UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-25844
TAITRON COMPONENTS INCORPORATED
(Name of Registrant as specified in its charter)
California 95-4249240
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
28040 West Harrison Parkway
Valencia, California 91355-4162
(Address of Principal Executive Offices)
(661) 257-6060
Registrant's telephone number, including area code:
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Class A Common Stock, par value $.001 per share
(Title of each class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
-
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Approximate aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 2001 was $7.3 million.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding on February 28, 2001
- --------------------------------------- --------------------------------
Class A Common Stock, $.001 par value 4,956,970
Class B Common Stock, $.001 par value 762,612
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement relating to Registrant's
Annual Meeting of Shareholders scheduled to be held on June 1, 2001 are
incorporated by reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS.
For a discussion of certain material factors which may affect the Company,
see "BUSINESS - Cautionary Statements and Risk Factors" commencing on page 9 of
this report.
General
Taitron Components Incorporated ("Taitron" or the "Company") is a "discrete
components superstore," which distributes a wide variety of transistors, diodes
and other discrete semiconductors, optoelectronic devices and passive components
to other electronic distributors, original equipment manufacturers (OEMs) and to
contract electronic manufacturers (CEMs) who incorporate these devices in their
products. In order to meet the rapid delivery requirements of its customers,
the Company maintains a significant inventory of discrete components. At
December 31, 2000, the Company's inventory consisted of over 1.6 billion
components. The Company distributes over 13,000 different products manufactured
by more than 75 different suppliers. The Company's per unit sales price of
components for the net sales made during the year ended December 31, 2000
averaged approximately 1.8 cents each.
Discrete semiconductors are basic electronic building blocks. One or more
different types of discrete semiconductors generally are found in the electronic
or power supply circuitry of such diverse products as automobiles, televisions,
radios, telephones, computers, medical equipment, airplanes, industrial robotics
and household appliances. The term "discrete" is used to differentiate those
single function semiconductor products which are packaged alone, such as
transistors or diodes, from those which are "integrated" into microchips and
other integrated circuit devices.
The United States electronics distribution industry is composed of national
distributors (and international distributors), as well as regional and local
distributors. Electronics distributors market numerous products, including
active components (such as transistors, microprocessors and integrated
circuits), passive components (such as capacitors and resistors), and
electromechanical, interconnect and computer products. The Company focuses its
efforts almost exclusively on the distribution of discrete semiconductors,
optoelectronic devices and passive components, a small subset of the component
market. In 2000, Electronic Buyers News ranked the Company 48th among the top
50 distributors and 46/th/ for distribution of discrete semiconductors based
upon 1999 sales in North America. The largest single distributor reported sales
of over $6.7 billion. Of this magazine's top 50 electronics distributors, the
Company believes that it is the only distributor which concentrates its efforts
principally on the discrete semiconductor market.
The Company's "superstore" strategy includes carrying inventory with
quality (name brand), quantities and varieties. Some suppliers have given the
Company the exclusive right for selling all or part of their products in the
United States and positioned the Company to be the master distributor of their
product lines. In 2000, approximately 44% of the Company's sales went to other
distributors.
The Company intends to continue to grow by increasing its sales to existing
customers through further expansion of the number of different types of discrete
component and other non-integrated circuit components in its inventory and by
attracting additional CEMs, OEMs and electronics distributor customers. In
addition to its' own sales force, the Company sells its products through a
national network of independent sales representatives.
In 2000, the Company invested in interior improvements to our new 55,000
square foot warehouse and headquarters located in Valencia, new outside sales
offices in Illinois and New England, computer hardware and software enhancements
and continued upgrades of the Company's integrated real-time information system
and on-line query system. Management believes these investments will increase
the Company's efficiency, improve inventory turns and eventually reduce
operating cost.
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Discrete Semiconductors
Semiconductors can be broadly divided into two categories - discrete
semiconductors, including transistors, diodes, rectifiers and bridges, which are
packaged individually to perform a single or limited function, and integrated
circuits, such as microprocessors and other "chips," which can contain from a
few to as many as several million transistors and other elements in a single
package, and usually are designed to perform complex tasks.
While integrated circuits, such as microprocessor chips, have garnered more
public exposure during the past several years, discrete semiconductors, the
ancestral root of integrated circuits, have been a core element of electric
equipment for more than 30 years. Discrete semiconductors are found in most
consumer, industrial and military electrical and electronic applications.
