telecommunications outages, computer hacking or other general system failure. Difficulties in
upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could have
material adverse effects on our business, financial condition, results of operations and cash flows.
We are subject to interest rate risk that could have an adverse effect on our cost of working capital and interest expenses.
We have credit facilities with U.S. and Asian financial institutions, as well as other debt instruments, with interest rates
equal to LIBOR or similar indices plus a negotiated margin. A rise in interest rates could have an adverse impact upon our cost
of working capital and our interest expense. As of December 31, 2005, our outstanding interest-bearing debt was $10.7 million.
An increase of 1.0% in interest rates would increase our annual interest rate expense by approximately $107,000.
If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over
financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our
business and the trading price of our Common Stock.
Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to
prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal
controls. These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are
necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, these controls
may not always be effective. There are inherent limitations on the effectiveness of internal controls including collusion,
management override, and failure of human judgment. Because of this, control procedures are designed to reduce rather than
eliminate business risks. In connection with their audit of our financial statements, our independent registered public accounting
firm identified several deficiencies in our internal controls, including a need for additional accounting personnel. If we fail to
maintain an effective system of internal controls or if management or our independent registered public accounting firm were to
discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud
and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our
stock price.
Terrorist attacks, or threats or occurrences of other terrorist activities whether in the United States or internationally may
affect the markets in which our Common Stock trades, the markets in which we operate and our profitability.
Terrorist attacks, or threats or occurrences of other terrorist or related activities, whether in the United States or
internationally, may affect the markets in which our Common Stock trades, the markets in which we operate and our
profitability. Future terrorist or related activities could affect our domestic and international sales, disrupt our supply chains and
impair our ability to produce and deliver our products. Such activities could affect our physical facilities or those of our
suppliers or customers. Such terrorist attacks could cause ports or airports to or through which we ship to be shut down, thereby
preventing the delivery of raw materials and finished goods to or from our manufacturing facilities in Shanghai, China or Kansas
City, Missouri, or to our regional sales offices. Due to the broad and uncertain effects that terrorist attacks have had on financial
and economic markets generally, we cannot provide any estimate of how these activities might affect our future results.
17
RISKS RELATED TO OUR INTERNATIONAL OPERATIONS
Our international operations subject us to risks that could adversely affect our operations.
We expect net sales from foreign markets to continue to represent a significant portion of our total net sales. In
addition, the majority of our manufacturing facilities are located overseas in China. In 2004 and 2005, net sales to customers
outside the United States represented 71.3% and 74.4%, respectively, of our net sales. There are risks inherent in doing business
internationally, and any or all of the following factors could cause harm to our business:
(cid:190) changes in, or impositions of, legislative or regulatory requirements, including tax laws in the United States and in
the countries in which we manufacture or sell our products;
(cid:190) compliance with trade or other laws in a variety of jurisdictions;
(cid:190) trade restrictions, transportation delays, work stoppages, and economic and political instability;
(cid:190) changes in import/export regulations, tariffs and freight rates;
(cid:190) difficulties in collecting receivables and enforcing contracts;
(cid:190) currency exchange rate fluctuations;
(cid:190) restrictions on the transfer of funds from foreign subsidiaries to the United States;
(cid:190) the possibility of international conflict, particularly between or among China and Taiwan and the United States;
(cid:190) legal regulatory, political and cultural differences among the countries in which we do business; and
(cid:190) longer customer payment terms.
We have significant operations and assets in China, Taiwan and Hong Kong and, as a result, will be subject to risks
inherent in doing business in those jurisdictions, which may adversely affect our financial performance.
We have a significant portion of our assets in mainland China, Taiwan and Hong Kong. Our ability to operate in
China, Taiwan and Hong Kong may be adversely affected by changes in those jurisdictions’ laws and regulations, including
those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. In
addition, our results of operations in China, Taiwan and Hong Kong are subject to the economic and political situation there.
We believe that our operations in China, Taiwan and Hong Kong are in compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Changes in the political environment or government policies in those jurisdictions could result in revisions to laws or
regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency
revaluations. In addition, a significant destabilization of relations between or among China, Taiwan or Hong Kong and the
United States could result in restrictions or prohibitions on our operations or the sale of our products or the forfeiture of our
assets in these jurisdictions. There can be no certainty as to the application of the laws and regulations of these jurisdictions in
particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws
inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities, resulting in uncertainties as to
which authorities have jurisdiction over particular parties or transactions. The possibility of political conflict between these
countries or with the United States could have an adverse impact upon our ability to transact business in these jurisdictions and
to generate profits.
We are subject to foreign currency risk as a result of our international operations.
We face exposure to adverse movements in foreign currency exchange rates, primarily to some Asian currencies and, to
a lesser extent, the Euro. For example, many of our employees, who are located in China are paid in the Chinese Yuan and,
accordingly, an increase in the value of the Yuan compared to the U.S. dollar could increase our operating expenses. In addition,
we sell our products in various currencies and, accordingly, a decline in the value of any such currency against the U.S. dollar,
which is our primary functional currency, could create a decrease in our net sales. Our foreign currency risk may change over
time as the level of activity in foreign markets grows and could have an adverse impact upon our financial results. These
currencies are principally the Chinese Yuan, the Taiwanese dollar, the Japanese Yen, the Euro and the Hong Kong dollar. The
Chinese government has recently taken action to permit the Yuan to U.S. dollar exchange rate to fluctuate, which may
exacerbate our exposure to foreign currency risk and harm our results of operations. We do not usually employ hedging
techniques designed to mitigate foreign currency exposures and, therefore, we could experience currency losses as these
currencies fluctuate against the U.S. dollar.
18
We may not continue to receive preferential tax treatment in China, thereby increasing our income tax expense and
reducing our net income.
As an incentive for establishing our first Shanghai-based manufacturing subsidiary, which we refer to as Diodes-China,
in 1996 and in accordance with the taxation policies of China, Diodes-China, received preferential tax treatment for the years
ended December 31, 1996 through December 31, 2005.
Diodes-China is located in the Songjiang district, where the standard central government tax rate is 24.0%. However, as
an incentive for establishing Diodes-China, the earnings of Diodes-China were subject to a 0% tax rate by the central
government from 1996 through 2000, and to a 12.0% tax rate from 2001 through 2005. For 2006 and future years, Diodes-
China’s earnings will continue to be subject to a 12.0% tax rate provided it exports at least 70.0% of its net sales. In addition,
due to an $18.5 million permanent re-investment of Diodes-China earnings in 2004, Diodes-China has applied to the Chinese
government for additional preferential tax treatment on earnings that are generated by this $18.5 million investment. If
approved, those earnings will be exempted from central government income tax for two years, and then subject to a 12.0% tax
rate for the following three years.
In addition, the earnings of Diodes-China would ordinarily be subject to a standard local government tax rate of 3.0%.
However, as an incentive for establishing Diodes-China the local government waived this tax from 1996 through 2005.
Management expects this tax to be waived for the year of 2006; however, the local government can re-impose this tax at any
time at its discretion.
In 2004, we established our second Shanghai-based manufacturing facility, Diodes-Shanghai, located in the Songjiang
Export Zone of Shanghai, China. In the Songjiang Export Zone, the central government standard tax rate is 15.0%. There is no
local government tax. During 2004, Diodes-Shanghai earnings were subject to the standard 15.0% central government tax rate.
As an incentive for establishing Diodes-Shanghai, for 2005 and 2006 the earnings of Diodes-Shanghai are exempted from
central government income tax, and for the years 2007 through 2009 its earnings will be subject to a 7.5% tax rate. From 2010
onward, provided that Diodes-Shanghai exports over 70% of its net sales, its earnings will be subject to a 10.0% tax rate.
We may not be able to continue receiving this preferential tax treatment, which may cause an increase in our income
tax expense, thereby reducing our net income.
The distribution of any earnings of our foreign subsidiaries to the United States may be subject to U.S. income taxes, thus
reducing our net income.
We are currently planning, and may in the future plan, to distribute earnings of our foreign subsidiaries from Asia to the
United States. We may be required to pay U.S. income taxes on these earnings to the extent we have not previously recorded
deferred U.S. taxes on such earnings. Any such taxes would reduce our net income in the period in which these earnings are
distributed.
On October 22, 2004, the American Jobs Creation Act, or AJCA, was signed into law. Among other items, the AJCA
establishes a phased repeal of the extraterritorial income exclusion, a new incentive tax deduction for U.S. corporations to
repatriate cash from foreign subsidiaries equal to 85% of cash dividends received in the year elected that exceeds a base-period
amount, and significantly revises the taxation of U.S. companies doing business abroad.
At December 31, 2004, the Company made a minimum estimate for repatriating cash from its subsidiaries in China
and Hong Kong of $8.0 million under the AJCA, and recorded an income tax expense of approximately $1.3 million. Under
the guidelines of the AJCA, the Company developed a required domestic reinvestment plan, covering items such as U.S.
bank debt repayment, U.S. capital expenditures and U.S. research and development activities, among others, to cover the
dividend repatriation. During 2005, the Company completed a quantitative analysis of the benefits of the AJCA, the foreign
tax credit implications, and state and local tax consequences of the impact of the AJCA on the Company’s plans for
repatriation. Based on the analysis, the Company repatriated $24.0 million from its foreign subsidiaries in 2005.
The Company is evaluating the need to provide additional deferred taxes for the future earnings of its foreign
subsidiaries to the extent such earnings may be appropriated for distribution to the Company’s corporate office in North
America, and as further investment strategies with respect to foreign earnings are determined. Should the Company’s North
American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained
from the Company’s foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the
recording of income tax provisions on the U.S. entity, thus reducing net income. As of December 31, 2005, the Company
has recorded approximately $1.1 million in deferred taxes for earnings of its foreign subsidiaries.
19
RISKS RELATED TO OUR COMMON STOCK
Variations in our quarterly operating results may cause our stock price to be volatile.
We may experience substantial variations in net sales, gross profit margin and operating results from quarter to
quarter. We believe that the factors that influence this variability of quarterly results include:
(cid:190) general economic conditions in the countries where we sell our products;
(cid:190) seasonality and variability in the computing and communications market and our other end-markets;
(cid:190) the timing of our and our competitors’ new product introductions;
(cid:190) product obsolescence;
(cid:190) the scheduling, rescheduling and cancellation of large orders by our customers;
(cid:190) the cyclical nature of demand for our customers’ products;
(cid:190) our ability to develop new process technologies and achieve volume production at our fabrication facilities;
(cid:190) changes in manufacturing yields;
(cid:190) changes in gross profit margins due to the Anachip acquisition;
(cid:190) adverse movements in exchange rates, interest rates or tax rates; and
(cid:190) the availability of adequate supply commitments from our outside suppliers or subcontractors.
Accordingly, a comparison of our results of operations from period to period is not necessarily meaningful to
investors and our results of operations for any period do not necessarily indicate future performance. Variations in our quarterly
results may trigger volatile changes in our stock price.
We may enter into future acquisitions and take certain actions in connection with such acquisitions that could affect the
price of our Common Stock.
As part of our growth strategy, we expect to review acquisition prospects that would implement our vertical integration
strategy or offer other growth opportunities. While we have no current agreements and no active negotiations underway with
respect to any acquisitions, we may acquire businesses, products or technologies in the future. In the event of future
acquisitions, we could:
(cid:190) use a significant portion of our available cash;
(cid:190) issue equity securities, which would dilute current stockholders’ percentage ownership;
(cid:190) incur substantial debt;
(cid:190) incur or assume contingent liabilities, known or unknown;
(cid:190) incur amortization expenses related to intangibles; and
(cid:190) incur large, immediate accounting write-offs.
Such actions by us could harm our results from operations and adversely affect the price of our Common Stock.
Our directors, executive officers and significant stockholders hold a substantial portion of our Common Stock, which may
lead to conflicts with other stockholders over corporate transactions and other corporate matters.
Our directors, executive officers and our affiliate, LSC, beneficially own approximately 32% of our outstanding
Common Stock, including options to purchase shares of our Common Stock that are exercisable within 60 days of December 31,
2005. These stockholders, acting together, will be able to influence significantly all matters requiring stockholder approval,
including the election of directors and significant corporate transactions such as mergers or other business combinations. This
control may delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market
price of our Common Stock.
LSC, our largest stockholder, owns approximately 22.9% (5,777,187 shares) of our Common Stock. Some of our
directors and executive officers may have potential conflicts of interest because of their positions with LSC or their ownership of
LSC Common Stock. Some of our directors are LSC directors and officers, and our non-employee Chairman of our Board of
Directors is Chairman of the board of LSC. Several of our directors and executive officers own LSC Common Stock and hold
options to purchase LSC Common Stock. Service on our Board of Directors and as a director or officer of LSC, or ownership of
LSC Common Stock by our directors and executive officers, could create, or appear to create, actual or potential conflicts of
interest when directors and officers are faced with decisions that could have different implications for LSC and us. For example,
potential conflicts could arise in connection with decisions involving the Common Stock owned by LSC, or under the other
agreements we may enter into with LSC. LSC was our largest external supplier of discrete semiconductor products for
subsequent sale by us. In 2004 and 2005, approximately 14.7% and 17.2%, respectively, of our net sales were from products
20
manufactured by LSC. In addition to being our largest external supplier of finished products in each of these periods, we sold
silicon wafers to LSC totaling 11.1% and 9.6%, respectively, of our net sales during such periods, making LSC our largest
customer.
We may have difficulty resolving any potential conflicts of interest with LSC, and even if we do, the resolution may be
less favorable than if we were dealing with an entirely unrelated third party.
Our early corporate records are incomplete. As a result, we may have difficulty in assessing and defending against claims
relating to rights to our Common Stock purporting to arise during periods for which our records are incomplete.
We were formed in 1959 under the laws of California and reincorporated in Delaware in 1969. We have had several
transfer agents over the past 46 years. In addition, our early corporate records, including our stock ledger, are incomplete. As a
result, we may have difficulty in assessing and defending against claims relating to rights to our Common Stock purporting to
arise during periods for which our records are incomplete.
Item 1B.
Unresolved Staff Comments
None
Item 2.
Properties
The Company’s primary physical properties during the year ended December 31, 2005 were as follows:
A. The Company’s headquarters and product distribution center is located in an industrial building at
3050 East Hillcrest Drive, Westlake Village, CA 91362 USA, and consists of approximately 30,900
square feet. The Company is the primary lessee under a lease that has been extended three years and
expires in 2009, at an amount of approximately $29,000 per month, with a 5-year option.
B. Regional sales offices located in the U.S., leased at less than $1,000 per month, at the following
locations:
1. One Overlook Drive, Suite 8, Amherst, NH 03031
2. 160-D East Wend, Lemont, IL 60439
3. 18430 Brookhurst Street, Suite 201A, Fountain Valley, CA 92708
4. 199 Route 13, Brookline, NH 03033
C. Industrial premises consisting of approximately 3,600 square feet and located at 3Fl. 501-10 Chung-
Cheng Road, Hsin-Tien City, Taipei, Taiwan, Republic of China. The building, used as sales and
administrative offices, is under a lease that expires in December 2007, at an amount of approximately
$1,800 per month.
D. Industrial premises consisting of approximately 7,000 square feet and located at 2Fl. 501-15 Chung-
Cheng Road, Hsin-Tien City, Taipei, Taiwan, Republic of China. These premises, owned by Diodes-
Taiwan, are used as sales and administrative offices.
E.
F.
Industrial premises consisting of approximately 9,000 square feet and located at 5Fl. 501-16 Chung-
Cheng Road, Hsin-Tien City, Taipei, Taiwan, Republic of China. These premises, owned by Diodes-
Taiwan, are used as a warehousing facility.
Industrial building located at No. 999 Chen Chun Road, Xingqiao Town, Songjiang County, Shanghai,
People’s Republic of China. This building, consisting of approximately 13,500 square meters, is the
product distribution and manufacturing facility for Diodes-China. The building is under a lease that
expires in 2017 from a company owned by our 5% joint venture partner at a monthly rate of
approximately $61,000 per month.
G. Regional offices located in Mainland China, leased at less than $4,000 per month, at the following
locations:
1. Room 508, 1158 ChangNing Road, Shanghai, China
2. Room 706, 7th Floor Cyber Tower B, TianAn Cyber Park, Futian District, Shenzhen, China
21
H. Industrial building located at 777 N. Blue Parkway Suite 350, Lee's Summit, MO 64086 USA.
Acquired in December 2000, Diodes-FabTech’s 5-inch wafer foundry includes a 16,000 sq. ft. clean
room within a 70,000 sq. ft. manufacturing facility formerly owned by AT&T, under a lease that
expires in 2009, at an amount of approximately $125,000 per month.
I.
Industrial building located at Number 102, 1st Floor, International Plaza, 20 Sheung Yuet Road,
Kowloon Bay, Kowloon, Hong Kong. These premises are leased from Lite-On Semiconductor, Ltd. at
a rate of approximately $5,000 per month, and are used as sales, warehousing and logistics offices.
J. Sales and administrative offices located at 22, Avenue Paul Séjourné F-31000 Toulouse, France,
leased at less than $1,000 per month.
K. Industrial building located at Plant No. 1, Lane 18, San Zhuang Road, Songjiang Export Zone,
Shanghai, People’s Republic of China. This building, consisting of approximately 6,900 square
meters, is the product distribution and manufacturing facility for Diodes-Shanghai. The building is
under a lease that expires in 2009 from a company owned by our 5% joint venture partner at a monthly
rate of approximately $24,000 per month.
The Company believes its current facilities are adequate for the foreseeable future. See Notes 4 and 13 of “Notes to
Consolidated Financial Statements.”
Item 3.
Legal Proceedings
The Company is, from time to time, involved in litigation incidental to the conduct of its business. The Company
does not believe it is currently a party to any pending litigation.
During March 2004, a $100,000 payment was accepted as settlement in full for an environmental claim received in
June 2000 relating to the period 1967 through 1973. At December 31, 2005, the Company had no accrual on its balance sheet
related to this settled matter.
Item 4.
Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders by the Company during the fourth quarter of 2005.
22
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "DIOD." Until
June 19, 2000, the Company’s Common Stock was traded on the American Stock Exchange (“AMEX”) under the symbol
"DIO." In July 2000, November 2003, and December 2005, the Company effected 50% stock dividends in the form of three-for-
two stock splits. The following table shows the range of high and low closing sales prices per share, adjusted for the three-for-
two stock splits, for the Company's Common Stock for each fiscal quarter from January 1, 2004 as reported by Nasdaq.
Calendar Quarter
Ended
Closing Sales Price of
Common Stock
First quarter (through March 8) 2006
Fourth quarter 2005
Third quarter 2005
Second quarter 2005
First quarter 2005
Fourth quarter 2004
Third quarter 2004
Second quarter 2004
First quarter 2004
High
$ 39.85
34.94
25.93
22.34
18.31
19.49
17.24
16.53
16.78
Low
$ 32.46
23.09
20.63
16.79
13.05
14.39
11.22
13.89
12.68
On March 8, 2006, the closing sales price of the Company’s Common Stock as reported by Nasdaq was $35.40, and
there were approximately 600 holders of record of our Common Stock.
