UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended
June 30, 2008
Or
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|
o
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|
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: 002-25577
DIODES INCORPORATED
(Exact name of registrant as specified in its charter)
|
|
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Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
95-2039518
(I.R.S. Employer
Identification Number)
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|
15660 North Dallas Parkway Suite 850 Dallas, Texas
(Address of principal executive offices)
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75248
(Zip code)
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(972) 385-2810
(Registrants telephone number, including area code)
|
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
þ
The number of shares of the registrants Common Stock outstanding as of August 7, 2008 was 40,851,587
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
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|
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December 31,
|
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June 30,
|
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|
|
2007
|
|
|
2008
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|
|
|
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(unaudited)
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|
CURRENT ASSETS
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|
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|
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Cash and cash equivalents
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$
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56,179
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|
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$
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86,132
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Short-term investments
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323,472
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|
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|
|
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Total cash and short-term investments
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379,651
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|
86,132
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|
Accounts receivable, net
|
|
|
89,578
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|
|
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111,934
|
|
Inventories
|
|
|
53,031
|
|
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|
101,649
|
|
Deferred income taxes, current
|
|
|
5,173
|
|
|
|
6,620
|
|
Prepaid expenses and other
|
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|
10,576
|
|
|
|
15,088
|
|
|
|
|
|
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Total current assets
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538,009
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321,423
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LONG-TERM INVESTMENT, available-for-sale
securities
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294,653
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PROPERTY, PLANT AND EQUIPMENT, net
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123,407
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183,415
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DEFERRED INCOME TAXES, non-current
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|
3,241
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17,626
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|
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OTHER ASSETS
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|
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Goodwill
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25,135
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112,324
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Intangible assets, net
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9,643
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|
|
|
17,418
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Other
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|
6,930
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|
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|
7,718
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total assets
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$
|
706,365
|
|
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$
|
954,577
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these financial statements.
-3-
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
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December 31,
|
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June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
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(unaudited)
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CURRENT LIABILITIES
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Line of credit
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$
|
|
|
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$
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16,520
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Accounts payable
|
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55,145
|
|
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|
58,423
|
|
Accrued liabilities
|
|
|
27,841
|
|
|
|
41,541
|
|
Income tax payable
|
|
|
1,732
|
|
|
|
6,418
|
|
Current portion of long-term debt
|
|
|
1,345
|
|
|
|
1,365
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|
Current portion of capital lease obligations
|
|
|
145
|
|
|
|
449
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
86,208
|
|
|
|
124,716
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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LONG-TERM DEBT, net of current portion
|
|
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|
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2.25% convertible senior notes due 2026
|
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230,000
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|
230,000
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Long-term borrowings
|
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|
5,815
|
|
|
|
170,038
|
|
CAPITAL LEASE OBLIGATIONS, net of current portion
|
|
|
1,331
|
|
|
|
2,352
|
|
OTHER LONG-TERM LIABILITIES
|
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|
6,249
|
|
|
|
35,793
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
329,603
|
|
|
|
562,899
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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MINORITY INTEREST IN JOINT VENTURES
|
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7,164
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|
8,448
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CONTINGENCIES AND COMMITMENTS
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STOCKHOLDERS EQUITY
|
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Preferred stock par value $1.00 per share; 1,000,000 shares authorized;
no shares issued or outstanding
|
|
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Common stock par value $0.66 2/3 per share; 70,000,000 shares authorized;
40,172,491 and 40,838,821 issued and outstanding at December 31, 2007 and
June 30, 2008, respectively
|
|
|
26,782
|
|
|
|
27,226
|
|
Additional paid-in capital
|
|
|
121,412
|
|
|
|
127,248
|
|
Retained earnings
|
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|
220,504
|
|
|
|
247,814
|
|
Accumulated other comprehensive income (loss)
|
|
|
900
|
|
|
|
(19,058
|
)
|
|
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|
|
|
|
|
Total stockholders equity
|
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|
369,598
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|
|
|
383,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
706,365
|
|
|
$
|
954,577
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
-4-
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Three Months Ended
|
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Six Months Ended
|
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|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
96,283
|
|
|
$
|
116,018
|
|
|
$
|
188,303
|
|
|
$
|
211,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
65,605
|
|
|
|
76,400
|
|
|
|
128,102
|
|
|
|
140,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,678
|
|
|
|
39,618
|
|
|
|
60,201
|
|
|
|
71,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
13,397
|
|
|
|
17,127
|
|
|
|
26,075
|
|
|
|
31,786
|
|
Research and development
|
|
|
3,156
|
|
|
|
4,994
|
|
|
|
6,101
|
|
|
|
8,730
|
|
Restructuring charge and gain on disposal of
fixed assets
|
|
|
1,770
|
|
|
|
|
|
|
|
1,770
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
18,323
|
|
|
|
22,121
|
|
|
|
33,946
|
|
|
|
40,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,355
|
|
|
|
17,497
|
|
|
|
26,255
|
|
|
|
31,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,285
|
|
|
|
2,554
|
|
|
|
8,320
|
|
|
|
8,002
|
|
Interest expense
|
|
|
(1,696
|
)
|
|
|
(2,285
|
)
|
|
|
(3,421
|
)
|
|
|
(3,983
|
)
|
Other
|
|
|
72
|
|
|
|
(1,202
|
)
|
|
|
(56
|
)
|
|
|
(1,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
2,661
|
|
|
|
(933
|
)
|
|
|
4,843
|
|
|
|
2,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
15,016
|
|
|
|
16,564
|
|
|
|
31,098
|
|
|
|
33,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION
|
|
|
(2,221
|
)
|
|
|
(2,781
|
)
|
|
|
(4,879
|
)
|
|
|
(4,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
12,795
|
|
|
|
13,783
|
|
|
|
26,219
|
|
|
|
28,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in earnings of joint ventures
|
|
|
(546
|
)
|
|
|
(675
|
)
|
|
|
(961
|
)
|
|
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
12,249
|
|
|
$
|
13,108
|
|
|
$
|
25,258
|
|
|
$
|
27,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
0.32
|
|
|
$
|
0.64
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.60
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,397
|
|
|
|
40,616
|
|
|
|
39,220
|
|
|
|
40,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
42,023
|
|
|
|
42,843
|
|
|
|
41,897
|
|
|
|
42,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
-5-
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,258
|
|
|
$
|
27,311
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,978
|
|
|
|
16,465
|
|
Amortization of intangibles
|
|
|
418
|
|
|
|
466
|
|
Amortization of convertible bond issuance costs
|
|
|
630
|
|
|
|
622
|
|
Minority interest earnings
|
|
|
961
|
|
|
|
1,284
|
|
Share-based compensation
|
|
|
4,654
|
|
|
|
5,133
|
|
Loss (gain) on disposal of property, plant and equipment
|
|
|
348
|
|
|
|
(37
|
)
|
Changes in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,793
|
)
|
|
|
(7,347
|
)
|
Inventories
|
|
|
(442
|
)
|
|
|
(16,652
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,876
|
)
|
|
|
(1,242
|
)
|
Deferred income taxes
|
|
|
863
|
|
|
|
(1,034
|
)
|
Changes in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(5,382
|
)
|
|
|
(3,502
|
)
|
Accrued liabilities
|
|
|
415
|
|
|
|
(1,248
|
)
|
Other liabilities
|
|
|
2,210
|
|
|
|
(104
|
)
|
Income taxes payable
|
|
|
(88
|
)
|
|
|
3,064
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
32,154
|
|
|
$
|
23,179
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
$
|
|
|
|
$
|
(152,934
|
)
|
Acquired intangibles
|
|
|
|
|
|
|
(66
|
)
|
Purchases of property, plant and equipment
|
|
|
(23,318
|
)
|
|
|
(25,092
|
)
|
Sales (purchases) of available-for-sale securities
|
|
|
(18,772
|
)
|
|
|
2,797
|
|
Proceeds from sale of property, plant and equipment
|
|
|
5
|
|
|
|
45
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
$
|
(42,085
|
)
|
|
$
|
(175,250
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances on line of credit, net
|
|
$
|
1,056
|
|
|
$
|
16,463
|
|
Net proceeds from issuance of common stock
|
|
|
3,894
|
|
|
|
1,147
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
165,000
|
|
Repayments of long-term debt
|
|
|
(1,383
|
)
|
|
|
(1,062
|
)
|
Repayments of capital lease obligations
|
|
|
(81
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
3,486
|
|
|
$
|
181,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
|
|
|
236
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(6,209
|
)
|
|
|
29,953
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
48,888
|
|
|
|
56,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
42,679
|
|
|
$
|
86,132
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
-6-
DIODES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(cont)
(Unaudited)
(In thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Acquisition:
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
|
|
|
$
|
196,958
|
|
Liabilities assumed
|
|
|
|
|
|
|
(44,219
|
)
|
Cash acquired
|
|
|
|
|
|
|
24,566
|
|
|
|
|
|
|
|
|
Cash paid for the acquisition
|
|
$
|
|
|
|
$
|
177,305
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
-7-
DIODES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A Basis of Presentation and Recently Issued Accounting Pronouncements
Unless the context otherwise requires, the words Diodes, the Company, we, us and our refer
to Diodes Incorporated and its subsidiaries. The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance with accounting principles generally accepted in
the United States (U.S.) for interim financial information and with the instructions to Form 10-Q.
They do not include all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with accounting principles generally
accepted in the U.S. for complete financial statements. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial statements and related notes
contained in our Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and accruals) considered
necessary for a fair presentation of the results of operations for the period presented have been
included in the interim period. Operating results for the three and six months ended June 30, 2008
are not necessarily indicative of the results that may be expected for the year ending December 31,
2008. The condensed consolidated financial data at December 31, 2007 is derived from audited
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.
The preparation of financial statements in conformity with accounting principles generally accepted in
the U.S. requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these estimates. As
permitted under accounting principles generally accepted in the U.S., interim accounting for certain
expenses, including income taxes, are based on full year forecasts. Such amounts are expensed in full
in the year incurred. For interim financial reporting purposes, income taxes are recorded based upon
estimated annual effective income tax rates.
All significant intercompany balances and transactions have been eliminated.
Corporate Structure
During 2007, we undertook an internal restructuring whereby our foreign subsidiaries were structured
under our newly formed, wholly owned Netherlands holding company, Diodes International B.V. In
addition, Shanghai Kai Hong Electronic Co., Ltd. and Shanghai Kai Hong Technology Co., Ltd. were
structured under Diodes Hong Kong Holding Company, Limited., a newly formed, wholly owned subsidiary of
Diodes International B.V. The primary purpose of this internal restructuring was for treasury management
and tax planning functions.
In connection with our acquisition of Zetex plc (Zetex) (see-Note M Business Acquisitions), we
formed Diodes Holdings UK Limited and Diodes Investment Company, which are the holding companies for
Diodes Zetex Limited.
The consolidated financial statements include the parent company, Diodes Incorporated, and the following:
|
|
|
Holding companies
|
|
|
|
|
|
Diodes International B.V. (Diodes-International)
|
|
100% owned
|
Diodes Hong Kong Holding Company Limited
|
|
100% owned
|
Diodes Holdings UK Limited
|
|
100% owned (2008)
|
Diodes Investment Company
|
|
100% owned (2008)
|
|
|
|
Subsidiaries
|
|
|
|
|
|
Diodes Taiwan, Inc. (Diodes-Taiwan)
|
|
100% owned
|
Diodes Hong Kong Limited (Diodes-Hong Kong)
|
|
100% owned
|
Anachip Corp. (Anachip or Diodes-Anachip)
|
|
99.81% owned
|
Shanghai Kai Hong Electronic Co., Ltd. (Diodes-China)
|
|
95% owned
|
Shanghai Kai Hong Technology Co., Ltd. (Diodes-Shanghai)
|
|
95% owned
|
Diodes FabTech, Inc. (FabTech or Diodes-FabTech)
|
|
100% owned
|
Diodes United Kingdom Limited
|
|
100% owned
|
Diodes Korea Inc.
|
|
100% owned
|
Diodes Germany GmbH
|
|
100% owned
|
Diodes France SARL
|
|
100% owned (2008)
|
Diodes Zetex Limited (Diodes-Zetex)
|
|
100% owned (2008)
|
-8-
Reclassifications
Certain prior years balances have been reclassified to conform to the current financial statement
presentation. These reclassifications had no impact on previously reported net income or stockholders
equity.
Recently Issued Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) APB
14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement).
FSP APB 14-1 clarifies that convertible debt instruments that may
be settled in cash upon conversion are not addressed by paragraph 12 of Accounting Principles Board
Opinion No. 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
. FSP APB
14-1 also specifies that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the future impacts and
required disclosures of this pronouncement and believes that there will be a material adjustment made
to account for the liability and equity components of the Companys $230 million convertible senior
notes separately.
In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
. This standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to
be used in preparing financial statements that are presented in conformity with generally accepted
accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60
days following approval by the U.S. Securities and Exchange Commission (SEC) of the Public Company
Accounting Oversight Boards amendments to AU Section 411,
The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles
. We do not expect SFAS No. 162 to have a material impact
on the preparation of our consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of Intangible Asset
.
FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS 142,
Goodwill and Other Intangible Assets
. The intent of this FSP is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under
SFAS 141R,
Business Combinations,
and other accounting
principles generally accepted in the U.S. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The
guidance for determining the useful life of a recognized intangible asset in this FSP shall be applied
prospectively to intangible assets acquired after the effective date. The disclosure requirements
shall be applied prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. The Company is currently evaluating the impacts and required disclosures of adopting
this pronouncement.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an Amendment of SFAS No. 133
(SFAS 161). SFAS 161 requires that objectives for using
derivatives instruments be disclosed in terms of underlying risk and accounting designation. The fair
value of derivative instruments and their gains and losses will need to be presented in tabular format
in order to present a more complete picture of the effects of using derivative instruments. SFAS 161
is effective for financial statements issued for fiscal years beginning after November 15, 2008. The
Company is currently evaluating the impacts and required disclosures of adopting this pronouncement.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
, (SFAS 141R) which changes
how business acquisitions are accounted. SFAS No. 141R requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction
and establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed in a business combination. Among the more significant changes in the
accounting for acquisitions are the following: i) Transaction costs will generally be expensed.
Certain such costs are presently treated as costs of the acquisition; ii) In-process research and
development (IPR&D) will be accounted for as an asset, with the cost recognized as the research and
development is realized or abandoned. IPR&D is presently expensed at the time of the acquisition; iii)
Contingencies, including contingent consideration, will generally be recorded at fair value with
subsequent adjustments recognized in operations. Contingent consideration is presently accounted for
as an adjustment of purchase price; and iv) Decreases in valuation allowances on acquired deferred tax
assets will be recognized in operations. Such changes previously were considered to be subsequent
changes in consideration and were recorded as adjustments to goodwill. SFAS 141R is effective for
business combinations and adjustments to an acquired entitys deferred tax asset and liability
balances occurring after December 31, 2008. Early adoption is prohibited. The Company is currently
evaluating the future impacts and required disclosures of this pronouncement.
-9-
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
, (SFAS 160) which establishes new standards governing the
accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate,
among other things, that NCIs (previously referred to as minority interests) be treated as a separate
component of equity, not
as a liability; that increases and decreases in the parents ownership
interest, that leave control intact, be treated as equity transactions, rather than as step
acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary
be allocated to the NCIs even when such allocation might result in a deficit balance. This standard
also requires changes to certain presentation and disclosure requirements. SFAS 160 is effective
beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively,
except for the presentation and disclosure requirements, which are to be applied retrospectively to
all periods presented. After adoption, noncontrolling interests ($4.8 million and $7.2 million at
December 31, 2006 and 2007, respectively) will be classified as stockholders equity, a change from
its current classification between liabilities and stockholders equity. The Company is currently
evaluating the future impacts and required disclosures of this pronouncement.
In December 2007, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue
No. 07-1,
Accounting for Collaborative Arrangements
that discusses how parties to a collaborative
arrangement (which does not establish a legal entity within such arrangement) should account for
various activities. The consensus indicates that costs incurred and revenues generated from
transactions with third parties (i.e., parties outside of the collaborative arrangement) should be
reported by the collaborators on the respective line items in their income statements pursuant to EITF
Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent. Additionally, the
consensus provides that income statement characterization of payments between the participants in a
collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such
pronouncements is not within their scope; or a reasonable, rational, and consistently applied
accounting policy election. EITF Issue No. 07-1 is effective for the Company beginning January 1, 2009
and is to be applied retrospectively to all periods presented for collaborative arrangements existing
as of the date of adoption. The Company is currently evaluating the future impacts and required
disclosures of this pronouncement.
In June 2007, the FASBs EITF reached a consensus on EITF Issue No. 07-3,
Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and Development Activities
that
would require nonrefundable advance payments made by the Company for future research and development
activities to be capitalized and recognized as an expense as the goods or services are received by the
Company. EITF Issue No. 07-3 is effective for the Company with respect to new arrangements entered
into beginning January 1, 2008. The Companys adoption of this pronouncement did not have a material
impact and the Company does not have any arrangements in the scope of this pronouncement.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115
(SFAS 159). This Statement
permits entities to choose to measure many financial instruments and certain other items at fair value
and report unrealized gains and losses on these instruments in earnings. SFAS 159 is effective as of
January 1, 2008. At the effective date, an entity may elect the fair value option for eligible items
that exist at that date. The entity shall report the effect of the first re-measurement to fair value
as a cumulative-effect adjustment to the opening balance of retained earnings. The Company has not
elected the fair value option for eligible items that existed as of January 1, 2008.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157
clarifies the principle that fair value should be based on the assumptions market participants would
use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under SFAS 157, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS 157 became effective beginning
January 1, 2008 and did not have a material effect on the Companys financial position, results of
operations or cash flows. In February 2008, FASB Staff Position (FSP) No. 157-2,
Effective Date of
FASB Statement No. 157
, was issued that delayed the application of SFAS 157 for non-financial assets
and non-financial liabilities, until January 1, 2009 (see Note E Fair Value Measurements).
NOTE B Functional Currencies, Comprehensive Income and Foreign Currency Translation
Functional Currencies and Translation
The functional currency for most of our international operations is the
U.S. dollar. The functional currency for our subsidiaries Diodes-Taiwan, Diodes-Anachip and Diodes-Zetex is their
local currency, as the Company believes it is the appropriate currency for them to use. Assets and liabilities
denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Income and
expense accounts denominated in foreign currencies are translated at the average exchange rate during the period
presented. Resulting translation adjustments are recorded as a separate component of accumulated other
comprehensive income or loss within stockholders equity in the consolidated condensed balance sheets.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are recorded as other income (expense) in the consolidated condensed statements
of income. The Company had foreign exchange transaction losses of approximately $0.1 million and $1.2 million for
the three months ended June 30, 2007 and 2008, respectively, and approximately $0.3 million and $1.7 million for
the six months ended June 30, 2007 and 2008, respectively.
-10-
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 separate components
of the equity section of the balance sheet, such items, along with net income, are components of comprehensive
income or loss. The components of other comprehensive income or loss include foreign currency translation
adjustments, unrealized holding losses for available-for-sale securities, unrealized loss on defined benefit plan
and foreign currency gain on forward contracts. Accumulated other comprehensive income was $0.9 million at
December 31, 2007 and accumulated other comprehensive loss was $19.1 million at June 30, 2008. The $20.0 million
change in other comprehensive loss was primarily a result of a $16.5 million, net of tax, unrealized loss of
available-for-sale securities (see Note F Short-term and Long-term Investments) and $8.5 million, net of tax,
unrealized loss on defined benefit plan (see Note P Defined Benefit Plan) during the first six months of 2008,
partially offset by a $4.7 million currency translation gain.
Total comprehensive income for the three and six months ended June 30, 2007 and 2008 was as follows
(in thousands)
:
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Net income
|
|
$
|
12,249
|
|
|
$
|
13,108
|
|
|
$
|
25,258
|
|
|
$
|
27,313
|
|
Translation adjustment
|
|
|
257
|
|
|
|
1,622
|
|
|
|
(189
|
)
|
|
|
4,681
|
|
Unrealized loss on available-for-sale securities, net
of tax
|
|
|
|
|
|
|
(5,031
|
)
|
|
|
|
|
|
|
(16,524
|
)
|
Unrealized loss on defined benefit plan, net of tax
|
|
|
|
|
|
|
(8,540
|
)
|
|
|
|
|
|
|
(8,540
|
)
|
Foreign currency gain on forward contracts, net of tax
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
12,506
|
|
|
$
|
1,584
|
|
|
$
|
25,069
|
|
|
$
|
7,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE C Hedging
As a multinational company, our transactions are denominated in a variety of currencies. During the
second quarter of 2008, in connection with the acquisition of Zetex, the Company adopted forward
exchange contracts, designated as foreign-currency cash flow hedges, to reduce the potentially
adverse effects of foreign-currency exchange rate fluctuations that occur in the normal course of
business. The Company uses forward exchange contracts to hedge, thereby attempting to reduce our
overall exposure to the effects of currency fluctuations on cash flows. The Company does not permit
speculation in financial instruments for profit on the exchange rate price fluctuation, trading in
currencies for which there are no underlying exposures, or entering into trades for any currency to
intentionally increase the underlying exposure.
These forward exchange contracts are recognized on the balance sheet at their fair value.
Unrealized gain positions are recorded as assets and unrealized loss positions are recorded as
liabilities. Changes in the fair values of the outstanding forward exchange contracts that are
highly effective are recorded in other comprehensive income until net income is affected by the
variability of the cash flows of the hedged transaction. Changes in the fair values of the forward
exchange contracts not effective as hedging instruments are recognized in earnings in the current
period. Results of ineffective hedges are recorded in the expense line item being hedged.
The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in offsetting changes
in the cash flows of hedged items and whether those forward exchange contracts are expected to
remain highly effective in future periods.
As of June 30, 2008, the Company had forward contracts, primarily relating to the Zetex operations,
of approximately $53.2 million that mature monthly over the next 18 months. For the six months
ended June 30, 2008, the Company had net foreign exchange hedge-related transaction losses of $1.5
million related to hedging the Zetex acquisition purchase price and deferred net unrealized losses
on outstanding forward exchange contracts recorded as other comprehensive gain of $0.4 million (net
of tax). For the six months ended June 30, 2008, the Company had no ineffective hedges because
forward foreign currency contract amounts were less than the specifically identified anticipated
transactions.
-11-
NOTE D Earnings Per Share
The shares used in the computation of basic and diluted earnings
per common share were as follows
(in thousands, except per share
data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
used in computing basic earnings per share
|
|
|
39,397
|
|
|
|
40,617
|
|
|
|
39,220
|
|
|
|
40,431
|
|
|
Net income
|
|
$
|
12,249
|
|
|
$
|
13,108
|
|
|
$
|
25,258
|
|
|
$
|
27,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.31
|
|
|
$
|
0.32
|
|
|
$
|
0.64
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding
used in computing basic earnings per share
|
|
|
39,397
|
|
|
|
40,617
|
|
|
|
39,220
|
|
|
|
40,431
|
|
Add: Assumed exercise of stock options and
stock awards
|
|
|
2,626
|
|
|
|
2,227
|
|
|
|
2,677
|
|
|
|
2,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,023
|
|
|
|
42,844
|
|
|
|
41,897
|
|
|
|
42,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,249
|
|
|
$
|
13,108
|
|
|
$
|
25,258
|
|
|
$
|
27,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.31
|
|
|
$
|
0.60
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share are based upon the weighted average number of
shares of Common Stock and common stock equivalents outstanding,
including those related to share-based compensation and convertible
notes. Earnings per share are computed using the treasury stock
method under FASB Statement No. 128. The convertible notes include
a net share settlement feature which requires us to redeem the par
amount of the bond in cash and any remaining value, assuming the
bond is in the money, in incremental shares, cash or a combination
thereof. The net share settled convertible as structured is defined
in EITF 90-19, Instrument C, which allows us to use the treasury
stock method of calculating the diluted earnings per share. The
incremental value of the shares is determined based on the average
price of our Common Stock over the reporting period. There are no
shares in the earnings per share calculation related to the
convertible notes outstanding as our average stock price did not
exceed the conversion price of $39.00 and, therefore, there is no
conversion spread.
NOTE E
Fair Value Measurements
As stated in Note A Basis of Presentation and Recently Issued Accounting Pronouncements,
on January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value the
financial assets and liabilities. SFAS 157 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer
the liability occurs in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement costs). Valuation techniques should be consistently applied. Inputs to valuation
-12-
techniques refer to the assumptions that market participants would
use in pricing the asset or liability. Inputs may be observable,
meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on
market data obtained from independent sources, or unobservable,
meaning those that reflect the reporting entitys own assumptions
about the assumptions market participants would use in pricing the
asset or liability developed based on the best information
available in the circumstances. In that regard, SFAS 157
establishes a fair value hierarchy for valuation inputs that gives
the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs Unadjusted quoted prices in active markets for
identical assets or liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2 Inputs Inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly
or indirectly. These include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the asset
or liability (for example, interest rates, volatilities, prepayment
speeds, loss severities, credit risks and default rates) or inputs
that are derived principally from or corroborated by observable
market data by correlation or other means.
Level 3 Inputs Significant unobservable inputs that reflect an
entitys own assumptions that market participants would use in
pricing the assets or liabilities.
Historically, the fair value of the Companys auction rate
securities (ARS) has approximated par value due to the frequent
resets through the auction process. While we continue to earn
interest on investments at the maximum contractual rate, these
investments are not currently trading and therefore do not
currently have a readily determinable market value. Accordingly,
the estimated fair value of the ARS no longer approximates par
value.
Due to a lack of observable market quotes on our $320.7 million ARS
portfolio, we utilized a valuation model that relies exclusively on
Level 3 inputs. Fair value presented for the ARS is based on
third-party information and were determined using proprietary
models based upon well-recognized financial principles and
reasonable estimates about relevant future market conditions
including those that are based on the expected cash flow streams,
the underlying financial condition and credit quality of the issuer
and bond insurer, the percent of the Federal Family Education Loan
Program (FFELP) guaranty, and the maturity of the securities, as
well as the market activity of similar securities. The valuation
of our ARS investment portfolio is subject to uncertainties that
are difficult to predict and the future actual market prices may
differ materially (see Note F Short-term and Long-term
Investments).
Financial assets and liabilities carried at fair value as of June
30, 2008 are classified in the following table
(in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
Level 3:
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Total at
|
|
Description
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294,653
|
|
|
$
|
294,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294,653
|
|
|
$
|
294,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the beginning and ending
balances for assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3)
during the period ended June 30, 2008
(in thousands)
:
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
securities
|
|
|
|
|
|
|
Beginning balance as of January 1, 2008
|
|
$
|
320,700
|
|
|
|
|
|
|
Total gains or losses (unrealized)
|
|
|
|
|
Included in other comprehensive loss
|
|
|
(26,072
|
)
|
Purchases, issuances, and settlements
|
|
|
25
|
|
|
|
|
|
Ending balance as of June 30, 2008
|
|
$
|
294,653
|
|
|
|
|
|
-13-
Certain financial assets and financial liabilities are measured at
fair value on a nonrecurring basis, that is, the instruments are
not measured at fair value on an ongoing basis but are subject to
fair value adjustments in certain circumstances (for example, when
there is evidence of impairment). Financial assets and financial
liabilities measured at fair value on a non-recurring basis were
not significant at June 30, 2008.
