U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-25844
TAITRON COMPONENTS INCORPORATED
(Exact Name of Small Business Issuer as Specified in Its Charter)
CALIFORNIA 95-4249240
(State Or Other Jurisdiction of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
25202 ANZA DRIVE
SANTA CLARITA, CALIFORNIA 91355
(Address Of Principal Executive Offices)
(805) 257-6060
(Issuer's Telephone Number, Including Area Code)
NONE
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--------- ---------
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class A Common Stock, $.001 par value, 6,167,341 shares outstanding as of
April 30, 1996
Class B Common Stock, $.001 par value, 762,612 shares outstanding as of April
30, 1996
Transitional Small Business Disclosure Format (check one)
YES NO X
--------- ---------
TABLE OF CONTENTS
ITEM PAGE NO.
---- -------
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 13
Item 6. Exhibits 13
Page 2 of 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TAITRON COMPONENTS INCORPORATED
Balance Sheets
(Dollars in Thousands)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 588 1,145
Trade accounts receivable, net 5,057 5,363
Inventory 38,242 27,752
Deferred income taxes 477 400
Prepaid expenses and other current assets 198 92
-------- ------
Total current assets 44,562 34,752
Property and equipment, net 1,713 1,627
Other assets 13 1
-------- ------
Total assets $ 46,288 36,380
======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 14,500 --
Trade accounts payable 4,376 12,862
Accrued liabilities 651 881
Current portion of long-term debt 17 16
Income taxes payable (23) 155
Total current liabilities 19,521 13,914
-------- ------
Long-term debt, less current portion 502 511
-------- ------
Convertible, subordinated note 3,000 --
-------- ------
Shareholders' equity:
Preferred stock, $.001 par value.
Authorized 5,000,000 shares; none
issued or outstanding -- --
Common stock, no par value.
Authorized 10,000,000 shares; none
issued and outstanding. -- --
Class A common stock, $.001 par value.
Authorized 20,000,000 shares; issued
and outstanding 6,167,341 shares 6 6
Class B common stock, $.001 par value.
Authorized, issued and outstanding
762,612 shares 1 1
Additional paid-in capital 14,531 14,531
Retained earnings 8,727 7,417
-------- ------
Total shareholders' equity 23,265 21,955
-------- ------
Total liabilities and
shareholders' equity $ 46,288 36,380
-------- ------
See accompanying notes to financial statements
Page 3 of 15
TAITRON COMPONENTS INCORPORATED
Statements of Earnings
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ----------------------------
1996 1995 1996 1995
------------------------------ ----------------------------
(Unaudited) (Unaudited)
Net sales $ 7,824 9,203 15,889 17,507
Cost of goods sold 5,402 6,024 10,790 11,587
------------------------------ ----------------------------
Gross profit 2,422 3,179 5,099 5,920
Selling, general and administrative 1,244 1,389 2,601 2,736
expenses
------------------------------ ----------------------------
Operating earnings 1,178 1,790 2,498 3,184
Interest expense, net 247 20 294 164
Other expense (income), net 12 6 16 (17)
------------------------------ ----------------------------
Earnings before income taxes 918 1,764 2,188 3,037
Income tax expense 369 721 878 1,238
------------------------------ ----------------------------
Net earnings $ 550 1,043 1,310 1,799
------------------------------ ----------------------------
Net earnings per share $ .08 .16 .19 .33
============================== ============================
Weighted average common shares
outstanding 6,998,000 6,491,000 6,985,000 5,451,000
============================== ============================
See accompanying notes to financial statements
Page 4 of 15
TAITRON COMPONENTS INCORPORATED
Statements of Cash Flows
(Dollars in thousands)
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995
----------- ---------
(Unaudited)
Cash flows from operating activities:
Net earnings $ 1,310 1,799
-------- ------
Adjustments to reconcile net earnings
to net cash used in operating
activities:
Depreciation and amortization 56 65
Deferred income taxes (77) (100)
Changes in:
Trade accounts receivable 306 (1,185)
Inventory (10,490) (1,712)
Prepaid expenses and other current (106) (64)
assets
Other assets (12) 2
Trade accounts payable (8,486) 1,987
Accrued liabilities (230) 133
Income taxes payable (178) (765)
-------- ------
Total adjustments (19,217) (1,640)
-------- ------
Net cash from (used) in
operating activities (17,907) 159
-------- ------
Cash flows from investing activities
acquisitions of property and equipment (142) (84)
-------- ------
Cash flows from financing activities:
Net borrowings on notes payable 14,500 (5,364)
Payments on long-term debt (8) (13)
Proceeds from issuance of Common Stock 11,305
Proceeds from issuance of Convertible,
subordinated note 3,000 --
-------- ------
Net cash provided by financing
activities 17,492 5,928
-------- ------
Net increase (decrease) in cash
and cash equivalents (557) 6,003
Cash and cash equivalents, beginning of
period 1,145 59
-------- ------
Cash and cash equivalents, end of period $ 588 6,062
======== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 301 250
======== ======
Cash paid for income taxes $ 1,134 2,102
======== ======
See accompanying notes to financial statements
Page 5 of 15
TAITRON COMPONENTS INCORPORATED
Notes to Financial Statements
(All amounts are unaudited except the balance sheet as of December 31, 1995)
(1) BASIS OF PRESENTATION
The unaudited financial statements have been prepared on the same basis as
the audited financial statements and, in the opinion of Management, reflect
all adjustments (consisting of normal recurring accruals) necessary for a
fair presentation for each of the periods presented. The results of
operations for interim periods are not necessarily indicative of results to
be achieved for full fiscal years.