We have never declared or paid cash dividends on our Common Stock. Our credit agreement permits us to pay
dividends to our stockholders to the extent that any such dividends declared or paid in any fiscal year do not exceed an amount
equal to 50% of our net profit after taxes for such fiscal year. The payment of dividends is within the discretion of the
Company’s Board of Directors, and will depend upon, among other things, the Company’s earnings, financial condition, capital
requirements, and general business conditions. There have been no stock repurchases in the Company’s history.
23
Item 6.
Selected Financial Data
The following selected financial data for the fiscal years ended December 31, 2001 through 2005 is qualified in its
entirety by, and should be read in conjunction with, the other information and financial statements, including the notes
thereto, appearing elsewhere herein. Certain amounts as presented in the accompanying financial statements have been
reclassified to conform to 2005 financial statement presentation. These reclassifications had no impact on previously
reported net income or stockholders' equity.
(In thousands, except per share data)
Year Ended December 31,
Incom e Statem ent Data
2001
2002
2003
2004
2005
Net sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Loss (gain) on sales and impairment of fixed assets
Income (loss) from operations
Interest income (expense), net
Other Income (expense)
Income (loss) before taxes and minority interest
Income tax provision (benefit)
Minority interest in joint venture
Net income
Earnings per share: (1 )
Basic
Diluted
Number of shares used in computation (1 )
Basic
Diluted
$
93,210
$
115,821
$
136,905
$
185,703
$
214,765
14,179
13,711
592
8
26,710
16,228
1,472
43
36,528
19,586
2,049
1,037
60,735
23,503
3,422
74,377
30,285
3,713
14
(102)
(132)
8,967
13,856
33,796
40,481
(2,074)
(1,183)
(860)
785
(1,421)
(1,769)
(224)
124
(637)
(418)
(5)
12,991
32,741
2,460
6,514
221
406
41,108
6,685
67
7,851
1,729
(320)
(436)
(676)
(1,094)
5,802
10,095
25,551
33,329
$ 0.01
$ 0.32
$ 0.53
$ 1.27
$ 1.44
$ 0.01
$ 0.29
$ 0.47
$ 1.10
$ 1.29
18,324
19,982
18,415
19,946
19,096
21,609
20,106
23,207
23,168
25,894
As of December 31,
B alance Sheet Data
2001
2002
2003
2004
2005
Total assets
W orking capital
Long-term debt
Stockholders' equity
$
103,258
$
105,010
$
123,795
$
167,801
$
289,515
19,798
29,497
51,124
20,831
18,417
57,678
27,154
12,583
71,450
49,571
11,347
112,148
146,651
9,486
225,474
(1) Adjusted for the effect of a 3-for-2 stock split in July 2000, November 2003, and December 2005.
24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the Company’s financial condition and results of operations should be read together with
the consolidated financial statements and the notes to consolidated financial statements included elsewhere in this Form 10-K.
Overview
We are a global supplier of discrete and analog IC semiconductor products. We design, manufacture and market
discrete semiconductors focused on diverse end-use applications in the consumer electronics, computing, industrial,
communications and automotive sectors. Discrete semiconductors, which provide electronic signal amplification and switching
functions, are basic building-block electronic components that are incorporated into almost every electronic device. We believe
that our product focus provides us with a meaningful competitive advantage relative to broadline semiconductor companies that
provide a wider range of semiconductor products.
We are headquartered in Westlake Village, California, near Los Angeles. We have two manufacturing facilities located
in Shanghai, China, and a wafer fabrication facility in Kansas City, Missouri; and our sales and marketing and logistical centers
are located in Taipei, Taiwan; Shanghai and Shenzhen, China; and Hong Kong. We also have regional sales offices or
representatives in: Derbyshire, England; Toulouse, France; Frankfurt, Germany; and various cities in the United States.
In 1998, we began to transform our business from the distribution of discrete semiconductors manufactured by others to
the design, manufacture and marketing of discrete semiconductor products using our internal manufacturing capabilities. The
key elements of our strategy of transforming our business from a distribution-based model to one primarily based on the design
and manufacture of proprietary products are:
(cid:190) expanding our manufacturing capacity, including establishing integrated state-of-the-art packaging and testing facilities
in Asia, in 1998 and 2004, and acquiring a wafer foundry in the United States in 2000.
(cid:190) expanding our sales and marketing organization in Asia in order to address the shift of manufacturing of electronics
products from the United States to Asia.
(cid:190) establishing our sales and marketing organization in Europe commencing in 2002.
(cid:190) expanding the number of our field application engineers to design our products into specific end-user applications.
In implementing this strategy, the following factors have affected, and, we believe, will continue to affect, our results of
operations:
(cid:190) Since 1998, we have experienced increases in the demand for our products, and substantial pressure from our customers
and competitors to reduce the selling price of our products. We expect future increases in net income to result primarily
from increases in sales volume and improvements in product mix in order to offset reduced average selling prices of our
products.
(cid:190) In 2004 and 2005, 14.3% and 15.3%, respectively, of our net sales were derived from products introduced within the
last three years, which we term “new products,” compared to 12.1% in 2003. New products generally have gross profit
margins that are significantly higher than the margins of our standard products. We expect net sales derived from new
products to increase in absolute terms, although our net sales of new products as a percentage of our net sales will
depend on the demand for our standard products, as well as our product mix.
(cid:190) Our gross profit margin was 34.6% in 2005, compared to 32.7% in 2004 and 26.7% in 2003. This improvement in our
gross margin was due to improvements in product mix, as well as increases in wafer and packaging yields, reductions in
manufacturing costs and increases in capacity utilization. We expect only modest improvements in yields and capacity
utilization in the future and, as a result, future gross profit margins will depend primarily on our product mix, as well as
on the demand for our product.
(cid:190) As of December 31, 2005, we had invested approximately $95.7 million in our Asian manufacturing facilities. During,
2005, we invested approximately $23.5 million in our Asian manufacturing facilities and we expect to continue to
invest in our manufacturing facilities, although the amount to be invested will depend on product demand and new
product developments.
25
(cid:190) During 2005, the percentage of our net sales derived from our Asian subsidiaries was 65.4%, compared to 59.1% in
2004 and 55.5% in 2003. We expect our net sales to the Asian market to continue to increase as a percentage of our
total net sales for 2006 and beyond as a result of the continuing shift of the manufacture of electronic products from the
United States to Asia.
(cid:190) We have increased our investment in research and development from $3.4 million in 2004 to $3.7 million in 2005. We
continue to seek to hire qualified engineers who fit our focus on proprietary discrete processes and packaging
technologies. Our goal is to expand research and development expenses to approximately 2-3% of net sales as we
bring additional proprietary devices to the market.
During 2005, we sold 2,125,000 shares of our Common Stock in a follow-on public offering, raising approximately
$71.7 million (net of commissions and expenses). We used approximately $30 million of the net proceeds in connection with
the Anachip acquisition and we intend to use the remaining net proceeds from this offering for working capital and other general
corporate purposes, including acquisitions.
As part of our growth strategy, in December 2005, we announced the acquisition of Anachip, a fabless Taiwanese
semiconductor company focused on analog ICs designed for specific applications. The acquisition, which closed on January 10,
2006, fits in the center of our long-term strategy. Anachip’s main product focus is Power Management ICs. The analog devices
they produce are used in LCD monitor/TV's, wireless LAN 802.11 access points, brushless DC motor fans, portable DVD
players, datacom devices, ADSL modems, TV/satellite set-top boxes, and power supplies. Anachip brings a design team with
strong capabilities in a range of targeted analog and power management technologies. This acquisition also shows our
disciplined approach to making acquisitions. We paid approximately $30 million to acquire Anachip, which had power
management IC revenues of approximately $35 million. The acquisition is expected to be accretive to our 2006 earnings.
Net Sales
We generate a substantial portion of our net sales through the sale of discrete semiconductor products, designed and
manufactured by us or third parties. We also generate a portion of our net sales from outsourcing manufacturing capacity to
third parties and from the sale of silicon wafers to manufacturers of discrete semiconductor components. We serve customers
across diversified industry segments, including the consumer electronics, computing, industrial, communications and automotive
markets.
We recognize revenue from product sales when title to and risk of loss of the product have passed to the customer, there
is persuasive evidence of an arrangement, the sale price is fixed or determinable and collection of the related receivable is
reasonably assured. These criteria are generally met upon shipment to our customers. Net sales are stated net of reserves for
pricing adjustments, discounts, rebates and returns.
The principal factors that have affected or could affect our net sales from period to period are:
(cid:190) the condition of the economy in general and of the semiconductor industry in particular,
(cid:190) our customers’ adjustments in their order levels,
(cid:190) changes in our pricing policies or the pricing policies of our competitors or suppliers,
(cid:190) the termination of key supplier relationships,
(cid:190) the rate of introduction to, and acceptance of new products by, our customers,
(cid:190) our ability to compete effectively with our current and future competitors,
(cid:190) our ability to enter into and renew key corporate and strategic relationships with our customers, vendors and strategic
alliances,
(cid:190) changes in foreign currency exchange rates,
(cid:190) a major disruption of our information technology infrastructure; and
(cid:190) unforeseen catastrophic events, such as armed conflict, terrorism, fires, typhoons and earthquakes.
26
Cost of goods sold
Cost of goods sold includes manufacturing costs for our discrete semiconductors and our wafers. These costs include
raw materials used in our manufacturing processes as well as the labor costs and overhead expenses. Cost of goods sold is also
impacted by yield improvements, capacity utilization and manufacturing efficiencies. In addition, cost of goods sold includes the
cost of products that we purchase from other manufacturers and sell to our customers. Cost of goods sold is also affected by
inventory obsolescence if our inventory management is not efficient.
Selling, general and administrative expenses
Selling, general and administrative expenses relate primarily to compensation and associated expenses for personnel in
general management, sales and marketing, information technology, engineering, human resources, procurement, planning and
finance, and sales commissions, as well as outside legal, accounting and consulting expenses, and other operating expenses. We
expect our selling, general and administrative expenses to increase in absolute dollars as we hire additional personnel and expand
our sales, marketing and engineering efforts and information technology infrastructure.
Research and development expenses
Research and development expenses consist of compensation and associated costs of employees engaged in research
and development projects, as well as materials and equipment used for these projects. Research and development expenses are
primarily associated with our wafer facility in Kansas City, Missouri and our manufacturing facilities in China, as well as our
engineers at our U.S. headquarters. All research and development expenses are expensed as incurred, and we expect our
research and development expenses to increase in absolute dollars as we invest in new technologies and product lines.
Interest income / expense
Interest income consists of interest earned on our cash and investment balances. Interest expense consists of interest
payable on our outstanding credit facilities.
Income tax provision
Our global presence requires us to pay income taxes in a number of jurisdictions. In general, earnings in the United
States and Taiwan are currently subject to tax rates of 39.0% and 35.0%, respectively. Earnings of Diodes-Hong Kong are
currently subject to a 17.5% tax for local sales and/or local source sales, with all other sales foreign income tax-free. Earnings at
Diodes-Taiwan and Diodes-Hong Kong are also subject to U.S. taxes with respect to those earnings that are derived from
product manufactured by our China subsidiaries and sold to customers outside of Taiwan and Hong Kong, respectively. The
U.S. tax rate on these earnings is computed as the difference between the foreign effective tax rates and the U.S. tax rate. In
accordance with U.S. tax law, we receive credit against our U.S. federal tax liability for income taxes paid by our foreign
subsidiaries.
As an incentive for establishing our first Shanghai-based manufacturing subsidiary, Diodes-China, in 1996, and in
accordance with the taxation policies of China, Diodes-China, received preferential tax treatment for the years ended December
31, 1996 through 2005.
Diodes-China is located in the Songjiang district, where the standard central government tax rate is 24.0%. However, as
an incentive for establishing Diodes-China, the earnings of Diodes-China were subject to a 0% tax rate by the central
government from 1996 through 2000, and to a 12.0% tax rate from 2001 through 2005. For 2006 and future years, Diodes-
China’s earnings will continue to be subject to a 12.0% tax rate provided it exports at least 70% of its net sales. In addition, due
to an $18.5 million permanent re-investment of Diodes-China earnings in 2004, Diodes-China has applied to the Chinese
government for additional preferential tax treatment on earnings that are generated by this $18.5 million investment. If
approved, those earnings will be exempted from central government income tax for two years, and then subject to a 12.0% tax
rate for the following three years.
In addition, the earnings of Diodes-China would ordinarily be subject to a standard local government tax rate of 3.0%.
However, as an incentive for establishing Diodes-China, the local government waived this tax from 1996 through 2005.
Management expects this tax to be waived for at least the first half of 2006, however, the local government can re-impose this
tax at any time in its discretion.
27
In 2004, we established our second Shanghai-based manufacturing facility, Diodes-Shanghai, located in the Songjiang
Export Zone of Shanghai, China. In the Songjiang Export Zone, the central government standard tax rate is 15.0%. There is no
local government tax. During 2004, Diodes-Shanghai earnings were subject to the standard 15.0% central government tax rate.
As an incentive for establishing Diodes-Shanghai, for 2005 and 2006 the earnings of Diodes-Shanghai are exempted from
central government income tax, and for the years 2007 through 2009 its earnings will be subject to a 7.5% tax rate. From 2010
onward, provided that Diodes-Shanghai exports over 70% of its net sales, its earnings will be subject to a 10.0% tax rate.
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. Earnings of Diodes-Hong Kong are currently subject to a 17.5% tax for local sales and/or local source sales,
all other sales are foreign income tax-free.
In accordance with United States tax law, the Company receives credit against its U.S. Federal tax liability for corporate
taxes paid in foreign jurisdictions. The repatriation of funds from foreign subsidiaries to the Company may be subject to Federal
and state income taxes.
As of December 31, 2005, accumulated and undistributed earnings of Diodes-China and Diodes-Shanghai are
approximately $51.2 million, including $28.5 million of restricted earnings (which are not available for dividends). Through
March 31, 2002, the Company had not recorded deferred U.S. Federal or state tax liabilities (estimated to be $8.9 million as of
March 31, 2002) on these cumulative earnings since the Company, at that time, considered this investment to be permanent, and
had no plans or obligation to distribute all or part of that amount from China to the United States. Beginning in April 2002, the
Company began to record deferred taxes on a portion of the China earnings in preparation of a dividend distribution. In the year
ended December 31, 2004, the Company received a dividend of approximately $5.7 million from its Diodes-China subsidiary,
for which the tax effect is included in U.S. Federal and state taxable income.
On October 22, 2004, the President of the United States signed the American Jobs Creation Act (AJCA) into law.
Originally intended to repeal the extraterritorial income (ETI) exclusion, which had triggered tariffs by the European Union, the
AJCA expanded to cover a wide range of business tax issues. Among other items, the AJCA establishes a phased repeal of the
ETI, a new incentive tax deduction for U.S. corporations to repatriate cash from foreign subsidiaries at a reduced tax rate (a
deduction equal to 85% of cash dividends received in the year elected that exceeds a base-period amount) and significantly
revises the taxation of U.S. companies doing business abroad.
At December 31, 2004, the Company made a minimum estimate for repatriating cash from its subsidiaries in China and
Hong Kong of $8.0 million under the AJCA, and recorded an income tax expense of approximately $1.3 million. Under the
guidelines of the AJCA, the Company developed a required domestic reinvestment plan, covering items such as U.S. bank debt
repayment, U.S. capital expenditures and U.S. research and development activities, among others, to cover the dividend
repatriation. During 2005, the Company completed a quantitative analysis of the benefits of the AJCA, the foreign tax credit
implications, and state and local tax consequences of the impact of the AJCA on the Company’s plans for repatriation. Based on
the analysis, the Company repatriated $24.0 million from its foreign subsidiaries in 2005.
The Company is evaluating the need to provide additional deferred taxes for the future earnings of its foreign
subsidiaries to the extent such earnings may be appropriated for distribution to the Company’s corporate office in North
America, and as further investment strategies with respect to foreign earnings are determined. Should the Company’s North
American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained from the
Company’s foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the recording of
income tax provisions on the U.S. entity, thus reducing net income. As of December 31, 2005, the Company has recorded
approximately $1.1 million in deferred taxes for earnings of its foreign subsidiaries, primarily Diodes-Hong Kong.
28
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory
reserves and income taxes, among others. Our estimates are based upon historical experiences, market trends and financial
forecasts and projections, and upon various other assumptions that management believes to be reasonable under the
circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies and estimates affect the significant estimates and judgments we
use in the preparation of our consolidated financial statements, and may involve a higher degree of judgment and complexity
than others.
Revenue recognition
We recognize revenue when there is persuasive evidence that an arrangement exists, when delivery has occurred, when
our price to the buyer is fixed or determinable and when collectibility of the receivable is reasonably assured. These elements are
met when title to the products is passed to the buyers, which is generally when our product is shipped.
We reduce revenue in the period of sale for estimates of product returns, distributor price adjustments and other
allowances, the majority of which are related to our North American operations. Our reserve estimates are based upon historical
data as well as projections of revenues, distributor inventories, price adjustments, average selling prices and market conditions.
Actual returns and adjustments could be significantly different from our estimates and provisions, resulting in an adjustment to
revenues.
Inventory reserves
Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out
method. On an on-going basis, we evaluate our inventory, both finished goods and raw material, for obsolescence and slow-
moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material
usage related to our manufacturing facilities. Based upon this analysis, as well as an inventory aging analysis, we accrue a
reserve for obsolete and slow-moving inventory. If future demand or market conditions are different than our current estimates,
an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.
Accounting for income taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes
in each of the tax jurisdictions in which we operate. This process involves using an asset and liability approach whereby
deferred tax assets and liabilities are recorded for differences in the financial reporting bases and tax bases of our assets and
liabilities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and
liabilities. Management continually evaluates its deferred tax asset as to whether it is likely that the deferred tax assets will be
realized. If management ever determined that our deferred tax asset was not likely to be realized, a write-down of the asset
would be required and would be reflected as an expense in the accompanying period.
Allowance for doubtful accounts
Management evaluates the collectability of our accounts receivable based upon a combination of factors, including the
current business environment and historical experience. If we are aware of a customer’s inability to meet its financial obligations
to us, we record an allowance to reduce the receivable to the amount we reasonably believe we will be able to collect from the
customer. For all other customers, we record an allowance based upon the amount of time the receivables are past due. If actual
accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting
effect on operating expense.
Impairment of long-lived assets
As of December 31, 2005, goodwill was $5.1 million ($4.2 million related to the FabTech acquisition, and $881,000
related to Diodes-China). We account for goodwill in accordance with SFAS No. 142 (“Goodwill and Other Intangible
29
Assets”), for which goodwill is tested for impairment at least annually. We performed the required impairment tests of goodwill
and have determined that the goodwill is fully recoverable.