Certain non-financial assets and non-financial liabilities measured
at fair value on a recurring and non-recurring basis include
goodwill, other intangible assets and other non-financial
long-lived assets. As previously stated above, SFAS 157 will be
applicable to these fair value measurements beginning January 1,
2009.
NOTE F Short-term and Long-term Investments
Short-term and long-term investments at June 30, 2008 and December 31, 2007, were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
Cost Basis
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment
in auction rate securities
|
|
$
|
320,675
|
|
|
$
|
|
|
|
$
|
(26,072
|
)
|
|
$
|
294,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
320,675
|
|
|
$
|
|
|
|
$
|
(26,072
|
)
|
|
$
|
294,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
Cost Basis
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment
in auction rate securities
|
|
$
|
320,700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
320,700
|
|
Money market mutual funds
|
|
|
2,772
|
|
|
|
|
|
|
|
|
|
|
|
2,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
323,472
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
323,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, we had $320.7 million invested in ARS, which
are generally long-term debt instruments that provided liquidity
through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals. These mechanisms
historically have allowed existing investors to roll over their
holdings and continue to own the respective securities or to
liquidate their holdings by selling their securities at par value.
Historically, the Company invested in ARS for short periods of time
as part of its cash management program. However, the recent
uncertainties in the credit markets and the failure of the auctions
for the Companys ARS have prevented us and other investors from
liquidating holdings of ARS. An auction failure, which is not a
default in the underlying debt instrument, occurs when the amount
of securities submitted for sale exceed the amount of purchase
orders, resulting in our continuing to hold these securities. The
maturity dates for the Companys ARS range from 19 to 39 years and
averages 32 years. Based on current market conditions, if a
secondary market does not develop, it is likely that auctions
related to these securities will continue to be unsuccessful.
Unsuccessful auctions will result in our holding securities beyond
their next scheduled auction reset dates, thereby limiting the
liquidity of these investments.
Our ARS are primarily in student loan association bonds. None of
our investments are collateralized mortgage obligations or are
any other type of mortgage-backed or real estate-backed security.
As of June 30, 2008, approximately 85.7%, or $274.8 million, of the
$320.7 million par value ARS are collateralized by higher education
funded student loans that are supported by the federal government
as part of FFELP. The following table shows a natural grouping of
the FFELP guaranteed securities, as well as the percentage of the
ARS portfolio guaranteed by FFELP
(in thousands)
.
|
|
|
|
|
|
|
|
|
% of FFELP guaranty
|
|
Par Value
|
|
% of Total
|
|
Greater than 99.0%
|
|
$
|
195,000
|
|
|
|
60.8
|
%
|
Between 81.2% and 82.1%
|
|
|
86,825
|
|
|
|
27.1
|
%
|
50.50%
|
|
|
17,000
|
|
|
|
5.3
|
%
|
10.00%
|
|
|
3,850
|
|
|
|
1.2
|
%
|
non-FFELP guaranteed
|
|
|
18,000
|
|
|
|
5.6
|
%
|
|
Total
|
|
$
|
320,675
|
|
|
|
100.0
|
%
|
-14-
As of June 30, 2008, our portfolio of ARS was valued using a
valuation model that relies exclusively on Level 3 inputs. The
valuation resulted in the ARS being discounted by a range of 5.5%
to 23.1% of par value. The resulting discount of the total ARS
portfolio was 8.1% of par value, or $26.1 million pre-tax
unrealized loss (see Note E Fair Value Measurements).
We currently have the ability and intent to hold these ARS investments until a
recovery of the auction process or until maturity. Because of the inability to
determine when our investments in ARS would settle, as of
March 31, 2008, we
reclassified the entire ARS balance from short-term investments to long-term
investment, available-for-sale securities on our consolidated balance sheet.
Although we are uncertain as to when the liquidity issues relating to these
investments will improve, we consider these issues to be only temporary, and
thus reduced the carrying value of the ARS to $294.7 million by recording a
$16.5 million unrealized loss (net of $9.6 million tax effect) in other
comprehensive loss.
It is possible that further declines in ARS fair value may occur. We continue
to monitor the market for ARS and consider its impact (if any) on the fair
market value of the investments. If the current market conditions deteriorate
further, we may be required to record additional unrealized losses in other
comprehensive income or record impairment charges to the income statement.
NOTE G Inventories
Inventories are stated at the lower of cost or market value. Cost
is determined principally by the first-in, first-out method
(in
thousands)
.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
19,918
|
|
|
$
|
36,390
|
|
Work-in-progress
|
|
|
11,868
|
|
|
|
30,609
|
|
Finished goods
|
|
|
21,245
|
|
|
|
34,650
|
|
|
|
|
|
|
|
|
|
|
$
|
53,031
|
|
|
$
|
101,649
|
|
|
|
|
|
|
|
|
NOTE H Goodwill and Other Intangible Assets
The following amounts of goodwill and intangible assets relating to
the acquisition of Zetex are preliminary (See Note M Business
Acquisitions). The Company is undergoing an independent valuation
of the assets acquired, and upon completion of the valuation the
amounts of goodwill and intangible assets are subject to change.
Changes in goodwill are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
Acquisitions/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions/
|
|
|
|
|
|
|
|
|
|
|
purchase
|
|
Currency
|
|
|
|
|
|
|
|
|
|
purchase
|
|
Currency
|
|
|
|
|
Balance,
|
|
accounting
|
|
exchange
|
|
Balance,
|
|
Balance,
|
|
accounting
|
|
exchange
|
|
Balance,
|
|
|
January 1
|
|
adjustments
|
|
and other
|
|
December 31
|
|
January 1
|
|
adjustments
|
|
and other
|
|
June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,030
|
|
|
$
|
|
|
|
$
|
105
|
|
|
$
|
25,135
|
|
|
$
|
25,135
|
|
|
$
|
85,231
|
|
|
$
|
1,958
|
|
|
$
|
112,324
|
|
|
|
|
-15-
Intangible assets at June 30, 2008 are
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Currency exchange
|
|
|
Intangible Assets
|
|
Useful life
|
|
Amount
|
|
Amortization
|
|
and other
|
|
Net
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks
|
|
3-15 years
|
|
$
|
11,422
|
|
|
$
|
(2,025
|
)
|
|
$
|
(37
|
)
|
|
$
|
9,360
|
|
Software license
|
|
3 years
|
|
|
648
|
|
|
|
(33
|
)
|
|
|
4
|
|
|
|
619
|
|
|
Total amortized intangible assets:
|
|
|
|
|
|
$
|
12,070
|
|
|
$
|
(2,058
|
)
|
|
$
|
(33
|
)
|
|
$
|
9,979
|
|
|
Indefinite Life Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property
|
|
Indefinite
|
|
$
|
7,387
|
|
|
$
|
|
|
|
$
|
52
|
|
|
$
|
7,439
|
|
|
Total indefinite life intangible
assets:
|
|
|
|
|
|
$
|
7,387
|
|
|
$
|
|
|
|
$
|
52
|
|
|
$
|
7,439
|
|
|
Total intangible assets:
|
|
|
|
|
|
$
|
19,457
|
|
|
$
|
(2,058
|
)
|
|
$
|
19
|
|
|
$
|
17,418
|
|
|
Amortization expense related to intangible assets subject to
amortization was $0.2 million and $0.3 million for the three months
ended June 30, 2007 and 2008, respectively.
Amortization expense related to intangible assets subject to
amortization was $0.4 million and $0.5 million for the six months
ended June 30, 2007 and 2008, respectively.
-16-
NOTE I Income Tax Provision
Income tax expense of $2.8 million and $5.0 million was recorded
for the three and six months ended June 30, 2008, respectively.
This resulted in an effective tax rate of 14.9% in the six months
ended June 30, 2008, as compared to 15.7% in the same period of
last year and compared to 13.2% for the full year of 2007. Our
lower effective tax rate compared with the same period last year
was the result of lower income in the U.S. and higher income in
lower-taxed jurisdictions, partially offset by an increased income
tax rates at our China subsidiaries.
Our global presence requires us to pay income taxes in a number of
jurisdictions. In general, earnings in the U.S. and Taiwan are
currently subject to tax rates of 39.0% and 25.0%, respectively. In
addition, Taiwan earnings are subject to an additional 10% retained
earnings tax should the Taiwan earnings not be distributed.
Earnings of Diodes-Hong Kong are subject to a 16.5% tax for local
sales or local source sales; all other Hong Kong sales are not
subject to foreign income taxes. 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 this Subpart F income 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 the formation of Diodes-Anachip, earnings of
Diodes-Anachip are subject to a five-year tax holiday (subject to
certain qualifications of Taiwanese tax law). In the third quarter
of 2006, we elected to begin this five-year tax holiday as of
January 1, 2006. Beginning 2011, Anachip earnings will be subject
to the statutory Taiwan income tax rate.
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 2007. For 2008, we expect a tax rate of 25%. In
addition, due to a $15 million permanent re-investment of
Diodes-China earnings in 2004, Diodes-China has received additional
preferential tax treatment (earnings will be exempted from central
government income tax for two years, and then subject to tax rates
in the range of 12.0% to 12.5% for the following three years) on
earnings that are generated by this investment.
In addition, the earnings of Diodes-China would ordinarily be
subject to a standard local government tax rate of 3.0% through
2007. However, as an incentive for establishing Diodes-China, the
local government waived this tax from 1996 through 2007.
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%, and there is no local
government tax. As an incentive for establishing Diodes-Shanghai,
the 2005 and 2006 earnings of Diodes-Shanghai were exempted from
central government income tax and the 2007 earnings were subject to
a 7.5% tax rate. For 2008, we expect a tax rate of 12.5%.
It is unclear to what extent our China subsidiaries will receive
preferential tax treatment. The recent China government income tax
reform terminates some existing tax incentives for foreign
enterprises doing business in China. The central government tax
rate in China increased to 25% beginning in 2008; however, we
believe Diodes-China may qualify for a high technology
preferential tax treatment that would reduce the tax rate to 15%
and Diodes-China may qualify for a transitional tax rate of 9%.
On June 9, 2008, the Company completed the acquisition of all the
outstanding ordinary capital stock of Zetex. Earnings of the Zetex
United Kingdom subsidiaries are currently subject to a tax rate of
28% and the earnings of Zetex-Hong Kong are subject to a 16.5% tax
rate. In addition, the German subsidiaries are subject to a 30%
tax rate.
We file income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. We are no longer subject
to U.S. federal income tax examinations by tax authorities for tax
years before 2004. The IRS has contacted the Company regarding an
examination for the tax year ended 2005. With respect to state and
local jurisdictions and countries outside of the U.S., with limited
exceptions, we are no longer subject to income tax audits for years
before 2001. Although the outcome of tax audits is always
uncertain, we believe that adequate amounts of tax, interest and
penalties, if any, have been provided for in our FASB
Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN48) reserve for any adjustments that may result from future
tax audits. We recognize accrued interest and penalties, if any,
related to unrecognized tax benefits in income tax expense.
We adopted the provisions FIN48 effective January 1, 2007. As a
result of the implementation of FIN48, we increased our liability
for unrecognized tax benefits, primarily related to our foreign
subsidiaries, by approximately $2.0 million during the first
quarter of 2007, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings. As of January 1, 2008
and June 30, 2008, the gross amount of unrecognized tax benefits
was approximately $4.1 million and $4.3 million, respectively.
It is reasonably possible that the amount of the unrecognized
benefit with respect to certain of our unrecognized tax positions
will significantly increase or decrease within the next 12 months.
These changes may be the result of settlement of ongoing audits or
competent authority proceedings. At this time, an estimate of the
range of the reasonably possible outcomes cannot be made.
-17-
In addition, funds repatriated from foreign subsidiaries to the
U.S. may be subject to federal and state income taxes. As of
January 1, 2007, we had accrued $3.3 million for U.S. taxes on
future dividends from our foreign subsidiaries. With the
establishment of the holding companies in 2007, the Company intends
to permanently reinvest overseas all of its earnings from its
foreign subsidiaries. Accordingly, the $3.3 million liability was
reversed during 2007, and U.S. taxes are no longer being recorded
on undistributed foreign earnings.
NOTE J Deferred compensation
Beginning January 1, 2007, the Company implemented a Non-Qualified
Deferred Compensation Plan (the Deferred Compensation Plan) for
executive officers, key employees and members of the Board of
Directors (the Board). The Deferred Compensation Plan allows
eligible participants to defer the receipt of eligible compensation
until designated future dates. The Company offsets its obligations
under the Deferred Compensation Plan by investing in the actual
underlying investments. These investments are classified as trading
securities and are carried at fair value. At June 30, 2008, these
investments totaled approximately $2.1 million. All gains and
losses in these investments are equally offset by corresponding
gains and losses in the Deferred Compensation Plan liabilities.
NOTE K Share-based Compensation
We maintain share-based compensation plans for our officers, key
employees, and our Board, which provide for stock options and stock
awards. For further details regarding the Companys share-based
compensation plans, please see Note 15 of our notes to consolidated
financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2007.
Stock Options.
Through March 31, 2006, substantially all stock
options granted vest in equal annual installments over a three-year
period and expire ten years after the grant date. Beginning April
1, 2006, substantially all stock options granted vest in equal
annual installments over a four-year period and expire ten years
after the grant date.
For the three months and six months ended June 30, 2007 and 2008,
share-based compensation expense associated with the Companys
stock options recognized in the income statement is as follows
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Cost of sales
|
|
$
|
79
|
|
|
$
|
51
|
|
|
$
|
160
|
|
|
$
|
105
|
|
Selling and
administrative expense
|
|
|
1,205
|
|
|
|
1,072
|
|
|
|
2,508
|
|
|
|
2,151
|
|
Research and development
expense
|
|
|
118
|
|
|
|
110
|
|
|
|
243
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense
|
|
$
|
1,402
|
|
|
$
|
1,233
|
|
|
$
|
2,911
|
|
|
$
|
2,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense for the three months and six months ended June 30, 2007
and 2008 was estimated on the date of grant using the Black-Scholes option
pricing model. For the six months ended June 30, 2008, the Company granted
stock options to purchase approximately 241,000 shares of the Companys Common
Stock, which vests in equal annual installments over a four-year period and
expire ten years from the date of grant. Options granted during the six
months ended June 30, 2008 had a weighted-average grant date fair value of
$16.70.
The total intrinsic value (actual gain) of options exercised during the six
months ended June 30, 2008 was approximately $6.5 million. The total net cash
proceeds received from stock option exercises during the six months ended June
30, 2008 was $1.1 million.
-18-
A summary of the stock option plans as of June 30, 2008 follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Stock options
|
|
Shares (000)
|
|
|
Price
|
|
|
Term (yrs)
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1,
2008
|
|
|
4,268
|
|
|
$
|
10.06
|
|
|
|
6.0
|
|
|
$
|
85,393
|
|
Granted
|
|
|
241
|
|
|
|
27.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(292
|
)
|
|
|
3.93
|
|
|
|
|
|
|
|
6,513
|
|
Forfeited or expired
|
|
|
(15
|
)
|
|
|
18.84
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
4,202
|
|
|
$
|
11.48
|
|
|
|
5.8
|
|
|
$
|
67,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008
|
|
|
3,317
|
|
|
$
|
8.59
|
|
|
|
5.1
|
|
|
$
|
63,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above is before applicable income taxes and represents
the amount optionees would have received if all options had been exercised on the last business
day of the period indicated, based on our closing stock price.
As of June 30, 2008, total unrecognized stock-based compensation expense related to unvested
stock options, net of forfeitures, was approximately $8.6 million, before income taxes, and is
expected to be recognized over a weighted average of approximately 2.2 years.
Share Grants.
Restricted stock awards and restricted stock units generally vest in equal annual
installments over a four-year period.
A summary of the status of our non-vested share grants as of June 30, 2008 follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
Value
|
|
Share Grants
|
|
Shares (000)
|
|
|
Fair Value
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2008
|
|
|
1,018
|
|
|
$
|
18.34
|
|
|
$
|
30,602
|
|
Granted
|
|
|
105
|
|
|
|
27.91
|
|
|
|
|
|
Vested
|
|
|
(375
|
)
|
|
|
15.77
|
|
|
|
9,342
|
|
Forfeited
|
|
|
(28
|
)
|
|
|
26.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2008
|
|
|
720
|
|
|
$
|
20.78
|
|
|
$
|
19,897
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2007 and 2008, there was
$0.8 million and $1.3 million, respectively, of share-based
compensation expense related to non-vested stock award
arrangements granted under the plans.
During the six months ended June 30, 2007 and 2008, there was
$1.7 million and $2.7 million, respectively, of share-based
compensation expense related to non-vested stock award
arrangements granted under the plans.
The total intrinsic value (actual gain) of restricted stock grants
vested during the six months ended June 30, 2008 was approximately
$9.3 million.
As of June 30, 2008, total un-recognized share-based compensation
expense related to non-vested stock award arrangements, net of
forfeitures, was approximately $12.9 million, before income taxes,
and is expected to be recognized over a weighted average of
approximately 2.2 years.
-19-
NOTE L
Segment and Geographic Information
An operating segment is defined as a component of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief decision maker, or
decision-making group, in deciding how to allocate resources and
in assessing performance. 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 Senior Vice President
of Finance. For financial reporting purposes, we operate in a
single segment, standard semiconductor products, through our
various manufacturing and distribution facilities. We aggregated
our products since the products are similar and have similar
economic characteristics, and the products are similar in
production process and share the same customer type.
Our primary operations include the domestic operations in North
America and the Far East. For reporting purposes, European sales,
which accounted for approximately 4.2% and 8.7% of total sales
for the three months ended June 30, 2007 and 2008, respectively,
and approximately 4.3% and 7.4% of total sales for the six months
ended June 30, 2007 and 2008, respectively, are consolidated into
the domestic (North America) operations.
The accounting policies of the operations are the same as those
described in the summary of significant accounting policies in our
Annual Report on Form 10-K for the year ended December 31, 2007.
Revenues are attributed to geographic areas based on the location
of the market producing the revenues
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
June 30, 2007
|
|
Far East
|
|
|
North America
|
|
|
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
121,240
|
|
|
$
|
29,943
|
|
|
$
|
151,183
|
|
Inter-company sales
|
|
|
(48,585
|
)
|
|
|
(6,315
|
)
|
|
|
(54,900
|
)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,655
|
|
|
$
|
23,628
|
|
|
$
|
96,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
97,658
|
|
|
$
|
12,766
|
|
|
$
|
110,424
|
|
Assets
|
|
$
|
199,278
|
|
|
$
|
462,145
|
|
|
$
|
661,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
June 30, 2008
|
|
Far East
|
|
|
North America
|
|
|
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
154,228
|
|
|
$
|
42,366
|
|
|
$
|
196,594
|
|
Inter-company sales
|
|
|
(72,855
|
)
|
|
|
(7,721
|
)
|
|
|
(80,576
|
)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
81,373
|
|
|
$
|
34,645
|
|
|
$
|
116,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
107,323
|
|
|
$
|
76,092
|
|
|
$
|
183,415
|
|
Assets
|
|
$
|
344,715
|
|
|
$
|
609,862
|
|
|
$
|
954,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
June 30, 2007
|
|
Far East
|
|
|
North America
|
|
|
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
231,907
|
|
|
$
|
60,666
|
|
|
$
|
292,573
|
|
Inter-company sales
|
|
|
(93,395
|
)
|
|
|
(10,875
|
)
|
|
|
(104,270
|
)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
138,512
|
|
|
$
|
49,791
|
|
|
$
|
188,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
97,658
|
|
|
$
|
12,766
|
|
|
$
|
110,424
|
|
Assets
|
|
$
|
199,278
|
|
|
$
|
462,145
|
|
|
$
|
661,423
|
|
|
|
|
|
|
|
|
|
|
|
-20-
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
June 30, 2008
|
|
Far East
|
|
|
North America
|
|
|
Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
292,698
|
|
|
$
|
72,222
|
|
|
$
|
364,920
|
|
Inter-company sales
|
|
|
(137,402
|
)
|
|
|
(15,920
|
)
|
|
|
(153,322
|
)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
155,296
|
|
|
$
|
56,302
|
|
|
$
|
211,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
107,323
|
|
|
$
|
76,092
|
|
|
$
|
183,415
|
|
Assets
|
|
$
|
344,715
|
|
|
$
|
609,862
|
|
|
$
|
954,577
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information
Revenues were derived from (billed to) customers located in the following countries. All
Others represents countries with less than 10% of the total revenues each (
in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
for the Three Months
|
|
|
Percentage of
|
|
|
|
Ended June 30,
|
|
|
Net Sales
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
37,047
|
|
|
$
|
34,983
|
|
|
|
38.5
|
%
|
|
|
30.2
|
%
|
Taiwan
|
|
|
23,201
|
|
|
|
33,433
|
|
|
|
24.1
|
%
|
|
|
28.8
|
%
|
United States
|
|
|
20,643
|
|
|
|
21,923
|
|
|
|
21.4
|
%
|
|
|
18.9
|
%
|
All Others
|
|
|
15,392
|
|
|
|
25,679
|
|
|
|
16.0
|
%
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,283
|
|
|
$
|
116,018
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
for the Six Months
|
|
|
Percentage of
|
|
|
|
Ended June 30,
|
|
|
Net Sales
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
62,039
|
|
|
$
|
61,085
|
|
|
|
32.9
|
%
|
|
|
28.9
|
%
|
Taiwan
|
|
|
56,820
|
|
|
|
66,048
|
|
|
|
30.2
|
%
|
|
|
31.2
|
%
|
United States
|
|
|
40,829
|
|
|
|
41,239
|
|
|
|
21.7
|
%
|
|
|
19.5
|
%
|
All Others
|
|
|
28,615
|
|
|
|
43,226
|
|
|
|
15.2
|
%
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
188,303
|
|
|
$
|
211,598
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE M Business Acquisitions
Zetex Acquisition
On June 9, 2008, the Company completed the
acquisition of all the outstanding ordinary capital stock of Zetex, a
company incorporated under the laws of England and Wales. The
shareholders of Zetex received 85.45 pence in cash per Zetex ordinary
share, valuing the fully diluted share capital of Zetex at approximately
U.S.$176.3 million (based on a USD:GBP exchange rate of 1.9778),
excluding acquisition costs, fees and expenses.
As consideration for Zetex, the Company paid the following (in thousands):
|
|
|
|
|
Purchase price (net of cash acquired)
|
|
$
|
149,143
|
|
Acquisition related costs
|
|
|
3,595
|
|
|
|
|
|
Total purchase price
|
|
$
|
152,738
|
|
|
|
|
|
-21-
In addition, in order to finance the acquisition, the Company entered into a loan for $165
million, which accrues interest at a floating rate of interest per annum equal to the sum of the
prevailing daily 30-day LIBOR plus 1.25% (see Note N Margin Loan), secured by its ARS portfolio.
The results of operations of the Zetex acquisition have been included in the consolidated
financial statements from June 1, 2008. The purpose of this acquisition was to create revenue,
operating and cost synergies and to enhance the Companys leadership in discrete and analog
solutions. In addition, the Company believes that the acquisition will strengthen and broaden the
Companys product offerings, including entry into the LED lighting and automotive markets and
expand the Companys geographical footprint in the European markets.
Because Zetex was acquired late in the second quarter of 2008 and was a significant acquisition, it
will require a comprehensive review of asset values and liabilities, and a significant part of the
evaluation will take into consideration the integration of Zetex. A final determination of the
allocation of the purchase price to the assets acquired and liabilities assumed has not been made
and should be considered preliminary. The final determination is subject to the completion of a
comprehensive independent valuation of the assets acquired and liabilities assumed. The Company is
in the process of an independent valuation and expects to have this valuation completed by 2008
year-end.
The following summarizes the preliminary (subject to final determination) allocation of the
purchase price to the fair value of the assets acquired and liabilities assumed at the date of
acquisition:
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
13,445
|
|
Inventory
|
|
|
30,605
|
|
Prepaid expenses and other current assets
|
|
|
4,363
|
|
Property, plant and equipment, net
|
|
|
50,145
|
|
Deferred tax assets
|
|
|
5,235
|
|
Other long-term assets
|
|
|
136
|
|
Trademarks and other intangible assets
|
|
|
7,991
|
|
Goodwill
|
|
|
85,036
|
|
|
|
|
|
Total assets acquired
|
|
$
|
196,956
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
$
|
6,057
|
|
Accrued expenses and other liabilities
|
|
|
16,154
|
|
Pension liability
|
|
|
10,873
|
|
Deferred tax liabilities
|
|
|
7,288
|
|
Other liabilities
|
|
|
3,846
|
|
|
|
|
|
Total liabilities assumed
|
|
|
44,218
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
152,738
|
|
|
|
|
|
The following unaudited pro forma consolidated results of operations for the quarters ended
June 30, 2007 and 2008 have been prepared as if the acquisition of Zetex had occurred at January 1,
2007 and January 1, 2008, respectively for each quarter (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
Net revenues
|
|
$
|
128,999
|
|
|
$
|
149,271
|
|
|
$
|
251,442
|
|
|
$
|
262,124
|
|
Net income
|
|
$
|
14,248
|
|
|
$
|
4,254
|
|
|
$
|
29,255
|
|
|
$
|
14,802
|
|
Net income per common shareBasic
|
|
$
|
0.36
|
|
|
$
|
0.10
|
|
|
$
|
0.75
|
|
|
$
|
0.37
|
|
Net income per common
shareDiluted
|
|
$
|
0.34
|
|
|
$
|
0.10
|
|
|
$
|
0.70
|
|
|
$
|
0.35
|
|
-22-
The unaudited pro forma consolidated results of operations do not purport to be indicative of
the results that would have been obtained if the above acquisition had actually occurred as of the
dates indicated or of those results that may be obtained in the future. The unaudited pro forma
consolidated results of operations do not include any adjustments to net income to give effect to
depreciation of property, plant and equipment acquired and amortization of intangible assets
acquired as the Company is undergoing an independent valuation of the assets and liabilities
acquired and is unable to determine what those effects would be. Upon completion of the valuation,
the Company intends to make adjustments for these items in future pro forma disclosures for Zetex.
These unaudited pro forma consolidated results of operations were derived, in part, from the
historical consolidated financial statements of Zetex and other available information and
assumptions believed to be reasonable under the circumstances.
Note N Long-Term Borrowings Margin Loan
On March 31, 2008, the Company obtained from UBS Financial Services Inc. (UBS) an
Irrevocable Standby Letter of Credit (Letter of Credit) in favor of Diodes-FabTech, in an
aggregate amount of $165 million.
In connection with the acquisition of Zetex (see Note M Business Acquisitions), the Company
drew $165 million, which accrues interest at a floating rate of interest per annum equal to the sum
of the prevailing daily 30-day LIBOR plus 1.25% and is payable monthly. The margin loan is secured
by the Companys ARS and does not have a maturity date. The margin loan may be called if the value
of the ARS portfolio falls below 75% of the par value or below a required percentage of the par
value under applicable statutes, rules and regulations and may be called any time subject to the
discretion of UBS if UBS considers a margin call necessary for its protection. There are no
scheduled principal payments and the margin loan can be paid in part or in its entirety by the
Company at anytime without penalty. Management does not believe the margin loan will be called
within the next twelve months.
NOTE O Commitments
Purchase commitments
As of June 30, 2008, we have approximately
$9.1 million in non-cancelable purchase contracts related to
capital expenditures, primarily for manufacturing equipment in
China.