In accordance with item 310(b) to form 10-QSB of Regulation S-B, the
accompanying financial statements and related footnotes have been condensed
and do not contain certain information that is included in the Company's
annual financial statements and footnotes thereto. For further information
refer to the financial statements and related footnotes for the year ended
December 31, 1995 and "MANAGEMENT'S DISCUSSION AND ANALYSIS", included in
the Company's Annual Report on Form 10-KSB for the year ended December 31,
1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized upon shipment of the merchandise. Reserves for sales
allowances and customer returns are established based upon historical
experience and management's estimates as shipments are made. Sales returns
for the quarters ended June 30, 1996 and 1995 aggregated $645,000 and
$315,000, respectively and for the six months ended June 30, 1996 and 1995
aggregated $977,000 and $683,000 respectively.
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The allowance for sales returns and doubtful accounts at June 30, 1996 and
December 31, 1995 aggregated $168,000 and $138,000, respectively.
INVENTORY
Inventory, consisting principally of products for resale, is stated at the
lower of cost or market, using the first-in, first-out method. The value
presented is net of valuation allowances of $623,000 and $447,000 at June
30, 1996 and December 31, 1995, respectively.
(3) NET EARNINGS PER SHARE
Net earnings per share is based on the weighted average number of common
shares outstanding as adjusted for the common stock reverse split described
in note 4, for all periods presented.
Pursuant to the requirements of the Securities and Exchange Commission,
common stock issued by the Company during the 12 months immediately
preceding the initial public offering (note 4) have been included in the
calculation of the weighted average common shares outstanding as if they
were outstanding for all periods presented using the treasury stock method.
(4) SHAREHOLDERS' EQUITY
In MarchE1995, the Board of Directors authorized the filing of a
registration statement for an initial public offering of the Company's
common stock. In that connection, the Company recorded a .891-for-1 reverse
stock split of its common stock outstanding at December 31, 1995.
Accordingly, all references to the number of shares outstanding have been
adjusted to give effect to the aforementioned reverse stock split.
Page 6 of 15
Additionally, the Company:
. Authorized the issuance of up to 5,000,000 shares of newly authorized
Preferred Stock, par value $.001 per share.
. Authorized the issuance of up to 20,000,000 shares of newly authorized
Class A Common Stock, par value $.001 per share. Each holder of Class A
Common Stock is entitled to one vote for each share held.
. Authorized the issuance of 762,612 shares of newly created Class B
Common Stock, par value $.001 per share. Each holder of Class B Common
Stock is entitled to ten votes for each share held.
. Reclassified all of the shares of the Company's common stock
outstanding at December 31, 1995 for an equal number of shares of
Class A Common Stock.
. Authorized the exchange of all Class A Common Stock (762,612 shares)
held by the Chief Executive Officer/Director for an equal number of
shares of Class B Common Stock. The Company effected the exchange in
March 1995.
On April 19, 1995, the Company sold 2,530,000 shares of Class A Common Stock
at $5.25 per share in connection with its initial public offering. The net
proceeds from this offering aggregated approximately $11.3 million. In
addition, as additional underwriting compensation and finders fee, the
company issued warrants exercisable over a period of four years commencing
April 19, 1996 to purchase up to 220,000 shares of Class A Common Stock at
$6.30, which is 120% of the initial public offering price.