Discrete semiconductors represent only a small subset of the different
types of semiconductors currently available. Discrete semiconductors are
generally more mature products with a more predictable demand, more stable
pricing and more constant sourcing than other products in the semiconductor
industry, and are thus less susceptible to technological obsolescence than
integrated circuits. The Company believes that the market for discrete
semiconductors is growing, although at a slower pace than the market for
semiconductors in general. This could in part be due to the fact that OEMs are
designing products which utilize integrated circuits in place of discrete
semiconductors.
Optoelectronic Devices and Passive Components
The Company offers optoelectronic devices such as LED's, infrared sensors
and opto couplers, along with passive devices, such as resistors, capacitors and
inductors which are electronic components manufactured with non-semiconductor
materials. The Company believes that optoelectronic devices and passive
components can be marketed through existing channels, which in turn will
reinforce the Company's current relationship with its customers. Sales of
optoelectronic devices were $1,782,000, $1,761,000 and $1,972,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. Sales of passive
components during 2000, 1999 and 1998 were $7,165,000, $1,976,000 and
$1,046,000, respectively. During 2000, the Company purchased inventory of
$8,017,000 and $1,034,000 of passive and optoelectronic components,
respectively, to facilitate planned increases in sales of these components in
the future. This is a forward looking statement and the Company cannot
guarantee that sales of passive and optoelectronic components will increase in
the future.
Electronic Distribution Channels
Electronic component manufacturers ("suppliers") sell components directly
to CEMs and OEMs, as well as to their distributors. The practice among the
major suppliers is generally to focus their direct selling efforts on larger
volume customers, while utilizing distributors to reach medium and smaller sized
CEMs and OEMs, as well as smaller distributors. Many suppliers consider
electronic distributors to be an integral part of their businesses. As a
stocking, marketing and financial intermediary, the distributor relieves its
suppliers of a portion of their costs and personnel associated with stocking and
selling products, including otherwise sizable investments in finished goods
inventories and accounts receivable. By having geographically dispersed selling
and delivery capabilities, distributors are often able to serve smaller and
medium sized companies more effectively and economically than can the supplier.
Electronic distributors are also important to CEMs and OEMs. CEMs and OEMs
frequently place orders which are of insufficient size to be placed directly
with the suppliers or require delivery schedules not available from them.
Distributors offer product availability, selection and more rapid and flexible
delivery schedules keyed to meet the requirements of their CEMs and OEM
customers. They also often rely upon electronic distributors to provide timely,
knowledgeable access to electronic components.
There is also pressure on both the suppliers, CEMs and OEMs to maintain
small inventories. Inventory is costly to maintain and thus suppliers desire to
ship finished goods as soon as such goods are manufactured. CEMs and OEMs
typically demand "just in time" delivery -- receipt of their requirements
immediately prior to the time when the components are to be used. Distributors
fill this niche.
Most large distributors tend to be broad line distributors, carrying
various different categories of electronic products, and usually focus their
resources on the fastest selling products in each category they distribute. Of
the top 50 electronics distributors reported by Electronic Buyers News, the
Company believes that only Taitron and three other companies focused a
significant portion of their distribution efforts on discrete semiconductors.
However, the Company believes that the three other companies concentrated their
selling efforts on other semiconductor components, such as integrated circuits,
microprocessors and memory components. The Company believes that it was the
only distributor which concentrated its efforts almost exclusively on the
discrete semiconductor market.
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Strategy
Since the Company was founded in 1989, its goal has been to become one of
the leading distributors of discrete semiconductors in North America. The
Company initially gained market share by concentrating on selling discrete
semiconductors at competitive prices. The Company has marketed itself as a
"discrete components superstore," whose in-depth focus on discrete
semiconductors and extensive inventory of products is of benefit to both
suppliers and OEMs. In creating the "superstore" strategy, the Company has
attempted to develop a more efficient link between suppliers and the small to
medium sized OEMs and distributors which generally do not have direct access to
large suppliers and must purchase exclusively through distributors. The primary
aspects of the Company's strategy include:
Inventory. The Company believes that its most important competitive
advantage is the depth of its inventory. Unlike other distributors who
carry only the best-selling discretes, the Company's entire inventory
consists of a wide range of discrete semiconductors, optoelectronic devices
and passive components. Due to manufacturers' lead times ranging from
eight weeks to twenty-four weeks, the Company generally attempts to
maintain approximately a ten month supply of inventory of most products in
its catalogs. Currently, the Company's inventory is higher than this goal
as a result of its decision to maintain inventory levels and intensify its
long standing purchasing strategy by making opportunistic purchases of
suppliers' uncommitted capacity, at favorable pricing. With immediate
availability of a wide selection of products and brands, the Company
attempts to function more like a wholesale superstore than a franchised
distributor. See Part II Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS -
Liquidity and Capital Resources."