NOTE P Defined Benefit Plan
In connection with the acquisition of Zetex (see Note M Business Acquisitions), the Company
has adopted a contributory defined benefit plan that covers certain employees in the United Kingdom
(U.K.) and Germany. The defined benefit plan is closed to new entrants and frozen with respect
to future benefit accruals. The retirement benefit is based on the final average compensation and
service of each eligible employee. On the acquisition date, the Company determined the fair value
of the defined benefit plan assets and plans to utilize an annual measurement date of December 31.
At subsequent measurement dates, defined benefit plan assets will be determined based on fair
value. Defined benefit plan assets consist primarily of high quality corporate bonds that are
denominated in the currency in which the benefits will be paid and that have terms to maturity
approximating to the terms of the related pension liability. The net pension and supplemental
retirement benefit obligations and the related periodic costs are based on, among other things,
assumptions of the discount rate, estimated return on plan assets and mortality rates. These
obligations and related periodic costs are measured using actuarial techniques and assumptions. The
projected unit credit method is the actuarial cost method used to compute the pension liabilities
and related expenses.
For the six months ended June 30, 2008, net period benefit costs associated with the defined
benefit in accordance with SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans
(an amendment of FASB Statements No. 87, 88, 106 and 132R), were
approximately $0.1 million. All unrecognized actuarial gains and losses, prior service costs and
accumulated other comprehensive income are eliminated and the balance sheet liability is set equal
to the funded status of the defined benefit plan at acquisition date.
-23-
The following tables set forth the benefit obligation, the fair value of plan assets, and the
funded status of the Companys plans; the amounts recognized in the Companys financial statements;
and the principal weighted-average assumptions used for the six months ended June 30, 2008:
|
|
|
|
|
|
|
Defined
|
|
|
|
Benefit Plan
|
|
Change in benefit obligation:
|
|
|
|
|
Beginning balance at date of acquisition
|
|
$
|
123,599
|
|
Service cost
|
|
|
34
|
|
Interest cost
|
|
|
675
|
|
Actuarial loss
|
|
|
1,524
|
|
Benefits paid
|
|
|
(229
|
)
|
|
|
|
|
Benefit obligation at June 30, 2008
|
|
$
|
125,604
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at date of acquisition
|
|
$
|
112,450
|
|
Actual return on plan assets
|
|
|
(6,108
|
)
|
Benefits paid
|
|
|
(229
|
)
|
|
|
|
|
Fair value of plan assets at June 30, 2008
|
|
$
|
106,113
|
|
|
|
|
|
Funded
status at June 30, 2008
|
|
|
(19,490
|
)
|
|
|
|
|
Based on an actuarial study preformed as of June 30, 2008, the plan is under-funded and a liability
of $19.5 million is reflected in the Companys consolidated financial statements as noncurrent
liabilities. The amount recognized in accumulated other comprehensive income was a net loss of
$8.5 million and the weighted-average discount rate assumption used to determine benefit
obligations as of June 30, 2008 was 6.7%.
The following are weighted-average assumptions used to determine net periodic benefit costs for the
six months ended June 30, 2008:
|
|
|
|
|
Discount rate
|
|
|
6.6
|
%
|
Expected long-term return on plan assets
|
|
|
6.7
|
%
|
The Company does not expect to make any contributions to the defined benefit plan during
fiscal year 2008. The Company adopted a payment plan that Zetex had in place with the trustees
of the defined benefit plan, in which the Company will pay approximately 1.0 million GBP
(approximately $2.0 million based on a USD:GBP exchange rate of 2:1) every March from 2009 through
2012.
-24-
NOTE Q
Related Parties
We conduct business with one related party company, Lite-On
Semiconductor Corporation (LSC), and its subsidiaries and
affiliates, that owns 20.7% of our outstanding Common Stock as of
June 30, 2008, and one significant company, Zi Yun International
Pte., Ltd. (Zi Yun) (formerly Keylink International) (and its
subsidiaries and affiliates), our 5% joint venture partner in
Diodes-China and Diodes-Shanghai. For further details about
related parties, please see Note 16 of our notes to consolidated
financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2007
The Audit Committee of our Board of Directors reviews all related
party transactions for potential conflict of interest situations on
an ongoing basis, in accordance with such procedures as the Audit
Committee 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.
Lite-On Semiconductor Corporation
During the six months ended
June 30, 2007 and 2008, we sold silicon wafers to LSC totaling 6.8%
and 3.8% of our net sales, respectively, making LSC one of our
largest customers. Also for the six months ended June 30, 2007 and
2008, 11.2 % and 10.3%, respectively, of our net sales were from
discrete semiconductor products purchased from LSC for subsequent
sale by us, making LSC our largest outside supplier. 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 the six months ended June 30, 2007 and 2008, we reimbursed this
entity in aggregate amounts of $0.3 million and $0.3 million,
respectively, for these items. We believe such transactions are on
terms no less favorable to us than could be obtained from
unaffiliated third parties.
Net sales to, and purchases from, LSC for the three and six months
ended June 30, 2007 and 2008 were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,132
|
|
|
$
|
4,160
|
|
|
$
|
12,888
|
|
|
$
|
8,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
$
|
11,821
|
|
|
$
|
14,400
|
|
|
$
|
23,720
|
|
|
$
|
27,166
|
|
Zi Yun International Pte., Ltd.
During the six months ended
June 30, 2007 and 2008, we sold silicon wafers to companies owned
by Zi Yun totaling 0.4% and 0.5% of our net sales, respectively.
Also for the six months ended June 30, 2007 and 2008, 1.6% and
1.4%, respectively, of our net sales were from discrete
semiconductor products purchased from companies owned by Zi Yun.
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, Zi Yun. We also pay a consulting fee to Zi Yun. For the six
months ended June 30, 2007 and 2008, we paid Zi Yun an aggregate of
$4.3 million and $5.3 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.
Net sales to, and purchases from, companies owned by Zi Yun for
three and six months ended June 30, 2007 and 2008 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
Net sales
|
|
$
|
835
|
|
|
$
|
317
|
|
|
$
|
835
|
|
|
$
|
994
|
|
Purchases
|
|
$
|
950
|
|
|
$
|
1,588
|
|
|
$
|
1,921
|
|
|
$
|
3,410
|
|
-25-
Accounts receivable from, and accounts payable to, LSC and Zi Yun
were as follows as of December 31, 2007 and June 30, 2008
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
LSC
|
|
$
|
3,526
|
|
|
$
|
3,392
|
|
Zi Yun International
|
|
|
1,879
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
$
|
5,405
|
|
|
$
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
LSC
|
|
$
|
8,906
|
|
|
$
|
9,339
|
|
Zi Yun International
|
|
|
4,229
|
|
|
|
4,385
|
|
|
|
|
|
|
|
|
|
|
$
|
13,135
|
|
|
$
|
13,724
|
|
|
|
|
|
|
|
|
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Except for the historical information contained herein, the matters addressed in
this Item 2 constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are subject to
a variety of risks and uncertainties, including those discussed below under the
heading Risk Factors and elsewhere in this Quarterly Report on
Form 10-Q
, that
could cause actual results to differ materially from those anticipated by the
Companys management. The Private Securities Litigation Reform Act of 1995 (the
Act) provides certain safe harbor provisions for forward-looking statements.
All forward-looking statements made in this Quarterly Report on
Form 10-Q
are
made pursuant to the Act. The Company undertakes no obligation to publicly
release the results of any revisions to their forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unexpected events. Unless the context otherwise requires, the
words Diodes, the Company, we, us and our refer to Diodes Incorporated
and its subsidiaries.
This managements discussion should be read in conjunction with the managements
discussion included in the Companys Annual Report on
Form 10-K
for the fiscal
year ended December 31, 2007, previously filed with Securities and Exchange
Commission.
Highlights For the Three and Six Months Ended June 30, 2008
|
|
|
Revenue for the three months ended June 30, 2008 increased 20.5% over the prior year
same period to $116.0 million;
|
|
|
|
|
Revenue for the six months ended June 30, 2008 increased 12.4% over prior year same
period to $211.6 million;
|
|
|
|
|
Gross profit for the three months ended June 30, 2008 increased 29.1% over the prior
year same period to $39.6 million and gross margin increased 2.2% over the prior year same
period to 34.1%;
|
|
|
|
|
Gross profit for the six months ended June 30, 2008 increased 18.8% over the prior year
same period to $71.5 million and gross margin increased 1.8% over the prior year same
period to 33.8%;
|
|
|
|
|
Income from operations for the three months ended June 30, 2008 increased 38.0% over the
prior year same period to $17.1 million;
|
|
|
|
|
Income from operations for the six months ended June 30, 2008 increased 16.6% over the
prior year same period to $30.6 million;
|
|
|
|
|
On June 9, 2008, we completed the acquisition of Zetex plc (Zetex), which is expected
to result in revenue, operating and cost synergies;
|
|
|
|
|
In connection with the acquisition of Zetex, we entered into a margin loan for $165
million.
|
-26-
Overview
We are a global supplier of application specific standard products within the broad discrete and
analog semiconductor markets. These products include diodes, rectifiers, transistors, MOSFETs,
protection devices, functional specific arrays, power management devices including DC-DC
switching and linear voltage regulators, amplifiers and comparators, Hall effect sensors and
silicon wafers used to manufacture these products.
We design, manufacture and market these semiconductors for diverse end-use applications in the
consumer electronics, computing, industrial, communications and automotive sectors.
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 standard semiconductor products provides us with a meaningful
competitive advantage relative to other semiconductor companies that provide a wider range of
semiconductor products.
We were incorporated in 1959 in California and reincorporated in Delaware in 1969. We are
headquartered in Dallas, Texas. We have two manufacturing facilities located in Shanghai, China,
one in Neuhaus, Germany and a joint venture facility in Chengdu, China, and our wafer fabrication
facilities are in Kansas City, Missouri and Manchester, England. Our sales, marketing,
engineering and logistical centers are located in Westlake Village, California; Taipei, Taiwan;
Shanghai and Shenzhen, China; Manchester, England; and Hong Kong. We have strengthened our
product design centers in Dallas, San Jose, Shanghai, England, Germany and Taiwan to position our
design engineers to work more closely with our customers and enable us to deliver a stream of
innovative solutions in our targeted product categories. We also have regional sales offices
and/or representatives in: Derbyshire, England, Toulouse, France, Frankfurt, Germany, and in
various cities in the U.S.
We generate a substantial portion of our net sales through the sale of discrete and analog
semiconductor products designed and manufactured by third parties or us. 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 industries, including the consumer electronics, computing, industrial,
communications and automotive markets.
Our
strategy is to continue to enhance our position as a global supplier of standard
semiconductor products, and to continue to add other product lines, such as power management
products, using our packaging technology capability.
As described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, the
principal elements of our strategy include the following:
|
|
|
Continue to rapidly introduce innovative discrete and analog semiconductor
products;
|
|
|
|
|
Expand our available market opportunities;
|
|
|
|
|
Maintain intense customer focus;
|
|
|
|
|
Enhance cost competitiveness; and
|
|
|
|
|
Pursue selective strategic acquisitions
.
|
In implementing these strategies, the following factors have affected, and, we believe, will
continue to affect, our results of operations:
|
|
|
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 any reduced average selling prices of our
products.
|
|
|
|
|
For the six months ended June 30, 2008, our revenue reflects seasonality combined with the
impact of the overall weakening economy, in particular on key targeted end-equipment in the
consumer and computing markets, as well as our foundry and subcontracting business, which showed
greater weakness than our core revenue drivers.
|
|
|
|
|
Our net sales were derived from new products introduced within the last three years, comprising
of 35.1% and 36.4% for the six months ended June 30, 2007 and 2008, respectively, compared to
28.2% in 2006. The significant increase in new products primarily resulted from the Anachip and
Zetex acquisitions. We expect new products to generally have gross profit margins that are 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.
|
|
|
|
|
For the six months ended June 30, 2008, the percentage of our net sales derived from our Asian
subsidiaries was 73.4%, compared to 73.6% in the same period last year. We expect our net sales
to the Asian market to increase as a percentage of our total net sales as a result of our
customers continuing to shift their manufacturing of electronic products from the U.S. to Asia,
although, the Zetex acquisition will begin to add significant revenue in Europe.
|
-27-
|
|
|
Our gross profit margin was 33.8% for the six months ended June 30, 2008, compared to 32.0% in
the same period last year. Our gross margin percentage was higher than the same period last year
as average selling prices remained flat and average unit cost decreased for the six months ended
June 30, 2008 due to improvement of manufacturing efficiency. In 2007, we completed the move of
our analog product from Taiwan to our China manufacturing facilities to increase the gross margin
on this product line. Future gross profit margins will depend primarily on our product mix, cost
savings, and the demand for our products.
|
|
|
|
|
As of June 30, 2008, we had invested approximately $198 million in our Asian manufacturing
facilities. For the six months ended June 30, 2008, we invested approximately $25.8 million in
capital expenditures, primarily in our Asian manufacturing facilities. For 2008, we anticipate
total capital expenditures of approximately 10-12% of annual revenue 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.
|
|
|
|
|
We have increased our investment in research and development from $6.1 million, or 3.2% of net
sales, for the six months ended June 30, 2007 to $9.2 million, or 4.3% of net sales, for the six
months ended June 30, 2008 primarily as a result of the Zetex acquisition. We continue to seek to
hire qualified engineers who fit our focus on proprietary semiconductor processes and packaging
technologies. We expect research and development expenses to be approximately 5% to 6% of net
sales, which will enable us to bring additional proprietary devices to the market.
|
Recent Acquisitions
Zetex Acquisition
On June 9, 2008 we acquired Zetex. See Note M Business
Acquisitions to Notes to Consolidated Condensed Financial
Statements for detailed information regarding this acquisition.
-28-
Results of Operations for the Three Months Ended June 30, 2007 and 2008
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of income bear to
net sales and the percentage dollar increase (decrease) of such
items from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Net Sales
|
|
Percentage Dollar
|
|
|
Three months ended June 30,
|
|
Increase (Decrease)
|
|
|
2007
|
|
2008
|
|
07 to 08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100
|
|
|
|
100
|
|
|
|
20.5
|
|
Cost of goods sold
|
|
|
(68.1
|
)
|
|
|
(65.9
|
)
|
|
|
16.5
|
|
Gross profit
|
|
|
31.9
|
|
|
|
34.1
|
|
|
|
29.1
|
|
Operating expenses
|
|
|
(19.1
|
)
|
|
|
(19.0
|
)
|
|
|
20.7
|
|
Operating income
|
|
|
12.8
|
|
|
|
15.1
|
|
|
|
41.6
|
|
Interest income
|
|
|
4.5
|
|
|
|
2.2
|
|
|
|
(40.4
|
)
|
Interest expenses
|
|
|
(1.8
|
)
|
|
|
(2.0
|
)
|
|
|
34.7
|
|
Other income (expense)
|
|
|
0.1
|
|
|
|
(1.0
|
)
|
|
|
(1,793.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and minority interest
|
|
|
15.6
|
|
|
|
14.3
|
|
|
|
10.3
|
|
Income tax provision
|
|
|
(2.3
|
)
|
|
|
(2.4
|
)
|
|
|
25.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
13.3
|
|
|
|
11.9
|
|
|
|
7.7
|
|
Minority interest
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.7
|
|
|
|
11.3
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our
consolidated operating results and financial condition for the
three months ended June 30, 2008, compared to the three months
ended June 30, 2007. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report
(in
thousands)
.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Net Sales
|
|
$
|
96,283
|
|
|
$
|
116,018
|
|
Net sales increased approximately $19.7 million for the three
months ended June 30, 2008, compared to the same period last year.
The 20.5% increase in net sales represents an approximately 16.6%
increase in units sold with a 3.3% increase in average selling
prices (ASP). The revenue increase for the three months ended
June 30, 2008 was attributable to sales increases in all industry
segments, primarily due to the Zetex acquisition, partially offset
by an overall weaker global economy, as well as our foundry and
subcontracting business, which is showing greater weakness than our
core revenue drivers. Significant price pressure and an
unfavorable commodity-based product mix also affected sales for the
three months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Cost of goods sold
|
|
$
|
65,605
|
|
|
$
|
76,400
|
|
Gross profit
|
|
$
|
30,678
|
|
|
$
|
39,618
|
|
Gross profit margin
|
|
|
31.9
|
%
|
|
|
34.1
|
%
|
Cost of goods sold increased approximately $10.8 million, or 16.5%,
for the three months ended June 30, 2008 compared to the same
period last year. As a percent of sales, cost of goods sold
decreased to 65.9% for the three months ended June 30, 2008
compared to 68.1% in the same period last year and our average unit
cost (AUP) decreased 0.2%. As per SFAS 123R, included in cost of
goods sold was $0.1 million of non-cash, stock option compensation
expense related to our manufacturing facilities for both the three
months ended June 30, 2007 and 2008.
-29-
For the three months ended June 30, 2008, gross profit increased by
approximately $8.9 million, or 29.1%, compared to the same period
last year. Gross margin increased to 34.1% for the three months
ended June 30, 2008, compared to 31.9% for the same period last
year, due primarily to (i) the ASP increase and AUP decrease
related to improved manufacturing efficiency, (ii) demand-induced
changes in product mix and (iii) the acquisition of Zetex.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Selling, general and administrative expenses
(SG&A)
|
|
$
|
13,397
|
|
|
$
|
17,127
|
|
SG&A for the three months ended June 30, 2008 increased
approximately $3.7 million, or 27.8%, compared to the same period
last year, due primarily to (i) $2.1 million increase in wages and
related benefits, including share-based compensation, associated
with increased sales and the acquisition of Zetex and (ii) $0.9
million increase in building maintenance and utilities expenses
including additional costs due to the Zetex acquisition. SG&A as a
percentage of sales, increased to 14.8% for the three months ended
June 30, 2008, compared to 13.9% in the same period last year, due
to higher revenue in the second quarter of 2008. As per SFAS 123R,
included in SG&A expenses was $1.2 million and $1.1 million of
non-cash, stock option compensation expense for the three months
ended June 30, 2007 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Research and development expenses (R&D)
|
|
$
|
3,156
|
|
|
$
|
4,994
|
|
Investment in R&D for the three months ended June 30, 2008 was $5.0
million, an increase of approximately $1.8 million from the same
period last year due primarily to (i) $1.3 million increase in
wages and related benefits as a result of hiring additional
engineers and the acquisition of Zetex, (ii) $0.5 million increase
in building maintenance and utilities expense including additional
costs due to the Zetex acquisition. R&D, as a percentage of sales,
was 4.3% for the three months ended June 30, 2008 compared 3.3% in
the same period last year. Included in R&D expenses was $0.1
million of non-cash, SFAS 123R stock option compensation expense
for the three months ended June 30, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Interest income
|
|
$
|
4,285
|
|
|
$
|
2,554
|
|
Interest income decreased for the three months ended June 30, 2008
to $2.6 million, compared to $4.3 million in the same period last
year, due primarily to less interest income earned on
available-for-sale securities purchased with the proceeds from the
$230 million convertible bonds. Interest income for the three
months ended June 30, 2008 has been impacted by the continued
turmoil in the credit markets, and in particular with the ARS.
Since mid-February, all of our ARS portfolio auctions have failed
and may continue to fail in the future. With the decline in the
overall market interest rates, as well as our failed ARS auctions,
we expect a weighted average interest rate on the ARS to continue
to decline in the third quarter of 2008, as compared to the three
months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Interest expense
|
|
$
|
1,696
|
|
|
$
|
2,285
|
|
Interest expense for the three months ended June 30, 2008 was
approximately $2.3 million, compared to $1.7 million in the same
period last year. Interest expense is primarily associated with
interest expense related to the $230 million-2.25% convertible
bonds and the margin loan.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Other income (expense)
|
|
$
|
72
|
|
|
$
|
(1,202
|
)
|
-30-
Other expense for the three months ended June 30, 2008 was $1.2
million, compared to other income of $0.1 million in the same
period last year. Included in other expense for the three months
ended June 30, 2008 was $1.2 million foreign currency transaction
loss primarily due to $1.5 million loss from forward contract
hedging related to hedging the Zetex acquisition purchase price and
$0.3 million foreign currency transaction gain due to Taiwan
currency and China currency exchange rate changes during the
period. The other income for the three months ended June 30, 2007
was an approximate $0.1 million foreign currency gain due primarily
to Taiwan currency and China currency exchange rate changes during
the periods.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Income tax provision
|
|
$
|
2,221
|
|
|
$
|
2,781
|
|
We recognized income tax expense of $2.8 million for the three
months ended June 30, 2008, resulting in an effective tax rate of
16.8%, as compared to 14.8% in the same period last year. Income
taxes for interim periods ended June 30, 2008 and 2007 have been
included in the accompanying financial statements on the basis of
an estimated annual effective rate. The increase in the effective
tax rate was the result of the higher income tax rate on
Diodes-Zetexs earnings and an increased income tax rate on our
China subsidiaries, partially offset by lower quarterly income in
the U.S. and higher income in lower-taxed jurisdictions. We
continue to take advantage of available strategies to optimize our
tax rate across the jurisdictions in which we operate.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Minority interest
|
|
$
|
546
|
|
|
$
|
675
|
|
Minority interest represented the minority investors share of the
earnings of Diodes-China, Diodes-Shanghai and Diodes-Anachip for
the three months ended June 30, 2008 and 2007. The investment in
the subsidiaries and their equity balances are eliminated in the
consolidation of our financial statements, and the activities of
Diodes-China, Diodes-Shanghai and Diodes-Anachip are included
therein. As of June 30, 2008, we had 95% controlling interests in
Diodes-China and Diodes-Shanghai, and a 99.81% controlling interest
in Anachip.
-31-
Results of Operations for the Six Months Ended June 30, 2007 and 2008
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of income bear to
net sales and the percentage dollar increase (decrease) of such
items from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Net Sales
|
|
Percentage Dollar
|
|
|
Six months ended June 30,
|
|
Increase (Decrease)
|
|
|
2007
|
|
2008
|
|
07 to 08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100
|
|
|
|
100
|
|
|
|
12.4
|
|
Cost of goods sold
|
|
|
(68.0
|
)
|
|
|
(66.2
|
)
|
|
|
9.3
|
|
Gross profit
|
|
|
32.0
|
|
|
|
33.8
|
|
|
|
18.8
|
|
Operating expenses
|
|
|
(18.0
|
)
|
|
|
(19.1
|
)
|
|
|
19.2
|
|
Operating income
|
|
|
14.0
|
|
|
|
14.7
|
|
|
|
18.3
|
|
Interest income
|
|
|
4.4
|
|
|
|
3.8
|
|
|
|
(3.8
|
)
|
Interest expenses
|
|
|
(1.8
|
)
|
|
|
(1.9
|
)
|
|
|
16.4
|
|
Other income (expense)
|
|
|
(0.1
|
)
|
|
|
(0.7
|
)
|
|
|
2,524.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and minority interest
|
|
|
16.5
|
|
|
|
15.9
|
|
|
|
8.0
|
|
Income tax provision
|
|
|
(2.6
|
)
|
|
|
(2.4
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
13.9
|
|
|
|
13.5
|
|
|
|
9.1
|
|
Minority interest
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
|
|
33.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
13.4
|
|
|
|
12.9
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion explains in greater detail our
consolidated operating results and financial condition for the
six months ended June 30, 2008, compared to the six months ended
June 30, 2007. This discussion should be read in conjunction
with the consolidated financial statements and notes thereto
appearing elsewhere in this quarterly report
(in thousands)
.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Net Sales
|
|
$
|
188,303
|
|
|
$
|
211,598
|
|
Net sales increased approximately $23.3 million for the six months
ended June 30, 2008, compared to the same period last year. The
12.4% increase in net sales represents an approximately 13.9%
increase in units sold partially offset by a 1.3% decrease in ASP.
The revenue increase for the six months ended June 30, 2008 was
attributable to sales increases in all industry segments mainly due
to Zetex acquisition, partially offset by an overall weakening of
the global economy, as well as our foundry and subcontracting
business, which is showing greater weakness than our core revenue
drivers. Significant price pressure and an unfavorable
commodity-based product mix also affected sales for the six months
ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Cost of goods sold
|
|
$
|
128,102
|
|
|
$
|
140,064
|
|
Gross profit
|
|
$
|
60,201
|
|
|
$
|
71,534
|
|
Gross profit margin
|
|
|
32.0
|
%
|
|
|
33.8
|
%
|
Cost of goods sold increased approximately $12.0 million, or 9.3%,
for the six months ended June 30, 2008 compared to the same period
last year. As a percent of sales, cost of goods sold decreased to
66.2% for the six months ended June 30, 2008 compared to 68.0% in
the same period last year and our average unit cost (AUP)
decreased 4.0%. As per SFAS 123R, included in cost of goods sold
was $0.2 million and $0.1 million of non-cash, stock option
compensation expense related to our manufacturing facilities for
the six months ended June 30, 2007 and 2008, respectively.
-32-
For the six months ended June 30, 2008, gross profit increased by
approximately $11.3 million, or 18.8%, compared to the same period
last year. Gross margin increased to 33.8% for the six months
ended June 30, 2008, compared to 32.0% for the same period last
year, due primarily to (i) the AUP decline exceeding the ASP
decline related to improved manufacturing efficiency (ii)
demand-induced changes in product mix and (iii) the acquisition of
Zetex.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Selling, general and administrative expenses
(SG&A)
|
|
$
|
26,075
|
|
|
$
|
31,786
|
|
SG&A for the six months ended June 30, 2008 increased approximately
$5.7 million, or 21.9%, compared to the same period last year, due
primarily to (i) $3.2 million increase in wages and related
benefits, including share-based compensation, associated with
increased sales and the acquisition of Zetex and (ii) $1.1 million
increase in building maintenance and utilities expenses including
additional cost due to the Zetex acquisition. SG&A, as a
percentage of sales, increased to 15.0% for the six months ended
June 30, 2008, compared to 13.8% in the same period last year. As
per SFAS 123R, included in SG&A expenses was $2.5 million and $2.2
million of non-cash, stock option compensation expense for the six
months ended June 30, 2007 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Research and development expenses (R&D)
|
|
$
|
6,101
|
|
|
$
|
8,730
|
|
Investment in R&D in the six months ended June 30, 2008 was $8.7
million, an increase of approximately $2.6 million from the same
period last year due primarily to (i) $1.9 million increase in
wages and related benefits as a result of hiring additional
engineers and the acquisition of Zetex, (ii) $0.5 million increase
in building maintenance and utilities expense including additional
costs due to the Zetex acquisition. R&D, as a percentage of sales,
was 4.1% for the six months ended June 30, 2008 compared 3.2% in
the same period last year. Included in R&D expenses was $0.2
million of non-cash, SFAS 123R stock option compensation expense
for the six months ended June 30, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Interest income
|
|
$
|
8,320
|
|
|
$
|
8,002
|
|
Interest income for the six months ended June 30, 2008 was $8.0
million, compared to $8.3 million in the same period in 2007, due
primarily to interest income earned on available-for-sale
securities purchased with the proceeds from the $230 million
convertible bonds. Interest income for the first six months of
2008 has been impacted by the continued turmoil in the credit
markets, and in particular with the ARS. Since mid-February, all
of our ARS portfolio auctions have failed and may continue to fail
in the future. With the decline in the overall market interest
rates, as well as our failed ARS auctions, we expect a weighted
average interest rate on the ARS to continue to decline in the
third quarter of 2008, as compared to the six months ended June 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Interest expense
|
|
$
|
3,421
|
|
|
$
|
3,983
|
|
Interest expense for the six months ended June 30, 2008 was
approximately $4.0 million, compared to $3.4 million in the same
period last year. Interest expense is primarily associated with
interest expense related to the $230 million-2.25% convertible
bonds and the margin loan.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Other income (expense)
|
|
$
|
(56
|
)
|
|
$
|
(1,496
|
)
|
-33-
Other expense for the six months ended June 30, 2008 was $1.1
million, compared to $0.1 million for the same period last year.
