Competitor Alleges Diodes Financing Package Is Unfair
Diodes is selling more than $1 million in stock to some of its officers and key employees, but is giving them up to 10 years to pay for it.
The sale is part of a financing package to raise more than $3.5 million that the Chatsworth company says it needs to help it out of its financial malaise. In the fiscal year ended April 30, the company, which sells electrical components mostly made in Taiwan, lost $631,901 on sales of $12 million.
But giving the Diodes officers and employees so long to pay for the stock has irked Rectron Ltd., a Taiwan competitor that owns 50,000 of the company’s shares and holds $1.2 million in Diodes bonds.
Rectron’s attorney, Jack Goldman, says the stock sale is, in effect, a favorable loan to Diodes’ officers that is prohibited under conditions of bonds it holds, and that the deal will severely dilute the stake of current shareholders.
“Management stands to gain a tremendous amount at a cost to public stockholders,” Goldman said.
Microsemi Buys 800,000 Shares
Diodes is raising money by selling 1,777,500 shares at $2 each to 22 investors. Microsemi, a Santa Ana electrical components company, is buying 800,000 shares, the largest block, for $1.6 million cash. The deal will make Microsemi Diodes’ largest shareholder with a 23% stake.
The 22 investors include 11 Diodes officers and employees who are buying 787,500 shares. But 526,875 of those shares are being purchased on a deferred payment plan. Six members of the group are buying 450,000 shares using collateralized 10-year notes at an 8.5% annual interest rate. Two others are buying another 76,875 shares over time through separate agreements.
Goldman said the deal violates the terms of Diodes’ previous bond sales. Those terms prohibits loans of more than $100,000 to officers and employees, he said.
In addition, Goldman said that Diodes will end up with 3.9 million shares of common stock outstanding, compared to 2.1 million shares before all of the stock sales. Public stockholders, he said, will have their stake in the company reduced from nearly 90% to less than 50%.
Diodes’s stock closed Monday at $2.50 per share, compared to a three-year high of $7.88.
The sale also will put more than half of Diodes’ stock in the hands of Microsemi and Diodes’ insiders, which means that the company cannot be sold without their consent.
But David M. Lloyd, Diodes’ chairman--who is buying 125,000 shares using a note secured by real estate--denied that it is an anti-takeover move.
He also disagreed that he was getting a loan. “It’s a non-cash transaction,” he said, adding that the notes are secured.
Lloyd said that although the stock will be diluted, the company and shareholders ultimately will benefit by the infusion of the money. Company executives said they plan to use the money to expand the company’s offices in Taiwan and develop more powerful rectifiers with Microsemi.
Rectifiers are components used to regulate power in such equipment as computers and automobiles. In the past two years Diodes has been plagued by problems with a subsidiary in New England. Company officials say those problems are largely responsible for its losses.
The controversy over the stock sale is the latest in a series of disputes between Diodes and Rectron over the past two years.
Diodes, which once did more than 90% of its business selling Rectron parts, accused Rectron in 1985 of breaking an exclusive sales agreement by selling to its competitors, Lloyd said.
The two companies severed many of their ties, with Diodes issuing Rectron stock, bonds and refunding some inventory to pay bills owed Rectron.
Lloyd now questions whether Rectron, in complaining about the stock sale, is acting in the best interest of shareholders, or if the dispute stems from the bad blood between the two companies.
“Rectron is a competitor of ours,” Lloyd said. “We don’t know what their intention is--whether or not it is as a shareholder and bondholder or whether it is as competitor.”
The stock sales were approved at a special shareholders’ meeting last month.