(5) STOCK INCENTIVE PLAN
In March 1995, the Company and its shareholders established the 1995 Stock
Incentive Plan expiring in March 2005. In April 1995, the Company granted
119,000 ten-year options to purchase shares of the Company's Class A Common
Stock at $5.25 per share. Additionally, in June 1995, the Company granted
226,500 ten-year options to purchase shares of the Company's Class A Common
Stock at $7.13 per share. The options vest ratably over three years
commencing one year from the date of grant.
Also, in April 1995, the Company granted 6,600 stock appreciation rights to
certain employees. The exercise price of each right is $5.25.
(6) INCOME TAXES
Income taxes were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by Management.
(7) NOTES PAYABLE
In June 1995, the Company entered into unsecured revolving line of credit
agreement which provided the Company up to $10 million for operating
purposes and up to an additional $5 million for business acquisition
purposes. The $10 million line of credit expires in June 1997.
Due to the need for funds to finance recent opportunistic purchases of
inventory and the upcoming acquisition of a computer system, the Company
entered into an amendment to its line of credit agreement on March 30, 1996,
which converted the $5 million business acquisition facility into a $5
million revolving line of credit, which reduces to $2.5 million on November
1, 1996 and matures on January 2, 1997. This revolving line of credit bears
interest at the same rates as those under the $10 million facility. In
connection with this amendment, the bank required that the Company secure
both credit facilities with substantially all of the Company's assets.
Additionally, as part of this amendment, the Company entered into a $2
million letter of credit facility.
At June 30, 1996 there was $14.5 million outstanding under the $10 million
and $5 million revolving lines of credit.
(8) CONVERTIBLE SUBORDINATED NOTE PAYABLE
In May 1996, the Company issued a five year Convertible, Subordinated Note
(the Note)for $3,000,000, at 8% simple interest per annum. The Note is
convertible into the Company's Class A Common Stock at the conversion price
of $5.25 per share. These securities have not been registered under the
Securities Act of
Page 7 of 15
1933, as amended (the Act), in the belief that the securities are exempt
from such registration under Regulation S of the Act.
Interest is payable annually, on each of the Note's anniversary date, and
the principal is due May 18, 2001.
Page 8 of 15
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Results of Operations
The Company distributes a wide variety of transistors, diodes and other
semiconductors and optoelectronic devices to other electronic distributors and
to original equipment manufacturers who incorporate them in their products.
The following table sets forth, for the periods indicated, certain operating
amounts and ratios as a percentage of net sales.
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
---------------------------------------------------
(Dollars in thousands) 1996 1995 1996 1995
- ---------------------- ---------------------------------------------------
Net sales $7,824 9,203 $15,889 17,507
Cost of goods sold 5,402 6,024 10,790 11,587
Gross profit 2,422 3,179 5,099 5,920
% of net sales 31.0.% 34.5% 32.1% 33.8%
Selling, general and administrative 1,244 1,389 2,601 2,736
expenses
% of net sales 15.9% 15.1% 16.4% 15.6%
Operating earnings 1,178 1,790 2,498 3,184
% of net sales 15.0% 19.5% 15.7% 18.2%
Net earnings 550 1,043 1,310 1,799
% of net sales 7.0% 11.3% 8.2% 10.3%
Page 9 of 15
The year 1995 was exceptionally good for Taitron and other discrete
suppliers. For most of 1995, the demand for discrete semiconductors, in general,
was greater than the supply. This intense competition for the available supply
of discrete semiconductors pushed the prices higher than in normal market
conditions. The Company, from time to time, had to decline some sales because
of the limited supply of certain of these products.
Shortages in 1995 created demands resulting in excess inventories at end-
users, distributors and retailers. In the first half of 1996, the majority of
Taitron's customers have been struggling with inventory adjustments and
corrections. To help customers readjust their inventories, Taitron
strategically decided to accept more returns and order cancellations than it
normally would.
To help suppliers and maintain Taitron's long term partnership, the Company
decided to increase inventory levels and intensify its long standing purchasing
strategy by making opportunistic purchases of suppliers' uncommitted capacity,
at favorable pricing.
As a result the Company's inventory has increased significantly, during the
first two quarters of 1996, leading to the leasing of additional warehouse
space. This strategy will posture the Company to be price competitive, while
still maintaining acceptable profit margins.
The Company believes, that these strategies with customers and suppliers
will benefit the Company in the long run. However, there can be no assurance
that this will happen.