Included in other expense for the six months ended June 30, 2008
was approximately $1.5 million of loss from forward contract
hedging related to hedging the Zetex acquisition purchase price.
Included in other expense for the six months ended June 30, 2007
was approximately $0.3 million of foreign currency losses, due
primarily to Taiwan currency and China currency exchange rate
changes during the periods.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Income tax provision
|
|
$
|
4,879
|
|
|
$
|
4,996
|
|
We recognized income tax expense of $5.0 million for the six months
ended June 30, 2008, resulting in an effective tax rate of 14.9%,
as compared to 15.7% in the same period last year. Income taxes for
interim periods ended June 30, 2008 and 2007 have been included in
the accompanying financial statements on the basis of an estimated
annual effective rate. The decrease in the effective tax rate was
the result of lower quarterly income in the U.S. and higher income
in lower-taxed jurisdictions, partially offset by the higher income
tax rate on Diodes-Zetexs earnings and an increased income tax
rate at our China subsidiaries. We continue to take advantage of
available strategies to optimize our tax rate across the
jurisdictions in which we operate.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
Minority interest
|
|
$
|
961
|
|
|
$
|
1,279
|
|
Minority interest represented the minority investors share of the
earnings of Diodes-China, Diodes-Shanghai and Diodes-Anachip for
the six months ended June 30, 2008 and 2007. The investment in the
subsidiaries and their equity balances are eliminated in the
consolidation of our financial statements, and the activities of
Diodes-China, Diodes-Shanghai and Diodes-Anachip are included
therein. As of June 30, 2008, we had 95% controlling interests in
Diodes-China and Diodes-Shanghai, and a 99.81% controlling interest
in Anachip.
-34-
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 and to fund on-going operations. At December 31,
2007 and June 30, 2008, our working capital was $451.8 million and
$196.7 million, respectively. Our working capital decreased in the
first six months of 2008 due to the re-classification of our
available-for-sale securities from current assets to long-term
assets as a result of the current lack of liquidity for the ARS.
We expect cash generated by our U.S. and international operations,
together with existing cash, cash equivalents, and available credit
facilities to be sufficient to cover cash needs for working capital
and capital expenditures for at least the next 12 months. Cash and
cash equivalents, the conversion of other working-capital items and
borrowings are expected to be sufficient to fund on-going
operations.
At June 30, 2008, we had $320.7 million of ARS. With the liquidity
issues experienced in the global credit and capital markets, our
ARS have experienced multiple failed auctions. While we continue to
earn and receive interest on these investments at the maximum
contractual rate, the estimated fair values of these ARS no longer
approximates par value. As of June 30, 2008, we recorded unrealized
losses of $16.5 million (net of $9.6 million tax effect) in other
comprehensive loss for ARS with declines in value from December 31,
2007 deemed to be temporary.
If uncertainties in the credit and capital markets continue or
these markets deteriorate further we may incur additional value
decreases (realized or unrealized) to our ARS investment portfolio,
which could negatively affect our financial condition, financial
flexibility, cash flow and reported earnings.
On October 5, 2006, we issued $230 million in aggregate principal
amount of convertible senior notes due on October 1, 2026. We
received approximately $224.0 in net proceeds from this debt
offering and our intent was to use the net proceeds from this
offering for working capital and other general corporate purposes,
including acquisitions. We have subsequently invested the
proceeds primarily in ARS, which is discussed above.
Capital expenditures for the six months ended June 30, 2007 and
2008 were $27.3 million and $25.8 million, respectively. Our
capital expenditures for these periods were primarily related to
manufacturing expansion in our facilities in China. Capital
expenditures in the first six months of 2008 were 12.2% of
revenue, which is in line with our 10-12% full-year estimate.
Discussion of Cash Flow
Cash and cash equivalents increased from $56.2 million at December
31, 2007, to $86.1 million at June 30, 2008 primarily from cash
generated by operating activities.
Operating Activities
Net cash provided by operating activities for the six months ended
June 30, 2008 was $23.2 million, resulting primarily from $27.3
million of net income in the period, as well as $17.6 million in
depreciation and amortization. Net cash provided by operating
activities was $32.2 million for the same period last year. Net
cash provided by operating activities decreased $9.0 million for
the six months ended June 30, 2008 compared to the same period last
year. This decrease resulted primarily from an approximately $17.0
million increase in assets, partially offset by a $1.1 million
increase in liabilities, $2.0 million increase in net income and a
$4.5 million increase in depreciation and amortization expense. 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 was $175.3 million for the
six months ended June 30, 2008 compared to $42.1 million for the
same period last year. The $133.2 million increase in net cash used
by investing activities resulted primarily from an approximately
$153.0 million increase in acquisitions, net of cash acquired,
partially offset by a decrease of $21.6 million in investment in
available-for-sale securities.
Financing Activities
Our financing activities include net borrowings, share issuances
and excess tax benefits associated with stock option exercises. Net
cash provided by financing activities totaled $181.4 million for
the six months ended June 30, 2008 compared to $3.5 million in the
same period last year. This increase is primarily the result of
$165.0 million draw on the margin loan in connection with the
acquisition of Zetex and a $15.4 million increase in advances on
line of credit.
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Debt Instruments
On March 28, 2008, the Company entered into a fourth amendment to
its U.S. credit agreement with Union Bank (Fourth Amended Credit
Agreement or Revolving Credit Agreement). Under the Fourth
Amended Credit Agreement, the Company now has available a
revolving credit commitment of up to $22.5 million (increased from
$20.0 million), including a $5.0 million letter of credit
sub-facility and a term loan facility of $5.0 million. As of June
30, 2008, the Company had $0.8 million outstanding under the
revolving credit commitment, and there was $2.4 million
outstanding under the term loan. The purpose of the revolving
credit facility is to provide cash for domestic working capital
purposes, and to fund permitted acquisitions.
Any amounts borrowed under the Union Bank credit facility are
collateralized by all of our U.S. accounts, instruments, chattel
paper, documents, general intangibles, inventory, equipment,
furniture and fixtures, pursuant to security agreements in
connection with these credit arrangements. Any amounts borrowed
under the Union Bank credit facility bear interest at LIBOR plus
1.15%. At June 30, 2008, the effective rate under both agreements
was 4.23%.
The Revolving Credit Agreement contains covenants that require us
to maintain a leverage ratio not greater than 3.25 to 1.0, an
interest expense coverage ratio of not less than 2.0 to 1 and a
current ratio of not less than 1.0 to 1. The agreement 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 Revolving 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, this agreement limits our ability
to dispose of some assets, incur additional indebtedness, engage in
liquidation or merger, acquisition, partnership or other
combination (except permitted acquisitions). The Revolving Credit
Agreement also contains customary representations, warranties,
affirmative and negative covenants and events of default. The term
loan does not contain any financial or negative covenants; however,
a default under our Revolving Credit Agreement will cause a
cross-default under the term loan. Due to the margin loan used to
finance the Zetex acquisition, we received a covenant waiver from
Union Bank for the leverage ratio covenant; therefore, as of June
30, 2008, we were in compliance with the bank covenants.
On March 31, 2008, the Company obtained from UBS Financial Services
Inc. an Irrevocable Standby Letter of Credit (Letter of Credit)
in favor of Diodes-FabTech, in an aggregate amount of $165 million,
available for payment to the order of the beneficiary on demand.
Draws under the Letter of Credit will be deemed to be a margin loan
against our approximately $320 million of ARS.
On June 9, 2008, in connection with the acquisition of Zetex, the
Company drew $165 million under the Letter of Credit, which accrues
interest at a floating rate of interest per annum equal to the sum
of the prevailing daily 30-day LIBOR plus 1.25% and is payable
monthly. See Note N to Notes to Consolidated Financial Statements
for detailed information regarding the margin loan.
As of June 30, 2008, our Asia subsidiaries have available lines of
credit of up to an aggregate of $36.8 million, with several Chinese
and Taiwanese financial institutions. These lines of credit, except
for one Taiwanese credit facility, are collateralized by each
subsidiarys 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. At June 30, 2008, $3.0 million was outstanding on these
lines of credit.
In October, 2006, we issued and sold convertible senior notes with
an aggregate principal amount of $230 million due 2026 (Notes),
which pay 2.25% interest per annum on the principal amount of the
notes, payable semi-annually in arrears on April 1 and October 1 of
each year, beginning on April 1, 2007. Interest will accrue on the
notes from and including October 12, 2006 or from and including the
last date in respect of which interest has been paid or provided
for, as the case may be, to, but excluding, the next interest
payment date or maturity date, as the case may be. Commencing with
the six-month period beginning October 1, 2011, and for each
six-month period thereafter, we will, on the interest payment date
for such interest period, pay contingent interest to the holders of
the notes under certain circumstances and in amounts described in
the indenture.
Note holders may require us to repurchase all or a portion of their
notes upon a fundamental change (as defined) at a repurchase price
in cash equal to 100% of the principal amount of the notes to be
repurchased, plus any accrued and unpaid interest to, but
excluding, the fundamental change repurchase date. Future minimum
interest payments related to the Notes as of December 31, 2007 are
$5.2 million for each year from 2008 through 2011. Future minimum
payments related to the Notes as of June 30, 2008 through 2011 and
thereafter include $75.0 million in interest and $230 million in
principal for a total of $305.0 million.
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In connection with the issuance of the Notes, we incurred
approximately $6.2 million of issuance costs, which primarily
consisted of investment banker fees, legal and accounting fees.
These costs are classified within other assets and are amortized as
a component of interest expense using the straight-line method over
the life of the Notes from issuance through October 12, 2011.
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, swap
agreements, or outsource of research and development services, that
could expose us to liability that is not reflected on the face of
our financial statements.
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Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S.
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.
Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, relate to revenue recognition, inventories, accounting for income taxes, allowance for
doubtful accounts, impairment of goodwill and long-lived assets and share based compensation. There have been no
material changes to our critical accounting policies since December 31, 2007, except for the changes described
below.
Short-term and Long-term Investments
Our investments consist primarily of ARS, 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-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.
We review our ARS for impairment in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and
Equity Securities
, and related guidance issued by the FASB and SEC in order to determine the classification of
the decline in fair value as temporary or other-than-temporary.
In evaluating the fair value of the individual ARS, we classified such decline in fair value as temporary, and
thus recorded the $16.5 million unrealized loss (net of $9.6 million tax effect) in other comprehensive loss as
of June 30, 2008. The differentiating factors between temporary and other-than-temporary are primarily the length
of the time and the extent to which the market value has been less than cost, the financial condition and
near-term prospects of the issuer and our intent and ability to retain our investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in market value. See Note F to Notes to Consolidated
Financial Statements for further information regarding our ARS.
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.
We are involved in various tax matters, some of whose outcome is uncertain. For purposes of evaluating whether or
not a tax position is uncertain (i) we presume the tax position will be examined by the relevant taxing authority
that has full knowledge of all relevant information, (ii) technical merits of a tax position are derived from
authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their
applicability to the facts and circumstances of the tax position, and (iii) each tax position is evaluated
without consideration of the possibility of offset or aggregation with other tax positions taken. A tax benefit
from an uncertain position may be recognized only if it is more likely than not that the position is
sustainable, based on its technical merits, and the tax benefit of a qualifying position is the largest amount of
tax benefits that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority
having full knowledge of all relevant information.
We adopted the provisions of FIN 48 effective January 1, 2007. As a result of the implementation of FIN 48, we
recorded an approximate $2.0 million increase in the liability for unrecognized tax benefits, primarily related
to our foreign subsidiaries, which was accounted for as a reduction to the January 1, 2007 balance of retained
earnings.
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Fair Value Measurements
As stated in Note A Basis of Presentation and New Accounting Standards, on January 1, 2008, we adopted the
methods of fair value as described in SFAS 157 to value ARS portfolio investments. SFAS 157, among other things,
defines fair value, establishes a consistent framework for measuring fair value and expands disclosures for each
major asset and liability category measured at fair value on either a recurring or nonrecurring basis. SFAS 157
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As such, fair value is
market-based measurement that should be determined based on the assumptions that market participants would use in
pricing an assets or liability. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as following:
Level 1 Observable inputs such as quoted prices inactive market.
Level 2 Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
Level 3 Unobservable inputs in which there is little or no market data, which requires the reporting entity to
develop its own assumptions.
Due to lack of observable market quotes on our ARS portfolio, the fair value presented for the ARS is based on
third-party information and were determined using proprietary models based upon well-recognized financial
principles and reasonable estimates about relevant future market conditions. The valuation model relies
exclusively on Level 3 inputs including those that are based on the expected cash flow streams, the underlying
financial condition and credit quality of the issuer and bond insurer, and the maturity of the securities, as
well as the market activity of similar securities. The valuation of our ARS investment portfolio is subject to
uncertainties that are difficult to predict. Factors that may impact our valuation include changes to credit
rating of the securities as well as to the underlying assets supporting those securities, rates of default of the
underlying assets, underlying collateral value, discount rates, counterpart risk and ongoing strength and quality
of market credit and liquidity.
Recently Issued Accounting Pronouncements
See Note A to Notes to Consolidated Condensed Financial Statements for detailed information
regarding the status of recently issued accounting pronouncements.
Available Information
Our Internet address is
http://www.diodes.com
. We make available,
free of charge through our Internet website, our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, proxy statements, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and
Exchange Commission (the SEC). To support our global
customer-base, particularly in Asia and Europe, our website is
language-selectable into English, Chinese, 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 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, including SEC filings and press releases, as
well as stock quotes and information on corporate governance
compliance.
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Cautionary Statement for Purposes of the Safe Harbor Provision of the Private
Securities Litigation Reform Act of 1995
Except for the historical information contained herein, the matters
addressed in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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, or similar
phrases or the negatives of such terms. Such forward-looking
statements are subject to a variety of risks and uncertainties,
including those discussed under Risks Related To Our Business and
elsewhere in this Quarterly Report on Form 10-Q that could cause
actual results to differ materially from those anticipated by our
management. The Private Securities Litigation Reform Act of 1995
(the Act) provides certain safe harbor provisions for
forward-looking statements. All forward-looking statements made on
this Quarterly Report on Form 10-Q are made pursuant to the Act.
All forward-looking statements contained in this Quarterly Report
on Form 10-Q are subject to, in addition to the other matters
described in this Quarterly Report on Form 10-Q, a variety of
significant risks and uncertainties. The following discussion
highlights some of these risks and uncertainties. Further, from
time to time, information provided by us or statements made by our
employees may contain forward-looking information. There can be no
assurance that actual results or business conditions will not
differ materially from those set forth or suggested in such
forward-looking statements as a result of various factors,
including those discussed below.
For more detailed discussion of these factors, see the Risk
Factors discussion in Item 1A of the Companys most recent Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission and in Part II, Item 1A of this report. The
forward-looking statements included in this Quarterly Report on
Form 10-Q are made only as of the date of this report, and the
Company undertakes no obligation to update the forward-looking
statements to reflect subsequent events or circumstances.
Risk Factors
Risks Related To Our Business
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Downturns in the highly cyclical semiconductor industry or changes in end-market demand
could affect our operating results and financial condition.
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The semiconductor business is highly competitive, and increased competition may harm our
business and our operating results.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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We are subject to many environmental laws and regulations that could affect our
operations or result in significant expenses.
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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.
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We may fail to attract or retain the qualified technical, sales, marketing and
management personnel required to operate our business successfully.
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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.
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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.
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If OEMs do not design our products into their applications, a portion of our net sales
may be adversely affected.
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We rely heavily on our internal electronic information and communications systems, and
any system outage could adversely affect our business and results of operations.
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We are subject to interest rate risk that could have an adverse effect on our cost of
working capital and interest expenses.
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We have a significant amount of debt following the offering of our convertible senior
notes. Our substantial indebtedness could adversely affect our business, financial
condition and results of operations and our ability to meet our payment obligations under
the notes and our other debt.
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It is likely that the liquidity of our ARS will continue to be limited, which could
adversely affect our ability to fund our operations and acquisitions, and may require us to
record losses on these securities.
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Our margin loan with UBS Financial Services, Inc. (UBS) may be called at any time
subject to the discretion of UBS if UBS considers a margin loan call necessary for UBS
protection, or if the value of our ARS falls below 75% of the outstanding margin loan
balance or a required percentage of the outstanding margin loan balance under certain
applicable statutes, rules and regulations, which could severely impact our liquidity.
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The value of our benefit plan assets and liabilities is based on estimates and
assumptions, which may prove inaccurate.
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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.
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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.
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Risks Related To Our International Operations
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Our international operations subject us to risks that could adversely affect our
operations.
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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.
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We are subject to foreign currency risk as a result of our international operations.
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We may not continue to receive preferential tax treatment in Asia, thereby
increasing our income tax expense and reducing our net income.
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The distribution of any earnings of our foreign subsidiaries to the U.S. may be
subject to U.S. income taxes, thus reducing our net income.
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Risks Related To Our Common Stock
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Variations in our quarterly operating results may cause our stock price to be
volatile.
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We may enter into future acquisitions and take certain actions in connection with
such acquisitions that could affect the price of our Common Stock.
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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.
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We were formed in 1959, and 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.
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Conversion of our convertible senior notes will dilute the ownership interest of
existing shareholders, including holders who had previously converted their notes.
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The repurchase rights and the increased conversion rate triggered by a make-whole
fundamental change could discourage a potential acquirer.
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Certain provisions of Delaware law and our Certificate of Incorporation and Bylaws
may delay or prevent a takeover attempt that may have resulted in a premium over the
market price for our shares.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to financial market risk results primarily from
fluctuations in interest and currency rates. There have been no
material changes to our market risks as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2007 except as
updated below.
At June 30, 2008, our $320.7 million of ARS have experienced
multiple failed auctions due to the liquidity issues experienced in
the global credit and capital markets. While we continue to earn
and receive interest on these investments at the maximum
contractual rate, the estimated fair values of these auction rate
securities no longer approximates par value. As of June 30, 2008,
we recorded an unrealized loss of $16.5 million (net of $9.6
million tax effect) in other comprehensive loss for ARS with
declines in value from December 31, 2007 deemed to be temporary.
We
continue to monitor the market for ARS and consider its impact
(if any) on the fair value of our investments. If the current
market conditions deteriorate further, or the anticipated recovery
in fair values does not occur, we may be required to record
additional unrealized losses or impairment charges in future
periods.
We intend and have the ability to hold these ARS until the market
recovers. We do not anticipate having to sell these securities in
order to operate our business. We believe that, based on our
current unrestricted cash and cash equivalents of $86.1 million at
June 30, 2008, as well as our available credit facilities, the
current lack of liquidity in the credit and capital markets will
not have a material impact on our liquidity, our cash flow, or our
ability to fund our existing operations. We may be required to
hold our ARS until maturity, please see Risk Factor
It is
likely that the liquidity of our ARS will continue to be limited,
which could adversely affect our ability to fund our operations and
acquisitions, and may require us to record losses on these
securities.
in Part II, Item 1A of this Report.
During the second quarter of 2008, with the acquisition of Zetex,
we adopted forward exchange contracts, designated as
foreign-currency cash flow hedges, to reduce the potentially
adverse effects of foreign-currency exchange rate fluctuations that
occur in the normal course of business. The Company uses forward
exchange contacts to hedge, thereby attempting to reduce our
overall exposure to the effects of currency fluctuations on cash
flows. The Company does not permit speculation in financial
instruments for profit on the exchange rate price fluctuation,
trading in currencies for which there are no underlying exposures,
or entering into trades for any currency to intentionally increase
the underlying exposure. As part of its overall strategy to manage
the level of exposure to the risk of foreign currency exchange rate
fluctuations, primarily to changes in the value of the Euro and the
British Pound Sterling, the Company hedges a portion of its foreign
currency exposures anticipated over the ensuing twelve-month to
two-year periods. In doing so, the Company uses foreign currency
exchange contracts that generally have maturities of three months
to two years to provide continuing coverage throughout the hedging
period.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer, Keh-Shew Lu, and Chief Financial
Officer, Carl C. Wertz, with the participation of the Companys
management, carried out an evaluation of the effectiveness of our
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, our disclosure controls and
procedures are effective at the reasonable assurance level to
ensure that information required to be included in this report is:
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recorded, processed, summarized and reported within
the time period specified in the Commissions rules and
forms; and
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accumulated and communicated to our management,
including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions required
disclosure.
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Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an
entitys 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.
Changes in Controls over Financial Reporting
There was no change in our 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, our internal control over financial reporting,
except as follows:
On June 9, 2008, the Company acquired Zetex, whose financial
statements reflect total assets and revenues constituting 14.7% and
6.9% respectively, of the consolidated financial statement amounts
for the six months ended June 30, 2008. As permitted by the rules
of the SEC, the Company will exclude Zetex from its annual
assessment of the effectiveness on internal control over financial
reporting for the year ending December 31, 2008, the year of
acquisition. Management continues to monitor Zetexs internal
controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in litigation incidental to the
conduct of our business. We do not believe we are currently a
party to any pending litigation.
-44-
Item 1A. Risk Factors
There have been material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007, filed on February 29, 2008, and such changes are reflected
immediately below. The following risk factors as well as the risks described in our Annual Report on Form 10-K, are not
the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
It is likely that the liquidity of our ARS will continue to be limited, which could adversely affect our ability to fund
our operations and acquisitions, and may require us to record losses on these securities.
As of June 30, 2008, we have invested primarily in ARS with a cost basis of $320.7 million and a current fair value of
$294.7 million, which are classified as long-term investment, available-for-sale securities. The maturities of the
securities range between 19 and 39 years and averages 32 years.
ARS are generally long-term debt instruments that are intended to provide liquidity through a Dutch auction process
that resets the applicable interest rate at pre-determined calendar intervals. These auctions historically allowed
existing investors to rollover their holdings and continue to own their respective securities or liquidate their
holdings by selling their securities at par value. Since mid-February 2008, there have been more sellers than buyers
at each scheduled interest rate auction date and parties desiring to sell their securities have been unable to do so.
As of March 31, 2008, we reclassified our ARS from short-term investments to long-term investments, available-for-sale
securities, and recorded an $11.5 million unrealized loss (net of $6.6 million tax effect) in other comprehensive
income (loss). Further, under the terms of our ARS, most of the securities have reset to a lower interest rate. If
the market for our ARS is not re-established, the absence of liquidity could adversely affect our ability to fund
operations and acquisitions, and may require us to record losses on these securities. In addition, if our ARS do not
reset to higher interest rates, it could have a material adverse effect on our interest income. See Note F to Notes
to Consolidated Financial Statements for more information.
Our margin loan with UBS Financial Services, Inc. (UBS) may be called at any time subject to the discretion of UBS if
UBS considers a margin loan call necessary for UBS protection, or if the value of our ARS falls below 75% of the
outstanding margin loan balance or a required percentage of the outstanding margin loan balance under certain applicable
statutes, rules and regulations, which could severely impact our liquidity.
In connection with the acquisition of Zetex, the Company drew $165 million on its Irrevocable Standby Letter of Credit
(Letter of Credit) in favor of Diodes-FabTech with UBS, which accrues interest at a floating rate of interest per
annum equal to the sum of the prevailing daily 30-day LIBOR plus 1.25% and is payable monthly. The margin loan is
secured by the Companys ARS and does not have a maturity date. The margin loan may be called at any time subject to
the discretion of UBS if UBS considers a margin loan call necessary for UBS protection, or if the fair value of the
ARS falls below 75% of the outstanding margin loan balance or a required percentage of the outstanding margin loan
balance under certain applicable statutes, rules and regulations. There are no scheduled principal payments and the
margin loan can be paid in part or in its entirety by the Company at anytime without penalty. Although we do not
expect the margin loan to be called, the fair value of our ARS has declined during each of the first two quarters of
2008, and we are unable to determine if and how much the ARS will continue to decline. See Note N to Notes to
Consolidated Financial Statements for more information.
The value of our benefit plan assets and liabilities is based on estimates and assumptions, which may prove inaccurate.
Certain of the Companys employees in the United Kingdom (U.K.) and Germany participate in Company sponsored defined
benefit plans. The defined benefit plan is closed to new entrants and is frozen with respect to future benefit accruals.
The retirement benefit is based on the final average compensation and service of each eligible employee. The Company
accounts for these benefit plans in accordance with SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R)
, which requires the Company to
make actuarial assumptions that are used to calculate the earning value of the related assets, where applicable, and
liabilities and the amount of expenses to be recorded in the Company s consolidated financial statements. Assumptions
include the expected return on plan assets, discount rates, and mortality rates. While we believe the underlying
assumptions, under the projected unit credit method are appropriate, the carrying value of the related assets and
liabilities and the actual amount of expenses recorded in the consolidated financial statements could differ materially
from the assumptions used. See Note P to Notes to Consolidated Financial Statements for more information.
-45-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Revolving 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. For further details,
please see Debt Instruments under Part I, Item 2 of this Report.
Item 3. Defaults Upon Senior Securities
There are no matters to be reported under this heading.
Item 4. Submission of Matters to a Vote of Security Holders
The Company submitted to a vote of its security holders at an
annual meeting of stockholders on May 29, 2008, the election of
members of the Board. The directors were each elected to serve
until the 2008 annual meeting or until their successors are elected
and have qualified. The results of the tabulation for each nominee
for director of the Company is as follows:
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C.H. Chen,
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For:
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23,672,108
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Director
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Withheld:
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15,375,683
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Michael R. Giordano,
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For:
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29,029,538
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Director
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Withheld:
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10,018,253
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Keh-Shew Lu,
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For:
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38,084,226
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Director
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Withheld:
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963,565
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L.P. Hsu,
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For:
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38,515,544
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Director
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Withheld:
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532,247
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Shing Mao,
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For:
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38,212,281
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Director
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Withheld:
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835,510
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Raymond Soong,
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For:
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34,940,544
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Director
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Withheld:
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4,107,247
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John M. Stich,
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For:
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38,682,244
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Director
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Withheld:
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365,547
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The Company also submitted to a vote of its security holders at an
annual meeting of shareholders on May 29, 2008, the appointment of
Moss Adams LLP as the Companys independent registered public
accounting firm for the fiscal year ending December 31, 2008. The
result of the tabulation was 38,418,939 shares voted in favor of
the proposal, 539,068 shares voted against, and 89,784 abstained
from voting on the proposal. No broker non-votes with respect to
this proposal were received.
Item 5. Other Information
There are no matters to be reported under this heading.
-46-
Item 6. Exhibits
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Exhibit
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Filed
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Number
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Description
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Form
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Date of First Filing
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Number
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Herewith
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3.1
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Certificate of Incorporation, as amended (File No.
333-127833).
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S-3
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September 8, 2006
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3.1
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3.2
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Amended Bylaws of the Company dated July 19, 2007.
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8-K
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July 23, 2007
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3.1
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10.1
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Contract for the Purchase and Sale of Real Estate
dated May 6, 2008, between Diodes Incorporated and
West Plano Land Company, LP.
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X
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10.2
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Service Agreement between Diodes Zetex Limited and
Colin Keith Greene, dated June 30, 2008.