We assess the impairment of long-lived assets, including goodwill, on an on-going basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. Our impairment review process is based upon
(i) an income approach from a discounted cash flow analysis, which uses our estimates of revenues, costs and expenses, as well
as market growth rates, and (ii) a market multiples approach which measures the value of an asset through an analysis of recent
sales or offerings or comparable public entities. If ever the carrying value of the goodwill is determined to be less than the fair
value of the underlying asset, a write-down of the asset will be required, with the resulting expense charged in the period that the
impairment was determined.
Results of Operations
The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income
bear to net sales and the percentage dollar increase (decrease) of such items from period to period.
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income (loss) from operations
Interest income (expense)
Other income (expense)
Income before taxes and
minority interest
Income tax benefit (provision)
Minority interest
Net income
Percent of Net sales
Year Ended December 31,
Percentage Dollar Increase (Decrease)
Year Ended Decemeber 31,
2001
2002
2003
2004
2005
01 to '02
02 to '03
03 to '04
04 to '05
100%
(84.8)
15.2
(15.4)
(0.2)
(2.2)
0.8
(1.6)
1.9
(0.2)
0.1
100%
(76.9)
23.1
(15.4)
7.7
(1.0)
0.1
6.8
(1.5)
(0.3)
5.0
100%
(73.3)
26.7
(16.6)
10.1
(0.6)
(0.0)
9.5
(1.8)
(0.3)
7.4
100%
(67.3)
32.7
(14.5)
18.2
(0.3)
(0.2)
17.6
(3.5)
(0.4)
13.8
100%
(65.4)
34.6
(15.8)
18.8
0.1
0.2
19.1
(3.1)
(0.5)
15.5
24.3%
18.2%
35.6%
15.6%
12.8
88.4
24.0
6893.2
(43.0)
(91.5)
652.5
197.7
42.9
4578.9
12.6
36.8
27.8
54.5
(27.3)
24.5
66.3
18.8
143.9
(25.9)
(107.5)
(8260.0)
65.5
42.3
36.3
74.0
152.0
164.8
54.9
153.1
12.3
22.5
25.8
19.8
(134.7)
197.1
25.6
2.6
61.8
30.4
30
The following discussion explains in greater detail the consolidated financial condition of the Company. This
discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere
herein. Earnings per share discussion reflects the three-for-two stock split in December 2005. All per share amounts have
been adjusted to reflect the stock split.
Year 2005 Compared to Year 2004
Net sales
Net sales for 2005 increased $29.1 million to $214.8 million from $185.7 million for 2004. The 15.6% increase was
due primarily to an approximately 36.0% increase in units sold as a result of increased end-market demand for the
Company’s products, partly offset by a 15.0% decrease in total average selling prices (ASPs). ASPs for discrete products
decreased by 10.7% while ASPs for wafers fell 17.3%. The following table sets forth the geographic breakdown of our net
sales for the periods indicated based on the country to which the product is shipped:
Net sales for the year
ended December 31,
2004
(Dollars in thousands)
2005
Percentage of
net sales
2004
2005
China
Taiwan
United States
All Others
Total
$
44,311
50,716
53,204
37,472
$
68,050
59,838
54,981
31,896
23.9%
27.3%
28.7%
20.2%
31.7%
27.9%
25.6%
14.9%
$
185,703
$
214,765
100.0%
100.0%
Cost of goods sold
Cost of goods sold increased $15.4 million, or 12.3%, for 2005 compared to $125.0 million in 2004. As a percent
of sales, cost of goods sold decreased from 67.3% for 2004 to 65.4% for 2005. The Company’s average unit cost (AUP) for
discrete devices decreased approximately 14.3% from 2004, and AUPs for wafer products decreased approximately 14.9%.
These cost decreases were due primarily to improved manufacturing efficiencies.
Gross profit
Gross profit for 2005 increased 22.5% to $74.4 million from $60.7 million for 2004. Of the $13.7 million increase,
$9.6 million was due to the 190 basis point increase in gross profit margin from 32.7% in 2004 to 34.6% in 2005, while $4.1
million was due to the 22.5% increase in net sales. Gross profit increases in Asia were the primary contributor to the gross
profit increase in 2005. The higher gross margin percentage was due primarily to improved product sales mix, increased
capacity utilization and manufacturing efficiencies, partially offset by pricing pressure on our wafer products.
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) for 2005 increased approximately $6.8 million, or 28.9%,
compared to $23.5 million 2004, due primarily to (i) a $1.8 million expense relating to share inducement grants made to
Dr. Keh-Shew Lu, our President and Chief Executive Officer, and C.H. Chen, our Vice Chairman, (ii) higher sales
commissions, wages and marketing expenses associated with increased sales and, (iii) consulting, legal and accounting fees
primarily associated with Sarbanes-Oxley compliance. SG&A, as a percentage of net sales, was 14.1% in 2005, compared to
12.7% in 2004.
31
Research and development expenses
Research and development expenses (R&D) increased to $3.7 million, or 1.7% of net sales, in 2005 from $3.4
million, or 1.8% of net sales, in 2004. R&D expenses are primarily related to new product development at the silicon wafer
level, and, to a lesser extent, at the packaging level. We continue to seek to hire qualified engineers who fit our focus on
next-generation processes and packaging technologies. Our goal is to expand R&D to 2-3% of revenue as we bring
proprietary technology and advanced devices to the market.
Gain on sale of fixed assets
Gain on sale of fixed assets of $102,000 for 2005 was due primarily to a gain on the termination of two capital
leases in China.
Interest income / expense
Net interest income for 2005 was $221,000 compared to net interest expense of $620,000 in 2004, due primarily to
interest income earned on proceeds from our public offering of equity securities in 2005, as well as to a reduction in our total
debt from $17.5 million at December 31, 2004 to $12.5 million at December 31, 2005. Our interest income is generated for
interest earned on our cash balances and short-term investments. Our interest expense has been primarily the result of
borrowings to finance the FabTech acquisition in 2000, as well as our ongoing investment in, and expansion of, our Diodes-
China and Diodes-Shanghai manufacturing facilities.
Other income
Other income for 2005 increased $824,000 from 2004, due primarily to lower currency exchange losses in Taiwan
as well as the expiration of management incentive agreements associated with the FabTech acquisition.
Income tax provision
We recognized income tax expense of $6.7 million for 2005, resulting in an effective tax rate of 16.3%, as
compared to $6.5 million or 19.9% for the same period in 2004, due primarily to an increase in profits earned in lower tax
rate jurisdictions.
Minority interest in joint venture earnings
Minority interest in joint venture earnings represents the minority investor’s share of the income of Diodes-China
and Diodes-Shanghai. We established Diodes-Shanghai in 2004. The increase in these subsidiaries’ income for the tweleve
months ended December 31, 2005 is primarily the result of increased sales, and manufacturing efficiencies. As of December
31, 2005, we had a 95% controlling interest in each of these subsidiaries.
Net income
We generated net income of $33.3 million (or $1.44 basic earnings per share and $1.29 diluted earnings per share)
for the twelve months ended December 31, 2005, as compared to $25.6 million (or $1.27 basic earnings per share and $1.10
diluted earnings per share) for the same period in 2004. This 30.4% increase in net income is due primarily to the 15.6% net
sales increase at a gross profit margin of 34.6% for 2005, compared to a gross profit margin of 32.7% in 2004.
32
Year 2004 Compared to Year 2003
Net sales
Net sales for 2004 increased $48.8 million to $185.7 million, from $136.9 million for 2003. The 35.6% increase was
due primarily to an approximately 40.0% increase in units sold as a result of increased demand for our products, as well as an
improved product mix, offset in part by a 9.1% decrease in average selling prices for wafers. The following table sets forth
the geographic breakdown of our net sales for the periods indicated based on the country to which the product is shipped:
Net sales for the year
ended December 31,
2003
(Dollars in thousands)
2004
Percentage of
net sales
2003
2004
United States
Taiwan
China
All Others
Total
41,593
38,087
53,204
50,716
$
25,908
$
44,311
31,317
37,472
30.4%
27.8%
18.9%
22.9%
28.7%
27.3%
23.9%
20.2%
$
136,905
$
185,703
100.0%
100.0%
Cost of goods sold
Cost of goods sold increased $24.6 million, or 24.5%, for 2004 compared to $100.3 million in 2003, as a result of
the increase in net sales. As a percent of net sales, however, cost of goods sold decreased to 67.3% for 2004 from 73.3% for
2003. Our average unit cost for discrete devices decreased approximately 6.5% from 2003, and average unit cost for wafer
products decreased approximately 12.1%. These cost decreases were due primarily to improved manufacturing efficiencies.
Gross profit
Gross profit for 2004 increased 66.3% to $60.7 million from $36.5 million for 2003. Of the $24.2 million increase,
$13.0 million was due to an increase in gross profit margin from 26.7% in 2003 to 32.7% in 2004, while $11.2 million was
due to the 35.6% increase in net sales. Gross profit increases in Asia were the primary contributor to the overall gross profit
increase in 2004. Gross profit margin increased due to enhanced capacity utilization, continuing manufacturing efficiencies,
relatively stable pricing, and a product mix that continued to shift toward higher-value performance discrete semiconductor
devices.
Selling, general and administrative expenses
For 2004, SG&A increased $3.9 million to $23.5 million from $19.6 million for 2003. The 19.9% increase in
SG&A was due primarily to higher sales commissions, incentives, marketing and royalty expenses associated with the 35.6%
increase in net sales for the year, and higher wage and benefits expenses. Also contributing to the increased selling, general
and administrative expenses were higher corporate and administrative expenses, including legal and accounting fees,
primarily associated with Sarbanes-Oxley Act compliance. However, as a percentage of sales, selling, general and
administrative expenses decreased to 12.7% for 2004 from 14.3% in 2003.
Research and development expenses
R&D increased to $3.4 million, or 1.8% of net sales, in 2004 from $2.0 million, or 1.5% of sales, in 2003. R&D was
primarily related to new product development relating to silicon wafers, and, to a lesser extent, packaging.
33
Interest expense, net
Net interest expense for 2004 decreased $223,000 to $637,000 from $860,000 in 2003, due primarily to a decrease
in the use of our credit facilities, as well as to lower interest rates. In 2004, we repaid $3.6 million of debt outstanding under
our credit facilities, reducing the balances outstanding from $21.1 million at December 31, 2003 to $17.5 million at
December 31, 2004.
Other expense
Other expense for 2004 increased $413,000 compared to 2003, primarily due to approximately $400,000 in
currency exchange losses related to the weakened U.S. dollar, primarily versus the Taiwan dollar, recorded in the fourth
quarter of 2004.
Income tax provision
Our effective tax rate in 2004 was 19.9%, compared to 18.9% for 2003. We recorded a provision for income taxes
in the amount of $6.5 million for 2004, compared to $2.5 million for 2003. Included in the tax provision for 2004 is
$1.3 million in deferred taxes recorded in the fourth quarter for an $8.0 million planned dividend distribution from our Asian
subsidiaries in 2005 under the AJCA, offset by a $1.2 million foreign investment tax refund (net of U.S. taxes), and an
approximately $500,000 research and development tax credit.
Minority interest in joint venture earnings
The minority interest in joint venture earnings represents the minority investor’s share of income of Diodes-China
and Diodes-Shanghai. Diodes-Shanghai was established in 2004. The increase in these subsidiaries’ income for 2004 is
primarily the result of increased sales of higher margin products. As of December 31, 2004, we had a 95% controlling
interest in each of these subsidiaries.
Net income
We generated net income of $25.6 million (or $1.27 basic earnings per share and $1.10 diluted earnings per share)
in 2004, as compared to $10.1 million (or $0.53 basic earnings per share and $0.47 diluted earnings per share) for 2003.
This 153.5% increase in net income is due primarily to the 35.6% net sales increase at a gross profit margin of 32.7% in
2004, compared to a gross profit margin of 26.7% in 2003.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity are cash, funds from operations and borrowings under our credit facilities. Our
primary liquidity requirements have been to meet our inventory and capital expenditure needs. For 2003, 2004 and 2005, our
working capital was $27.2 million, $49.6 million, and $146.7 million, respectively. We anticipate our working capital position
will be sufficient for at least the next 12 months.
In 2003, 2004 and 2005, our capital expenditures were $17.0 million, $26.5 million and $24.7 million, respectively.
Our capital expenditures for these periods were primarily related to manufacturing expansion in our facilities in China and, to a
lesser extent, our wafer fabrication facility in the United States. The increased amount of capital expenditures from 2003 to 2004
($17.0 million and $26.5 million, respectively) was primarily attributable to increasing capacity at our facilities to meet demand
for our products, including the establishment of our Diodes-Shanghai facility in 2004. In 2005, our capital expenditures reduced
to $24.6 million as a result of increased equipment efficiencies and the slower market growth as compared to 2004.
Discussion of cash flows
Cash and short-term investments have increased from $12.8 million at December 31, 2003, to $19.0 million at
December 31, 2004, to $113.6 million at December 31, 2005. The increase from 2004 to 2005 was primarily due to the
proceeds from the follow-on offering.
34
Operating activities
Net cash provided by operating activities during 2005 was $50.6 million, resulting primarily from $33.3 million of net
income in this period. Net cash provided by operating activities was $29.3 million for 2004 and $18.8 million for 2003. Net cash
provided by operations increased by $21.3 million from 2004 to 2005. This increase resulted primarily from a $7.8 million
increase in our net income (from $25.6 million in 2004 to $33.3 million in 2005) and decreases in inventories, resulting from
faster inventory turns, and decreases in accounts receivable. We continue to closely monitor our credit terms with our
customers, while at times providing extended terms, primarily required by our customers in Asia and Europe.
Investing activities
Net cash used by investing activities for 2005 was $65.8 million resulting from capital expenditures of $19.6 million
(net of $5.1 million purchased on accounts payable), short-term investments of municipal bonds and equity investments. Net
cash used by investing activities was $26.1 million for 2004 and $15.6 million for 2003. Net cash used for investing activities in
those periods primarily related to manufacturing expansion in our facilities in China and, to a lesser extent, our wafer fabrication
facility in the United States.
Financing activities
Net cash provided by financing activities for 2005 was $70.8 million, resulting primarily from $71.7 million in net
proceeds from the offering of equity securities, offset by $10.9 million debt repayment. In addition, the Company received $4.2
million from stock option exercises in 2005. Net cash provided by financing activities was $2.2 million for 2004 and
$1.9 million for 2003. Net cash provided by financing activities for 2004 was primarily due to $5.6 million received in
connection with the exercise of stock options, partially offset by $4.8 million repaid under our debt instruments. Net cash
provided by financing activities for 2003 was primarily due to $2.0 million received in connection with the exercise of stock
options.
Debt instruments
On August 29, 2005, we amended our U.S. credit arrangements with Union Bank of California, N.A. (Union Bank).
Under the second amendment to our amended and restated credit agreement, we now have available a revolving credit
commitment of up to $20.0 million, including a $5.0 million letter of credit sub-facility. In addition, and in connection with this
amendment, one of our subsidiaries, FabTech, also amended and restated a term note and related agreement with respect to an
existing term loan arrangement, which we refer to as the FabTech term loan. After giving effect to this amendment, the principal
amount under the FabTech term loan was increased to $5.0 million.
The revolving credit commitment expires on August 29, 2008. The FabTech term loan, which amortizes monthly,
matures on August 29, 2010. As of December 31, 2005, we had no amounts outstanding under our revolving credit facility, and
there was $4.7 million outstanding under the FabTech term loan. Loans to Diodes Incorporated under our credit facility are
guaranteed by FabTech, and in turn, the FabTech term loan is guaranteed by Diodes Incorporated. The purpose of the revolving
credit facility is to provide cash for domestic working capital purposes, and to fund permitted acquisitions.
All loans under the credit facility and the FabTech term loan are collateralized by all of Diodes Incorporated’s and
FabTech’s accounts, instruments, chattel paper, documents, general intangibles, inventory, equipment, furniture and fixtures,
pursuant to security agreements entered into by Diodes Incorporated and FabTech in connection with these credit arrangements.
Both amounts borrowed under the revolving credit facility and the FabTech term loan bear interest at LIBOR plus
1.15%. At December 31, 2005, the effective rate under both the credit agreement and the FabTech term loan was LIBOR plus
1.15%, or 5.38%.
The credit agreement contains covenants that require us to maintain a leverage ratio not greater than 2.25 to 1.0, an
interest expense coverage ratio of not less than 2.0 to 1.0 and a current ratio of not less than 1.0 to 1.0. It also requires us to
achieve a net profit before taxes, as of the last day of each fiscal quarter, for the two consecutive fiscal quarters ending on that
date of not less than $1. The credit agreement permits us to pay dividends to our stockholders to the extent that any such
dividends declared or paid in any fiscal year do not exceed an amount equal to 50% of our net profit after taxes for such fiscal
year. However, it limits our ability to dispose of assets, incur additional indebtedness, engage in liquidation or merger,
acquisition, partnership or other combination (except permitted acquisitions). The credit agreement also contains customary
representations, warranties, affirmative and negative covenants and events of default.
35
The agreements governing the FabTech term loan do not contain any financial or negative covenants. However, they
provide that a default under our credit agreement will cause a cross-default under the FabTech term loan.
As of December 31, 2005, FabTech had paid down $3.75 million, to pay in full a note in favor of LSC, which debt was
incurred in connection with our acquisition of FabTech from LSC in 2000. This note matured on June 30, 2006 and amortized
monthly. The obligations under this note were subordinated to the obligations under our U.S. credit agreement with Union Bank.
Diodes-China and Diodes-Taiwan have available lines of credit of up to an aggregate of $29.2 million, with a number
of Chinese and Taiwanese financial institutions. These lines of credit, except for one Taiwanese credit facility, are collateralized
by its premises, are unsecured, uncommitted and, in some instances, may be repayable on demand. Loans under these lines of
credit bear interest at LIBOR or similar indices plus a specified margin.
As of December 31, 2005, Diodes-China owed $1.8 million under a note to one of our customers, which debt was
incurred in connection with our investing in manufacturing equipment. We repay this unsecured and interest-free note in
quarterly price concession installments, with any remaining balance due in July 2008.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements and other relationships with unconsolidated entities that will affect our
liquidity or capital resources. We have no special purpose entities that provided off-balance sheet financing, liquidity or market
or credit risk support, nor do we engage in leasing, hedging (except for the interest rate swap agreement, which expired in
November 30, 2004), or research and development services, that could expose us to liability that is not reflected on the face of
our financial statements.