Strategic Purchasing. When the opportunity presents itself, the
Company makes opportunistic purchases of a supplier's uncommitted inventory
in order to take advantage of favorable pricing. The Company also makes
significant purchases in advance in an attempt to maintain consistent
inventory levels and meet anticipated orders. When possible, the Company
attempts to control its inventory risks by matching large customer orders
with simultaneous purchases from suppliers. See "BUSINESS - Cautionary
Statements and Risk Factors - Need to Maintain Large Inventory; Price
Fluctuations."
Master Distributor. The Company distributes electronic components to
other nationwide distributors when their inventory cannot fulfill immediate
customer orders. The Company, with its high volume, low cost inventory
acts as a master distributor for certain of its component suppliers. The
Company estimates that approximately 44% of its sales are a direct result
of being a master distributor.
Franchised Distributors. In 1998, the Company developed a Franchised
Distributor Agreement with its preferred distributors to promote a much
stronger business relationship. Under this type of agreement, Taitron's
Franchised Distributors provide point of sales ("POS") reports which
identifies the distributor's customers and the Company provides the
distributors price protection, stock rotations and return privileges among
other benefits. By the end of 2000, over 60 Preferred Distributors signed
the Franchised Agreement.
Relationships with Suppliers. Unlike most other distributors, the
Company does not always demand stock rotation and price protection
privileges which are generally available from its suppliers. Stock rotation
and price protection privileges are beneficial to distributors because they
enable distributors to reduce inventory cost or rotate inventory they are
unable to sell, thus significantly reducing the risks and costs associated
with over-purchasing or obsolescence. Price protection mitigates the risks
of falling prices of components held in inventory. The Company has
distribution agreements with certain suppliers that provide the Company
with stock rotation and price protection privileges. These distribution
agreements also provide stock buy back terms where suppliers will buy back
inventory from the distributor if the supplier terminates the distribution
agreement. The Company believes that it has been able to gain a
competitive advantage over other distributors by typically foregoing or not
demanding these privileges (and thus assuming the majority of risk for
over-purchasing, product obsolescence and the risk for price fluctuations)
in order to obtain better pricing. The Company has operated an office in
Taipei, Taiwan, since 1997. This office focuses on product procurement and
strengthening relationships with suppliers in the Far East. See "BUSINESS
- Cautionary Statements and Risk Factors - Need to Maintain Large
Inventory; Price Fluctuations" and "BUSINESS -Suppliers."
Reliable One Stop Shopping. The Company offers a large selection of
different name-brand discrete semiconductors, optoelectronic devices and
passive components at competitive prices which reduces significantly the
number of suppliers a buyer must purchase from. The Company provides
customers with catalogs that are specially designed to aid customers in
quickly locating the types and
4
brands of products that they need. Because of its large inventory, the
Company can often fill a significant portion, or all, of a customer's order
from stock. Historically, the Company has been able to fill most of its
customers' orders within 24 hours and in compliance with their requested
delivery schedules. The Company also follows a lenient policy of "no
hassle" returns. Under this policy, if a customer can demonstrate an
acceptable cause for a return, it may generally return products to the
Company for a reasonable period of time after purchase, without penalty or
restocking charge. See "BUSINESS - Cautionary Statements and Risk Factors -
Product Returns," Part II Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS -
Results of Operations," "BUSINESS - Customers" and "BUSINESS - Sales and
Marketing."
Support Smaller Distributors,CEMs and OEMs. The Company focuses its
marketing efforts on smaller contract manufacturers, distributors, CEMs and
OEMs who generally do not have direct access to suppliers because of their
limited purchasing volumes and, therefore, usually have to purchase their
requirements from large distributors, often with substantial markups.