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X
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10.3
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Side Letter to the Service Agreement between
Diodes Zetex Limited and Hans Rohrer, dated July
11, 2008.
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X
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10.4
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Amendment to the Addendum to Clients Agreement
and Terms and Conditions for Irrevocable Standby
Letter of Credit, dated June 9, 2008, between
Diodes Incorporated and UBS Financial Services,
Inc.
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8-K
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June 13, 2008
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99.1
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10.5
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Fourth Floor of the Accommodation Building Lease
Agreement dated January 1, 2008, between Shanghai
Kai Hong Technology Co., Ltd. and Shanghai Ding
Hong Electronic Co., Ltd.
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X
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10.6
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Factory Building Lease Agreement dated March 1,
2008 between Shanghai Kai Hong Technology Co.,
Ltd. and Shanghai Yuan Hao Electronic Co. Ltd.
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X
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31.1
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Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
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X
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31.2
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Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
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X
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32.1
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Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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X
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32.2
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Certification Pursuant to 18 U.S.C. adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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X
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PLEASE NOTE: It is inappropriate for investors to assume the
accuracy of any covenants, representations or warranties that may
be contained in agreements or other documents filed as exhibits to
this Quarterly Report on Form 10-Q. In certain instances the
disclosure schedules to such agreements or documents contain
information that modifies, qualifies and creates exceptions to the
representations, warranties and covenants. Moreover, some of the
representations and warranties may not be complete or accurate as
of a particular date because they are subject to a contractual
standard of materiality that is different from those generally
applicable to stockholders and/or were used for the purpose of
allocating risk among the parties rather than establishing certain
matters as facts. Accordingly, you should not rely on the
representations and warranties as characterizations of the actual
state of facts at the time they were made or otherwise.
-47-
SIGNATURE
Pursuant to the requirements 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.
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DIODES INCORPORATED
(Registrant)
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By:
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/s/ Carl C. Wertz
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August 11, 2008
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CARL C. WERTZ
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Chief Financial Officer, Treasurer and Secretary
(Duly Authorized Officer and Principal Financial and
Chief Accounting Officer)
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-48-
EXHIBIT 10.1
CONTRACT FOR THE PURCHASE
AND SALE OF REAL ESTATE
This CONTRACT FOR THE PURCHASE AND SALE OF REAL ESTATE (this
Contract
) is executed between
WEST PLANO LAND COMPANY, LP
a Delaware limited partnership (
Seller
), and
DIODES INCORPORATED
, a
Delaware corporation (
Purchaser
), to be effective (the
Effective Date
) when fully executed by
Seller and Purchaser.
SECTION 1
AGREEMENT OF SALE AND PURCHASE
1.01
In consideration of the covenants contained herein, and subject to the terms and
conditions hereof, Seller agrees to sell to Purchaser and Purchaser agrees to purchase from Seller
the real property being approximately 15.5 acres located in Plano, Collin County, Texas bounded on
the east side by Communications Parkway and on the north side by Legacy Drive as depicted on
Exhibit A
attached hereto and incorporated herein, together with all improvements located
thereon and all rights and appurtenances pertaining thereto, if any, including all rights, title,
and interest of Seller in and to adjacent streets, alleys, and rights-of-way (all of the foregoing
collectively referred to as the
Property
).
1.02
Upon delivery of the Survey (as hereinafter defined), the metes and bounds legal
description reflected on the Survey shall be substituted for
Exhibit A
for all purposes
under this Contract.
SECTION 2
EARNEST MONEY
2.01
On or before 5:00 p.m., Dallas, Texas, time on the third (3rd) business day after
the Effective Date, Purchaser shall deliver wired funds to Republic Title Company of Texas, Inc.,
2626 Howell Street, 10
th
Floor, Dallas, Texas 75204, Attention: C. Richard White [phone
(214) 855-8868] (the
Title Company
) in the amount of One Hundred Thousand Dollars ($100,000.00)
(the
Earnest Money
). The Title Company shall place the Earnest Money in an FDIC-insured,
interest-bearing account in a financial institution approved by Seller (with the Title Company
placing the Earnest Money in multiple accounts to the extent necessary for the Earnest Money to be
fully insured). All interest earned on any portion of the Earnest Money held in escrow by the Title
Company hereunder shall (a) be added to the principal of the Earnest Money then held in escrow; (b)
constitute a part of the Earnest Money; and (c) be included within the meaning and definition of
the term
Earnest Money
used herein. Interest earned on the Earnest Money shall, for income tax
purposes, be deemed earned by Purchaser. Purchaser hereby represents and warrants that its federal
taxpayer identification number is 95-2039518.
2.02
Unless returned to Purchaser as hereinafter provided or paid to Seller as
hereinafter provided, the Earnest Money shall be paid to Seller at Closing (hereinafter defined) as
a credit against the Purchase Price (hereinafter defined).
West Plano Land Diodes Contract of Sale
1
2.03
Purchasers obligation to deliver the Earnest Money is a condition precedent to
Sellers obligations and Purchasers rights hereunder. If Purchaser fails to deposit the Earnest
Money as required by Section 2.01 hereof, Seller may terminate this Contract immediately upon
written notice to Purchaser (without any opportunity by Purchaser to cure); whereupon, except for
the Surviving Obligations (hereinafter defined), neither party shall have any further rights,
obligations, or remedies under this Contract. Sellers right to terminate this Contract as provided
in this Section 2.03 shall continue until the Earnest Money has been deposited and can only be
waived by Seller in writing.
SECTION 3
PURCHASE PRICE
The purchase price (the
Purchase Price
) for the Property shall be based on an amount equal
to Seven and 50/100 Dollars ($7.50) per square foot of Net Land Area contained in the Property,
being approximately Five Million Sixty-three Thousand Eight Hundred Fifty Dollars ($5,063,850.00),
to be amended, however, as the Net Land Area is determined by the Survey (as hereinafter defined),
and shall be payable to Seller, in cash, in accordance with the terms provided herein at the
Closing (as hereinafter defined). The term
Net Land Area
means the gross land area of the
Property less the land area, if any, included in (i) utility easements, drainage easements,
ingress/egress easements or existing or proposed rights-of-way that materially and adversely affect
the development or use of the Property for commercial office purposes (excepting any easements
located within the landscape setback), (ii) the 100-year flood plain, and (iii) encroachments on
the Property. Any area within the 100-year flood plain shall be as defined by the Federal Emergency
Management Agency or other applicable governmental authority.
SECTION 4
TITLE COMMITMENT AND SURVEY
4.01
Delivery of Title Commitment
. Within fifteen (15) days after the
Effective Date, Seller, at its sole cost and expense, shall cause to be delivered to Purchaser a
current commitment for title insurance covering the Property issued by the Title Company, together
with the best available copies of all items referred to therein as exceptions (collectively, the
Title Commitment
).
4.02
Delivery of Survey
. Within fifteen (15) days after the Effective Date,
Seller, at Sellers cost and expense, shall cause to be delivered to Purchaser the most current
survey of the Property (the
Survey
) in Sellers possession, prepared by a licensed surveyor or
engineer (the
Surveyor
) and meeting the minimum standard detail requirements for ALTA/ACSM Land
Title Surveys. The Survey shall (i) set forth a metes and bounds description of the Property,
(ii) show all alleys, streets, roads, and rights-of-way within the boundaries of the Property,
(iii) show any improvements that constitute an encroachment or protrusion affecting the Property,
(iv) identify any portion of the Property lying within any 100-year flood plain, (v) identify all
recorded easements that affect the Property, (vi) set forth the number of total square feet of the
Property, and (vii) specify the gross land area and the Net Land Area of the Property. The Survey
shall include a certification to the Title Company and Purchaser and shall be otherwise in
West Plano Land Diodes Contract of Sale
2
a form acceptable to the Title Company to permit, at Purchasers sole cost and election, modification
of the Survey exception to the Owners Policy of Title Insurance to be delivered to Purchaser to
read Shortages in Area only.
SECTION 5
PURCHASERS REVIEW OF TITLE COMMITMENT
AND SURVEY
5.01
Purchasers Title Review Period
. Purchaser shall have until 5:00 p.m.,
Dallas, Texas, time on the tenth (10
th
) day after Purchaser receives the last of the
Title Commitment and the Survey (the
Title Review Period
) within which to review and make written
objections (the
Objections
) to any matters shown or referred to in the Title Commitment or on the
Survey. All matters shown in the Title Commitment or on the Survey with respect to which Purchaser
does not make an Objection within the Title Review Period shall be deemed
Permitted Exceptions
.
5.02
Sellers Response; Purchasers Right to Terminate
. Seller shall respond
in writing (
Sellers Response
) to any Objections within five (5) business days after receiving
Purchasers Objections; provided however, Seller shall have no obligation to cure any Objections.
If Sellers Response is unsatisfactory to Purchaser for any reason, Purchaser, as its sole and
exclusive remedy, may terminate this Contract by delivering written notice of termination to Seller
within three (3) days after receiving Sellers Response (the
Termination Period
); whereupon, the
Earnest Money shall be returned to Purchaser, and, except for the Surviving Obligations (hereafter
defined), neither party shall have any further rights, obligations, or remedies under this
Contract. In the event that Purchaser elects not to terminate the Contract, any Objection which
Seller has not agreed to cure, other than a Must-Cure Objection, shall be deemed to be a Permitted
Exception. Notwithstanding the foregoing, Seller agrees at or prior to Closing to satisfy and cause
to be released of record the following (
Must-Cure Objections
): (i) any mortgage, deed of trust or
other security interest granted by Seller to secure a loan or other monetary obligation, and (ii)
any mechanics, materialmens, tax, judgment or other lien entered against Seller that would
survive Closing and thereafter be enforceable against the Property or Purchaser, as owner of the
Property. In addition, Seller agrees to terminate the Haggard Lease (as hereinafter defined) as it
relates to the Property on or before the Closing Date.
5.03
Purchasers Failure to Terminate
. If Purchaser fails to terminate this
Contract within the Inspection Period (defined below) or the Termination Period:
(a) Purchaser shall be deemed to have unconditionally waived all Objections to any matters
shown in the Title Commitment or on the Survey that remain uncured upon expiration of the
Termination Period except those Objections, if any, that Seller has agreed in writing to cure prior
to Closing (including any Must-Cure Objections);
(b) Permitted Exceptions shall also include any Objections which Purchaser has waived or is
deemed to have waived or that Seller has cured to Purchasers reasonable satisfaction prior to
Closing;
West Plano Land Diodes Contract of Sale
3
(c) Upon expiration of the Inspection Period, Purchaser shall have completed its Studies
(hereinafter defined) and, except for matters Seller has cured or agreed in writing to cure prior
to Closing, Purchaser shall be deemed to have unconditionally approved and accepted the condition
of the Property, except as to matters which must be satisfied under the terms of Section 6.07 as a
condition to Closing;
(d) Upon expiration of the Inspection Period, Purchaser shall be deemed to have
unconditionally waived any Necessary Approvals (as hereafter defined) which have not yet been
obtained; and
(e) Upon expiration of the Inspection Period, the Earnest Money shall become nonrefundable,
except in the event of Sellers default or a failure of any express condition precedent to
Purchasers obligation to close.
SECTION 6
PURCHASERS INSPECTION PERIOD; COVENANTS AND CONDITIONS
6.01
Purchasers Inspection Period; Right to Terminate
. Purchaser shall have
the period (the
Inspection Period
) beginning on the Effective Date and ending on June 15, 2008
during which to inspect the Property and to seek to obtain the Necessary Approvals. In the event
Purchaser determines the Property is unacceptable to Purchaser, or if Purchaser fails to obtain any
of the Necessary Approvals, Purchaser has the right to terminate this Contract, in its sole
discretion, by written notice delivered to Seller prior to the expiration of the Inspection Period,
whereupon the Earnest Money shall be returned to Purchaser and, except for the Surviving
Obligations, neither party shall have any further rights, obligations, or remedies under this
Contract.
6.02
Right to Inspect
. During the Inspection Period and subject to Sellers
security requirements, Purchaser shall have the right to go onto the Property during normal
business hours to conduct such physical, engineering, archeological, soils, subsidence,
environmental, feasibility, and other tests and studies as Purchaser deems appropriate
(collectively, the
Studies
), all at the sole cost and expense of Purchaser. Purchaser shall
obtain the approval of Seller prior to performing any invasive tests on the Property, which
approval shall not be unreasonably withheld. If this Contract fails to close, Purchaser shall
restore the Property to substantially the same condition as existed prior to entry onto the
Property, at the sole cost and expense of Purchaser. Purchaser shall release, hold harmless,
defend, and indemnify Seller (and the directors, officers, employees, agents, and representatives
of Seller, collectively) from and against any claim, suit, liability, damage, loss, cost, and
expense (including the reasonable fees and expenses of attorneys selected by any of the indemnified
parties) asserted against or incurred by such indemnified parties as a direct or indirect result of
any act or omission of Purchaser or its employees, agents, contractors, or representatives in
conducting the Studies, provided, however, the indemnity shall not extend to (i) protect Seller
from any pre-existing liabilities for matters merely discovered by Purchaser (i.e., latent
environmental contamination), except to the extent such liabilities are increased due to
Purchasers actions or negligence or (ii) any liens, claims, causes of action, damages, liabilities
or expenses that are attributable to the action or inaction of Seller or its agent or employees.
The obligations of Purchaser to restore the Property and to hold
harmless, defend, and indemnify Seller (or any other indemnified parties) contained in this
Section 6 shall survive Closing or any termination of this Contract.
West Plano Land Diodes Contract of Sale
4
6.03
Necessary Approvals
. During the Inspection Period, Purchaser shall seek
to secure from the applicable governmental authorities all changes of zoning, special use permits,
conditional use permits, approvals, consents, licenses and permits necessary for Purchasers
development of the Property (collectively, the
Necessary Approvals
). Purchaser shall submit to
the appropriate governmental authorities all applicable applications for the Necessary Approvals,
together with any related supporting documentation, promptly following the Effective Date. Any
Necessary Approvals which would be binding upon Seller in the event Purchaser does not close its
acquisition of the Property shall be subject to the prior approval of Seller in its sole and
absolute discretion.
6.04
Delivery of Reports
. Seller will deliver to Purchaser the following
documents, if any, in Sellers possession: (a) a copy of that certain Environmental FirstSearch
Report prepared by Banks Information Solutions, Inc., Job 0710-02 dated July 10, 2006 (Phase I)
covering the Property and certain additional property not covered by the Contract, which if
provided by Seller, shall be for informational purposes only, and shall not be used in lieu of
Purchasers further due diligence inspection of the Property during the Inspection Period, as
defined in Section 6.01 hereof; (b) correspondence with governmental agencies regarding the
environmental condition of the Property; if any, (c) copies of the ad valorem tax statements
covering the Property for the three (3) year period prior to the Effective Date (or for the period
of time that Seller has owned the Property, whichever is less); (d) copies of all geotechnical
reports and soil compaction tests performed by or on behalf of Seller with regard to the Property,
if any, which, if provided by Seller, shall be for informational purposes only, and shall not be
used in lieu of Purchasers further due diligence inspection of the Property during the Inspection
Period, as defined in Section 6.01 hereof; and (e) a copy of the recorded subdivision plat to which
the Property is a part, if any. Purchaser acknowledges that Seller is not making any
representations or warranties concerning the environmental condition of the Property or as to the
accuracy, completeness, or conclusions contained in the Phase I or as to the accuracy, completeness
or conclusions contained in any other report delivered by Seller to Purchaser under this Section
6.04. Additionally, if Purchaser and Seller have failed to close the sale and purchase of the
Property, upon the Sellers request, Purchaser will provide or cause its consultants to provide to
Seller copies of all third party studies, reports and test results received by the Purchaser
(collectively, Reports) and the consultants regarding the Property (without representation or
warranty as to the accuracy, completeness, or conclusions contained in the Reports), without any
additional charge to Seller, within three (3) business days from the date of termination of this
Contract, and if Purchaser is entitled to a refund of the Earnest Money under the applicable
termination, the delivery of such Reports to Seller shall be a condition precedent to the return of
the Earnest Money to Purchaser.
6.05
Required Insurance
. Purchaser shall maintain (i) comprehensive general
liability insurance, including blanket contractual liability insurance, on a per occurrence basis
and in an amount of not less than $3,000,000.00 covering any personal injury and property damage
arising in connection with the presence of the Purchaser, its employees, representatives, agents,
contractors, any subcontractors, vendors or their respective employees, representatives or agents,
West Plano Land Diodes Contract of Sale
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(ii) comprehensive automobile liability insurance covering all owned, non-owned and hired vehicles, with limits of not less than $1,000,000.00 combined single limit for personal injury
and property damage, and (iii) statutory workers compensation and employers liability coverage in
amounts not less than $250,000.00, or qualified self-insurance, with sufficient evidence of such
self-insurance as reasonably requested by Seller. Purchaser will deliver a certificate of insurance
that names Seller and Purchaser as an additional insured thereunder related to the liability
coverage as their respective interests may appear, verifying such coverage to Seller prior to entry
upon the Property. All insurance will be provided by insurance companies reasonably acceptable to
the Seller, authorized to do business in the State of Texas and rated not less than A-VII in Bests
Insurance Guide. Purchasers liability insurance will be a primary policy and not in excess or
contributing with or secondary to any other insurance as may be available to Seller. Seller retains
the right to request certificates of insurance from contractors, subcontractors and vendors of
Purchaser prior to entering the Property to ensure compliance with this Contract. In the event
Purchasers insurance is materially changed which may affect Sellers interest or is going to be
cancelled, Purchaser will provide Seller notice 30 days prior to any such change or cancellation.
Purchasers indemnification set forth in the prior paragraph shall remain in full force and effect
related to any and all activities of Purchaser and Purchasers employees, representatives, agents,
subcontractors, vendors, guests and invitees. The obligations of Purchaser contained in this
Section 6.05 shall survive Closing or any termination of this Contract.
6.06
Sellers Obligations Prior to Closing
. From and after the Effective Date
until Closing, Seller and/or Sellers agents or representatives shall:
(a)
Notices
. Provide to Purchaser, within a reasonable time following receipt thereof,
any and all notices in any manner relating to the Property received by Seller or its agents or
representatives from any governmental or quasi-governmental instrumentality.
(b)
New Contracts
. Seller shall refrain from transferring the Property, or creating on
the Property any easements; provided, however, that nothing herein shall preclude Seller from (i)
placing new or additional financing on the Property secured by a Deed of Trust, Assignment of
Leases and Rents, or other lien, provided that such liens may by their terms be removed by Seller
at Closing, or (ii) entering into any easements or other documents required by any applicable
governmental or quasi-governmental authority or provider of utility services.
6.07
Haggard Lease
. Seller has informed Purchaser that the Property is
currently subject to a farming and grazing lease (the
Haggard Lease
). Seller covenants that
neither the Haggard Lease nor a Memorandum thereof will be recorded and that Seller will terminate
the Haggard Lease as it relates to the Property on or before the Closing Date. Seller will provide
a copy of the Haggard Lease to Purchaser promptly following the Effective Date.
6.08
Conditions to Purchasers Obligation to Close
. The obligation of
Purchaser to consummate the conveyance of the Property hereunder is subject to the full and
complete satisfaction of each of the following conditions precedent:
(a) The representations and warranties of Seller contained in this Contract shall be true,
complete and accurate in all material respects, on and as of the date hereof and the Closing Date
as if the same were made on and as of such date;
West Plano Land Diodes Contract of Sale
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(b) Seller shall have performed each and every obligation and covenant of Seller to be
performed hereunder; and
(c) The Haggard Lease is terminated as it relates to the Property effective as of the Closing
Date.
Purchaser shall have the right to waive some or all of the foregoing conditions in its sole
and absolute discretion; provided, however, that no such waiver shall be effective or binding on
Purchaser unless it is in writing and executed by an authorized officer of Purchaser.
6.09
Conditions to Sellers Obligation to Close
. The obligation of Seller to
consummate the conveyance of the Property hereunder is subject to the full and complete
satisfaction of each of the following conditions precedent:
(a) The representations and warranties of Purchaser contained in this Contract shall be true,
complete and accurate in all material respects, on and as of the date hereof and the Closing Date
as if the same were made on and as of such date; and
(b) Purchaser shall have performed each and every obligation and covenant of Purchaser to be
performed hereunder.
Seller shall have the right to waive some or all of the foregoing conditions in its sole and
absolute discretion; provided, however, that no such waiver shall be effective or binding on Seller
unless it is in writing and executed by an authorized officer of Seller.
SECTION 7
REPRESENTATIONS
7.01
Representations of Seller
. Seller makes the following representations to
Purchaser which are true and correct as of the date Seller executes this Contract and which shall
be true and correct at Closing:
(a) To Sellers Knowledge (hereafter defined), Seller has not received any notice, and has no
actual knowledge, of any pending or threatened litigation or pending or threatened condemnation
proceeding that affects the Property;
(b) Except for the Haggard Lease, to Sellers Knowledge, there are no parties in possession of
any portion of the Property as lessees, tenants at sufferance or trespassers;
(c) To Sellers Knowledge, there are no mechanics liens or unrecorded liens against the
Property for any activities attributable to Seller, its agents, or employees;
(d) Seller is a Delaware limited partnership, validly existing and in good standing, with full
power and authority to enter into this Contract, to consummate the sale and purchase of the
Property, and to perform the covenants and agreements of Seller, all as contemplated or provided
for by this Contract; and are empowered to bind Seller to this Contract;
(e) Except as provided in this Contract, no joinder or consent of any other person or party is
required in connection with the consummation of sale and Purchase of the Property under this
Contract by Seller;
West Plano Land Diodes Contract of Sale
7
(f) The execution, delivery and performance of this Contract does not, and the consummation of
the transactions contemplated hereby will not, violate any provision of the Articles of the
partnership agreement of Seller, or any provision of any agreement, instrument, order, judgment or
decree to which Seller is a party;
(g) There is no claim, action, litigation, arbitration or other proceeding pending or, to the
best of Sellers knowledge, threatened against Seller which relates to the Property or the
transactions contemplated hereby or which to the knowledge of Seller could result in the imposition
of a lien against the Property or an action against Purchaser. If Seller receives notice of any
such claim, litigation or proceeding prior to the Closing, Seller shall promptly notify Purchaser
of the same in writing;
(h) To Sellers knowledge, Seller has not received any written notices from any federal,
state, county or municipal agency or authority claiming a material violation or breach of any laws,
ordinances, orders, regulations or guidelines affecting the Property, which breach or violation has
not been cured by Seller; and
(i) Seller is not a
foreign person
as that term is used in Section 1445(f)(3) of the United
States Internal Revenue Code of 1986, as amended.
With the sole exception of Sections 7.01(d), (e) and (f), all representations and warranties
of Seller contained in this Contract, however described or characterized, including, but not
limited to, Sellers knowledge and Sellers actual knowledge (
Sellers Knowledge
) shall be
representations and warranties based solely on the actual knowledge of Mark C. Allyn and David Reed
(
Sellers Representatives
). The actual knowledge of the foregoing individuals does not create
any independent duty of inquiry by such individuals and does not include any knowledge imputed to
them from any other person. None of Mark C. Allyn or David Reed shall have any personal liability
to Purchaser under this Contract. The express representations and warranties of Seller made in this
Contract shall survive Closing and not merge into any instrument or conveyance delivered at the
Closing; provided, however, that any action, suit or proceeding with respect to the truth, accuracy
or completeness of such representations and warranties shall be commenced, if at all, on or before
the date which is twelve (12) months after the date of the Closing and, if not commenced on or
before such date, thereafter such representations and warranties shall be void and of no force or
effect, and provided further, (a) Purchaser shall seek only actual damages and not consequential,
special, punitive or indirect damages as a result of any default by Seller, and (b) in no event
shall Sellers aggregate liability to Purchaser under this Contract for any and all breaches of a
representation and warranty or any other obligation that survives Closing exceed an amount equal to
Five Hundred Thousand and No/100 Dollars ($500,000.00).
7.02
EXCEPT AS SPECIFICALLY PROVIDED IN THIS CONTRACT OR IN ANY DOCUMENT DELIVERED BY
SELLER TO PURCHASER AT CLOSING:
(a) Purchaser acknowledges and agrees that none of Seller or its agents or representatives has
made any representations or warranties as to the Property or its environmental or physical condition.
West Plano Land Diodes Contract of Sale
8
(b) Purchaser acknowledges and agrees that EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS
CONTRACT, SELLER HAS NOT MADE, DOES NOT MAKE, AND EXPRESSLY DISCLAIMS, ANY WARRANTIES,
REPRESENTATIONS, COVENANTS, OR GUARANTEES, EXPRESS OR IMPLIED OR ARISING BY OPERATION OF LAW, AS TO
THE MERCHANTABILITY, HABITABILITY, QUANTITY, QUALITY, OR ENVIRONMENTAL CONDITION OF THE PROPERTY
(INCLUDING BUT NOT LIMITED TO THE PRESENCE OR ABSENCE OF ANY AND ALL HAZARDOUS MATERIALS) OR ITS
SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR USE. PURCHASER FURTHER ACKNOWLEDGES AND AGREES
THAT HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PROPERTY DURING THE INSPECTION PERIOD, OTHER
THAN THE EXPRESS REPRESENTATIONS AND WARRANTIES MADE BY SELLER IN THIS CONTRACT, PURCHASER IS
RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION PROVIDED OR TO
BE PROVIDED BY SELLER. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION PROVIDED OR
TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES AND THAT SELLER
HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND, EXCEPT AS
OTHERWISE EXPRESSLY SET FORTH IN THIS CONTRACT, MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR
COMPLETENESS OF SUCH INFORMATION.
(c) Purchaser acknowledges and agrees that as of Closing, Purchaser will have thoroughly
investigated and thoroughly inspected the Property and will be familiar and satisfied with all
aspects of the physical condition of the Property and will have made its own determination as to
the merchantability, habitability, quantity, quality, and condition of the Property, including,
without limitation, the possible presence of Hazardous Materials (as hereinafter defined) at, on,
in, or under the Property and the Property suitability or fitness for any particular purpose or
use.
(d) Purchaser acknowledges and agrees that after Closing (except as to provisions of this
Contract which expressly survive Closing), Purchaser will be deemed to have unconditionally
accepted the Property in its condition on the Closing Date on an
AS IS, WHERE IS
and
WITH ALL
FAULTS
basis (including any environmental conditions or matters) and acknowledges and agrees that
without this unconditional acceptance, the sale of the Property would not be made and that Seller
shall be under no obligation whatsoever to undertake any repair, alteration, remediation, or other
work of any kind with respect to any portion of the Property.
(e) Purchaser, and Purchasers successors and assigns, expressly and unconditionally release
Seller and Sellers affiliates, successors, and assigns from any and all responsibility, liability,
obligations, and claims (whether known or unknown, apparent, non-apparent, or latent, and whether
existing prior to, at, or after the Closing) that Purchaser and its successors and assigns may now
or hereafter have against Seller and Sellers affiliates, successors, and assigns based, in whole or in part, upon the presence of Hazardous Materials at, on, in,
or under the Property, including, without limitation, any obligation to take the Property back or
reduce the Purchase Price, and including any actions for contribution or indemnity.
West Plano Land Diodes Contract of Sale
9
(f) The term
Hazardous Materials
as used in this Section 7 means any substances (a) the
presence of which requires reporting, investigations or remediation under any current federal,
state, or local statute, regulation or ordinance or (b) which are currently defined as hazardous
waste, hazardous substances, toxic substances, regulated substances, pollutants, or contaminants
under any current federal, state, or local statute, regulation or ordinance.