Contractual Obligations
The following table represents the Company’s contractual obligations as of December 31, 2005:
Contractual
Obligations
Long-term debt
Capital leases
Operating leases
Purchase obligations
Total obligations
Payments due by period (in thousands)
Total
$9,487
2,049
11,401
11,584
$34,521
Less than
1 year
$4,621
185
3,682
11,584
$20,072
1-3 years
$3,200
370
6,245
0
$9,815
3-5 years
$1,666
370
1,474
0
$3,510
More than
5 years
$0
1,124
0
0
$1,124
There have been no material changes to our contractual obligations as of December 31, 2005, as compared to
December 31, 2004. Inflation did not have a material effect on net sales or net income in fiscal years 2003 through 2005. A
significant increase in inflation could affect future performance.
Recently Issued Accounting Pronouncements and Proposed Accounting Changes
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and
Error Corrections, A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective
application to prior periods’ financial statements for changes in accounting principles, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application
of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be
recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a
change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in
fiscal years beginning after the date this Statement is issued. The Company does not anticipate a material impact on the financial
statements from the adoption of this consensus.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement
Obligations, An Interpretation of FASB Statement No. 143,” which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The
36
adoption of this Interpretation did not have a material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In December 2004, FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value
methodology of valuing stock-based compensation and recognizing that valuation in the financial statements from the date of
grant. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our results of
operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will partially depend on levels of share-based payments granted in the future.
However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as shown in the Stock-based Compensation table contained in Note 1 of our financial statements.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current literature. We are currently evaluating
several option valuation models in order to calculate the required compensation expense. We have elected to adopt the
provisions of SFAS No. 123(R) on a modified prospective application method with no restatement of any prior periods.
SFAS No. 123(R) is effective for us as of the beginning of the fiscal year ending December 31, 2006.
In December 2004, the FASB also issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter
4.” This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should
be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed
production overhead costs to inventory be based on the normal capacity of the production facilities. The provisions of this
standard are effective for the fiscal years beginning after June 15, 2005. The Company is currently evaluating the potential
impact of this standard on its financial position and results of operations, but does not believe the impact of the change will
be material.
On October 22, 2004, the American Jobs Creation Act of 2004 was passed, which raised a number of issues with
respect to accounting for income taxes. In response, on December 21, 2004, the FASB issued two FASB Staff Positions, or
FSP, FSP 109-1— Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004 and FSP 109-2— Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which
became effective for us upon issuance.
The AJCA provides a deduction for income from qualified domestic production activities, to be phased in from
2005 through 2010, which is intended to replace the existing extra-territorial income exclusion for foreign sales. In FSP 109-
1, the FASB decided the deduction for qualified domestic production activities should be accounted for as a special
deduction under SFAS No. 109, rather than as a rate reduction. Accordingly, any benefit from the deduction will be reported
in the period in which the deduction is claimed on the tax return. No adjustment to deferred taxes was required. The
adoption of this standard is not expected to have significant impact on Company’s consolidated financial statements.
The AJCA also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad
by providing an 85.0% dividends received deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the
AJCA. FSP 109-2 addresses when to reflect in the financial statements the effects of the one-time tax benefit on the
repatriation of foreign earnings. Under SFAS No. 109, companies are normally required to reflect the effect of new tax law
changes in the period of enactment. FSP 109-2 provides companies additional time to determine the amount of earnings, if
any, that they intend to repatriate under the AJCA’s provisions. See Note 8 of our financial statements for more discussion
of the impact of the AJCA, including the impact on our repatriation of foreign earnings.
In November 2004, the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 03-13,
Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, in Determining Whether to Report Discontinued Operations. The consensus provides guidance in determining:
(1) which cash flows should be taken into consideration when assessing whether the cash flows of the disposal component
have been or will be eliminated from the ongoing operations of the entity, (2) the types of involvement ongoing between the
disposal component and the entity disposing of the component that constitute continuing involvement in the operations of the
disposal component, and (3) the appropriate (re)assessment period for purposes of assessing whether the criteria in
paragraph 42 have been met. The consensus was ratified by the FASB at their November 30, 2004 meeting and should be
applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after
December 15, 2004. We do not anticipate a material impact on our financial statements from the adoption of this consensus.
In September 2004, the EITF reached a consensus on EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131 in
determining whether to aggregate operating segments that do not meet the quantitative thresholds. The consensus states that
37
operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the
objective and basic principles of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,”
the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria (a)-(e)
listed in paragraph 17 of SFAS No. 131. The effective date of the consensus in this Issue is for fiscal years ending after
October 13, 2004. The ratification of this Issue did not have an impact on our financial reporting.
In March 2004, the EITF reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments with an effective date of June 15, 2004. EITF 03-01
provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. Investors are
required to disclose quantitative information about: (1) the aggregate amount of unrealized losses, and (2) the aggregate
related fair values of investments with unrealized losses, segregated into time periods during which the investment has been
in an unrealized loss position of less than 12 months and greater than 12 months. In addition, investors are required to
disclose the qualitative information that supports their conclusion that the impairments noted in the qualitative disclosure are
not other-than temporary. We determined that EITF 03-01 would not have a material impact on our financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46R, or FIN 46R, Consolidation of Variable Interest
Entities, a revision to Interpretation No. 46. FIN 46R clarifies the application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support from other parties or in which equity investors do not have the characteristics of a controlling financial interest; these
entities are referred to as “variable interest entities.” Variable interest entities within the scope of FIN 46R are required to be
consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46R also
requires disclosure of significant variable interests in variable interest entities for which a company is not the primary
beneficiary. We have assessed Diodes-Shanghai under the provisions of FIN 46R and have concluded that our investment in
Diodes-Shanghai does not meet the criteria for consolidation under the standard. However, Diodes-Shanghai is consolidated
under other applicable accounting literature. We will periodically review our investment in Diodes-Shanghai to insure that
we comply with the guidelines prescribed by FIN 46R.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk. We face exposure to adverse movements in foreign currency exchange rates, primarily in
Asia. Our foreign currency risk may change over time as the level of activity in foreign markets grows and could have an
adverse impact upon our financial results. Certain of our assets, including certain bank accounts and accounts receivable,
and liabilities exist in non-U.S. dollar denominated currencies, which are sensitive to foreign currency exchange fluctuations.
These currencies are principally the Chinese Yuan and the Taiwanese dollar and, to a lesser extent, the Japanese Yen, the
Euro and the Hong Kong dollar. Because of the relatively small size and nature of each individual currency exposure, we do
not regularly employ hedging techniques designed to mitigate foreign currency exposures. Therefore, we could experience
currency gains and losses. If the Chinese Yuan and the Taiwanese dollar were to strengthen or weaken by 1.0% against the
U.S. dollar, we would experience currency gains or losses of approximately $150,000 and $60,000, respectively. In the
future, we may enter into hedging arrangements designed to mitigate foreign currency fluctuations.
In July 2005, the Chinese government allowed the Chinese Yuan to float and be traded freely, although it is only
permitted to float within a 0.3% band against the Chinese central bank rate set for the U.S. dollar. Should the Chinese
government allow a significant Chinese Yuan appreciation, and we do not take appropriate means to offset this exposure, the
effect could have an adverse impact upon our financial results.
Interest Rate Risk. We have credit facilities with U.S. and Asian financial institutions as well as other debt
instruments with interest rates equal to LIBOR or similar indices plus a negotiated margin. A rise in interest rates could have
an adverse impact upon our cost of working capital and our interest expense. In July 2001, we entered into an interest rate
swap agreement to hedge our exposure to variability in expected future cash flows resulting from interest rate risk related to
a portion of our long-term debt. The interest rate under the swap agreement was fixed at 6.8% and was based on the notional
amount of U.S. $2.3 million as of December 31, 2003. The swap contract was inversely correlated to the related hedged
long-term debt and was therefore considered an effective cash flow hedge of the underlying long-term debt. The level of
effectiveness of the hedge was measured by the changes in the market value of the hedged long-term debt resulting from
fluctuation in interest rates. At November 30, 2004 the interest rate swap agreement on our long-term debt expired. As a
matter of policy, we do not enter into derivative transactions for trading or speculative purposes. As of December 31, 2005,
our outstanding debt under our interest-bearing credit agreements was $10.7 million. Based on an increase or decrease in
interest rates by 1.0% for the year, our annual interest rate expense would increase or decrease by approximately $107,000.
38
Political Risk. We have a significant portion of our assets in Mainland China and Taiwan. The possibility of
political conflict between the two countries or with the United States could have an adverse impact upon the Company’s
ability to transact business through these important business segments and to generate profits. See “Risk Factors – Foreign
Operations.”
Item 8.
Financial Statements and Supplementary Data
See “Item 15. Exhibits and Financial Statement Schedules” for the Company’s Consolidated Financial Statements
and the notes and schedules thereto filed as part of this Annual Report on Form 10-K.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
The Company's Chief Executive Officer, Dr. Keh-Shew Lu, and Chief Financial Officer, Carl C. Wertz, with the
participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company's disclosure
controls and procedures are effective to provide reasonable assurance that material information relating to the Company
(including its consolidated subsidiaries) required to be included in this report is made known to them.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable
assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making
can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or
intentional circumvention of the established processes.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed by, or under the supervision of, the Company's Chief
Executive Officer and the Chief Financial Officer and implemented by the Company's Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles in the United States of
America.
The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles in the United States of
America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation from management, including our Chief Executive Officer and the
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework and criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of
controls, testing of operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2005.
39
Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has
been audited by Moss Adams LLP, an independent registered public accounting firm, who has expressed unqualified
opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting as
of December 31, 2005 as stated in their report which is included in Item 8 of this Report.
Changes in Internal Control
There was no change in the Company's internal control over financial reporting, known to the Chief Executive
Officer or the Chief Financial Officer, that occurred during the period covered by this report that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
We have audited management's assessment, included in the accompanying Management's Report on Internal
Control over Financial Reporting that Diodes Incorporated and Subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Diodes Incorporated and Subsidiaries’
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management's assessment that Diodes Incorporated and Subsidiaries maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Also in our opinion, Diodes Incorporated and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement schedule of Diodes Incorporated and
Subsidiaries as of and for the year ended December 31, 2005, and our report dated March 10, 2006 expressed an unqualified
opinion on those financial statements and financial statement schedule.
/s/ Moss Adams LLP
40
Moss Adams LLP
Los Angeles, California
March 10, 2006
Item 9B.
Other Information
None.
Item 10.
Directors and Executive Officers of the Registrant
PART III
The information concerning the directors and executive officers of the Company is incorporated herein by reference
from the section entitled "Proposal One – Election of Directors" contained in the definitive proxy statement of the Company
to be filed pursuant to Regulation 14A within 120 days after the Company's fiscal year end of December 31, 2005, for its
annual stockholders' meeting for 2006 (the "Proxy Statement").
The Company has adopted a code of ethics that applies to the Company’s Chief Executive Officer and senior financial
officers. The code of ethics has been posted on the Company’s website under the Corporate Governance portion of the Investor
Relations section at www.diodes.com. The Company intends to satisfy disclosure requirements regarding amendments to, or
waivers from, any provisions of its code of ethics on its website.
Item 11.
Executive Compensation
The information concerning executive compensation is incorporated herein by reference from the section entitled
“Proposal One – Election of Directors” contained in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information concerning the security ownership of certain beneficial owners and management and related
stockholder matters is incorporated herein by reference from the section entitled “General Information – Security Ownership
of Certain Beneficial Owners and Management” and “Proposal One - Election of Directors” contained in the Proxy
Statement.
Item 13.
Certain Relationship and Related Transactions
The information concerning certain relationships and related transactions is incorporated herein by reference from
the section entitled “Proposal One – Election of Directors – Certain Relationships and Related Transactions” contained in the
Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information concerning the Company’s principal accountant’s fees and services is incorporated herein by
reference from the section entitled “Proposal Five – Ratification of the Appointment of Independent Registered Public
Accounting Firm” in the Proxy Statement.
41
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
Financial Statements and Schedules
(1) Financial statements:
Report of Independent Registered Public Accounting Firm
Page
43
Consolidated Balance Sheet at December 31, 2004 and 2005
44 to 45
Consolidated Statement of Income for the Years Ended December 31,
2003, 2004, and 2005
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 2003, 2004, and 2005
Consolidated Statement of Cash Flows for the Years Ended December
31, 2003, 2004, and 2005
Notes to Consolidated Financial Statements
(2) Schedules:
Report of Independent Registered Public Accounting Firm on Financial
Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
46
47
48 to 49
50 to 72
73
74
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable
or is shown in the financial statements and note thereto.
(b)
Exhibits
The exhibits listed on the Index to Exhibits at page 76 are filed as exhibits or incorporated by reference to this
Annual Report on Form 10-K.
(c)
Financial Statements of Unconsolidated Subsidiaries and Affiliates
Not Applicable.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
We have audited the accompanying consolidated balance sheets of Diodes Incorporated and Subsidiaries as of December 31,
2005 and 2004 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, 2005. 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, 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, 2005 and 2004, and the consolidated results of its
operations and cash flows for each of the years in the three year period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the effectiveness of Diodes Incorporated and Subsidiaries’ internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 10, 2006 expressed an unqualified opinion thereon.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
March 10, 2006
43
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Total cash and short-term investments
Accounts receivable
Trade customers
Related parties
Allowance for doubtful accounts
Inventories
Deferred income taxes, current
Prepaid expenses and other
Prepaid income taxes
2004
2005
$
18,970,000
-
$
73,288,000
40,348,000
18,970,000
113,636,000
38,682,000
5,526,000
44,208,000
(432,000)
43,776,000
22,238,000
2,453,000
4,243,000
406,000
48,348,000
6,804,000
55,152,000
(534,000)
54,618,000
24,611,000
2,541,000
5,326,000
-
Total current assets
92,086,000
200,732,000
PROPERTY, PLANT AND EQUIPMENT, net
60,857,000
68,930,000
DEFERRED INCOME TAXES, non-current
7,970,000
8,466,000
OTHER ASSETS
Equity investment
Goodwill
Other
-
5,090,000
1,798,000
5,872,000
5,090,000
425,000
Total assets
$
167,801,000
$
289,515,000
The accompanying notes are an integral part of these financial statements.
44
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
December 31,
2004
2005
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit
Accounts payable
Trade
Related parties
Accrued liabilities
Income tax payable
Current portion of long-term debt
Related party
Others
Current portion of capital lease obligations
Total current liabilities
LONG-TERM DEBT, net of current portion
Related party
Others
CAPITAL LEASE OBLIGATIONS, net of current portion
Minority interest in joint verture
STOCKHOLDERS' EQUITY
Class A convertible preferred stock -
par value $1.00 per share; 1,000,000
shares authorized; no shares issued and outstanding
Common stock - par value $0.66 2/3 per share;
30,000,000 shares authorized; 23,644,901 and 25,258,119 shares
issued at 2004 and 2005, respectively
Additional paid-in capital
Retained earnings
Less:
Treasury stock - 2,420,262 and no shares of
common stock, at cost, at 2004 and 2005, respectively
Accumulated other comprehensive loss (gain)
$
6,167,000
$
3,000,000
17,274,000
3,936,000
10,481,000
978,000
2,500,000
1,014,000
165,000
42,515,000
1,250,000
6,583,000
2,172,000
3,133,000
18,619,000
7,921,000
18,312,000
1,470,000
-
4,621,000
138,000
54,081,000
-
4,865,000
1,618,000
3,477,000
-
-
15,763,000
16,262,000
81,330,000
113,355,000
16,839,000
94,664,000
114,659,000
226,162,000
1,782,000
(575,000)
1,207,000
-
688,000
688,000
Total stockholders' equity
112,148,000
225,474,000
Total liabilities and stockholders' equity
$
167,801,000
$
289,515,000
The accompanying notes are an integral part of these financial statements.
45
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
2003
2004
2005
NET SALES
$
136,905,000
$
185,703,000
$
214,765,000
COST O F GO ODS SOLD
100,377,000
124,968,000
140,388,000
Gross profit
36,528,000
60,735,000
74,377,000
O PERATING EXPENSES
Selling, general and administrative
Research and developm ent
Im pairment of fixed assets
Loss (gain) on disposal of fixed assets
Total operating expenses
19,586,000
2,049,000
1,000,000
37,000
22,672,000
23,503,000
3,422,000
-
14,000
30,285,000
3,713,000
-
(102,000)
26,939,000
33,896,000
Income from operations
13,856,000
33,796,000
40,481,000
O TH ER INCOM E (EXPENSES)
Interest incom e (expense), net
Other
Total other incom e (expenses)
Income before income taxes
and m inority interest
(860,000)
(5,000)
(865,000)
(637,000)
(418,000)
(1,055,000)
221,000
406,000
627,000
12,991,000
32,741,000
41,108,000
INCO M E TAX PROVISION
(2,460,000)
(6,514,000)
(6,685,000)
Income before m inority interest
10,531,000
26,227,000
34,423,000
M inority interest in earnings of joint venture
(436,000)
(676,000)
(1,094,000)
NET INCOM E
$
10,095,000
$
25,551,000
$
33,329,000
EARNINGS PER SH ARE
Basic
Diluted
Number of shares used in com putation
Basic
Diluted
$
0.53
$
1.27
$
1.44
$
0.47
$
1.10
$
1.29
19,096,212
21,609,081
20,106,413
23,207,156
23,168,180
25,894,384
The accompanying notes are an integral part of these financial statements.
46
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2004, and 2005
Common stock
Shares
Shares in
Treasury
Amount
Common stock
in treasury
Additional paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
gain (loss)
Total
BALANCE,
December 31, 2002
20,908,719
2,420,262
$
13,939,000
$
(1,782,000)
$
316,000
$
45,684,000
$
(478,000)
$
57,679,000
Comprehensive income, net of tax:
Net income for the year
ended December 31, 2003
Translation adjustments
Change in unrealized loss on
derivative instruments,
net of tax of $27,000
Total comprehensive income
Management fee from LSC
Exercise of stock options
including $1,139,000 income
tax benefit
BALANCE,
10,095,000
10,095,000
169,000
169,000
286,000
68,000
68,000
10,332,000
286,000
1,032,206
-
688,000
-
2,465,000
-
-
3,153,000
December 31, 2003
21,940,925
2,420,262
$
14,627,000
$
(1,782,000)
$
3,067,000
$
55,779,000
$
(241,000)
$
71,450,000
Comprehensive income, net of tax:
Net income for the year
ended December 31, 2004
Translation adjustments
Change in unrealized loss on
derivative instruments,
net of tax of $9,000
Total comprehensive income
Management fee from LSC
Exercise of stock options
including $8,514,000 income
tax benefit
BALANCE,
25,551,000
25,551,000
793,000
793,000
180,000
23,000
23,000
26,367,000
180,000
1,703,976
-
1,136,000
-
13,015,000
-
-
14,151,000
December 31, 2004
23,644,901
2,420,262
$
15,763,000
$
(1,782,000)
$
16,262,000
$
81,330,000
$
575,000
$
112,148,000
Comprehensive income, net of tax:
Net income for the year
ended December 31, 2005
Translation adjustments
Total comprehensive income
Management fee from LSC
Exercise of stock options
including $2,898,000 income
tax benefit
Equity awards
Follow-on offering
787,545
58,435
3,187,500
525,000
39,000
2,126,000
180,000
7,023,000
1,775,000
69,592,000
33,329,000
33,329,000
(1,263,000)
(1,263,000)
32,066,000
180,000
7,548,000
1,814,000
71,718,000
Treasury share retirement
(2,420,262)
(2,420,262)
(1,614,000)
1,782,000
(168,000)
-
-
-
BALANCE,
December 31, 2005
25,258,119
-
$
16,839,000
$
-
$
94,664,000
$
114,659,000
$
(688,000)
$
225,474,000
The accompanying notes are an integral part of these financial statements.