Three Month Period Ended June 30, 1996 Compared To The Three Month Period Ended
June 30, 1995
Net sales for the three months ended June 30, 1996 were $7,824,000,
compared with net sales for the three months ended June 30, 1995 of $9,203,000,
a decrease of $1,379,,000 or 15.0%. This 1996 sales decrease was attributable
to a decline in domestic volumes of $1,008,000. Price reductions accounted for
approximately $325,000 of the decrease in net sales.
Cost of goods sold decreased by $622,000 to $5,402,000 for the three month
period ended June 30, 1996, a decrease of 10.3% from the three month period
ended June 30, 1995. Gross profits decreased by $757,000 to $2,422,000 for the
three months ended June 30, 1996 from $3,179,000 for the same period in 1995,
and decreased as a percentage of net sales to 31.0% from 34.5%. Cost of goods
sold as a percentage of net sales was 69.0% in the second quarter of 1996, an
increase from 65.5% in the second quarter of 1995.
Selling, general and administrative expenses decreased by $145,000 or 10.5%
for the second quarter of 1996 compared to the same period of 1995. These
costs, as a percentage of net sales, increased slightly to 15.9% for the three
months ended June 30, 1996 from 15.1% for the three months ended June 30, 1995.
Operating earnings decreased by $612,000 or 34.2% between the three month
periods ended June 30, 1996 and 1995, and decreased as a percentage of sales to
15.0% to 19.5%.
Interest expense, net of interest income, for the three months ended June
30, 1996 increased $227,000 compared to the three months ended June 30, 1995.
This increase is due primarily to increased borrowings during the second quarter
of 1996 compared to the second quarter of 1995.
Income taxes were $369,000 in the second quarter of 1996, representing an
effective tax rate of 40.2%, compared to $721,000 for the second quarter of
1995, an effective tax rate of 40.9%.
The Company had net earnings of $550,000 for the second quarter ended June
30, 1996 as compared with net earnings of $1,043,000 for the second quarter
ended June 30, 1995, an decrease of $493,000 or 47.3% for reasons discussed
above. Net earnings as a percentage of net sales decreased to 7.0% from 11.3%.
Page 10 of 15
Six Month Period Ended June 30, 1996 Compared To The Six Month Period Ended June
30, 1995.
Net sales for the six months ended June 30, 1996 were $15,889,000, compared
with the six months ended June 30, 1995 of $17,507 ,000, a decrease of
$1,618,000 or 9.2%. This 1996 sales decrease was attributable to a decline in
domestic volumes of approximately $1,333,000. Price reductions accounted for
approximately $400,000 of the decrease in net sales. A decrease in export sales
of $540,000 also contributed to the decline in net sales. These decreases were
offset by a net increase in sales to new customers of approximately $655,000.
Cost of goods sold decreased by $797,000 to $10,790,000 for the six month
period ended June 30, 1996, a decrease of 6.9% from the six month period ended
June 30, 1995. Gross profits decreased by $821,000 to $5,099,000 for the six
months ended June 30, 1996 from $5,920,000 for the same period in 1995, and
decreased as a percentage of net sales to 32.1% from 33.8%. Cost of net sales,
as a percentage of sales was 67.9% in the first six months of 1996, and 66.2% in
the same period of 1995.
Selling, general and administrative expenses decreased by $135,000 or 4.9%
between the six months of 1996 and the same period of 1995. These costs, as a
percentage of net sales, were 16.4% for the six months ended June 30, 1996 and
15.6% for the six months ended June 30, 1995 .
Earnings from operations decreased by $685,000 or 21.5% between the six
months periods ended June 30, 1996 and 1995, and decreased as a percentage of
net sales to 15.7% from 18.2%.
Interest expense, net of interest income, for the six months ended June 30,
1996 increased $130,000 compared to the six months ended June 30, 1995. This
increase is due primarily to increased borrowings during the first half of 1996
compared to the first half of 1995.
Other expenses, net of other income, increased $33,000 between the six
month periods ended June 30, 1996 and 1995.
Income taxes were $878,000 in the first six months of 1996, representing an
effective tax rate of 40.1%, compared to $1,237,000 for the first six months of
1995, an effective tax rate of 40.8%.
The Company had net earnings of $1,310,000 for the six months ended June
30, 1996 as compared with net earnings of $1,799,000 for the six months ended
June 30, 1995, a decrease of $489,000 or 27.2% for reasons discussed above. Net
earnings as a percentage of net sales decreased to 8.2% from 10.3%.