THE PROVISIONS OF THIS SECTION 7.02 SHALL SURVIVE THE CLOSING.
7.03
Purchaser acknowledges and agrees that the provisions of this Section 7 have been
negotiated by the parties, have been reviewed by Purchaser and by an attorney selected by Purchaser
and that Purchaser fully understands and accepts the provisions of this Section 7.
7.04
Representations of Purchaser
. Purchaser makes the following
representations to Seller which are true and correct as of the date Purchaser executes this
Contract and which shall be true and correct at the closing of this Contract:
(a) Purchaser is a corporation with full power and authority to enter into this Contract and
to consummate the sale and purchase of the Property, and to perform all covenants and agreements of
Purchaser as contemplated by this Contract, and the party or parties executing this Contract on
behalf of Purchaser have been duly authorized and are empowered to bind Purchaser to this Contract.
(b) Except as provided in this Contract, no joinder or consent of any other person or party is
required in connection with the consummation of sale and Purchase of the Property under this
Contract by Purchaser.
(c) The execution, delivery and performance of this Contract does not, and the consummation of
the transactions contemplated hereby will not, violate any provision of the articles of
incorporation, bylaws, certificate of authority (if Purchaser is a foreign corporation) of
Purchaser, or any provision of any agreement, instrument, order, judgment or decree to which
Purchaser is a party.
(d) Neither Purchaser nor, to Purchasers knowledge, any of its affiliates, nor any of their
respective partners, members, shareholders or other equity owners, and none of their respective
employees, officers, directors, representatives or agents, is a person or entity with whom U.S.
persons or entities are restricted from doing business under regulations of the Office of Foreign
Asset Control (
OFAC
) of the Department of the Treasury (including those named on OFACs Specially
Designated and Blocked Persons List) or under any statute, executive order (including the September
24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit,
Threaten to Commit, or Support Terrorism), or other governmental action.
West Plano Land Diodes Contract of Sale
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SECTION 8
CLOSING
8.01
Closing
. If neither party has terminated this Contract as permitted
herein, the closing of this Contract (the
Closing
) shall occur at the office of the Title
Company, or such other place as may be agreed to by Seller and Purchaser, on the date which is
fifteen (15) days after the expiration of the Inspection Period (the
Closing Date
). At or prior
to 2:00 p.m., Dallas, Texas time, on the Closing Date, Purchaser shall deposit or cause to be
deposited with the Title Company sums sufficient to pay the Purchase Price (net of all prorations,
adjustments and credits to be made hereunder). Provided all conditions precedent to Purchasers
obligation to close have been satisfied or waived, Purchaser shall cause the Purchase Price to be
paid to Seller prior to 3:00 p.m. Dallas, Texas time as follows:
(a) Purchaser shall cause the Title Company to pay Seller the Earnest Money being held by the
Title Company, by federal wire transfer in immediately available funds to any bank account(s) as
Seller shall designate, and the amount of such payment shall be credited against the Purchase
Price.
(b) Purchaser shall cause the Title Company to pay Seller the remaining balance of the
Purchase Price, after crediting the amounts set forth in this Section 8 received by Seller and
subject to the prorations, adjustments and credits to be made hereunder, by federal wire transfer
in immediately available funds to such bank account(s) as Seller may designate.
(c) Purchaser and Seller shall each have the right, on or prior to the Closing Date, to
deposit into escrow with the Title Company all closing documents and other items required to fully
and completely consummate Closing pursuant to this Contract, in which event either party exercising
such right shall not be required to attend Closing in person, and such failure to attend Closing
shall not constitute a default hereunder. Purchaser and Seller shall endeavor in good faith to
compile and calculate all required prorations and adjustments, and to prepare (or cause the Title
Company to prepare) a settlement statement acceptable to both Purchaser and Seller detailing all
items and costs of Closing, no later than three (3) business days prior to the Closing Date.
(d) Purchaser represents to Seller that it has received approval of the development incentives
from the City Council of the City of Plano as described in the acceptance letter from Purchaser to
the City of Plano dated April 9, 2008 (the
Approval
) for its intended development upon the
Property, subject to satisfaction of the conditions (the
Approval Conditions
) specified in the
Approval. Purchaser agrees to provide seller with a copy of the Approval within three (3) business
days of the Effective Date of this Contract and diligently pursue satisfaction of all of the
Approval Conditions. Seller will cooperate and provide reasonable assistance to Purchaser in
satisfying the Approval Conditions, including, without limitation, if requested by Purchaser,
attendance and support of Purchaser at all meetings and hearings before the City Council of the
City of Plano relating to the Approval or the proposed development of the Property.
Notwithstanding any provisions to the contrary herein, if Purchaser has not obtained written
confirmation from the City of Plano that all of the Approval Conditions have been satisfied and the
development incentives have been finally approved (the
Final Approval
) prior to the scheduled
Closing Date, then Purchaser may elect, at its sole discretion, by written notice to Seller
West Plano Land Diodes Contract of Sale
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given at least three (3) business days prior to the Closing Date to either (i) waive obtaining
the Final Approval as a condition to Closing, or (ii) extend the Closing Date to the earlier of (x)
three (3) business days following receipt of written confirmation from the City Council of the City
of Plano that the Approval Conditions have been satisfied and Final Approval of the development
incentives accepted by Purchaser in the Approval has been given or (y) thirty (30) days following
the originally schedule Closing Date (the
Outside Closing Date
) As part of its written notice
of extension, Purchaser will provide Seller with reasonable evidence that Purchaser has timely
provided all items and otherwise complied with the Approval Conditions together with a listing of
any outstanding items and the time frames within which such items are to expected to be obtained.
In the event that Final Approval has not been given on or before thirty (30) days from the
originally scheduled Closing Date then Purchaser may elect by giving written notice to Seller on or
before the Outside Closing Date, at its sole discretion, to either (i) waive obtaining the Final
Approval as a condition to Closing or (ii) terminate this Contract by delivery of a written
termination notice to Seller on or before the Closing Date, in which event the Earnest Money shall
be immediately returned to Purchaser free of claims by Seller. The Final Approval described in
this Section 8.01(d) is for Purchasers benefit and can only be waived by Purchaser.
8.02
Sellers Obligations at Closing
. At Closing, Seller shall deliver or
cause to be delivered to the Title Company prior to 2:00 p.m. Dallas, Texas time on the Closing
Date, and shall cause to be released to Purchaser prior to 3:00 p.m. Dallas, Texas time on the
Closing Date, all at Sellers sole cost and expense:
(a) A special warranty deed (the
Deed
) in the form shown in
Exhibit B
, attached
hereto and incorporated herein, duly executed and acknowledged by Seller in recordable form
conveying to Purchaser good and indefeasible fee simple title to the Property, subject only to the
Permitted Exceptions;
(b) The Memorandum of Right of First Offer and Right of First Refusal as provided in Section
11.06(i) below;
(c) An Owners Policy of Title Insurance insuring good and indefeasible fee simple title in
Purchaser in the full amount of the Purchase Price and subject only to the Permitted Exceptions
(said policy to be delivered by the Title Company in due course following the closing);
(d) A termination letter executed by Seller relating to the termination of the Haggard Lease
as it relates to the Property;
(e) A non-foreign affidavit pursuant to Section 1445 of the Code stating that Seller is not a
foreign entity and such other information as may be required by Section 1445 of the Code;
(f) A Secretarys Certificate or other officers certificate from Seller evidencing the status
and capacity of Seller and the authority of the person executing the various documents on behalf of
Seller in connection with the sale and purchase of the Property satisfactory to the Title Company;
(g) An Estoppel from the Legacy Association in the form attached as
Exhibit C
and
incorporated herein;
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(h) An
owners affidavit
, in form reasonably acceptable to the Title Company and sufficient
for the Title Company to delete any exceptions for (a) mechanics or materialmens liens arising
from work at the Property which is the responsibility of Seller hereunder, (b) parties in
possession, other than tenants as tenants only, and (c) matters not shown in the public records;
(i) A settlement statement (the
Settlement Statement
), prepared by the Title Company;
(j) The Memorandum of Repurchase Option as provided in Section 11.05(h) below; and
(k) Such other documents as are reasonably requested by the Title Company or Purchaser (such
request by Purchaser to be made at least five (5) days prior to Closing) to close the sale and
purchase of the Property.
8.03
Purchasers Obligations at Closing
. At Closing, Purchaser shall deliver
to Seller, at Purchasers sole cost and expense:
(a) The full amount of the Purchase Price in wired funds (subject to prorations and a credit
for the Earnest Money);
(b) A Secretarys Certificate or authorizing resolutions certified by an officer of Purchaser
evidencing the status and capacity of Purchaser and the authority of the person executing the
various documents on behalf of Purchaser in connection with the sale and purchase of the Property;
(c) The Memorandum of Repurchase Option;
(d) The Memorandum of Right of First Offer and Right of First Refusal; and
(e) Such other documents as are reasonably requested by the Title Company or Seller (such
request by Seller to be made at least five (5) days prior to Closing) to close the transaction.
8.04
Prorations
.
(a) Ad valorem taxes shall be prorated as of Closing. If the ad valorem taxes for the year of
Closing have not been determined as of Closing, the proration shall be based on the ad valorem
taxes for the preceding tax year and the assessed value of the current year, provided if the
assessed value for the current year has not been determined then ad valorem taxes shall be
estimated based upon ad valorem taxes for the immediately preceding calendar year. No adjustment or
proration will be made for any increase in the market value of the Property made by any applicable
taxing authority as a result of this transaction, all such adjustments being the responsibility of Purchaser. This determination will be deemed to be final and no further
adjustments will be required. If the Property has been designated or valued as agricultural, open
space or other special category such that their sale or change of use would trigger the imposition
of any rollback or catch up tax,
West Plano Land Diodes Contract of Sale
13
Seller shall be responsible for any such taxes and interest thereon for periods prior to Closing. Seller shall pay to or credit Purchaser at Closing the amount
of rollback taxes, including, without limitation, interest and penalties for all periods prior to
the date of Closing, which Seller and Purchaser reasonably determine as of the Closing would have
been due and payable as if the change of usage of the Property was made as of the date of Closing
and thereafter, Purchaser shall be responsible for paying such rollback taxes when they become
due and payable. This determination will be deemed to be final and no further adjustments will be
required. Notwithstanding the foregoing, provided that Seller has made an agricultural use
exemption through the Closing Date, prorations for the tax year in which the Closing Date occurs
shall be calculated based on ad valorem taxes assessed as if the agricultural use exemption had
remained in place throughout the such tax year. Assessments related to the Legacy Association will
additionally be prorated as of the Closing, will be deemed to be final and no further adjustments
will be required. The obligations of the parties in this Section 8.04 shall survive the Closing of
this Contract.
(b) In the event that the Purchaser elects to maintain the agricultural use exemption for a
period of time after Closing, Sellers obligation to pay any roll back taxes with respect thereto
shall not exceed the amount that would have been due had the roll back taxes been calculated
based upon a change in use or ownership as of the Closing Date.
8.05
Other Closing Costs
. Purchaser shall pay all recording costs and all
costs, if any, associated with Purchasers financing of all or any portion of the Purchase Price.
Seller shall pay for the cost of the Survey, and Purchaser shall pay for any updates to the Survey.
Seller shall pay for the cost of the basic title premium for the Title Policy (excluding the costs
of any modification of the survey exception or other endorsements, which shall be paid by
Purchaser), and all fees associated with the removal of the Must-Cure Objections. Seller shall also
pay the commission in accordance with the provisions of Section 11.01 at the Closing. Each party
will pay one-half (1/2) of any escrow fee charged by Title Company. Each party shall also pay its
own attorneys fees and other costs and expenses of negotiating and consummating this Contract. Any
other costs or expenses incident to this transaction and the closing thereof not expressly provided
for above shall be allocated between and paid by the parties in accordance with custom and practice
in Plano, Collin County, Texas.
8.06
Possession
. At Closing, upon the satisfaction of all conditions precedent
to Sellers obligation to close, Seller shall deliver possession of the Property to Purchaser,
subject only to the Permitted Exceptions.
SECTION 9
EXCLUSIVE REMEDIES OF PURCHASER
If any of Sellers representations is inaccurate as of Closing, or if Seller fails to perform
any of its obligations hereunder (except Sellers failure after Closing to perform its Surviving
Obligations) and such inaccuracy or failure is not cured within seven (7) business days after
Seller receives Purchasers notice in writing of such inaccuracy or failure, Purchasers sole
and exclusive remedies shall be either to: (a) terminate this Contract; whereupon, the Earnest
Money shall immediately be returned to Purchaser, and, except for the Surviving Obligations,
neither party shall have any further rights, obligations, or remedies under this Contract; or (b)
file a lawsuit against Seller in Collin County, Texas, to enforce specific performance of this
Contract
West Plano Land Diodes Contract of Sale
14
(which suit must be filed within two (2) years and one day after the scheduled date of
Closing as set forth in Section 8.01 hereof; otherwise, Purchaser shall be deemed to have
unconditionally waived its right to sue for specific performance). Except for Sellers failure
after Closing to perform any of its Surviving Obligations, Purchaser unconditionally waives its
right to pursue any other remedies against Seller including, but not limited to, actual,
consequential, special, incidental, and punitive damages.
SECTION 10
EXCLUSIVE REMEDY OF SELLER
If any of Purchasers representations is inaccurate as of the Closing, or if Purchaser fails
to perform any of its obligations hereunder (except Purchasers failure after Closing to perform
its Surviving Obligations) and such failure is not cured within seven (7) business days after
Seller notifies Purchaser thereof in writing, Sellers sole and exclusive remedy shall be to
terminate this Contract and receive the Earnest Money as liquidated damages (the foregoing notice
and cure period does not, however, apply to the failure by Purchaser to deposit the Earnest Money
as provided in this Contract). Purchaser acknowledges that payment of the Earnest Money to Seller
pursuant to this Section 10 does not constitute a penalty. Purchaser further acknowledges that the
actual damages suffered by Seller for Purchasers breach are incapable of exact calculation and
that the Earnest Money represents a sum that is a reasonable estimate of what Sellers actual
damages might be. Except for Purchasers failure after Closing to perform any of its Surviving
Obligations, Seller unconditionally waives it right to pursue other remedies against Purchaser
including, but not limited to, actual, consequential, special, incidental, and punitive damages.
Upon termination of this Contract pursuant to this Section 10, the Earnest Money shall be paid to
Seller, and except for the Surviving Obligations, neither party shall have any further rights,
obligations, or remedies under this Contract.
SECTION 11
ADDITIONAL PROVISIONS
11.01
Brokers and Commissions
. Seller and Purchaser acknowledge and agree that the
only brokers that have been involved with the origination and negotiation of this Contract are CB
Richard Ellis, Inc. (
CBRE
), as the broker for Seller, and Jans Realty, Inc. (
Jans
), as broker
for the Purchaser (CBRE and Jans are collectively the
Broker
). If, as, and when this Contract
closes, but not otherwise, Seller agrees to pay a real estate sales commission equal to (i) six
percent (6%) of the first one million dollars ($1,000,000.00); plus (ii) three percent (3%) of the
Purchase Price in excess of one million dollars, to be divided equally between CBRE and Jans at
Closing. If this Contract fails to close for any reason, including a breach by either party, Seller
shall have no obligation to pay Broker any commission or any other costs, expenses, fees, or
compensation of any kind. Seller and Purchaser agree to hold harmless, defend, and indemnify each
other from any claim, suit, liability, losses, costs, and expenses (including reasonable attorneys
fees and court costs) resulting from any claim for any fee, commission, finders fee or other consideration from
any broker, agent, finder, or salesman based on an alleged agreement with the indemnifying party
(or others acting on its behalf). If Brokers signature appears on this Contract, it will be for
the sole purpose of acknowledging the terms and conditions upon which Broker is entitled to a
commission pursuant to this Section 11.01 (which terms and conditions supersede and replace all
prior
West Plano Land Diodes Contract of Sale
15
understandings and agreements between Seller and Broker with regard to the Property). Broker
is not otherwise a party to this Contract, and with the exception of an amendment to this Section
11.01 that directly affects Brokers rights, this Contract may be amended or terminated without
notice to or the consent of Broker. The absence of Brokers signature shall not in any way affect
the validity of this Contract. The obligations of the parties contained in this Section 11.01 shall
survive the closing or any termination of this Contract.
11.02
Non-Assignability
. Except as otherwise specifically provided herein,
this Contract may not be assigned by Purchaser without the prior written consent of Seller, which
may be withheld in Sellers sole discretion. Notwithstanding the foregoing, however, Purchaser may
assign its interest under this Contract upon five (5) days written notice to Seller prior to
Closing to an affiliate, subsidiary or parent company without Sellers consent so long as (a) such
assignee is, directly or indirectly, managed and/or controlled by Purchaser or is an affiliate
which is owned by Purchaser or its ultimate parent and which is controlled by Purchaser or its
ultimate parent; and (b) Purchaser provides Seller with the name and, if requested by Seller,
copies of the organizational documents for such assignee as filed with the applicable Secretary of
State or other governmental authority and provides Seller with any other information that Seller
may reasonably request with respect to the proposed assignee at least three (3) business days in
advance of the Closing Date. Purchaser shall in no event be released from any of its obligations or
liabilities hereunder as a result of any assignment. The obligations of Purchaser under this
Section 11.02 shall survive the Closing and shall not be merged therein. Whenever reference is made
in this Contract to Seller or Purchaser, such reference shall include the successors and assigns of
such party under this Contract.
11.03
Deed Restriction
. The Property is being conveyed to Purchaser by Seller
for the purposes of construction and operation of an office headquarters building for Purchaser and
to be substantially occupied by Purchaser or its successor and its employees and certain ancillary
uses associated with such office headquarters use as described in the Deed Restriction (as
hereafter defined), and at Closing the Purchaser and Seller will execute and record the Deed which
shall create a deed restriction (the
Deed Restriction
) covering the Property and containing the
following covenant, in which Seller will be referred to as
Grantor
and Purchaser as
Grantee
:
Grantee will construct, occupy and operate improvements on the Property for use as an office
headquarters and ancillary uses associated with such office headquarters use that primarily serve
and benefit the occupants in the improvements on the Property (e.g. tenant employee cafeteria,
deli, gift shop, lobby banking, etc.). Without limiting the foregoing, it is specifically agreed
that the Property may not be used for (i) commercial office building development (as hereafter
defined) other than as specifically provided in this Section 11.03, (ii) any retail intended to
serve and benefit the general public, or motor or drive-through banking, (iii) restaurant (intended
to primarily serve and benefit the general public outside of the occupants of the improvements on
the Property), (iv) hotel, (v) town home and multi-family residential development, (vi) free-standing restaurant and/or retail pads, and (vii) medical
office condominiums. For purposes hereof, commercial office building development shall mean any
building or combination of buildings and other amenities which is used for office purposes other
than an office headquarters for Purchaser and no more than twenty percent (20%) shall of the
leasable area be leased to unrelated third parties not affiliated with Purchaser. Further, any
office headquarters building constructed on the Property must otherwise be incompliance with the
West Plano Land Diodes Contract of Sale
16
Declarations applicable to the Property (and thus shall be subject to approval by the Legacy
Associations Design Review Board) and must be designed and constructed with an exterior appearance
at least comparable to first class office buildings on other properties in the vicinity of the
Property. These restrictions will be binding upon, and will be a covenant running with the land as
to the Property and will remain in effect until the earlier of (a) recordation in the real property
records of Collin County, Texas of a written release of this covenant executed by Grantor and
Grantee, or (b) fifteen (15) years after the date of the deed; provided, however, notwithstanding
the foregoing, the restriction prohibiting commercial office building development other than as an
office headquarters of Purchaser and leasing to unaffiliated third parties will remain in effect
only until the earlier of (i) recordation in the real property records of Collin County, Texas of a
written release of such commercial office building development restriction, or (ii) ten (10) years
after the date of the deed.
11.04
Declaration
.
(a) Purchaser understands and acknowledges that the Property is or is intended to be burdened
by, among other things (a) a certain Declaration of Covenants, Conditions, and Restrictions and
Association Declarations recorded under County Clerk # 20060920001358220, Real Property Records of
Collin County, Texas (the
Declaration
), (b) Association Declaration recorded under County Clerk #
200609200001358270, Real Property Records of Collin County, Texas (the
Association Declaration
),
and (c) restrictive covenants contained in the Special Warranty Deed to Seller recorded under
County Clerk # 200609200001358250, Real Property Records of Collin County, Texas, and that all such
restrictions and covenants will affect Purchasers development of the Property. A copy of the
Declaration, the Association Declaration and such Special Warranty Deed shall be provided to
Purchaser within two (2) business days after the Effective Date hereof. In that regard, Purchaser
has been advised and acknowledges that the Declaration and the Association Declaration provide,
among other things, that: (i) owners of property within the area covered by the Declaration will be
members of a property owners association known as the Legacy Association (the
Association
), and
liable for the payment of general and special assessments; and (ii) prior to the commencement of
construction on the Property by Purchaser, the proposed plans for construction must be reviewed and
approved by Seller and the Associations design review board (the
DRB
).
(b) Prior to the commencement of any development on the Property, Purchaser shall prepare a
preliminary plan for development of the Property (collectively, the
Development Plans
), which
shall address planned infrastructure, grading, and drainage and schematic plans for any buildings,
walls, or other vertical structures to be constructed by Purchaser on the Property (including
typical detail such as site plan, exterior elevations, color palettes, roofing shapes and
materials, and external finish specifications; but not including interior spaces and interior
utility and other service information). The Development Plans will reflect application of the
Declaration and all existing design guidelines promulgated pursuant thereto to the improvements which will be
built by or on behalf of Purchaser, it being acknowledged by Purchaser, however, that the
Declaration is, by its nature, general in scope and that all aspects of the Development Plans are
subject to Sellers review and approval as herein provided, whether or not specifically addressed
in the Declaration. The review and approval of the Development Plans by Seller as provided herein
is in addition to, and not in lieu of, approval by the DRB of the matters over which such body has
approval rights
West Plano Land Diodes Contract of Sale
17
pursuant to the Declaration, but Seller shall use commercially reasonable efforts
to obtain approval of Purchasers Development Plans by the DRB within thirty (30) days after
Purchaser submits same. In addition, it is understood and agreed that Purchaser may submit its
Development Plans to the DRB and Seller at the same time and in such case, Seller agrees to review
Purchasers Development Plans concurrently with the DRBs review of the Development Plans.
(c) Purchaser and Seller will negotiate in good faith to reach mutual agreement on an
acceptable level of specificity and/or finality for the Development Plans prior to commencement of
construction of the improvements (the period commencing on the date hereof and ending on such date
being herein referred to as the
Plan Approval Period
).
(d) After preparation of the Development Plans by Purchaser and approval thereof by Seller and
the DRB, it shall be Purchasers sole responsibility to obtain any necessary governmental permits
and approvals, including, but not limited to, the approval and filing of preliminary and final
plats, as may be required to permit Purchaser to proceed with its contemplated development. Any
changes in the approved Development Plans to accommodate any governmental requirements shall be
subject to Sellers written approval as contemplated in the Declaration, such approval not to be
unreasonably withheld or delayed.
(e) Purchaser acknowledges that the name
Legacy
is a registered trademark owned by EDS
Information Services L.L.C. (
EDS
). In the event Purchaser desires to use the name
Legacy
or any
derivation thereof in connection with the Property, Purchaser may do so only pursuant to a
Trademark License Agreement in form and substance satisfactory to EDS. If Purchaser desires to use
the name
Legacy
, Purchaser should make request therefore to EDS, giving full particulars of the
desired use, as soon as reasonably practicable to permit EDS the opportunity to evaluate the
proposed use. Purchaser acknowledges that EDS is under no obligation to license the name
Legacy
to Purchaser or any other party.
(f) The provisions of this Section 11.04 shall survive the Closing and shall be referred to in
the Deed.
11.05
Right of Repurchase
.
(a) The Property is being conveyed to Purchaser for the uses permitted by Section 11.03
hereof, as contemplated in the Development Plans for the Property heretofore approved by Seller
(the
Project
) and any further detailed plans approved by the DRB pursuant to the Declaration.
Subject to the terms and conditions hereof, Seller reserves and shall have the exclusive and
irrevocable option to repurchase the Property and all improvements thereon (the
Repurchase
Option
) under one of the two (2) following opportunities and for a purchase price (the
Repurchase
Price
) determined as follows:
(i) If Purchaser has failed to commence construction of the Project within eighteen (18)
months after the date of the Deed, subject to extension for delays caused by unusually adverse
weather conditions, strikes, unavailability of labor or materials, war, acts of the public enemy,
or other such events or circumstances beyond Purchasers reasonable control (collectively,
Force
Majeure
), and provided that any delays in commencement of construction beyond such eighteen (18)
month period are not due to a breach by the Development Manager
West Plano Land Diodes Contract of Sale
18
(as defined in Section 11.25 below) of the Development Agreement (as defined in Section 11.25 below), then Seller may elect to
repurchase the Property by delivering written notice of Sellers election (a
Repurchase Notice
)
to Purchaser not later than thirty (30) days following the Construction Commencement Deadline (as
hereafter defined). In order for Purchaser to avail itself of such extension for Force Majeure,
Purchaser must notify Seller within sixty (60) days of the date on which Purchaser obtains actual
knowledge of the occurrence of the event that constitutes Force Majeure (the
Force Majeure
Notice
). The date of expiration of such eighteen (18) month period, as extended by Force Majeure,
is referred to herein as the
Construction Commencement Deadline
). If Seller elects to repurchase
the Property pursuant to this Section 11.05(a)(i), the Repurchase Price will be in an amount equal
to the sum of: (a) the Purchase Price paid by Purchaser to Seller for the Property minus (b) the
amounts of any rollback credits provided by Seller to Purchaser in connection with the initial
closing of the sale of the Property to Purchaser, plus (c) an amount equal to all costs and
expenses (other than the Purchase Price) incurred by Purchaser in connection with the acquisition
of the Property and/or the proposed development thereof, including without limitation,
environmental, engineering, architectural, consulting, financing and attorneys fees and expenses,
interest paid under any acquisition and/or construction financing, commissions, title, property and
liability insurance premiums and expenses, and all other expenses incurred by Purchaser in
connection with the acquisition or proposed development of the Property, as reasonably evidenced by
Purchaser to Seller, including, but not limited to, invoices, contracts, and billing statements
(collectively, the
Land Acquisition Costs
), provided however, that in no event will the
Repurchase Price for the Property under this clause (i) be an amount in excess of 110% of the
Purchase Price; or
(ii) If Purchaser commences construction of the Project on the Property prior to the
Construction Commencement Deadline but has failed to substantially complete construction of the
building shell for the Project within thirty-six (36) months after the date of the Deed, subject to
extension for delays caused by Force Majeure, as provided in a Force Majeure Notice, then provided
that any delays in the substantial completion of construction beyond such thirty-six (36) month
period are not due to a breach by the Development Manager of the Development Agreement Seller may
elect to repurchase the Property by delivering a Repurchase Notice to Purchaser not later than
thirty (30) days following the Construction Completion Deadline (hereafter defined). The date of
expiration of such thirty-six (36) month period, as extended by Force Majeure, is referred to
herein as the
Construction Completion Deadline
. If Seller elects to repurchase the Property
pursuant to this Section 11.05(a)(ii), the Repurchase Price will be in an amount equal to the sum
of: (a) the Purchase Price, minus (b) the amounts of any rollback credits provided by Seller to
Purchaser in connection with the initial closing of the sale of the Property to Purchaser, if any,
plus (c) Land Acquisition Costs with respect to the Property (the
Development Parcel Percentage
),
plus (d) all other costs and expenses incurred by Purchaser (other than the Land Acquisition Costs
in connection with the acquisition and/or development of the Property, including without limitation, environmental, engineering,
architectural, consulting, financing and attorneys fees and expenses, interest paid under any
acquisition and/or construction financing, construction costs, contractors fees, expenses and
overhead, commissions, title, property and liability insurance premiums and expenses, and all other
expenses incurred by Purchaser in connection with the acquisition or development of the Property,
as reasonably evidenced by Purchaser to Seller (including, but not limited to, invoices, contracts,
and billing statements); provided
West Plano Land Diodes Contract of Sale
19
however, that in no event will the Repurchase Price for the
Property exceed an amount equal to the sum of the Development Parcel Percentage plus One Hundred
Fifty Dollars and No/100 ($150.00) per square foot times the square feet of building space
(excluding parking structures) actually (or to be) constructed on the Property (on a percentage of
completion basis) at the time of the closing of the Repurchase Option by Seller. If Purchaser does
not commence construction of a building on the Property prior to the Construction Commencement
Deadline, the provisions of this Section 11.05(a)(ii) shall not be applicable and Seller shall not
have the right to exercise a Repurchase Option pursuant to the provisions of this Section
11.05(a)(ii).