47
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
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
Equity awards
Loss on impairment and disposal of property, plant and equipment
Changes in operating assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other
Deferred income taxes
Accounts payable
Accrued liabilities
Income taxes payable
2003
2004
2005
$
10,095,000
$
25,551,000
$
33,329,000
11,073,000
436,000
-
1,037,000
(8,490,000)
(1,248,000)
(388,000)
270,000
5,082,000
-
954,000
13,173,000
676,000
-
14,000
(13,203,000)
(6,074,000)
(2,474,000)
5,463,000
3,728,000
1,468,000
978,000
16,228,000
1,094,000
1,814,000
(102,000)
(11,037,000)
(2,373,000)
696,000
(584,000)
5,330,000
2,770,000
3,390,000
Net cash provided by operating activities
18,821,000
29,300,000
50,555,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment
Purchases of short-term investments
Equity investment
Proceeds from sales of property, plant and equipment
(15,646,000)
(26,201,000)
(19,583,000)
-
-
357,000
-
-
68,000
(40,348,000)
(5,872,000)
-
Net cash used by investing activities
(15,289,000)
(26,133,000)
(65,803,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (repayments) on line of credit, net
Net proceeds from the issuance of common stock
Management incentive reimbursement from LSC
Proceeds from long-term debt
Repayments of long-term debt
Minority shareholder investment in subsidiary
Repayments of capital lease obligations
Dividend to minority shareholder
5,463,000
2,014,000
375,000
-
(2,321,000)
5,628,000
375,000
3,583,000
(3,167,000)
76,367,000
375,000
5,890,000
(5,833,000)
(4,819,000)
(7,750,000)
-
(157,000)
-
175,000
(158,000)
(300,000)
-
(136,000)
(750,000)
Net cash provided by financing activities
1,862,000
2,163,000
70,829,000
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
169,000
793,000
(1,263,000)
INCREASE IN CASH
5,563,000
6,123,000
54,318,000
CASH AND CASH EQUIVALENTS, beginning of year
7,284,000
12,847,000
18,970,000
CASH AND CASH EQUIVALENTS, end of year
$
12,847,000
$
18,970,000
$
73,288,000
The accompanying notes are an integral part of these financial statements.
48
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31,
2003
2004
2005
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
$
876,000
$
683,000
$
633,000
$
999,000
$
2,504,000
$
3,443,000
$
1,139,000
$
8,514,000
$
2,898,000
Property, plant and equipment purchased on accounts payable
$
1,371,000
$
321,000
$
5,061,000
The accompanying notes are an integral part of these financial statements.
49
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations – Diodes Incorporated and its subsidiaries manufacture and distribute discrete semiconductor
devices to manufacturers in the communications, computing, consumer electronics, industrial, and automotive markets. The
Company's products include small-signal transistors and MOSFETs, transient voltage suppressors (TVSs), zeners, Schottkys,
diodes, rectifiers, bridges and silicon wafers. The products are sold primarily throughout North America, Asia and Europe.
Principles of consolidation - The consolidated financial statements include the accounts of the parent company, Diodes
Incorporated (Diodes-North America), its wholly-owned subsidiaries; Diodes Incorporated Taiwan Co., Ltd. (Diodes-Taiwan),
Diodes Hong Kong, Ltd. (Diodes-Hong Kong) and FabTech, Inc. (FabTech or Diodes-FabTech); and its majority (95%) owned
subsidiaries, Shanghai KaiHong Electronics Co., Ltd. (Diodes-China) and Shanghai KaiHong Technology Co., Ltd. (Diodes-
Shanghai). All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue recognition – Revenue is recognized when there is persuasive evidence that an arrangement exists, when
delivery has occurred, when our price to the buyer is fixed or determinable and when collectibility of the receivable is
reasonably assured. These elements are met when title to the products is passed to the buyers, which is generally when our
product is shipped to both original equipment manufacturers (OEMs) and electronics component distributors. The Company
reduces revenue in the period of sale for estimates of product returns and other allowances.
In 2003, Diodes-China received approximately $254,000 in high-technology grants as an incentive for further investment
from the local Chinese government. The grants were unrestricted and available upon receipt to fund the operations of Diodes-
China. The Company recognized this grant income when received and recorded them within “other income” on the accompanying
statements of income. No high-technology grant income was received in 2004 or 2005 and management does not expect this type
of income in the future.
Product warranty – The Company generally warrants its products for a period of one year from the date of sale.
Historically, warranty expense has not been significant.
Cash and cash Equivalents – The Company considers all highly liquid investments with maturity of three months or
less at the date of purchase to be cash equivalents. The Company currently maintains substantially all of its day-to-day operating
cash balances with major financial institutions. Cash balances are usually in excess of Federal and/or foreign deposit insurance
limits. The Company has not experienced any losses related to these balances, and management believes its credit risk to be
minimal.
Short-Term Investments – The Company’s short-term investments consist primarily of municipal bonds, all of which
are classified as available-for-sale. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other comprehensive income. Available-for-sale securities with
remaining maturities of less than one year and those identified by management at time of purchase for funding operations in less
than one year are classified as short-term, and all other available-for-sale securities are classified as long-term. Unrealized losses
are charged against net earnings when a decline in fair value is determined to be other than temporary. Realized gains and losses
are accounted for on the specific identification method.
Inventories – Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in,
first-out method. On an on-going basis both finished goods inventory and raw material inventory is evaluated for obsolescence
and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw
material usage related to our manufacturing facilities. Based upon this analysis, as well as an inventory aging analysis, a reserve
for obsolete and slow-moving inventory is accrued (see Note 2).
Property, plant and equipment – Property, plant and equipment are depreciated using straight-line and accelerated
methods over the estimated useful lives, which range from 20 to 55 years for buildings and 3 to 10 years for machinery and
equipment. The estimated lives of leasehold improvements range from 3 to 5 years, and are amortized over the shorter of the
remaining lease term or their estimated useful lives (see Note 4).
Goodwill – The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142 (“Goodwill and Other Intangible Assets”), under which goodwill is tested for impairment at least annually.
50
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
An independent appraiser hired by the Company, performed the required impairment tests of goodwill as of January
1, 2005 and 2006, and has determined that the goodwill is fully recoverable. No goodwill was acquired or impaired during
the years ended December 31, 2003, 2004 and 2005. As of December 31, 2005, goodwill for Diodes-FabTech and Diodes-
China was $4.2 million and $0.9 million, respectively.
Impairment on long-lived assets – Certain long-lived assets of the Company are reviewed at least annually as to
whether their carrying values have become impaired in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” Management considers assets to be impaired if the carrying value exceeds the undiscounted
projected cash flows from operations. If impairment exists, the assets are written down to fair value or the projected discounted
cash flows from related operations. As of December 31, 2005, the Company expects the remaining carrying value of assets to be
recoverable.
Income taxes – Income taxes are accounted for using an asset and liability approach whereby deferred tax assets and
liabilities are recorded for differences in the financial reporting bases and tax bases of the Company's assets and liabilities (see
Note 8).
Concentration of credit risk – Financial instruments, which potentially subject the Company to concentrations of credit
risk, include trade accounts receivable. Credit risk is limited by the dispersion of the Company's customers over various
geographic areas, operating primarily in the electronics manufacturing and distribution industries. The Company performs on-
going credit evaluations of its customers and generally requires no collateral from its customers. Historically, credit losses have
not been significant.
The Company currently maintains substantially all of its day-to-day cash balances with major financial institutions. Cash
balances are usually in excess of Federal and/or foreign deposit insurance limits.
Valuation of financial instruments – The carrying value of the Company’s financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, working capital line of credit, and long-term debt approximately fair
value due to their current market conditions, maturity dates and other factors. Short-term investments classified as available
for sale are recorded at market value with unrealized gains or losses reflected in other accumulated comprehensive income or
loss.
Treasury shares – In December 2005, the Board of Directors canceled the 2,420,262 shares held in treasury. The
cancellation has no net impact on stockholders’ equity, shares outstanding or shares used to compute earnings per share.
Equity investment – On December 20, 2005, the Company acquired an 18.87% equity interest of Anachip Corporation,
a private-held Taiwanese fabless analog IC company, for approximately $5.9 million. The investment is being accounted for
under the equity method as required by APB No. 18, "The Equity Method of Accounting for Investments in Common Stock."
However, the Company did not record income from the investment on the consolidated financial statements for the ten days ending
December 31, 2005, as the amount was not material. In January 2006, the Company increased its equity ownership of Anachip
Corporation to 99.81%. As a result, Anachip will be consolidated beginning the first fiscal quarter of 2006.
Stock split – On December 1, 2005, the Company affected a three-for-two stock split for shareholders of record as
of November 18, 2005 in the form of a 50% stock dividend. All share and per share amounts in the accompanying
consolidated financial statements and footnotes disclosures have been retroactively adjusted to reflect the effect of this stock
split.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires that management make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
51
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings per share – Earnings per share are based upon the weighted average number of shares of common stock and
common stock equivalents outstanding, net of common stock held in treasury. Earnings per share is computed using the “treasury
stock method” under the Financial Accounting Standards Board (FASB) Statement No. 128.
For the years ended December 31, 2003, 2004 and 2005, options outstanding for 1,793,000 shares, 0 shares, and 682,000
shares, respectively, of common stock have been excluded from the computation of diluted earnings per share because their effect
was anti-dilutive.
Net income for earnings
per share computation
Basic
Weighted average number of common
shares oustanding during the year
Year Ended December 31
2003
2004
2005
$
10,095,000
$
25,551,000
$
33,329,000
19,096,211
20,106,413
23,168,180
Basic earnings per share
$
0.53
$
1.27
$
1.44
Diluted
Weighted average number of common
shares outstanding used in calculating
basic earnings per share
Add: additional shares issuable upon
exercise of stock options
Weighted average number of common
shares used in calculating
diluted earnings per share
19,096,211
20,106,413
23,168,180
2,512,869
3,100,744
2,726,204
21,609,080
23,207,157
25,894,384
Diluted earnings per share
$
0.47
$
1.10
$
1.29
52
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based compensation – The Company maintains stock-based compensation plans for its board of directors,
officers, and key employees, which provide for non-qualified and incentive stock options. The plans are described more
fully in Note 9. With the issuance in mid-December 2004 by FASB of SFAS No. 123(R), “Share-Based Payments,” which
is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” which was issued in 1995, the Company will
begin reporting the fair value of stock-based compensation as an expense in its financial statements beginning in 2006 (see
discussion in “Recently Issued Accounting Pronouncements and Proposed Accounting Changes” below). Prior to
implementation of this new standard, the Company accounted for those plans under the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No
compensation cost was reflected in net income for stock options, as all options granted under those plans have an exercise
price equal to or greater than the market value of the underlying common stock on the date of the grant. As required by
SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement
No. 123,” the following table illustrates the effect on net income and earnings per common share as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation for each period presented:
Net income
$
Deduct: stock-based compensation
2003
10,095,000
expense determined under fair value
method, net of tax
(1,397,000)
Amounts Per Share
Diluted
$
0.47
Basic
0.53
$
For the years ended December 31,
Amounts Per Share
Diluted
$
1.10
2004
25,551,000
Basic
1.27
$
$
2005
33,329,000
$
Amounts Per Share
Diluted
$
1.29
Basic
$
1.44
(0.07)
(0.07)
(1,642,000)
(0.08)
(0.07)
(2,805,000)
(0.12)
(0.11)
Pro forma net income
$
8,698,000
$
0.46
$
0.40
$
23,909,000
$
1.19
$
1.03
$
30,524,000
$
1.32
$
1.18
The pro forma information recognizes as compensation the value of stock options granted using the Black-Scholes
option pricing model which takes into account as of the grant date, the exercise price and expected life of the option, the
current price of underlying stock and its expected volatility, expected dividends on the stock, expected forfeitures and the
risk-free interest rate for the term of the option. The following is the weighted average of the data used to calculate the
estimated fair value:
December 31,
2005
2004
2003
Risk-free
interest rate
3.85%
3.64%
3.31%
Expected life
5.0 years
5.0 years
5.0 years
Expected
volatility
60.00%
68.36%
66.18%
Expected
forfeitures
2.54%
2.64%
2.77%
Expected
dividends
0%
0%
0%
The Company’s valuations are based upon a single option valuation approach using the Black-Scholes option
valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable and negotiable in a free trading market. In addition,
option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and
expected life of the option. Because the Company’s stock options have characteristics significantly different from those of
freely traded options, and changes in the subjective input assumptions can materially affect the Company’s fair value
estimate of those stock options, in the Company’s opinion, existing valuations models, including Black-Scholes, are not
reliable single measures and may misstate the fair value of the Company’s stock options. Because Company stock options
do not trade on a secondary exchange, recipients can receive no value nor derive any benefit from holding stock options
under these plans without an increase, above the grant price, in the market price of the Company’s stock. Such an increase in
stock price would benefit all stockholders commensurately.
53
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivative financial instrument – The Company used an interest rate swap agreement to hedge its exposure to
variability in expected future cash flows resulting from interest rate risk related to a portion of its long-term debt. The
interest rate swap agreement applied to 25% of the Company’s long-term debt and expired November 30, 2004. Market
value of the swap as of December 31, 2004 and 2005 is included in “Accumulated Other Comprehensive Loss”. The swap
contract is inversely correlated to the related hedged long-term debt and was therefore considered an effective cash flow
hedge of the underlying long-term debt. The level of effectiveness of the hedge was measured by the changes in the market
value of the hedged long-term debt resulting from fluctuation in interest rates. As a matter of policy, the Company does not
enter into derivative transactions for trading or speculative purposes.
Functional currencies and foreign currency translation – Through its subsidiaries, the Company maintains
operations in Taiwan, Hong Kong and China. The Company believes the New Taiwan (“NT”) dollar as the functional
currency at Diodes-Taiwan most appropriately reflects the current economic facts and circumstances of the operations.
Assets and liabilities recorded in NT dollar are translated at the exchange rate on the balance sheet date. Income and expense
accounts are translated at the average monthly exchange rate during the year. Resulting translation adjustments are recorded
as a separate component of accumulated other comprehensive income/(loss).
The Company uses the U.S. dollar as the functional currency in Diodes-China, Diodes-Shanghai and Diodes-Hong
Kong, as substantially all monetary transactions are made in that currency, and other significant economic facts and
circumstances currently support that position. As these factors may change in the future, the Company will periodically
assess its position with respect to the functional currency of its foreign subsidiaries. Included in net income are foreign
currency exchange losses of approximately $115,000, and $424,000 for the years ended December 31, 2003 and 2004,
respectively, and exchange gains of $79,000 for the year ended December 31, 2005.
Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity
section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of
other comprehensive income include foreign currency translation adjustments and changes in the unrealized loss on derivative
instruments from swap liability. Foreign currency translation adjustments are presented without a tax effect as the amounts relate
primarily to subsidiaries with indefinitely reinvested earnings.
Recently issued accounting pronouncements and proposed accounting changes – In May 2005, the Financial
Accounting Standards Board (FASB) issued SFAS No. 154, “Accounting Changes and Error Corrections, A Replacement of
APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial
statements for changes in accounting principles, unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change
in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not anticipate a material impact on the financial statements from the adoption of this
consensus.
54
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement
Obligations, An Interpretation of FASB Statement No. 143,” which requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The
adoption of this Interpretation did not have a material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In December 2004, FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value
methodology of valuing stock-based compensation and recognizing that valuation in the financial statements from the date of
grant. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our results of
operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will partially depend on levels of share-based payments granted in the future.
However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as shown in the Stock-based Compensation table contained in Note 1 of our financial statements.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current literature. We are currently evaluating
several option valuation models in order to calculate the required compensation expense. We have elected to adopt the
provisions of SFAS No. 123(R) on a modified prospective application method with no restatement of any prior periods.
SFAS No. 123(R) is effective for us as of the beginning of the fiscal year ending December 31, 2006.
In December 2004, the FASB also issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter
4.” This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should
be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed
production overhead costs to inventory be based on the normal capacity of the production facilities. The provisions of this
standard are effective for the fiscal years beginning after June 15, 2005. The Company is currently evaluating the potential
impact of this standard on its financial position and results of operations, but does not believe the impact of the change will
be material.
On October 22, 2004, the American Jobs Creation Act of 2004 was passed, which raised a number of issues with
respect to accounting for income taxes. In response, on December 21, 2004, the FASB issued two FASB Staff Positions, or
FSP, FSP 109-1— Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004 and FSP 109-2— Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which
became effective for us upon issuance.
The AJCA provides a deduction for income from qualified domestic production activities, to be phased in from
2005 through 2010, which is intended to replace the existing extra-territorial income exclusion for foreign sales. In FSP 109-
1, the FASB decided the deduction for qualified domestic production activities should be accounted for as a special
deduction under SFAS No. 109, rather than as a rate reduction. Accordingly, any benefit from the deduction will be reported
in the period in which the deduction is claimed on the tax return. No adjustment to deferred taxes was required. The adoption
of this standard is not expected to have significant impact on Company’s consolidated financial statements.
The AJCA also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad
by providing an 85.0% dividends received deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the
AJCA. FSP 109-2 addresses when to reflect in the financial statements the effects of the one-time tax benefit on the
repatriation of foreign earnings. Under SFAS No. 109, companies are normally required to reflect the effect of new tax law
changes in the period of enactment. FSP 109-2 provides companies additional time to determine the amount of earnings, if
any, that they intend to repatriate under the AJCA’s provisions. See Note 8 of our financial statements for more discussion of
the impact of the AJCA, including the impact on our repatriation of foreign earnings.
55
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In November 2004, the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 03-13,
Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, in Determining Whether to Report Discontinued Operations. The consensus provides guidance in determining:
(1) which cash flows should be taken into consideration when assessing whether the cash flows of the disposal component
have been or will be eliminated from the ongoing operations of the entity, (2) the types of involvement ongoing between the
disposal component and the entity disposing of the component that constitute continuing involvement in the operations of the
disposal component, and (3) the appropriate (re)assessment period for purposes of assessing whether the criteria in
paragraph 42 have been met. The consensus was ratified by the FASB at their November 30, 2004 meeting and should be
applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after
December 15, 2004. We do not anticipate a material impact on our financial statements from the adoption of this consensus.