Liquidity and Capital Resources
Since 1993, the Company has satisfied its liquidity requirements
principally through cash generated from operations, short-term commercial loans,
a convertible subordinated note and the sale of equity securities, including its
initial public offering in April 1995. The Company's cash flows provided by
(used in) operating, investing and financing activities for the six months ended
June 30, 1996 and 1995 were as follows:
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
----------- ----------
(In thousands)
Operating activities................. $(17,907) 159
Investing activities................. (142) (83)
Financing activities................. 17,492 5,927
Page 11 of 15
Since early 1995, as sales and earnings before income taxes increased, the
Company's cash requirements for operating activities have increased in order to
finance significantly higher levels of inventory and accounts receivable. In
addition, in positioning itself as a "discrete semiconductor superstore," the
Company has been required to significantly increase its inventory levels. As a
consequence, inventory has grown from $27.8 million at December 31, 1995 to
$38.2 million at June 30, 1996. Management believes that current inventory
levels are more than adequate to meet the needs of its customers under current
market conditions. A decrease of inventory levels was planned during the second
half of 1996 and no additional increase is planned until mid to late 1997.
The discrete semiconductor products distributed by the Company are mature
products, used in a wide range of commercial and industrial products and
industries. As a result, the Company has never experienced any material amounts
of product obsolescence. The Company also attempts to control its inventory
risks by matching large customer orders with simultaneous orders to suppliers.
Nonetheless, the high levels of inventory carried by the Company increase the
risks of price fluctuations and product obsolescence.
Investment activities in 1996 and 1995 consisted of the purchase of
property and equipment, principally computer equipment. The Company expects to
invest about $400,000 over the next four years in hardware and software for a
new fully integrated information system.
On April 19, 1995, the Company completed its initial public offering of
2,530,000 shares of its Class A Common Stock. The net proceeds of approximately
$11.3 million were used during 1995 to retire bank debt in the amount of $5.4
million, to repay $670,000 in long-term mortgage debt, to expand inventory and
for general corporate purposes.
As of June 30, 1996, the Company's unused sources of funds consisted of
approximately $1.1 million in cash and borrowing capacity under the Company's
$10 million and $5 million revolving lines of credit, both of which are provided
by Union Bank and expire at various dates in late 1996 through mid 1997 (see
note 7 in Notes to Financial Statements). The agreement governing these
facilities contains covenants that impose limitations on the Company, and
requires the Company to be in compliance with certain financial ratios. If the
Company fails to comply with the covenants contained in the agreement, the bank
may be able to accelerate the maturity of the indebtedness. As of June 30,
1996, the Company was in compliance with the required financial ratios and
covenants. Additionally, both lines of credit are secured by substantially all
of the Company's assets, other than real property.
In May 1996, the Company issued a five year Subordinated Convertible Note
(the Note) for $3,000,000, at 8% simple interest per annum. The Note is
convertible into the Company's Class A Common Stock at the conversion price of
$5.25 per share. These securities have not been registered under the Securities
Act of 1933, as amended (the Act), in the belief that the securities are exempt
from such registration under Regulation S of the Act. Interest is payable
annually, on each of the Note's anniversary date, and the principal is due May
18, 2001.
The Company believes that funds generated from operations, the amended bank
revolving lines of credit and the convertible subordinated note will be
sufficient to finance its working capital and capital expenditure requirements
for the foreseeable future.
Page 12 of 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Convertible Subordinated Note Agreement, dated May 18, 1996, by and
between the Registrant and Tenrich Holdings.
10.2 Lease Agreement, dated May 29, 1996, by and between Scott Valencia
Property Company as Lessor and Taitron Components Incorporated, as
Lessee for property located at 27827 Ave. Scott, Santa Clarita,
California, 91355.
(b) Reports on Form 8-K:
None
Page 13 of 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TAITRON COMPONENTS INCORPORATED
Date: August 12, 1996 By: /s/ David M. Turner
-------------------
David M. Turner,
Chief Financial Officer
(Principal Financial Officer)
(Chief Accounting Officer)
Page 14 of 15
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
10.1 Convertible Subordinated Note Agreement, dated May 18, 1996,
by and between the Registrant and Tenrich Holdings.
10.2 Lease Agreement, dated May 29, 1996, by and between Scott
Valencia Property Company as Lessor and Taitron Components
Incorporated, as Lessee for property located at 27827 Ave.
Scott, Santa Clarita, California, 91355.
Page 15 of 15