In order to exercise a Repurchase Option, Seller must deliver the Repurchase Notice to
Purchaser in accordance with the preceding provisions of this Section 11.05. If Seller fails to
timely deliver a Repurchase Notice to Purchaser pursuant to the preceding provisions of this
Section 11.05, the corresponding Repurchase Option arising pursuant to such provisions shall
terminate and be of no further effect. The Repurchase Options shall arise and may only be exercised
upon the occurrence of the events described in Section 11.05 above.
For purposes hereof: (a) commencement of construction of the Project shall be irrefutably
deemed to have occurred upon the commencement of grading activities on a portion of the Property so
long as Purchaser diligently continues with such construction through the substantially complete
construction of the improvements described in the Development Plans by the Construction Completion
Deadline, (b) construction of a building shall be irrefutably deemed to be
substantially complete
upon the issuance of a certificate of a registered architect that such improvements are complete in
accordance with the Development Plans and issuance of the final certificate of occupancy by the
applicable governmental authority for such building constructed within the Project.
(b) If Seller exercises the Repurchase Option, the closing of such repurchase (the
Repurchase
Closing
) shall take place at a title company designated by Seller on a date designated by Seller
but no later than sixty (60) days after the date of the Repurchase Notice. If Seller exercises the
Repurchase Option but does not close and fund the Repurchase Price to Purchaser on or prior to the
expiration of such sixty (60) day period, Sellers Repurchase Option shall automatically and
immediately terminate without notice. At the Repurchase Closing, Purchaser shall convey the
Property to Seller by special warranty deed in the form of the Deed, subject only to the permitted
title exceptions listed on
Exhibit B
attached to the Deed, and to easements, building set
back lines and other matters set forth on any plat which has been filed by Purchaser with respect
to the Property and/or which have been granted to any governmental authority or utility company,
except that there shall be no repurchase option reserved and the exception for liens securing ad
valorem taxes shall be limited to the year in which the closing of the repurchase takes place, with
the ad valorem taxes for such year to be prorated at the Repurchase
Closing based upon the most current available taxes. At the Repurchase Closing, Seller, at its
expense, may obtain an owners policy of title insurance issued by the title company designated by
Seller in the amount of the Repurchase Price and subject to no exceptions other than those
contained in the owners policy of title insurance insuring title to the Property received by
Purchaser in connection with the purchase of the Property by Purchaser from Seller, and to
easements, building set back lines and other matters set forth on any plat which has been filed by
Purchaser with respect to the Property and/or which have been granted to any governmental authority
or utility company, except there shall be no exception for any repurchase
West Plano Land Diodes Contract of Sale
20
option, and the policy or policies shall reflect only the then current year taxes. Seller shall not record in the real
property records of Collin County, Texas, a memorandum of the exercise of this option without the
joinder of Purchaser.
(c) If Seller exercises the Repurchase Option, Seller shall have a period of forty-five (45)
days after such exercise in which to perform, at Sellers sole expense, such environmental studies,
title reviews, surveys, engineering studies, or other investigations and due diligence with respect
to the Property and Project as Seller may deem relevant in connection with its repurchase the
Property, subject to the same covenants and conditions of Section 6 hereof that were applicable to
Purchasers inspection of and entry onto the Property (for this purpose, the terms
Seller
and
Purchaser
used in said Section 6 shall be deemed to refer to
Purchaser
and
Seller
,
respectively). Seller may, during such forty-five (45) day period, rescind its exercise of the
Repurchase Option by written notice to Purchaser, in which event Sellers repurchase rights as to
the Property shall cease and be of no further force or effect. No such rescission of the exercise
of Sellers Repurchase Option shall be deemed to limit or restrict any contractual or tort claims
(or the rights or remedies associated therewith), if any, that Seller may have against Purchaser,
whether in its capacity as an adjacent landowner, as the
Declarant
under the Declaration, the
Association Declaration, or otherwise, if such rescission is as a result of any environmental or
other condition on the Property that constitutes a violation of the Declaration, the Association
Declaration, a breach of any contractual agreements between Seller and Purchaser and/or a violation
of any environmental or other laws or regulations that create private rights of action against
violators.
(d) At the option and request of Seller, Purchaser will assign to Seller, without recourse,
representation or warranty, and Seller shall assume and agree to perform all obligations of
Purchaser under, any and all contracts, subcontracts, purchase orders, guarantees and warranties
related to the construction of the improvements on the Property repurchased by Seller pursuant to
the provisions hereof, along with any claimed or issued unused insurance proceeds related to any
damage to the improvements or equipment supporting such improvements, which may have occurred
during the construction of the improvements on the Property repurchased by Seller pursuant to the
provisions hereof.
(e) Prior to termination of the Repurchase Option, Purchaser agrees not to place any liens or
security interests on the Property or the improvements thereon except for indebtedness of Purchaser
related to Purchasers purchase of the Property and/or construction of any improvements thereon, or
the refinancing thereof, and Seller agrees that the Repurchase Option shall be subordinate to any
liens and security interests securing such indebtedness, and Seller shall enter into a
subordination agreement on terms reasonably acceptable to Seller if so requested by Purchasers
lender. In the event Seller exercises the Repurchase Option all such liens and security
interests shall be released as to the Property which is subject to such repurchase or any
improvements thereon upon payment by Seller of the Repurchase Price without regard to whether such
amount is sufficient to retire such indebtedness in full.
(f) At Purchasers request, upon the expiration or termination of the Repurchase Option,
Seller shall execute, in recordable form, a confirmation of the expiration of such option. If
Seller fails to execute and return such document within fifteen (15) days after receipt thereof
from Purchaser, Purchaser shall be entitled to file a memorandum of record in the Land Records of
Collin
West Plano Land Diodes Contract of Sale
21
County, Texas, confirming that such termination has occurred, and such memorandum may be
conclusively relied upon by all interested parties as to the termination of the Repurchase Option.
(g) The options and rights reserved herein are personal rights of Seller which may not be
assigned to others by Seller, except that Seller may assign its rights hereunder to an affiliate of
Seller; provided, however, that in the event of such assignment, an executed copy of the instrument
by which such assignment is made shall be provided to Purchaser promptly after the assignment.
(h) The provisions of this Section 11.05 shall survive the Closing, and at Closing, Seller and
Purchaser shall execute a Memorandum of Repurchase Option in the form of
Exhibit D
attached hereto to be recorded immediately following the recordation of the Deed.
11.06
Right of First Offer; Right of First Refusal
. The following provisions
shall be in addition to Sellers Repurchase Option pursuant to Section 11.05:
(a) As used in this Section 11.06, an
Undeveloped Tract
means a tract of land comprised of
all or any part of the Property, excluding, however, any such tract upon which the construction of
any new, permanent building has been substantially completed after the Closing Date. Also, as used
herein, a
Qualified Mortgage
means a deed of trust or mortgage that grants or creates a lien
against an Undeveloped Tract to secure indebtedness for borrowed money owed to a bank, insurance
company or other institutional lender.
(b) Subject to the exceptions and qualifications set out below in this Section 11.06, prior to
marketing any Undeveloped Tract to any third party, Purchaser will notify Seller in writing (the
ROFO Notice
) of Purchasers intention or desire to sell the applicable Undeveloped Tract, and
Seller shall have the right (the
ROFO
) for a period of thirty (30) days after Sellers receipt of
the ROFO Notice to negotiate with Purchaser in good faith to attempt to reach agreement on the
terms and conditions for the sale of the designated Undeveloped Tract from Purchaser to Seller
(i.e., purchase price, due diligence period, closing date, etc.) The ROFO Notice shall specify the
Undeveloped Tract which Purchaser intends or desires to sell and if the first ROFO Notice delivered
by Purchaser to Seller does not cover all of the Undeveloped Tracts, then the provisions of this
Section 11.06 and the ROFO shall be applicable each time Purchaser desires to sell any of the
remaining Undeveloped Tracts.
(c) Subject to the exceptions and qualifications set out below in this Section 11.06, if
Seller does not purchase the applicable Undeveloped Tract pursuant to the ROFO and if Purchaser
receives a proposal outlining the purchase price and general business terms upon which a
prospective purchaser desires to purchase such Undeveloped Tract, or if Purchaser expects to
make a proposal to a prospective purchaser outlining the purchase price and other general business
terms upon which Purchaser is willing to sell such Undeveloped Tract, and if on the basis of either
such proposal (the
Proposal
) Purchaser intends and desires to enter into further negotiations for
a more definitive purchase and sale agreement with the prospective purchaser, then Purchaser must,
prior to entering into negotiations for a more definitive purchase and sale agreement, submit the
Proposal to Seller with an offer (the
Offer
) to enter into a sales contract covering such
Undeveloped Tract with Seller on the Proposed Terms (as defined below). That is to say, except as
provided below, Purchaser will not enter into any such definitive purchase and sale agreement for
the sale of any
West Plano Land Diodes Contract of Sale
22
Undeveloped Tract to any third party unless and until Purchaser has first submitted
a Proposal and an Offer to Seller and complied with the provisions of this Section 11.06. It is
agreed that the provisions of this Section 11.06 shall apply not only to sales of the Undeveloped
Tracts, but also to any ground lease of any Undeveloped Tract by Purchaser for a term of twenty
(20) years or longer, including any renewal or extension options (a
Long Term Ground Lease
), and
in the event of any ground lease transaction, the terminology used in the definitions of
Proposal
and
Offer
and elsewhere herein shall be deemed to be adjusted accordingly to refer to a lease
transaction instead of a sale transaction, and the terms
purchase price
or
price
will be deemed
to mean all rents and other charges to be imposed upon the lessee thereunder.
(d) If Seller receives a Proposal and an Offer covering any Undeveloped Tract (the
Relevant
Property
) as provided in the preceding paragraph, but for any reason fails to accept the Offer in
writing within fifteen (15) days after Sellers receipt of the Offer, then Purchaser will be
entitled to sell the Relevant Property to the other prospective purchaser named in the Proposal (or
any of its affiliates) for a price equal to or greater than the price set forth in the Proposal and
otherwise on the terms set forth in the Proposal or on other terms which, when considered in the
aggregate, are not materially less favorable to Purchaser; provided, that the closing of such sale
occurs within 180 days after the date of Sellers receipt of the Offer from Purchaser. Any such
sale to the other prospective purchaser will be subject to the Permitted Encumbrances, which for
purposes of this Section 11.06 shall include the restrictions set forth in the Deed and the
Repurchase Option set forth in Section 11.05; but any such sale will not be subject to any rights
reserved by Seller in this Section 11.06. However, if such sale to the other prospective purchaser
does not close within 180 days after the date of Sellers receipt of the Offer from Purchaser, then
the rights reserved by this Section 11.06 shall continue in effect with respect to the subject
Undeveloped Tract. If, however, Seller accepts Purchasers Offer within such fifteen (15) day
period, Purchaser must cause a sales contract (the
Repurchase Contract
) to be prepared in
substantially the form attached hereto as
Exhibit F
, but providing for the sale of the
Relevant Property to Seller on the Proposed Terms. Purchaser may terminate Sellers rights under
this Section 11.06 (as to the subject Undeveloped Tract, but not as to any remaining Undeveloped
Tracts) if Seller fails to execute such a Repurchase Contract within ten (10) days after the same
is submitted to Seller by Purchaser, provided the Repurchase Contract is consistent with the
requirements of this Section 11.06 in all material respects.
(e) As used in this Section 11.06, the
Proposed Terms
will mean the purchase price and
general business terms outlined in the Proposal submitted to Seller with Purchasers Offer to sell
the Relevant Property; provided, however, that notwithstanding anything to the contrary in the Proposal or the form of sales contract attached as
Exhibit F
,
the following will be included in the Proposed Terms and made part of any Repurchase Contract:
(1) Under no circumstances will Purchaser be required to provide seller financing to Seller,
even if Purchaser is willing to provide such financing to another prospective purchaser. Further,
under no circumstances will Seller be required to accept the Relevant Property subject to any
Qualified Mortgage, or to assume any Qualified Mortgage, and Purchaser will be required at its
expense to obtain the release of the Relevant Property from any Qualified Mortgage on or before the
closing of the Repurchase Contract.
West Plano Land Diodes Contract of Sale
23
(2) Purchaser will, subject to the closing conditions applicable under the Repurchase
Contract, convey the Relevant Property to Seller by Special Warranty Deed (prepared from the State
Bar of Texas form), subject only to Permitted Encumbrances and any other Identified Encumbrances
(as defined in the form of Repurchase Contract attached as
Exhibit F
).
(3) As set forth in the form of Repurchase Contract attached as
Exhibit F
, the sale
will be subject to a thirty (30) day feasibility or inspection period and to Sellers receipt of an
acceptable title insurance commitment and survey. If, however, Seller elects to terminate the
Repurchase Contract as therein provided (other than by reason of a default by Purchaser), Purchaser
will be free to sell the Relevant Property or any portion thereof to another purchaser without
first offering the Relevant Property for sale to Seller.
(4) Closing under the Repurchase Contract will be scheduled on the first business day
following fifteen (15) days after expiration of the inspection period under the Repurchase
Contract. Closing will take place at the Dallas or Plano offices of the Title Company.
(5) Seller will be required, as a condition to its rights under the Repurchase Contract, to
deposit earnest money with the title company equal to one percent (1%) of the purchase price for
the Relevant Property no later than five days after execution of the Repurchase Contract.
(6) In the case of any Offer submitted for a Long Term Ground Lease, the Offer must include a
proposed form of ground lease. Also, the form of Repurchase Contract attached as
Exhibit F
must be revised to provide for delivery at closing of the Long Term Ground Lease, in the form
included with the Offer, in lieu of a deed from Purchaser to Seller.
(7) All matters not expressly and specifically covered in this Section 11.06 or the Proposal
(for example, representations or disclaimers of the seller as to the condition of the Relevant
Property) will, for the purposes of determining the Proposed Terms, be the same as set forth in the
form of contract attached as
Exhibit F
.
(f) If Seller enters into a Repurchase Contract and fails to close the purchase of the
Relevant Property in a timely manner for any reason other than Purchasers default under the
Repurchase Contract (including any failure to close because of title objections by Seller), Seller
will have no further rights under this Section 11.06 as to the Relevant Property covered by the
Repurchase Contract; although Sellers rights under this Section 11.06 shall continue with respect
to all remaining Undeveloped Tracts. Under no circumstances will Purchaser be required to incur any
cost to cure any title or other objections by Seller in connection with any sale of the Relevant
Property, except in connection with any Qualified Mortgage or other liens securing indebtedness,
which Purchaser shall be obligated to obtain the release of at its expense on or before the closing
under the Repurchase Contract.
(g) As provided in the paragraph (h) below, Sellers rights under this Section 11.06 will not
apply to any grant of a lien or conveyance or assignments made in any Qualified Mortgage, whether
such Qualified Mortgage exists now or is executed in the future by Purchaser,
West Plano Land Diodes Contract of Sale
24
nor will it apply to any foreclosure or other exercise of remedies under any Qualified
Mortgage or any conveyance in lieu thereof. However, any existing or future Qualified Mortgage will
be subject and subordinate to Sellers rights under this Section 11.06, and thus any such
foreclosure will not cut off or terminate the rights reserved by Seller in this Section 11.06 as to
future sales or conveyances of the property sold at the foreclosure.
(h) Sellers rights under this Section 11.06 will not apply to, and thus Purchaser will not be
required to deliver any Proposal or Offer to Seller in connection with or by reason of any of, the
following:
(1) the execution of any Qualified Mortgage or foreclosure of the lien of any Qualified
Mortgage or any conveyance in lieu of such a foreclosure (however, Sellers rights under this
Section 11.06 will survive any such foreclosure or conveyance in lieu of foreclosure and the
transferee will acquire the applicable property subject to Sellers rights under this Section
11.06);
(2) any conveyance or transfer to any entity that controls, is controlled by or is under
common control with Purchaser, including any subsidiary of Purchaser (however, Sellers rights
under this Section 11.06 will survive any such conveyance or transfer and the transferee will
acquire the applicable property subject to Sellers rights under this Section 11.06);
(3) any condemnation or conveyance in lieu thereof;
(4) any conveyance or transfer of any Undeveloped Tract which is made or to be made together
with or as a condition to transfers of significant assets of Purchaser (other than another
Undeveloped Tract) (however, Sellers rights under this Section 11.06 will survive any such
conveyance or transfer and the transferee will acquire the applicable property subject to Sellers
rights under this Section 11.06); or
(5) any grant of an easement which is appurtenant to or will otherwise benefit any land owned
by Purchaser or any of its affiliates or any occupant of any such land.
(i) The provisions of this Section 11.06 shall survive the Closing, and at Closing, Seller and
Purchaser shall execute a Memorandum of Right of First Offer and Right of First Refusal in the form
of
Exhibit G
attached hereto to be recorded immediately following the recordation of the
Deed.
11.07
Notice to Purchaser
. Seller hereby advises Purchaser to obtain an owner
policy of title insurance for the Property or have an abstract of title covering the Property
examined by an attorney selected by Purchaser.
11.08
Notices
. Any notice or other communication required, permitted, or
contemplated by this Contract (
Notice
) must be in writing and may be given by (a) United States
Mail, postage prepaid, registered or certified mail, return receipt requested; (b) a recognized,
bonded, national, overnight courier service; or (c) sent by telecommunication (
Fax
) during normal
business hours which shall be deemed delivered on the day sent, provided the original notice is
West Plano Land Diodes Contract of Sale
25
received by the addressee after being sent by a nationally recognized, overnight courier within
one business day of the Fax. Notice shall be deemed delivered (x) by United States Mail on the
earlier of (i) three (3) business days after deposited in the United States Mail or (ii) when
actually delivered (as evidenced by the return receipt); or (y) by overnight courier, one (1)
business day after deposit with such courier, all addressed as follows:
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SELLER
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West Plano Land Company, LP
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Attn: Mark C. Allyn
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2001 Ross Avenue, Suite 3300
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Dallas, TX 75201
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Phone: 214/863-3640
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Fax: 214/863-4493
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With a copy to:
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CB Richard Ellis
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Attn: David Reed
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2100 Ross Avenue, Suite 400
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Dallas, Texas 75201
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Phone: 214/979-6100
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Fax: 214/979-6134
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With a copy to:
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Powell Coleman & Arnold LLP
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Attn: Michael L. McCoy
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8080 North Central Expressway, Suite 1380
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Dallas, Texas 75206
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Phone: 214/890-7117
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Fax: 214/373-8768
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Attn: Christy L. Fields
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15601 Dallas Parkway, Suite 600
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Addison, Texas 75001
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Phone: 469/341-2465
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Fax: 214/655-1610
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PURCHASER:
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Diodes Incorporated
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Attn: Rick White, Senior Vice President
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15660 N. Dallas Parkway, Suite 850
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Dallas, Texas 75248
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Phone: 95-2039518
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Fax: 972/385-2315
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With a copy to:
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Friedman & Feiger LLP
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Attn: Gary E. Day
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5301 Spring Valley Road, Suite 200
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Dallas, Texas 75254
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Phone: 972/788-1400
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Fax: 972/776-5313
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Notice given in any other manner shall be deemed delivered when actually received. Either party may
change its address by giving the other party five (5) days advance written notice of such change.
Notices sent by a partys attorney shall constitute notice from the applicable party.
11.09
Time of the Essence
. Time is of the essence in the performance of this
Contract.
11.10
Attorneys Fees
. If Seller or Purchaser employs an attorney to enforce
any rights or remedies hereunder, the prevailing party shall be entitled to recover from the other
party reasonable attorneys fees and court costs. The obligations of the parties set forth in this
Section 11.09 shall survive the termination or closing of this Contract.
11.11
Performance of the Contract
. The obligations of the parties hereto are
performable in Collin County, Texas. This Contract shall be construed and interpreted in accordance
with the laws of the State of Texas.
11.12
Entire Agreement
. This Contract constitutes the entire agreement between
Seller and Purchaser with respect to the sale and purchase of the Property. This Contract
supersedes all prior representations, understandings, or agreements (whether oral or written) with
respect to the subject matter hereof. Except as provided in Section 11.17 below, this Contract
cannot be amended or modified except by a written instrument signed by both Seller and Purchaser.
11.13
Multiple Originals
. This Contract may be executed in multiple original
counterparts. Each counterpart shall be deemed an original, and when the counterparts are taken
together, they shall be deemed to be one and same instrument. This Contract may be executed via
facsimile or by sending copies of the executed Contract via email followed by regular mail of the
originals and shall be considered executed and binding upon receipt of the fax or email of the
signature page of the last of the partys signature to this Contract.
11.14
Severability
. If any provision of this Contract is held to be invalid,
illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any
other provision of this Contract, and the remainder of this Contract shall be construed and
interpreted as if such invalid, illegal, or unenforceable provision had never been contained
herein.
11.15
Time Periods
. Unless otherwise specified, any time period or deadline
provided in this Contract shall be measured in Calendar days. If any such time period or deadline
expires on a Saturday, Sunday, or legal holiday recognized by the State of Texas, such time period
or deadline shall be extended to the first business day thereafter.
11.16
Independent Contract Consideration
. Seller acknowledges that
contemporaneously with the execution of this Contract, Purchaser has delivered to Seller $50.00.
Such amount has been bargained for as consideration for Purchasers exclusive option to purchase
the Property and for Sellers execution of this Contract. Such amount is in addition to the Earnest
Money, is non-refundable, and shall be retained by Seller notwithstanding any other provision of
this Contract.
11.17
Condemnation
. If during the pendency of this Contract and prior to
Closing, condemnation proceedings are commenced with respect to all or any portion of the Property,
West Plano Land Diodes Contract of Sale
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Seller shall immediately notify Purchaser. In such event, Purchaser may, at its option, either (i)
elect to terminate this Contract by written notice to Seller within ten (10) business days
after receipt by Purchaser of such notice; whereupon, the Earnest Money shall be immediately
returned to Purchaser, and, except for the Surviving Obligations, neither party shall have any
further rights, obligations, or remedies under this Contract, or (ii) elect to close the
transaction, in which event, Purchaser shall be entitled to all proceeds of any award or payment in
lieu thereof resulting from such proceedings, and the Purchase Price will be paid in full by
Purchaser at Closing. In the event that Purchaser elects to close the transaction, Seller shall
assign to Purchaser at Closing such rights which Seller might have with respect to any condemnation
award or payment in lieu thereof.
11.18
Substitution of Legal Description
. When the Survey has been prepared and
approved or deemed to be approved by Purchaser in accordance with the provisions of Section 5, the
legal description of the Property set forth thereon shall be substituted for the description set
forth on
Exhibit A
attached hereto, and this Contract shall be deemed automatically
amended by such substitution.
11.19
Survival
. The provisions of this Contract that are expressly stated to
survive Closing, or termination of this Contract and those obligations of the parties hereto that
by their own terms are performable after Closing shall survive the Closing and are referred to
herein as
Surviving Obligations
. The representations and warranties of Seller and Purchaser set
forth in Section 7.01 and Section 7.04 hereof shall survive Closing for a period of one year and
are included within the Surviving Obligations.
11.20
Interpretation
. Where required for proper interpretation, words in the
singular shall include the plural, and words of any gender shall include all genders. The
descriptive headings of the sections of this Contract are for convenience only and shall not
control or affect the meaning of construction of any of the provisions hereof.
11.21
Waiver
. No waiver by either party of any of its rights or remedies
hereunder shall be considered a waiver of any other or subsequent right or remedy. No waiver by
either party of any of its rights or remedies hereunder shall be effective unless evidenced by a
written instrument executed by the waiving party.
11.22
Memorandum of Contract; Confidentiality
. Neither party shall record a
memorandum of this Contract in the real property records of the county in which the Property is
located. The parties agree that the existence of this Contract along with its terms and conditions
and all prior negotiations between the parties with regard to the Property, shall be kept
confidential by the parties and shall not be disclosed to any third party except to the Title
Company, the parties brokers and legal representatives, prospective financing sources of
Purchaser, and such other third parties who have a specific need to know such information and
except as may be required by applicable law. The information given to all third parties shall be
limited to such information as is necessary for the carrying out of their duties with regard to the
sale and purchase of the Property under this Contract. All media releases, public announcements and
public disclosures by Purchaser or Purchasers Representatives shall be coordinated with and
approved in writing by Seller prior to the release thereof. Except for any announcement intended
solely for internal distribution by Purchaser or any disclosure required by legal,
West Plano Land Diodes Contract of Sale
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accounting or
regulatory requirements beyond the reasonable control of Purchaser, all media releases, public
announcements or public disclosures (including, but not limited to, promotional or marketing
material) by Purchaser or its employees or agents relating to this Contract or its subject matter,
or including the name, trade name, trade mark, or symbol of Seller or any affiliate of Seller,
shall be coordinated with and approved in writing by Seller prior to the release thereof. Purchaser
shall not represent directly or indirectly that any contract or any service provided by Purchaser
to Seller has been approved or endorsed by Seller or include the name, trade name, trade mark, or
symbol of Seller or any affiliate of Seller without Sellers express written consent.
11.23
Termination of Offer
. This document, when first signed by either party,
represents an offer to sell or purchase the Property, as the case may be, that shall automatically
expire (without any further notice from or action by such party) in fifteen (15) days unless it is
signed by both parties within such period.
11.24
Conveyance Plat
. It is understood and acknowledged that Purchaser, at
its sole cost and expense, will seek to obtain approval of a conveyance plat for the Property
meeting the requirements of the Subdivision Ordinance of the City of Plano, Texas in accordance
with (i) the boundary of the Property shown on the Survey and (ii) all applicable laws (the
Conveyance Plat
) prior to the Closing, although the approval of a Conveyance Plat shall not be a
condition to the Closing hereunder. Seller agrees to cooperate, at no expense to Seller, by
providing all necessary signatures and taking other necessary actions to assist Purchaser in
applying for and obtaining approval of the Conveyance Plat. Purchaser acknowledges that
development of the Property cannot occur absent an approved and recorded Conveyance Plat and
compliance with the other platting and development requirements of the City of Plano.