In September 2004, the EITF reached a consensus on EITF Issue No. 04-10, Applying Paragraph 19 of FAS 131 in
determining whether to aggregate operating segments that do not meet the quantitative thresholds. The consensus states that
operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the
objective and basic principles of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the
segments have similar economic characteristics, and the segments share a majority of the aggregation criteria (a)-(e) listed in
paragraph 17 of SFAS No. 131. The effective date of the consensus in this Issue is for fiscal years ending after October 13,
2004. The ratification of this Issue did not have an impact on our financial reporting.
In March 2004, the EITF reached a consensus on the remaining portions of EITF 03-01, The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments with an effective date of June 15, 2004. EITF 03-01
provides new disclosure requirements for other-than-temporary impairments on debt and equity investments. Investors are
required to disclose quantitative information about: (1) the aggregate amount of unrealized losses, and (2) the aggregate
related fair values of investments with unrealized losses, segregated into time periods during which the investment has been
in an unrealized loss position of less than 12 months and greater than 12 months. In addition, investors are required to
disclose the qualitative information that supports their conclusion that the impairments noted in the qualitative disclosure are
not other-than temporary. We determined that EITF 03-01 would not have a material impact on our financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46R, or FIN 46R, Consolidation of Variable Interest
Entities, a revision to Interpretation No. 46. FIN 46R clarifies the application of consolidation accounting for certain entities
that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support from other parties or in which equity investors do not have the characteristics of a controlling financial interest; these
entities are referred to as “variable interest entities.” Variable interest entities within the scope of FIN 46R are required to be
consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46R also
requires disclosure of significant variable interests in variable interest entities for which a company is not the primary
beneficiary. We have assessed Diodes-Shanghai under the provisions of FIN 46R and have concluded that our investment in
Diodes-Shanghai does not meet the criteria for consolidation under the standard. However Diodes-Shanghai is consolidated
under other applicable accounting literature. We will periodically review our investment in Diodes-Shanghai to insure that
we comply with the guidelines prescribed by FIN 46R.
Reclassifications – Certain prior year amounts, as well as unaudited quarterly financial data presented in the
accompanying consolidated financial statements, have been reclassified to conform to the current year financial statement
presentation. On December 1, 2005 the Company affected a three-for-two stock split for shareholders of record as of
November 18, 2005 in the form of a 50% stock dividend. The Company has made corresponding adjustments to its common
stock and additional paid-in capital on the consolidated balance sheets and consolidated statements of stockholders’ equity
for the years ended 2004 and 2003. These reclassifications had no impact on previously reported net income or
stockholders’ equity.
56
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SHORT-TERM INVESTMENTS
Short-term investments at December 31, 2005, were as follows:
2005
Cost Basis
Unrealized
Gains
Unrealized
Losses
Recorded
Basis
State and local government obligations
$
40,150,000
$
-
$
-
$
40,150,000
Money market mutual funds
Corporate bond and notes
Total short-term investments
23,000
-
-
23,000
175,000
40,348,000
$
-
$
-
-
$
-
175,000
40,348,000
$
The estimated of fair value is based on publicly available market information or other estimates determined
by management. The maturities of debt securities at December 31, 2005, were as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Cost Basis
Estimated Fair
Value
$
-
$
-
-
-
-
-
40,150,000
40,150,000
$
40,150,000
40,150,000
$
NOTE 3 – INVENTORIES
Inventories, stated at the lower of cost or market value, at December 31 were:
F in ish e d g o o d s
W o rk -in -p ro g re ss
R aw m ate rials
L ess: reserv es
2 0 0 4
2 0 0 5
$
1 3 ,1 1 8 ,0 0 0
2 ,0 2 5 ,0 0 0
9 ,2 4 0 ,0 0 0
2 4 ,3 8 3 ,0 0 0
(2 ,1 4 5 ,0 0 0 )
$
1 4 ,7 2 2 ,0 0 0
3 ,0 0 2 ,0 0 0
9 ,5 3 4 ,0 0 0
2 7 ,2 5 8 ,0 0 0
(2 ,6 4 7 ,0 0 0 )
$
2 2 ,2 3 8 ,0 0 0
$
2 4 ,6 1 1 ,0 0 0
57
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 were:
Buildings and leasehold improvements
Construction in-progress
Machinery and equipment
Less: Accumulated depreciation
and amortization
Land
2004
2005
$
7,126,000
2,989,000
90,151,000
$
7,511,000
7,201,000
106,175,000
100,266,000
120,887,000
(39,671,000)
60,595,000
262,000
(52,219,000)
68,668,000
262,000
$
60,857,000
$
68,930,000
NOTE 5 – BANK CREDIT AGREEMENTS AND LONG-TERM DEBT
Line of credit – The Company maintains credit facilities with several financial institutions through its affiliated
entities in the United States and Asia. The credit unused and available under the various facilities as of December 31, 2005,
totals $43.5 million, as follows:
2005
Credit Facility
$
20,000,000
Terms
Revolving, collateralized by all assets, variable interest,
LIBOR plus variable margin, (approximately 5.4% at
December 31, 2005) due monthly
$
5,000,000
Term loan, collateralized by all assets, variable interest,
LIBOR plus variable margin, (approximately 5.4% at
December 31, 2005) due monthly
$
19,500,000
Unsecured, interest at LIBOR plus margin (approximately
4.6% at December 31, 2005) due quarterly
$
9,679,000
Unsecured, variable interest plus margin (approximately
2.5% at December 31, 2005) due monthly
$
54,179,000
Less: Long-term debt, net of Related Party (included in following table)
Line of credit
Outstanding at December 31,
2005
2004
$
3,167,000
$
-
4,597,000
4,687,000
6,000,000
6,000,000
-
-
13,764,000
10,687,000
(7,597,000)
(7,687,000)
$
6,167,000
$
3,000,000
58
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – BANK CREDIT AGREEMENTS AND LONG-TERM DEBT (Continued)
Long-term debt - The balances as of December 31, consist of the following:
2004
2005
Note payable to LSC, a major stockholder of the Company (see Note 11), due in equal
monthly installments of $208,000 plus interest beginning July 31, 2002, through June
30, 2006. The unsecured note bears interest at LIBOR plus 2% (approximately 6.23% at
December 31, 2005) and is subordinated to the interest of the Company's primary lender.
This note was paid in full in December 2005.
$
3,750,000
$
-
Term note portion of China credit facility due in 2006.
3,000,000
3,000,000
Term note portion due to unrelated customer, unsecured and interest-free
in quarterly price concession, balance due in July 2008.
-
1,800,000
Note payable to U.S. bank, collateralized by all assets, due in aggregate monthly
principal payments of $83,000 plus interest (approximately 5.4% at December 31,
2005).
Less: Current portion
Long-term debt, net of current portion
4,597,000
11,347,000
(3,514,000)
4,686,000
9,486,000
(4,621,000)
$
7,833,000
$
4,865,000
The $20.0 million U.S. credit facility includes a revolving credit commitment of up to $20.0 million, including a
$5.0 million letter of credit sub-facility. As of December 31, 2005, there was no amount outstanding under the letter of
credit sub-facility. The credit facilities contain certain covenants and restrictions, which, among other matters, require the
maintenance of certain financial ratios and attainment of certain financial results, and prohibit the payment of dividends.
The annual contractual maturities of long-term debt at December 31, 2005 are as follows:
2006
2007
2008
2009
2010
$
4,621,000
1,799,000
1,400,000
1,000,000
666,000
$
9,486,000
In July 2001, the Company entered into an interest rate swap agreement with a bank to hedge its interest exposure.
The interest rate under the swap agreement, which expired November 30, 2004, was fixed at 6.8% and based on the notional
amount, which was $2,292,000 at December 31, 2003.
59
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital lease agreements are summarized as follows:
For years ending December 31,
2006
2007
2008
2009
2010
Thereafter
Less: Interest
Present value of minimum lease payments
Less: Current portion
Long-term portion
$
185,000
185,000
185,000
185,000
185,000
1,124,000
2,049,000
(293,000)
1,756,000
(138,000)
1,618,000
$
At December 31, 2005, property under capital leases had a cost of $2,369,000, and the related accumulated depreciation
was $639,000.
NOTE 7 – ACCRUED LIABILITIES
Accrued liabilities at December 31 were:
Equipment purchases
Employee compensation and payroll taxes
Refunds to product distributors
Sales commissions
Other
2004
2005
$
$
2,012,000
5,779,000
151,000
437,000
2,102,000
10,481,000
7,073,000
6,094,000
649,000
629,000
3,867,000
18,312,000
$
$
60
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
The components of the income tax provisions are as follows:
Current tax provision
Federal
Foreign
State
Deferred tax expense (benefit)
Total income tax provision
2003
2004
2005
$
1,167,000
1,183,000
40,000
$
4,922,000
4,745,000
461,000
$
3,013,000
4,546,000
547,000
2,390,000
70,000
2,460,000
$
10,128,000
(3,614,000)
6,514,000
$
8,106,000
(1,421,000)
6,685,000
$
Reconciliation between the effective tax rate and the statutory tax rates for the years ended December 31, 2003,
2004, and 2005 are as follows:
2003
2004
2005
Percent
of pretax
earnings
34.0
Amount
4,417,000
$
Percent
of pretax
earnings
34.0
Amount
11,131,000
$
Amount
$
13,977,000
Percent
of pretax
earnings
34.0
753,000
(2,808,000)
98,000
5.8
(21.6)
0.8
1,588,000
(6,629,000)
424,000
4.8
(20.2)
1.3
1,870,000
(11,079,000)
1,917,000
4.6
(27.0)
4.7
Federal tax
State franchise tax,
net of Federal benefit
Foreign income tax rate difference
Other
Income tax provision (benefit)
$
2,460,000
19.0
$
6,514,000
19.9
$
6,685,000
16.3
As an incentive for establishing our first Shanghai-based manufacturing subsidiary, Diodes-China, in 1996, and in
accordance with the taxation policies of China, Diodes-China, received preferential tax treatment for the years ended
December 31, 1996 through 2005.
Diodes-China is located in the Songjiang district, where the standard central government tax rate is 24.0%.
However, as an incentive for establishing Diodes-China, the earnings of Diodes-China were subject to a 0% tax rate by the
central government from 1996 through 2000, and to a 12.0% tax rate from 2001 through 2005. For 2006 and future years,
Diodes-China’s earnings will continue to be subject to a 12.0% tax rate provided it exports at least 70% of its net sales. In
addition, due to an $18.5 million permanent re-investment of Diodes-China earnings in 2004, Diodes-China has applied to
the Chinese government for additional preferential tax treatment on earnings that are generated by this $18.5 million
investment. If approved, those earnings will be exempted from central government income tax for two years, and then
subject to a 12.0% tax rate for the following three years.
In addition, the earnings of Diodes-China would ordinarily be subject to a standard local government tax rate of 3.0%.
However, as an incentive for establishing Diodes-China, the local government waived this tax from 1996 through 2005.
Management expects this tax to be waived for at least the first half of 2006, however, the local government can re-impose this
tax at any time at its discretion.
61
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (Continued)
In 2004, we established our second Shanghai-based manufacturing facility, Diodes-Shanghai, located in the
Songjiang Export Zone of Shanghai, China. In the Songjiang Export Zone, the central government standard tax rate is
15.0%. There is no local government tax. During 2004, Diodes-Shanghai earnings were subject to the standard 15.0%
central government tax rate. As an incentive for establishing Diodes-Shanghai, for 2005 and 2006 the earnings of Diodes-
Shanghai are exempted from central government income tax, and for the years 2007 through 2009 its earnings will be subject
to a 7.5% tax rate. From 2010 onward, provided that Diodes-Shanghai exports over 70% of its net sales, its earnings will be
subject to a 10.0% tax rate.
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. Earnings of Diodes-Hong Kong are currently subject to a 17.5% tax for local sales and/or local
source sales, all other sales are foreign income tax-free.
In accordance with United States tax law, the Company receives credit against its U.S. Federal tax liability for
corporate taxes paid in foreign jurisdictions. The repatriation of funds from foreign subsidiaries to the Company may be
subject to Federal and state income taxes.
As of December 31, 2005, accumulated and undistributed earnings of Diodes-China and Diodes-Shanghai are
approximately $51.2 million, including $28.5 million of restricted earnings (which are not available for dividends). Through
March 31, 2002, the Company had not recorded deferred U.S. Federal or state tax liabilities (estimated to be $8.9 million as
of March 31, 2002) on these cumulative earnings since the Company, at that time, considered this investment to be
permanent, and had no plans or obligation to distribute all or part of that amount from China to the United States. Beginning
in April 2002, the Company began to record deferred taxes on a portion of the China earnings in preparation of a dividend
distribution. In the year ended December 31, 2004, the Company received a dividend of approximately $5.7 million from its
Diodes-China subsidiary, for which the tax effect is included in U.S. Federal and state taxable income.
On October 22, 2004, the President of the United States signed the American Jobs Creation Act (AJCA) into law.
Originally intended to repeal the extraterritorial income (ETI) exclusion, which had triggered tariffs by the European Union,
the AJCA expanded to cover a wide range of business tax issues. Among other items, the AJCA establishes a phased repeal
of the ETI, a new incentive tax deduction for U.S. corporations to repatriate cash from foreign subsidiaries at a reduced tax
rate (a deduction equal to 85% of cash dividends received in the year elected that exceeds a base-period amount) and
significantly revises the taxation of U.S. companies doing business abroad.
At December 31, 2004, the Company made a minimum estimate for repatriating cash from its subsidiaries in China
and Hong Kong of $8.0 million under the AJCA, and recorded an income tax expense of approximately $1.3 million. Under
the guidelines of the AJCA, the Company developed a required domestic reinvestment plan, covering items such as U.S.
bank debt repayment, U.S. capital expenditures and U.S. research and development activities, among others, to cover the
dividend repatriation. During 2005, the Company completed a quantitative analysis of the benefits of the AJCA, the foreign
tax credit implications, and state and local tax consequences of the impact of the AJCA on the Company’s plans for
repatriation. Based on the analysis, the Company repatriated $24.0 million from its foreign subsidiaries in 2005.
The Company is evaluating the need to provide additional deferred taxes for the future earnings of its foreign
subsidiaries to the extent such earnings may be appropriated for distribution to the Company’s corporate office in North
America, and as further investment strategies with respect to foreign earnings are determined. Should the Company’s North
American cash requirements exceed the cash that is provided through the domestic credit facilities, cash can be obtained
from the Company’s foreign subsidiaries. However, the distribution of any unappropriated funds to the U.S. will require the
recording of income tax provisions on the U.S. entity, thus reducing net income. As of December 31, 2005, the Company
has recorded approximately $1.1 million in deferred taxes for earnings of its foreign subsidiaries, primarily Diodes-Hong
Kong.
62
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (Continued)
At December 31, 2004 and 2005, the Company's deferred tax assets and liabilities are comprised of the following
items:
Deferred tax assets, current
Inventory cost
Accrued expenses and accounts receivable
Net operating loss carryforwards, foreign tax credits and other
2004
2005
$
364,000
702,000
1,387,000
$
672,000
1,692,000
177,000
$
2,453,000
$
2,541,000
Deferred tax assets, non-current
Plant, equipment and intangible assets
Net operating loss carryforwards, foreign tax credits and other
$
(2,632,000)
10,602,000
$
(1,181,000)
9,647,000
$
7,970,000
$
8,466,000
At December 31, 2005, the Company had Federal and state net operating loss (NOL) carryforwards of
approximately $9.7 million and $13.4 million, respectively, available to offset future regular and alternative minimum
taxable income. The Federal NOL carryforwards will begin to expire in 2016 and the state NOL carryforwards will begin to
expire in 2006.
At December 31, 2005, the Company had Federal and state tax credit carryforwards of approximately $8.0 million
and $0.2 million, respectively, available to offset future regular income and partially offset alternative minimum taxable
income. The Federal credit carryforwards will begin to expire in 2009 and the state credit carryforwards will begin to expire
in 2020.
For the years ended December 31, 2003, 2004 and 2005, the Company recorded tax benefits related to the exercise
of non-qualified stock options and the disqualified disposition of incentive stock options which were recorded as a credit to
additional paid in capital in the amount of $1,139,000, $8,514,000 and $2,898,000, respectively.
NOTE 9 – EMPLOYEE BENEFIT PLANS
Employee Retirement Plans – The Company maintains a 401(k) retirement plan (the Plan) for the benefit of qualified
employees at its North American locations. Employees who participate may elect to make salary deferral contributions to the Plan
up to 100% of the employees’ eligible payroll subject to annual Internal Revenue Code maximum limitations. The Company
makes a matching contribution of $1 for every $2 contributed by the participant up to 6% (3% maximum matching) of the
participant’s eligible payroll. In addition, the Company may make a discretionary contribution to the entire qualified employee
pool, in accordance with the Plan.
As stipulated by the regulations of the PRC, the Company maintains a retirement plan pursuant to the local Municipal
Government for its employees in China. The Company is required to make contributions to the retirement plan at a rate of 22.5%
of the employee’s eligible payroll.
Pursuant to the Taiwan Labor Standard Law and Factory Law, the Company maintains a retirement plan for its
employees in Taiwan. The Company makes contributions at a rate of 6% of the employee’s eligible payroll.
For the years ended December 31, 2003, 2004, and 2005, amounts expensed under these plan were approximately
$1,241,000, $1,428,000, and $1,848,000, respectively.