11.25
Development Management Agreement
. As part of the consideration for this
contract, Purchaser and Trammell Crow Company, or its affiliate designee, (the
Development
Manager
) have agreed to execute and deliver a Development Management Agreement (the
Development
Agreement
) providing for a fee to the Development Manager equal to 7.5% of the hard costs and
managed soft costs (excluding the Purchase Price for the Property) for oversight of the design and
construction of the office headquarters building over a design and construction period to
substantial completion estimated to be 15 months, with any time and services provided by the
Development Manager in excess of 15 months and not resulting solely by a breach by the Development
Manager of the Development Agreement to be compensated by an additional fee of $1,000 per day
payable to the Development Manager. The parties to the Development Agreement will negotiate in
good faith to reach mutual agreement on the terms and form of the Development Agreement prior to
the commencement of any construction on the Property by Purchaser and in any event no later than
the Construction Commencement Deadline. The obligations under this Section 11.25 shall survive
Closing and may be enforced by the parties and the Development Manager.
[SIGNATURE PAGES FOLLOW]
West Plano Land Diodes Contract of Sale
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IN WITNESS WHEREOF, Seller and Purchaser have executed this Contract as follows:
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SELLER
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WEST PLANO LAND COMPANY, LP,
a Delaware limited partnership
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By:
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West Plano Land Company GP LLC,
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a Delaware limited liability company,
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its sole general partner
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By:
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Mark C. Allyn
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President
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Date:
, 2008
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[SIGNATURES CONTINUE ON FOLLOWING PAGE]
West Plano Land Diodes Contract of Sale
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PURCHASER
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DIODES INCORPORATED,
a Delaware corporation
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By:
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Richard D. White
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Sr. VP Finance
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Date:
, 2008
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[SIGNATURES CONTINUE ON FOLLOWING PAGE]
West Plano Land Diodes Contract of Sale
TITLE COMPANY (FOR THE SOLE PURPOSE OF ACKNOWLEDGING RECEIPT OF A FULLY EXECUTED COPY OF THIS
CONTRACT AND AGREEING TO HOLD AND DISBURSE THE EARNEST MONEY AND ANY OTHER FUNDS RECEIVED BY IT IN
ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS CONTRACT):
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REPUBLIC TITLE OF TEXAS, INC.
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By:
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Title:
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Date:
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SELLERS BROKER (FOR THE SOLE PURPOSE OF
ACKNOWLEDGING SECTION 11.01)
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CB RICHARD ELLIS, INC.
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By:
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Title:
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Date:
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PURCHASERS BROKER (FOR THE SOLE PURPOSE OF
ACKNOWLEDGING SECTION 11.01)
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JANS REALTY, INC.
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By:
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Title:
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Date:
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West Plano Land Diodes Contract of Sale
EXHIBIT A
DESCRIPTION OF PROPERTY
A-1
EXHIBIT B
SPECIAL WARRANTY DEED
GRANTEES ADDRESS:
Diodes Incorporated
15660 North Dallas Parkway, Suite 850
Dallas, Texas 75248
NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OR ALL
OF THE FOLLOWING INFORMATION FROM ANY INSTRUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY BEFORE
IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVERS LICENSE
NUMBER.
SPECIAL WARRANTY DEED
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THE STATE OF TEXAS
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§
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§
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KNOW ALL MEN BY THESE PRESENTS
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COUNTY OF COLLIN
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§
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THAT,
WEST PLANO LAND COMPANY, LP
a Delaware limited partnership (
Grantor
), for and in
consideration of the sum of Ten and No/100 Dollars ($10.00) cash in hand paid by Diodes
Incorporated, a Delaware corporation, with an address of 15660 North Dallas Parkway, Suite 850,
Dallas, Texas 75248 (
Grantee
) and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Grantor, has GRANTED, BARGAINED, SOLD, and
CONVEYED, and by these presents does GRANT, BARGAIN, SELL, and CONVEY unto Grantee, the real
property more particularly described on
Exhibit A
attached hereto, together with all
improvements, rights, appurtenants, and hereditaments located thereon (the
Property
).
This conveyance is being made by Grantor and accepted by Grantee subject to those certain
title exceptions set forth in
Exhibit B
attached hereto and made a part hereof for all
purposes, but only to the extent that such exceptions are valid, existing, and, in fact, affect the
Property. Property taxes having been adjusted between Grantor and Grantee and appropriate payments
or credits having been made to Grantee, Grantee assumes and shall be responsible for payment of all
property taxes, including but not limited to all
rollback
or similar property taxes.
B-1
The Property is sold and conveyed in its
AS IS, WHERE IS
condition, without any warranty,
express or implied, of habitability or fitness for a particular purpose, or any other warranty or
assurance, it being understood and agreed that Grantee acquires the Property subject to any and all
defects.
Deed Restrictions
Grantee will construct, occupy and operate improvements on the Property for use as an office
headquarters building for Purchaser and to be substantially occupied by Purchaser or its successor
and its employees and ancillary uses associated with such office headquarters use that primarily
serve and benefit the occupants in the improvements on the Property (e.g. tenant employee
cafeteria, deli, gift shop, lobby banking, etc.) Without limiting the foregoing, it is specifically
agreed that the Property may not be used for (i) commercial office building development (as
hereafter defined) other than an office for the headquarters of Grantee, its employees and
successors, (ii) any retail intended to serve and benefit the general public, or motor or
drive-through banking, (iii) restaurant (intended to primarily serve and benefit the general public
outside of the occupants of the improvements on the Property), (iv) hotel, (v) town home and
multi-family residential development, (vi) free-standing restaurant and/or retail pads, and (vii)
medical office condominiums. For purposes hereof,
commercial office building development
shall
mean any building or combination of buildings and other amenities which is used for office purposes
other than an office for the headquarters of Grantee, its employees and successors, not exceeding
three stories in height [and with no more than twenty percent (20%) of the leasable area in the
building being leased to third parties not owned or controlled by, or under common control with,
Grantee
.
Further, any office headquarters building constructed on the Property must otherwise be
incompliance with the Declarations applicable to the Property (and thus shall be subject to
approval by the Legacy Associations Design Review Board) and must be designed and constructed with
an exterior appearance at least comparable to first class office buildings on other properties in
the vicinity of the Property. These restrictions will be binding upon, and will be a covenant
running with the land as to the Property and will remain in effect until the earlier of (a)
recordation in the real property records of Collin County, Texas of a written release of this
covenant executed by Grantor and Grantee or (b) fifteen (15) years after the date of this deed;
provided, however, notwithstanding the foregoing, the restriction prohibiting commercial office
building development other than an office headquarters of Grantee not to exceed three stories in
height and the restrictions on leasing to unaffiliated third parties will remain in effect only
until the earlier of (i) recordation in the real property records of Collin County, Texas of a
written release of such commercial office building development restriction or (ii) ten (10) years
after the date of this deed.
TO HAVE AND TO HOLD the Property, together with, all and singular, the rights and
appurtenances thereto in anywise belonging, to Grantee and Grantees heirs, executors,
administrators, legal representatives, successors, and assigns forever, and subject to the
exceptions set forth on the attached
Exhibit B
,
Grantor does hereby bind Grantor and
Grantors heirs, executors, administrators, legal representatives, successors, and assigns, against
every person whomsoever lawfully claiming or to claim the same, or any part thereof by, through, or
under Grantor, but not otherwise.
B-2
EXECUTED to be effective _______________, 2008.
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GRANTOR:
WEST PLANO LAND COMPANY, LP,
a Delaware limited partnership
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By:
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West Plano Land Company GP LLC,
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a Delaware limited liability company,
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its sole general partner
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By:
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Mark C. Allyn
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President
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THE STATE OF TEXAS
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§
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§
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COUNTY OF DALLAS
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§
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This instrument was acknowledged before me on
, 200__ by Mark C. Allyn,
President of West Plano Land Company GP LLC, a Delaware limited liability company, sole general
partner of West Plano Land Company, LP, a Delaware limited partnership, on behalf of said limited
partnership.
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Notary Public in and for the State of Texas
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Printed Name:
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My Commission Expires:
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B-3
EXHIBIT A TO THE SPECIAL WARRANTY DEED
PROPERTY DESCRIPTION
B-4
EXHIBIT B TO THE SPECIAL WARRANTY DEED
PERMITTED EXCEPTIONS
B-5
EXHIBIT C
ESTOPPEL CERTIFICATE
THIS ESTOPPEL CERTIFICATE (this Certificate) dated as of
, 20___, is executed
and delivered by LEGACY ASSOCIATION, a Texas non-profit corporation (Association), to and in
favor of
, a
(Purchaser).
RECITALS
1. The property (the Property) more particularly described on
Exhibit A
attached
hereto is the subject of a contract for the purchase and sale of real
estate by and between
(
) and Purchaser (the Contract).
2. Purchaser requires, as a condition to such acquisition, that the Association execute and
deliver this Certificate.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and confessed, the Association hereby represents and warrants to, and covenants
and agrees with, Purchaser as follows:
As of the date hereof, all fees, assessments and charges to the Property and the owner thereof
have been or shall be paid in full and thereafter there shall remain no unpaid assessments levied
against the Property except as set forth in Paragraph 4 below.
As of the date hereof, no default or event of default currently exists by the current owner
with respect to the Property, and the Association has no claim or lien against the Property or its
owner with respect to the Property which is not satisfied.
The use of the Property is currently in compliance with the existing Association Declaration
and the covenants, conditions and restrictions affecting the Property.
The Regular Assessment (as defined in the Association Declaration) for the Property for
calendar year 2008 is $
per gross acre, based upon
gross acres. The last
payment by the existing owner of the Property of its Regular
Assessment for
quarter 20___ was made on
, 20___. The ___ quarter 20___ Regular Assessment has not yet been invoiced and
is not yet due and payable. The Association will invoice Purchaser for the full amount of the
quarter 20___ Regular Assessment due for the Property on or about
20___, which will
be due and payable in
20___. Purchasers estimated
quarter 20___ Regular Assessment
is approximately
$
.
The Special Member Assessment (as defined in the Association Declaration) for the Property for
calendar year 20___is $ N/A. The last payment by the current owner of the Property of its Special
Member Assessment was made on N/A. The next scheduled payment owner of the Property of its Special
Member Assessment is $ N/A.
As of the date of this Certificate, the Association maintains a reserve fund pursuant to
Section 3.5 of the Association Declaration, which reserve fund currently equals $
as
of the
Quarter 20___.
C-1
The current owner of the Property is a Class A Member (as defined in the Association
Declaration) and will be entitled to one (1) vote per acre based on an estimated
gross
acres. The Class B Member (as defined in the Association Declaration) status formerly held by
Electronic Data Systems Corporation has terminated and no other party is a Class B Member or has
the right to become a Class B Member.
The Property comprises approximately
% of the entire property subject to the
Association.
The undersigned has all necessary power and authority to execute and deliver this Certificate
without the joinder of any other person or entity and the individual signing this Certificate on
behalf of the Association is fully authorized and empowered to do so and to bind the Association
and the Associations Board of Directors to the matters set forth in this Certificate.
This Certificate shall inure to the benefit of Purchaser and its successors and assigns. This
Certificate shall not be deemed to alter or modify any of the terms and conditions of the
Association Declaration or covenants, conditions and restrictions that affect the Property.
SIGNATURE PAGE FOLLOWS
C-2
EXECUTED AND DELIVERED as of the date first above written.
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ASSOCIATION:
LEGACY ASSOCIATION,
a Texas non-profit corporation
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By:
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Name:
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Patrick J. McInroe
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Its: President
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STATE OF TEXAS
COUNTY OF COLLIN
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§
§
§
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This
instrument was acknowledged before me on the
day of
20___, by
Patrick J. McInroe, President of Legacy Association, a Texas non-profit corporation, on behalf of
said Association.
_______________________________________________
Notary Public in and for the State of Texas
Printed
Name: _____________________
My Commission Expires: _____________
C-3
Exhibit A to Estoppel Certificate
The Property
C-4
EXHIBIT
D
FORM OF MEMORANDUM OF REPURCHASE OPTION
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THE STATE OF TEXAS
COUNTY OF COLLIN
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§
§
§
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THIS
MEMORANDUM OF OPTION AGREEMENT is made this
_________ day of
_________ 200_, by and
between WEST PLANO LAND COMPANY, LP, a Delaware limited partnership (
West Plano
), and DIODES
INCORPORATED, a Delaware corporation (
Diodes
), on the terms and conditions hereinafter set forth.
WHEREAS
, pursuant to Section 11.05
of that certain Contract for the Purchase and Sale of Real
Estate dated _________, 2008 by and between West Plano, as Seller, and Diodes, as Purchaser,
(the
Contract
) Diodes has granted to West Plano an option to repurchase the Property (as defined
in the Contract and herein so called) with respect to the tract of land more particularly described
on
Exhibit A
attached hereto and made a part hereof, in accordance with the terms and
conditions of the Contract.
NOW, THEREFORE
, for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Diodes and West Plano hereby provide public notice of the options to
repurchase the Property granted by Diodes to West Plano pursuant to the Contract. If the option to
repurchase the Property expires or terminates in accordance with the terms of the Contract this
Memorandum shall terminate and be null and void. Following any such termination, West Plano shall
promptly after a request made by Diodes execute a termination of this Memorandum (in recordable
form) if this Memorandum terminates as described above.
Information concerning the Contract may be obtained by contacting West Plano Land Company, LP,
Attention: Mark C. Allyn, 2100 Ross Avenue, Suite 400, Dallas, Texas 75201.
(SIGNATURE PAGES FOLLOW)
D-1
Effective as of the day and year set forth above.
WEST PLANO:
WEST PLANO LAND COMPANY, LP,
a Delaware limited partnership
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By:
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West Plano Land Company GP LLC,
a Delaware limited liability company,
its sole general partner
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By:
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Mark C. Allyn
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President
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THE STATE OF TEXAS
COUNTY OF __________
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§
§
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This
instrument was acknowledged before me on
_________, 200_ by Mark C. Allyn,
President of West Plano Land Company GP LLC, a Delaware limited liability company, sole general
partner of West Plano Land Company, LP, a Delaware limited partnership, on behalf of said limited
partnership.
Notary Public in and for the State of Texas
Printed Name: __________________________
My Commission Expires: __________________
D-2
DIODES:
DIODES INCORPORATED,
a Delaware corporation
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By:
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Richard D. White
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Sr. VP Finance
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THE STATE OF TEXAS
COUNTY OF ________
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§
§
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This
instrument was acknowledged before me on _________, 2008
by _________,
_________ of Diodes incorporated,
a _________ corporation, on behalf of said corporation.
Notary Public in and for the State of Texas
Printed Name: ____________________________
My Commission Expires: ____________________
D-1
EXHIBIT
E
[Intentionally Omitted]
E-1
EXHIBIT F
FORM OF CONTRACT OF SALE
(FOR USE UPON GRANTORS EXERCISE OF ITS RIGHT OF FIRST REFUSAL)
[SELLER]
[SELLERS ADDRESS]
, 20___
[BUYER]
[BUYERS ADDRESS]
Attn.:
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Re:
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Sale of approximately ____ acres of land in Collin County,
Texas, shown or described on
Exhibit A
attached hereto and the
improvements thereon, if any (the
Relevant Property
)
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Ladies and Gentlemen:
This letter confirms the agreement of [SELLER NAME] (
Seller
) to sell the Relevant Property
referenced above to [BUYER NAME] (
Buyer
) if certain contingencies are resolved or waived as
described below. Buyer and Seller agree that the sale will be governed by the following terms and
conditions
1)
Price and Other Terms and Conditions
.
(A)
Purchase Price
. The purchase price for the Relevant Property (the
Purchase Price
) will
be $
.
(B)
Earnest Money
: $
of earnest money (the
Earnest Money
) will be deposited by Buyer
with
[Name and Address of Title Company]
(the
Title Company
). Upon any termination of this
agreement which is effective prior to the expiration of the Inspection Period described below, $100
of the Earnest Money will be paid to Seller, as consideration for this agreement, and the remainder
of the Earnest Money will be promptly refunded to Buyer. Otherwise, at closing, the Earnest Money
will be applied to the Purchase Price. So long as the Title Company holds the Earnest Money, the Title Company will be
F-1
[Name of Buyer]
[Date]
Letter Agreement Page 2
expected to keep the Earnest
Money invested as reasonably requested by Buyer; provided, Buyer has notified the Title Company and
Seller of Buyers federal tax ID#. Any interest earned on the Earnest Money will be reported as
income by Buyer for income tax purposes. For purposes of this agreement, however, such interest
will be added to (and applied in accordance with this agreement as) Earnest Money.
(C) Date and Place for Closing
. Closing of the sale will occur in the offices of the Title
Company no later than 15 days after the end of the Inspection Period (as defined below). Time is of
the essence.
[NOTE: The next two subparagraphs are subject to any adjustments indicated by the Proposal.]
(D) Closing Costs
. Ad valorem taxes and any other ongoing expenses related to the Relevant
Property will be prorated at closing, based upon the best estimates available if actual amounts
cannot yet be determined. However, any
rollback
taxes or other taxes to be paid after closing for
any period prior to closing because of a change in ownership or use of the Relevant Property will
be for the account of Seller and will be credited against the Purchase Price. Further, any such
rollback
taxes will be computed as if use of the Relevant Property will change to commercial uses
immediately after closing. Buyer and Seller will each pay its own attorneys fees. Seller will also
pay the basic premium for the owners title insurance policy required in favor of Buyer by this
agreement; but the additional premium (if any) required because of any special endorsements or
modifications to the policy (including the
survey deletion
) required by Buyer will be paid by
Buyer.
(G) AS IS Sale
. The Relevant Property is to be sold and conveyed
AS IS
without any
representation or warranty by Seller, except (1) the title warranties in the special warranty deed
to be delivered by Seller as provided below, (2) the representations concerning Sellers tax status
in the non-foreign certificate to be delivered by Seller as provided below, and (3) that Seller
does make the following representations to Buyer, subject to any contrary information known to or
discovered by Buyer during the Inspection Period:
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(a)
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Seller has not, except as may be disclosed in written materials delivered to
Buyer as provided in paragraph 2(C) below, been notified of any violation of
environmental laws concerning the Relevant Property.
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(b)
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There are no judicial or administrative actions, suits or proceedings pending
or, to the Sellers knowledge, threatened against or affecting Seller concerning the
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F-2
[Name of Buyer]
[Date]
Letter Agreement Page 3
Relevant Property, including any such actions, suits or proceedings for the
condemnation of any part of the Relevant Property.
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(c)
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There are no parties in possession of the Relevant Property, except as
permitted under any existing agricultural lease which can be terminated without cost by
the owner of the Relevant Property on short notice.
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2)
Items to Be Delivered
Before
Closing
.
(A) Survey
: If Seller has not already done so, Seller will within 10 days after the date of
this agreement provide to Buyer an updated survey of the Relevant Property (the
Survey
) prepared
and certified by a licensed, professional surveyor, showing all easements, setbacks and other
encumbrances which can be shown on a survey, and confirming the Net Area used to compute the
Purchase Price.
(B) Title
: If Seller has not already done so, Seller will within 10 days after the date of
this agreement provide to Buyer a copy of a current commitment for title insurance (the
Commitment
), issued by the Title Company in the amount of the Purchase Price, covering the
Relevant Property, and delivered together with copies of all special title exceptions noted in the
Commitment.
(C) Other Materials
: If Seller has not already done so, Seller will within 10 days after the
date of this agreement provide to Buyer copies of (1) all environmental reports (if any) pertaining
to the Relevant Property (whether one or more, the
Report
) that Seller received when it acquired
the Relevant Property or that are otherwise be available to Seller, (2) any governmental permits
previously received by Seller regarding the use and maintenance of the Relevant Property, and (3)
any correspondence or notices from any governmental authorities or other parties that Seller has
received concerning the Relevant Property and possible or alleged violations of environmental or
other laws.
No representations of accuracy will be implied by Sellers delivery of any Report or other
information to Buyer.
3)
Items to Be Delivered
At
Closing
.
(A) Deed
. Seller will convey its interest in the Relevant Property to Buyer by a special
warranty deed (the
Deed
), which will be expressly subject to Identified Encumbrances (as defined
below).
F-3
[Name of Buyer]
[Date]
Letter Agreement Page 4
(B) Non-foreign Certificate
. Seller will deliver a certificate of non-foreign status to Buyer
at closing as needed to comply with the provisions of the Foreign Investors Real Property Tax Act
(FIRPTA).
(C) Title Policy
. At the closing, Seller will deliver to Buyer an owners title policy issued
by the Title Company (or written confirmation from the Title Company that it is then
unconditionally prepared to issue such a policy). The policy will be subject only to standard
printed exceptions (with the
survey deletion
made if requested by Buyer) and Identified
Encumbrances.
(D) Title Company Certificates
. Seller will deliver any evidence of authority and owners
affidavit that may reasonably be required by the Title Company as a condition to its delivery of
the owners title insurance policy to Buyer.
4)
Contingencies
.
The sale will be contingent upon satisfaction or wavier of each of the following conditions:
(A) Signing and Earnest Money
. Within 10 days after the date of this agreement, Buyer must
have signed and returned this agreement to Seller and must have deposited the Earnest Money with
the Title Company.
(B) Inspection
. Buyer must be satisfied with the condition and suitability of the Relevant
Property after further inspections as Buyer deems appropriate during the period that commences when
this agreement is fully executed and that ends 30 days after the date of this letter (the
Inspection Period
). Seller will permit entry upon the Relevant Property by Buyer and its
representatives and consultants to conduct such inspections throughout the Inspection Period. If
Buyer is not satisfied during the Inspection Period for any reason whatsoever, Buyer may terminate
this agreement and receive a refund of the Earnest Money by written notice to Seller. If, however,
Buyer fails to notify Seller in writing of the termination of this agreement before the end of the
Inspection Period, Buyer will be deemed to have waived this inspection contingency.
(C) Review of Title and Other Materials
. Before the expiration of the Inspection Period, Buyer
must receive, and be satisfied with all title exceptions and other matters disclosed in, the
Survey, the Commitment and the Report or any other materials concerning the Relevant
Property delivered to Buyer by Seller. Special title exceptions listed in Schedule B of the
Commitment, as the same may be modified by the Title Company at the request of Buyer, will
constitute
Identified Encumbrances
for purposes of this agreement.
F-4
[Name of Buyer]
[Date]
Letter Agreement Page 5
(D) No Other Surprises
. Nothing shall occur or be discovered after the Inspection Period and
prior to closing that could materially and adversely affect title to the Relevant Property or its
condition, and Seller must have been tendered the items which are listed above as items to be
delivered to Buyer at closing contemporaneously with Buyers tender of the Purchase Price.
5)
Remedies
.
If Buyer breaches this agreement prior to closing, Sellers sole remedy will be to collect and
retain the Earnest Money as liquidated damages; provided, however, that Buyer must indemnify Seller
against any property damage (including damage to the Relevant Property) or bodily injury caused by
Buyers on-site inspections of the Relevant Property.
6)
Miscellaneous
.
This agreement supersedes and replaces any prior agreements between the parties concerning the
Relevant Property.
This agreement will be binding upon and inure to the benefit of the parties and their respective
successors and assigns.
To facilitate execution, this agreement may be executed in multiple identical counterparts. It will
not be necessary that the signature of, or on behalf of, each party, or that the signature of all
persons required to bind any party, appear on each counterpart. All counterparts, taken together,
will collectively constitute a single instrument. But it will not be necessary in making proof of
any of this agreement to produce or account for more than a single counterpart containing the
respective signatures of, or on behalf of, each of the parties to this agreement. Any signature
page may be detached from one counterpart and then attached to a second counterpart with identical
provisions without impairing the legal effect of the signatures on the signature page. Signing and
sending a counterpart (or a signature page detached from the counterpart) by facsimile or other
electronic means to another party will have the same legal effect as signing and delivering an
original counterpart to the other party. A copy (including a copy produced by facsimile or other
electronic means) of any signature page that has been signed by or on behalf of a party to this
agreement will be as effective as the original signature page for the purpose of proving such
partys agreement to be bound.
F-5
[Name of Buyer]
[Date]
Letter Agreement Page 6
If the foregoing correctly sets forth your agreements, please execute a copy of this letter in
the space provided below and return the copy to Seller.
Very truly yours,
Seller
__________________________________________________
,
a
__________________________________________________
Accepted and agreed as of the date first above written
:
Buyer
__________________________________________________
,
a
__________________________________________________
F-6
EXHIBIT G
FORM OF MEMORANDUM OF RIGHT OF FIRST OFFER
AND RIGHT OF FIRST REFUSAL
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THE
STATE OF TEXAS
COUNTY OF COLLIN
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§
§
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THIS
MEMORANDUM OF RIGHT OF FIRST OFFER AND RIGHT OF FIRST REFUSAL is made
this _________ day of
_________, 2008, by and between WEST PLANO LAND COMPANY, LP, a Delaware limited partnership (
West
Plano
), and DIODES INCORPORATED a Delaware corporation (
Diodes
), on the terms and conditions
hereinafter set forth.
WHEREAS
, pursuant to that certain Contract for the Purchase and Sale of Real Estate dated
_________, 2008 by and between West Plano, as Seller, and , as Purchaser (the
Contract
),
Diodes has granted to West Plano a right of first offer and a right of first refusal to purchase
the Property (as defined in the Contract and herein so called) with respect to the tract of land
more particularly described on Exhibit A attached hereto and made a part hereof, in accordance with
the terms and conditions of the Contract.
NOW, THEREFORE
, for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Diodes and West Plano hereby provide public notice of the right of first offer
and right of first refusal to purchase the Property granted by Diodes to West Plano pursuant to the
Contract. If the right of first offer and right of first refusal expire or terminate in accordance
with the terms of the Contract, this Memorandum shall terminate and be null and void. Following any
such termination, West Plano shall promptly after a request made by Diodes execute a termination of
this Memorandum (in recordable form) if this Memorandum terminates as described above.
Information concerning the Contract may be obtained by contacting West Plano Land Company, LP,
Attention: Mark C. Allyn, 2100 Ross Avenue, Suite 400, Dallas, Texas 75201.
(SIGNATURE PAGES FOLLOW)
G-1
Effective as of the day and year set forth above.
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WEST PLANO:
WEST PLANO LAND COMPANY, LP,
a Delaware limited partnership
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By:
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West Plano Land Company GP LLC,
a Delaware limited liability company,
its sole general partner
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By:
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Mark C. Allyn
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President
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THE STATE OF TEXAS
COUNTY OF DALLAS
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§
§
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This
instrument was acknowledged before me on _________, 2008 by Mark C. Allyn, President
of West Plano Land Company GP LLC, a Delaware limited liability company, sole general partner of
West Plano Land Company, LP, a Delaware limited partnership, on behalf of said limited partnership.
_____________________________
Notary Public, State of Texas
____________________________________
My Commission Expires:
G-2
DIODES:
DIODES INCORPORATED,
a Delaware corporation
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By:
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Richard D. White
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Sr. VP Finance
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THE STATE OF TEXAS
COUNTY OF _________
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§
§
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This
instrument was acknowledged before me on _________, 2008 by Richard D. White, Sr. VP
Finance of Diodes Incorporated, a Delaware corporation, on behalf of said corporation.
Notary Public in and for the State of Texas
Printed Name:
My Commission Expires:
G-3