63
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – EMPLOYEE BENEFIT PLANS (Continued)
Stock Option Plans – The Company maintains stock option plans for directors, officers, and key employees, which
provide for non-qualified and incentive stock options. The Compensation and Stock Option Committee of the Board of
Directors determines the option price (not to be less than fair market value of the underlying common stock at the date of
grant for incentive stock options) at the date of grant. The options generally expire ten years from the date of grant and are
exercisable (vested) over the period stated in each option. Approximately 116,512 shares were available for future grants
under the plans as of December 31, 2005. A summary of stock option transactions for the plans follows:
Balance, December 31, 2002
Granted
Exercised
Canceled
Balance, December 31, 2003
Granted
Exercised
Canceled
Balance, December 31, 2004
Granted
Exercised
Canceled
Outstanding Options
Exercise Price Per Share
Number
Range
5,377,713
754,426
(1,032,212)
(22,988)
5,076,939
790,350
(1,705,088)
(53,400)
4,108,801
832,485
(788,193)
(57,980)
$ 0.55-10.63
7.09-8.69
0.55-10.63
3.70-10.63
1.48-10.63
12.21-14.57
1.48-10.63
3.70-12.21
1.48-14.57
17.30-25.79
1.48-14.57
3.79-23.31
Weighted
Average
$
3.93
8.69
1.95
5.23
5.04
12.23
3.31
9.09
7.09
22.34
5.26
13.11
Balance, December 31, 2005
4,095,113
$ 1.48-25.79
$
10.45
64
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – EMPLOYEE BENEFIT PLANS (Continued)
As of December 31, 2005, approximately 2,554,208 of the 4,095,113 options outstanding were exercisable. The
following summarizes information about stock options outstanding at December 31, 2005:
Range of exercise
prices
$ 1.78-10.63
1.48-10.63
3.70-25.79
$ 1.48-25.79
Number
outstanding
681,600
719,900
2,693,613
4,095,113
Weighted average
remaining contractual life (yrs)
4.1
4.0
8.2
6.7
Weighted average
exercise price
$ 7.03
5.04
12.77
$ 10.45
The following summarizes information about stock options exercisable at December 31, 2005:
Range of exercise
prices
$ 1.78-10.63
1.48-10.63
3.70-12.21
$ 1.48-12.21
Number
exercisable
681,600
718,775
1,153,833
2,554,208
Weighted average
remaining contractual life (yrs)
4.1
4.0
7.2
5.4
Weighted average
exercise price
$ 7.03
5.04
6.99
$ 6.45
'93 NQO
'93 ISO
'01 Plan
Total
'93 NQO
'93 ISO
'01 Plan
Total
Stock Bonus Plan – The Company also maintains an incentive stock bonus plan, which reserves shares of stock for
issuance to key personnel. No shares were issued under this incentive bonus plan for years ended December 31, 2003 and 2004.
In 2005, there were 330,000 restricted shares issued. As of December 31, 2005, there were 44,625 shares available for issuance
under this plan.
NOTE 10 – RELATED PARTY TRANSACTIONS
Lite-On Semiconductor Corporation (LSC) – In July 1997, Vishay Intertechnology, Inc. (Vishay) and the Lite-On
Group, a Taiwanese consortium, formed a joint venture - Vishay/Lite-On Power Semiconductor Pte., LTD. (Vishay/LPSC) - to
acquire Lite-On Power Semiconductor Corp. (LPSC), a then 37% shareholder of the Company and a member of the Lite-On
Group of the Republic of China. The Lite-On Group is a leading manufacturer of power semiconductors, computer peripherals,
and communication products.
In March 2001, Vishay agreed to sell its 65% interest in the Vishay/LPSC joint venture to the Lite-On Group, the 35%
joint venture partner. Because of this transaction, the Lite-On Group, through LPSC, its wholly-owned subsidiary, indirectly
owned approximately 37% of the Company’s common stock. In December 2001, LPSC merged with Dyna Image Corporation of
Taipei, Taiwan. Dyna Image is the world’s largest manufacturer of Contact Image Sensors (CIS), which are used in fax machines,
scanners, and copy machines. The combined company is called Lite-On Semiconductor Corporation (LSC). At December 31,
2005, LSC owned approximately 22.9% of the Company’s common stock. The Company considers its relationship with LSC to
be mutually beneficial and the Company and LSC plans to continue its strategic alliance as it has since 1991.
The Company also leases warehouse space from Lite-on HK Ltd. for its operations in Hong Kong. Such
transactions are on terms no less favorable to the Company than could be obtained from unaffiliated third parties. As
required by Nasdaq, the Audit Committee of the Board of Directors has approved the contracts associated with the related
party transactions. The Company buys product from, and sell products to, LSC.
65
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RELATED PARTY TRANSACTIONS (Continued)
Net sales to, and purchases from, LSC were as follows for years ended December 31:
2003
2004
2005
Net sales
Purchases
$
14,628,000
$
20,675,000
$
20,608,000
$
18,667,000
$
22,368,000
$
22,289,000
As a result of the acquisition of FabTech from LSC, the Company was indebted to LSC in the amount of $3,750,000 and
$0 as of December 31, 2004 and December 31, 2005, respectively. Terms of the debt are indicated in Note 5. As per the terms of
the acquisition agreement, LSC entered into a volume purchase agreement with FabTech pursuant to which LSC is obligated to
purchase from FabTech, and FabTech is obligated to manufacture and sell to LSC, silicon wafers.
As part of the FabTech acquisition, the Company entered into management incentive agreements with several
members of FabTech’s management. The agreements provide a guaranteed aggregate $375,000 annual payment as well as
contingent bonuses based on the annual profitability of FabTech (subject to a maximum annual amount). Any portion of the
guaranteed and contingent liability paid by FabTech is reimbursed by LSC. Guaranteed and maximum contingent bonus
payments provided for by the management incentive agreements for the year ended December 31, 2004 (the final year of the
agreements) were $375,000 and $1.2 million, respectively. No contingent bonus was earned or paid in the years 2003
through 2005.
Other related party – The Company sells product to, and purchases inventory from, companies owned by its 5%
minority shareholder, Keylink International (formerly Xing International), in Diodes-China and Diodes-Shanghai. In
addition, Diodes-China and Diodes-Shanghai each leases its manufacturing facilities from, subcontracts a portion of its
manufacturing process (metal plating and environmental services) to, and pays a consulting fee to, its 5% minority
shareholder. Total amounts for these services for the years ended December 31, 2003, 2004, and 2005 were $3,464,000,
$4,760,000, and $6,575,000. Such transactions are on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. As required by Nasdaq, the Audit Committee of the Board of Directors has approved the contracts
associated with the related party transactions.
Net sales to, and purchases from, companies owned by Keylink International were as follows for years ended
December 31:
2003
2004
2005
Net sales
Purchases
$
1,484,000
$
1,677,000
$
1,336,000
$
2,961,000
$
4,789,000
$
3,882,000
66
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RELATED PARTY TRANSACTIONS (Continued)
Accounts receivable from, and accounts payable to, related parties were as follows as of December 31:
2004
2005
Accounts receivable
LSC
Keylink International
Accounts payable
LSC
Keylink International
$
$
4,180,000
1,346,000
5,526,000
$
$
2,862,000
1,074,000
3,936,000
$
$
5,800,000
1,004,000
6,804,000
$
$
5,150,000
2,771,000
7,921,000
67
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SEGMENT INFORMATION
An operating segment is defined as a component of an enterprise about which separate financial information is available
that is evaluated regularly by the chief decision maker, or decision-making group, in deciding how to allocate resources and in
assessing performance. The Company’s chief decision-making group consists of the President and Chief Executive Officer, Chief
Financial Officer, Senior Vice President of Operations, Senior Vice President of Sales and Marketing, and Vice President, Asia
Sales. The Company operates in a single segment, discrete semiconductor devices, through its various manufacturing and
distribution facilities.
Our operations include the domestic operations (Diodes, Inc. and FabTech) located in the United States and the Asian
operations (Diodes-Taiwan located in Taipei, Taiwan, Diodes-China and Diodes-Shanghai both located in Shanghai, China, and
Diodes-Hong Kong located in Hong Kong, China). For reporting purposes, European operations, which accounted for
approximately 2.3%, 2.6% and 2.6% of total sales for the for the years ended December 31, 2003, 2004, and 2005,
respectively, are consolidated into the domestic (North America) operations.
The accounting policies of the operating entities are the same as those described in the summary of significant accounting
policies. Revenues are attributed to geographic areas based on the location of the market producing the revenues.
2005
Total sales
Intercompany sales
Net sales
Asia
U.S.A.
Consolidated
$
238,825,000
(98,427,000)
$
90,707,000
(16,340,000)
$
329,532,000
(114,767,000)
$
140,398,000
$
74,367,000
$
214,765,000
Assets
$
139,863,000
$
149,652,000
$
289,515,000
Property, plant & equipment, net
$
57,402,000
$
11,528,000
$
68,930,000
2004
Total sales
Intercompany sales
Net sales
$
185,308,000
$
92,634,000
$
277,942,000
(75,527,000)
(16,712,000)
(92,239,000)
$
109,781,000
$
75,922,000
$
185,703,000
Assets
$
116,729,000
$
51,072,000
$
167,801,000
Property, plant & equipment, net
$
48,589,000
$
12,268,000
$
60,857,000
2003
Total sales
Intercompany sales
Net sales
$
124,412,000
$
72,188,000
$
196,600,000
(48,378,000)
(11,317,000)
(59,695,000)
$
76,034,000
$
60,871,000
$
136,905,000
Assets
$
82,142,000
$
41,653,000
$
123,795,000
Property, plant & equipment, net
$
35,941,000
$
11,952,000
$
47,893,000
68
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – SEGMENT INFORMATION (Continued)
Geographic Information
Revenues were derived from the following countries (All Others represents countries with less than 10% of total
revenues each):
2005
Revenue
% of Total
Revenue
China
Taiwan
United States
All Others
Total
$
68,050,000
$
59,838,000
$
54,981,000
$
$
31,896,000
214,765,000
United States
Taiwan
China
All Others
Total
United States
Taiwan
China
Korea
All Others
Total
2004
Revenue
$
$
$
$
$
53,204,000
50,716,000
44,311,000
37,472,000
185,703,000
2003
Revenue
$
$
$
$
$
$
41,593,000
38,087,000
25,908,000
14,455,000
16,862,000
136,905,000
31.7%
27.9%
25.6%
14.8%
100.0%
% of Total
Revenue
28.7%
27.3%
23.9%
20.1%
100.0%
% of Total
Revenue
30.4%
27.8%
18.9%
10.6%
12.3%
100.0%
Major customers – In 2005, we sold silicon wafers to LSC totaling 9.6% (11.1% in 2004 and 10.7% in 2003) of our
total net sales, making LSC our largest customer. No other customer accounted for 10% or greater of our total net sales.
69
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – STOCKHOLDERS’ EQUITY
Follow-on offering – During 2005, we sold 2,125,000 shares of our Common Stock in a follow-on public offering,
raising approximately $71.7 million (net of commissions and expenses). We used approximately $30 million of the net
proceeds in connection with the Anachip acquisition and we intend to use the remaining net proceeds from this offering for
working capital and other general corporate purposes, including acquisitions.
NOTE 13 – COMMITMENTS and CONTINGENCIES
Operating leases – The Company leases its offices, manufacturing plants and warehouses under operating lease
agreements expiring through December 2009. Rent expense amounted to approximately $2,455,000, $2,938,000, and $3,765,000
for the years ended December 31, 2003, 2004, and 2005, respectively.
Future minimum lease payments under non-cancelable operating leases for years ending December 31 are:
2006
2007
2008
2009
2010
$
3,682,000
3,332,000
2,913,000
1,474,000
-
$
11,401,000
Purchase commitments – The Company has non–cancelable purchase contracts for capital expenditures, primarily for
manufacturing equipment in China, of $11,584,000 at December 31, 2005.
NOTE 14 – SUBSEQUENT EVENT
On December 20, 2005, the Company announced it had signed a definitive stock purchase agreement to acquire Anachip
Corporation, a Taiwanese fabless analog IC company.
Headquartered in the Hsinchu Science Park in Taiwan, Anachip’s main product focus is Power Management ICs.
Anachip's products are widely used in LCD monitor/TV's, wireless 802.11 LAN access points, brushless DC motor fans, portable
DVD players, datacom devices, ADSL modems, TV/satellite set-top boxes, and power supplies.
The selling shareholders of Anachip stock included LSC (which owned approximately 60% of Anachip’s outstanding
capital stock), and two Taiwanese venture capital firms (together owning approximately 20% of Anachip’s stock), as well as
current and former Anachip employees.
At December 31, 2005, the Company had purchased an aggregate of 9,433,613 shares (or approximately 18.9%) of the
50,000,000 outstanding shares of the capital stock of Anachip. On January 10, 2006, (the closing date of the acquisition) the
Company purchased an additional 40,470,212 shares and therefore, the Company holds approximately 99.81% of the Anachip
capital stock. At December31, 2005, the investment in Anachip is recorded under the equity method, however, the Company did
not record income from the investment on the consolidated financial statements for the ten days ending December 31, 2005, as the
amount was not material. As of result of the additional Anachip interest acquired during 2006, Anachip will be consolidated
beginning the first fiscal quarter of 2006.
70
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – SUBSEQUENT EVENT (Continued)
The purchase price of the acquisition was NT$20 per share (approximately US$30 million). The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in
the process of obtaining third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to
refinement.
Current assets
Fixed Assets/Non-current
Intangible assets
Patents and trademarks
Computer cost
Goodwill
Total assets acquired
Current liabilities
Non-current liabilities
Total liabilities assumed
Total purchase price
December 31, 2005
(unaudited)
$
23,752,000
2,045,000
2,269,000
246,000
19,541,000
47,853,000
(16,829,000)
(655,000)
(17,484,000)
30,369,000
$
$
The acquired intangible assets include patents and trademarks of $2,269,000 with an approximate 10-year weighted-
average useful life, and computer costs of $246,000 with a weighted-average useful life of approximately 3-7 years. The
recorded goodwill was assigned to the analog IC segment.
71
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Fiscal 2005
Net sales
Gross profit
Net income
Earnings per share
Basic
Diluted
Fiscal 2004
Net sales
Gross profit
Net income
Earnings per share
Basic
Diluted
Fiscal 2003
Net sales
Gross profit
Net income
Earnings per share
Basic
Diluted
March 31
June 30
Sept. 30
Dec. 31
Quarter Ended
$
48,600,000
$
50,598,000
$
54,200,000
$
61,367,000
16,596,000
7,240,000
17,496,000
7,665,000
18,877,000
8,383,000
21,407,000
10,041,000
$
0.34
0.31
$
0.35
0.32
$
0.38
0.34
$
0.40
0.36
March 31
June 30
Sept. 30
Dec. 31
Quarter Ended
$
41,435,000
$
47,017,000
$
49,364,000
$
47,887,000
12,750,000
15,028,000
16,746,000
16,211,000
4,856,000
6,123,000
7,242,000
7,330,000
$
0.25
0.21
$
0.31
0.27
$
0.36
0.31
$
0.35
0.31
March 31
June 30
Sept. 30
Dec. 31
Quarter Ended
$
29,446,000
$
33,316,000
$
34,941,000
$
39,202,000
7,461,000
1,923,000
8,346,000
2,172,000
9,162,000
2,563,000
11,559,000
3,437,000
$
0.10
0.09
$
0.11
0.10
$
0.13
0.12
$
0.18
0.15
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
To the Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
Our audits of the consolidated financial statements of Diodes Incorporated and Subsidiaries referred to in our report dated March
10, 2006 appearing in Item 8 in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed
in item 15(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
March 10, 2006
73
DIODES INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL A
COL B
COL C
COL D
COL E
Description
Year ended December 31,
2003
Allowance for doubtful accounts
Reserve for slow moving and obsolete inventory
2004
Allowance for doubtful accounts
Reserve for slow moving and obsolete inventory
2005
Allowance for doubtful accounts
Reserve for slow moving and obsolete inventory
Balance at
beginning
of period
Additions
charged
to costs &
expenses
Deductions
Balance at
end of
period
$
353,000
1,900,000
$
75,000
1,356,000
$
53,000
1,163,000
$
375,000
2,093,000
$
375,000
2,093,000
$
68,000
982,000
$
11,000
930,000
$
432,000
2,145,000
$
432,000
2,145,000
$
190,000
982,000
$
88,000
480,000
$
534,000
2,647,000
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DIODES INCORPORATED (Registrant)
By: /s/ Keh-Shew, Lu
KEH-SHEW LU
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ Carl C. Wertz
CARL C. WERTZ
Chief Financial Officer, Treasurer, and Secretary
(Principal Financial and Accounting Officer)
March 10, 2006
March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on March 10, 2006.
/s/ Raymond Soong
RAYMOND SOONG
Chairman of the Board of Directors
/s/ C.H. Chen
C.H. CHEN
Vice Chairman of the Board of Directors
/s/ Michael R. Giordano
MICHAEL R. GIORDANO
Director
/s/ Keh-Shew Lu
KEH-SHEW LU
Director
/s/ Shing Mao
SHING MAO
Director
/s/ M.K. Lu
M.K. LU
Director
/s/ John M. Stich
JOHN M. STICH
Director
75
Number
Description
INDEX TO EXHIBITS
Sequential
Page Number
2.1
Stock Purchase Agreement, dated December 20, 2005, by and among DII Taiwan Corporation Ltd., Lite-On
Semiconductor Corporation, Shin Sheng Investment Limited, Sun Shining Investment Corp. and Anachip
Corporation(40)
Certificate of Incorporation of Diodes Incorporated (the “Company”), as amended(1)
Amended By-laws of the Company dated August 14, 1987 (2)
Form of Certificate for Common Stock(41)
Stock Purchase and Termination of Joint Shareholder Agreement (3)
1994 Credit Facility Agreement between the Company and Wells Fargo Bank, National Association (4)
Company’s 401(k) Plan - Adoption Agreement (5)
Company’s 401(k) Plan - Basic Plan Documentation #03 (5)
Employment Agreement between the Company and Pedro Morillas (6)
Company’s Incentive Bonus Plan (7)
Company’s 1982 Incentive Stock Option Plan (7)
Company’s 1984 Non-Qualified Stock Option Plan (7)
Company’s 1993 Non-Qualified Stock Option Plan (7)
3.1
3.2
4.1
10.1
10.2
10.3 *
10.4 *
10.5 *
10.6 *
10.7 *
10.8 *
10.9 *
10.10 * Company’s 1993 Incentive Stock Option Plan (5)
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
$6.0 Million Revolving Line of Credit Note (8)
Credit Agreement between Wells Fargo Bank and the Company dated November 1, 1995 (8)
KaiHong Compensation Trade Agreement for SOT-23 Product (9)
KaiHong Compensation Trade Agreement for MELF Product (10)
Lite-On Power Semiconductor Corporation Distributorship Agreement (11)
Loan Agreement between the Company and FabTech Incorporated (12)
KaiHong Joint Venture Agreement between the Company and Mrs. J.H. Xing (12)
Quality Assurance Consulting Agreement between LPSC and Shanghai KaiHong Electronics Company, Ltd. (13)
Loan Agreement between the Company and Union Bank of California, N.A. (13)
First Amendment to Loan Agreement between the Company and Union Bank of California, N.A. (14)
Guaranty Agreement between the Company and Shanghai KaiHong Electronics Co., Ltd. (14)
Guaranty Agreement between the Company and Xing International, Inc. (14)
Fifth Amendment to Loan Agreement (15)
Term Loan B Facility Note (15)
Bank Guaranty for Shanghai KaiHong Electronics Co., LTD (16)
Consulting Agreement between the Company and J.Y. Xing (17)
Software License Agreement between the Company and Intelic Software Solutions, Inc. (18)
Diodes-Taiwan Relationship Agreement for FabTech Wafer Sales (19)
Separation Agreement between the Company and Michael A. Rosenberg (20)
Stock Purchase Agreement dated as of November 28, 2000, among Diodes Incorporated, FabTech, Inc. and Lite-
On Power Semiconductor Corporation (24)
Volume Purchase Agreement dated as of October 25, 2000, between FabTech, Inc. and Lite-On Power
Semiconductor Corporation (24)
Credit Agreement dated as of December 1, 2000, between Diodes Incorporated and Union Bank of California (24)
Subordination Agreement dated as of December 1, 2000, by Lite-On Power Semiconductor Corporation in favor of
Union Bank of California (24)
Subordinated Promissory Note in the principal amount of $13,549,000 made by FabTech, Inc. payable to Lite-On
Power Semiconductor Corporation (24)
Amended and Restated Subordinated Promissory Note between FabTech, Inc. and Lite-On Semiconductor Corp. (26)
Diodes Incorporated Building Lease – Third Amendment (29)
Document of Understanding between the Company and Microsemi Corporation (29)
Swap Agreement between the Company and Union Bank of California (30)
First Amendment and Waiver between the Company and Union Bank of California (30)
Second Amendment and Waiver between the Company and Union Bank of California (30)
Banking Agreement between Diodes-China and Everbright Bank of China (30)
Banking Agreement between Diodes-China and Agricultural Bank of China (30)
Banking Agreement between Diodes-Taiwan and Farmers Bank of China (30)
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
76
2001 Omnibus Equity Incentive Plan (31)
Sale and Leaseback Agreement between the Company and Shanghai Ding Hong Company, Ltd. (32)
Lease Agreement between the Company and Shanghai Ding Hong Company, Ltd. (32)
Third Amendment and Waiver to Union Bank Credit Agreement (33)
Revolving Credit Extension between the Company and Union Bank (34)
Amended and Restated Credit Agreement between the Company and Union Bank (35)
$2.0 Million Non Revolving-To-Term Note between the Company and Union Bank (35)
Lease Agreement for Plant #2 between the Company and Shanghai Ding Hong Electronic Equipment Limited (37)
$5 Million Term Note with Union Bank (37)
First Amendment To Amended And Restated Credit Agreement (37)
Covenant Agreement between Union Bank and FabTech, Inc. (37)
Amendment to The Sale and Lease Agreement dated as January 31, 2002 with Shanghai Ding Hong Electronic Co.,
Ltd. (37)
Lease Agreement between Diodes Shanghai and Shanghai Yuan Hao Electronic Co., Ltd. (37)
Supplementary to the Lease agreement dated as September 30, 2003 with Shanghai Ding Hong Electronic Co., Ltd.
(37)
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
Second Amendment to Amended and Restated Credit Agreement dated as of August 29, 2005, between Diodes
Incorporated and Union Bank of California, N.A. (39)
Covenant Agreement dated as of August 29, 2005, between FabTech, Inc. and Union Bank of California, N.A. (37)
Revolving Note dated as of August 29, 2005, of Diodes Incorporated payable to Union Bank of California, N.A. (37)
Term Note dated as of August 29, 2005, of FabTech, Inc. payable to Union Bank of California, N.A. (39)
Security Agreement dated as of February 27, 2003, between the Company and Union Bank of California, N.A. (37)
Security Agreement dated as of February 27, 2003, between FabTech, Inc. and Union Bank of California, N.A. (37)
Continuing Guaranty dated as of December 1, 2000, between the Company and Union Bank of California, N.A. (37)
Continuing Guaranty dated as of December 1, 2000, between FabTech, Inc. and Union Bank of California, N.A. (37)
Employment Agreement, dated August 29, 2005, between Diodes Incorporated and Dr. Keh-Shew Lu (38)
Employment Agreement, dated August 29, 2005, between Diodes Incorporated and Mark A. King (38)
Employment Agreement, dated August 29, 2005, between Diodes Incorporated and Joseph Liu (38)
Employment Agreement, dated August 29, 2005, between Diodes Incorporated and Carl C. Wertz (38)
Form of Indemnification Agreement. (38)
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71 Wafer Purchase Agreement, dated as of January 10, 2006, by and between Anachip Corporation and Lite-On
Semiconductor Corporation. (42)
Code of Ethics for Chief Executive Officer and Senior Financial Officers
Subsidiaries of the Registrant
14**
21**
23.1** Consent of Independent Registered Public Accounting Firm
31.1** Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1943, adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2** Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1943, adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1** Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification Pursuant to 18 U.S.C. adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Previously filed as Exhibit 3.1 to Form S-3/A filed with the Commission on September 8, 2005, which is
hereby incorporated by reference.
(2) Previously filed as Exhibit 3 to Form 10-K filed with the Commission for fiscal year ended April 30, 1988,
which is hereby incorporated by reference.
(3) Previously filed with the Company’s Form 8-K, filed with the Commission on July 1, 1994, which is hereby
incorporated by reference.
(4) Previously filed as Exhibit 10.4 to Form 10-KSB/A filed with the Commission for fiscal year ended December
31, 1993, which is hereby incorporated by reference.
(5) Previously filed with Company’s Form 10-K, filed with the Commission on March 31, 1995, which is hereby
incorporated by reference.
(6) Previously filed as Exhibit 10.6 to Form 10-KSB filed with the Commission on August 2, 1994, for the fiscal
year ended December 31, 1993, which is hereby incorporated by reference.
(7) Previously filed with Company’s Form S-8, filed with the Commission on May 9, 1994, which is hereby
incorporated by reference.
(8) Previously filed with Company’s Form 10-Q, filed with the Commission on November 14, 1995, which is
hereby incorporated by reference.
77
(9) Previously filed as Exhibit 10.2 to Form 10-Q/A, filed with the Commission on October 27, 1995, which is
hereby incorporated by reference.
(10) Previously filed as Exhibit 10.3 to Form 10-Q/A, filed with the Commission on October 27, 1995, which is
hereby incorporated by reference.
(11) Previously filed as Exhibit 10.4 to Form 10-Q, filed with the Commission on July 27, 1995, which is hereby
incorporated by reference.
(12) Previously filed with Company’s Form 10-K, filed with the Commission on April 1, 1996, which is hereby
incorporated by reference.
(13) Previously filed with Company’s Form 10-Q, filed with the Commission on May 15, 1996, which is hereby
incorporated by reference.
(14) Previously filed with Company’s Form 10-K, filed with the Commission on March 26, 1997, which is hereby
incorporated by reference.
(15) Previously filed with Company’s Form 10-Q, filed with the Commission on May 11, 1998, which is hereby
incorporated by reference.
(16) Previously filed with Company’s Form 10-Q, filed with the Commission on August 11, 1998, which is hereby
incorporated by reference.
(17) Previously filed with Company’s Form 10-Q, filed with the Commission on November 11, 1998, which is
hereby incorporated by reference.
(18) Previously filed with Company’s Form 10-K, filed with the Commission on March 26, 1999, which is hereby
incorporated by reference.
(19) Previously filed with Company’s Form 10-Q, filed with the Commission on August 10, 1999, which is hereby
incorporated by reference.
(20) Previously filed with Company’s Form 10-K, filed with the Commission on March 28, 2000, which is hereby
incorporated by reference.
(21) Previously filed with Company’s Form 10-Q, filed with the Commission on May 10, 2000, which is hereby
incorporated by reference.
(22) Previously filed with Company’s Form 10-Q, filed with the Commission on August 4, 2000, which is hereby
incorporated by reference.
(23) Previously filed with Company’s Form 10-Q, filed with the Commission on November 13, 2000, which is
hereby incorporated by reference.
(24) Previously filed with Company’s Form 8-K, filed with the Commission on December 14, 2000, which is
hereby incorporated by reference.
(25) Previously filed with Company’s Definitive Proxy Statement, filed with the Commission on May 1, 2000,
which is hereby incorporated by reference.
(26) Previously filed with Company’s Form 10-Q, filed with the Commission on August 7, 2001, which is hereby
incorporated by reference.
(27) Previously filed with Company’s Form 10-K, filed with the Commission on March 28, 2001, which is hereby
incorporated by reference.
(28) Previously filed with Company’s Form 10-Q, filed with the Commission on May 11, 2001, which is hereby
incorporated by reference.
(29) Previously filed with Company’s Form 10-Q, filed with the Commission on November 2, 2001, which is
hereby incorporated by reference.
(30) Previously filed with Company’s Form 10-K, filed with the Commission on March 31, 2002, which is hereby
incorporated by reference.
(31) Previously filed with Company’s Definitive Proxy Statement, filed with the Commission on April 27, 2001,
which is hereby incorporated by reference.
(32) Previously filed with Company’s Form 10-Q, filed with the Commission on May 15, 2002, which is hereby
incorporated by reference.
(33) Previously filed with Company’s Form 10-Q, filed with the Commission on August 14, 2002, which is hereby
incorporated by reference.
(34) Previously filed with Company’s Form 10-Q, filed with the Commission on November 14, 2002, which is
hereby incorporated by reference.
(35) Previously filed with Company’s Form 10-K, filed with the Commission on March 31, 2003, which is hereby
incorporated by reference.
(36) Previously filed with Company’s Form 10-Q, filed with the Commission on August 9, 2004, which is hereby
incorporated by reference.
(37) Previously filed with Company’s Form 8-K, filed with the Commission on September 2, 2005, which is
hereby incorporated by reference.
78
(38) Previously filed with Company’s Form 8-K, filed with the Commission on September 2, 2005, which is hereby
incorporated by reference.
(39) Previously filed with Company’s Form 8-K, filed with the Commission on September 7, 2005, which is hereby
incorporated by reference.
(40) Previously filed with Company’s Form 8-K, filed with the Commission on December 21, 2005, which is
hereby incorporated by reference.
(41) Previously filed as Exhibit 4.1 to Form S-3 filed with the Commission on August 25, 2005, which is hereby
incorporated by reference
(42) Previously filed as Exhibit 2.1 to Form 8-K filed with the Commission on January 12, 2006, which is hereby
incorporated by reference
*
Item 601 of Regulation S-K.
Constitute management contracts, or compensatory plans or arrangements, which are required to be filed pursuant to
**
Filed herewith
79
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Diodes Taiwan Company, Limited, a corporation organized and existing under the laws of the Republic of China
1.
(Taiwan) with principal offices located at 5 Fl., 510-16 Chung-Cheng Road, Hsin-Tien City, Taipei, Taiwan, Republic of China.
This subsidiary does business under its own name and is a wholly-owned subsidiary of Diodes Incorporated.
2.
Shanghai KaiHong Electronics Company, Limited (Diodes-China), a corporation formed under the laws of the
People’s Republic of China with principal offices located at No. 999 Chen Chun Road, Xingqiao Town, Songjiang County,
Shanghai, People’s Republic of China. This subsidiary does business under its own name. This is a 95% majority-owned joint
venture and a subsidiary of Diodes Incorporated.
FabTech Incorporated, a corporation formed under the laws of Delaware with principal offices located at 777 N.W. Blue
3.
Parkway, Suite 350, Lee's Summit, Missouri 64086-5709. This subsidiary does business under its own name and is a wholly-
owned subsidiary of Diodes Incorporated. The registrant acquired this business on December 1, 2000.
Diodes-Hong Kong Limited, a corporation formed under the laws of Hong Kong with registered offices located at Unit
4.
618, 6F, Peninsula Centre, No. 67 Mody Road, Tsimshatsui East, Kowloon, Hong Kong. This subsidiary does business under its
own name and is a wholly-owned subsidiary of Diodes Incorporated.
Shanghai KaiHong Technology Company, Limited (Diodes-Shanghai), a corporation formed under the laws of the
5.
People’s Republic of China with principal offices located at Plant No.1, Lane 18, SanZhuang Road, Songjiang Export Zone,
Shanghai, People’s Republic of China. This subsidiary does business under its own name. This is a 95% majority-owned joint
venture and a subsidiary of Diodes Incorporated.
80
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Diodes Incorporated and Subsidiaries
We consent to the inclusion in this Annual Report on Form 10-K of Diodes Incorporated for the year ended December 31,
2005 and to the incorporation by reference in Registration Statements on Forms S-8 (No. 33-78716, 333-106775 and 333-
124809) of Diodes Incorporated of our report dated March 10, 2006 appearing in Item 8 in this Annual Report on Form 10-
K, of our report dated March 10, 2006 on the financial statement schedule, which appears at page 42 of this Form 10-K, and
of our report dated March 10, 2006 with respect to management's assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial reporting, which report is included in Item 9 in this
Annual Report on Form 10-K.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
March 10, 2006
81
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Keh-Shew Lu, President and Chief Executive Officer, certify that:
I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
1.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
3.
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
5.
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
/s/ Keh-Shew Lu
Keh-Shew Lu
Chief Executive Officer
Date: March 10, 2006
82
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl C. Wertz, Chief Financial Officer, certify that:
I have reviewed this Annual Report on Form 10-K of Diodes Incorporated;
1.
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
3.
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
5.
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
/s/ Carl C. Wertz
Carl C. Wertz
Chief Financial Officer
Date: March 10, 2006
83
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to his knowledge, the Annual Report on Form 10-K for the twelve-month period ended December
31, 2005 of Diodes Incorporated (the “Company”) fully complies with the requirements of Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in
all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in
such report.
Very truly yours,
/s/ Keh-Shew Lu
Keh-Shew Lu
Chief Executive Officer
Date: March 10, 2006
A signed original of this written statement required by Section 906 has been provided to Diodes Incorporated and will be
retained by Diodes Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
84
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to his knowledge, the Annual Report on Form 10-K for the twelve-month period ended December
31, 2005 of Diodes Incorporated (the “Company”) fully complies with the requirements of Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in
all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in
such report.
Very truly yours,
/s/ Carl C. Wertz
Carl C. Wertz
Chief Financial Officer
Date: March 10, 2006
A signed original of this written statement required by Section 906 has been provided to Diodes Incorporated and will be
retained by Diodes Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.
85
Distribution Network
Through innovative marketing strategies and sophisticated
logistics, we work with world-class distributors to assist
our customers in advancing their technologies.
Corporate Information
BOARD OF DIRECTORS
Raymond Soong 3N
Chairman of the Board, Diodes Incorporated
Chairman of the Board, The Lite-On Group
Director since 1993
C.H. Chen 2, 3C, 4
Vice Chairman, Diodes Incorporated
Vice Chairman, Lite-On Semiconductor Corporation
Director since 2000
Michael R. Giordano 1CF, 2C, 4
Sr. Vice President, UBS Incorporated
Director since 1990
Dr. Keh-Shew Lu 3N, 4C
President & Chief Executive Officer, Diodes Incorporated
Retired Sr. Vice President, Texas Instruments, Inc.
Director since 2001
M.K. Lu
President, Lite-On Semiconductor Corporation
Director since 1995
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 and other publicly filed
reports, as filed with the U.S. Securities and Exchange
Commission, are available at www.diodes.com or www.sec.gov
or upon request of:
Investor Relations
CCG Investor Relations
10960 Wilshire Blvd., Suite 2050
Los Angeles, CA 90024
Contact: Crocker Coulson
Tel: 310-477-9800 Fax: 310-231-8663
e-mail: Crocker.Coulson@ccgir.com
or diodes-fin@diodes.com
Calendar Quarter Ended
(split adjusted)
Closing Sales Price
of Common Stock
2001
2003
2002
2004
Dr. Shing Mao 1, 3
Retired Chairman of the Board, Lite-On Incorporated
Director since 1990
93,210
John M. Stich 1, 2, 3, 4
14,179
President & Chief Executive Officer, The Asian Network
13,711
Retired Chief Marketing Officer, Texas Instruments, Inc.–Japan
592
Director since 2000
8
14,311
EXECUTIVE OFFICERS
(132)
(2,074)
Dr. Keh-Shew Lu
785
President & Chief Executive Officer
(1,421)
5 Years of Service
(1,769)
(224)
Joseph Liu
Senior Vice President, Operations
16 Years of Service
136,905
36,528
19,586
2,049
1,037
22,672
13,856
(860)
(5)
12,991
2,460
(436)
115,821
26,710
16,228
1,472
43
17,743
8,967
(1,183)
67
7,851
1,729
(320)
185,703
60,735
23,503
3,422
14
26,939
33,796
(637)
(418)
32,741
6,514
(676)
10,095
25,551
5,802
124
Mark A. King
Senior Vice President, Sales & Marketing
15 Years of Service
$
$
0.32
0.29
0.01
0.01
$
$
0.53
0.47
$
$
m
o
c
.
o
c
y
t
l
u
n
c
m
.
w
w
w
y
n
a
p
m
o
C
&
y
t
l
u
N
c
M
i
:
n
g
s
e
D
Carl C. Wertz
18,324
19,096
18,415
Chief Financial Officer, Secretary & Treasurer
19,982
21,609
19,946
13 Years of Service
$123,795
27,154
12,583
71,450
$105,010
$103,258
Steven Ho
19,798
20,831
Vice President, Asia Sales
29,497
18,417
15 Years of Service
51,124
57,678
1 – Audit Committee Member
5.6%
2 – Compensation & Stock Options Committee Member
10.7%
3 – Nominating Committee Member
4 – Strategic Planning Committee Member
C – Committee Chair
F – Financial Expert
N – Non-Voting Member
0.1%
0.2%
8.8%
15.6%
$
$
1.27
1.10
20,106
23,207
$167,801
49,571
11,347
112,148
17.5%
27.8%
High
$ 34.94
25.93
22.34
18.31
$ 19.49
17.24
16.53
16.77
Low
$ 23.09
20.63
16.79
13.05
$ 14.39
11.22
13.89
12.67
2005
Fourth Quarter 2005
Third Quarter 2005
Second Quarter 2005
First Quarter 2005
Fourth Quarter 2004
Third Quarter 2004
Second Quarter 2004
First Quarter 2004
214,765
74,377
30,285
3,713
(102)
33,896
40,481
221
406
41,108
6,685
(1,094)
Independent Registered Public Accounting Firm
Moss Adams, LLP
11766 Wilshire Blvd., Suite 900
Los Angeles, CA 90025
33,329
Transfer Agent & Registrar
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, NY 10004
Tel: 212-509-4000
$
$
1.44
1.29
General Counsel
Sheppard, Mullin, Richter & Hampton
333 S. Hope Street, 42nd Floor
Los Angeles, CA 90071-1448
23,168
25,894
Financial Information Online
World Wide Web users can access Company information on
the Diodes, Inc. Investor page at www.diodes.com
$289,515
146,651
9,486
225,474
14.6%
19.7%
DIODES INCORPORATED ANNUAL REPORT 2005
Manufacturing Facilities
Shanghai, China (2)
Kansas City, Missouri
Diodes Incorporated
Registered to ISO 9001-2000
File Number A5109
DIODES INCORPORATED
Corporate Offices
3050 E. Hillcrest Drive
Westlake Village, CA 91362-3154 USA
tel: 805.446.4800
fax: 805.446.4850
Asia Sales
Taipei, Taiwan
Hinchou, Taiwan
Shanghai, China
Shenzhen, China
Kowloon, Hong Kong
European Sales
France
Germany
United Kingdom
WWW.DIODES.COM
Nasdaq: DIOD