During the last few years, there has been substantial consolidations within
the electronics distribution industry creating very large distributors.
This trend to consolidate creates opportunities for the Company since
suppliers do not usually direct sales efforts toward smaller or medium
sized CEMs and OEMs and often the larger distributors no longer adequately
service smaller customers. The Company believes that its strategic
purchasing policies enable the Company to provide medium and smaller CEMs
and OEMs and distributors competitive prices while still maintaining
adequate profit margins. The Company, generally, does not impose minimum
order limitations on its customers, which enables smaller customers to
avoid the costs of carrying large inventories. The Company also offers its
customers a limited range of value added services such as cutting and
forming, quality monitoring and product source tracing. The Company
intends to continue to grow through further expansion of the number of
different types and brands of products in its inventory and by continuing
to expand its direct sales force geographically to attract additional
electronics distributors, CEMs and OEMs. See "BUSINESS - Sales and
Marketing."
Products
The Company markets a wide variety of discrete semiconductors, including
rectifiers (or power diodes), diodes, transistors, optoelectronic devices and
passive components. The Company attempts to maintain at least ten months of
inventory for each component in its catalogs. At December 31, 2000, the
Company's inventory contained over 1.6 billion separate components and over
13,000 distinct products. In 2000, the average per unit sales price of the
products sold by the Company was approximately 1.8 cents.
In 2000, the Company purchased products from over 75 suppliers, including
Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation, General
Semiconductor Inc., Samsung Electro-Mechanics Co. and Vishay Americas Inc. See
"BUSINESS - Cautionary Statements and Risk Factors - Suppliers," "BUSINESS -
Customers" and "BUSINESS - Suppliers."
Discretes are categorized based on various factors, including capacity,
construction, fabrication and function. The products sold by the Company
include:
Rectifiers. Rectifiers are generally utilized in power supply and
other high power applications to convert alternating current to direct
current. The Company sells a wide variety of rectifiers, including
silicon rectifiers, fast efficient rectifiers, schottky rectifiers, glass
passivated rectifiers, fast efficient glass passivated rectifiers, silicon
bridge rectifiers, fast recovery, glass passivated bridge rectifiers and
controlled avalanche bridge rectifiers.
Diodes. Diodes are two-lead semiconductors that only allow electric
current to flow in one direction. They are used in a variety of electronic
applications, including signal processing and direction of current.
Diodes sold by the Company include switching diodes, varistor diodes,
germanium diodes and zener diodes.
Transistors. Transistors are used in, among other applications, the
processing or amplification of electric current and electronic signals,
including data, television, sound and power. The Company currently stocks
many types of transistors, including small signal transistors, power
transistors and power MOSFETS.
Optoelectronic Devices. Optoelectronic devices are solid state
products which provide light displays (such as LEDs), optical links and
fiber-optic signal coupling. Applications vary from digital
5
displays on consumer video equipment to fiberoptic transmission of computer
signals to pattern sensing for regulation, such as is found in automobile
cruise controls. Optoelectronic devices are not generally classified as
discrete semiconductors or integrated circuits, although they incorporate
semiconductor materials.
Passive Components. Passive components are a type of electronic
component manufactured with non-semiconductor materials. Passive
components such as resistors, capacitors and inductors are used in
electronic circuitry but they do not provide amplification. Passive
components are basic electronic components found in virtually all
electronic products.
The products distributed by the Company are mature products that are used
in a wide range of commercial and industrial products and industries. The
Company believes that a majority of the products it distributes are used in
applications where integrated circuits are not viable alternatives. As a
result, the Company has never experienced any material amount of product
obsolescence, and does not expect to experience any material amount of product
obsolescence in the foreseeable future. This is a forward looking statement and,
as such, is subject to uncertainties. There can be no assurance that over time
the functions for which discretes are used will not eventually be displaced by
integrated circuits.
The Company conducts limited quality monitoring of its products. The
Company purchases products from reliable manufacturers who provide warranties
for their products that are common in the industry. Also, during the last
quarter of 2000, the Company obtained ISO 9002 certification.
The Company's distribution originates from a 55,000 square foot owned
facility located in Valencia. The newly purchased facility was fully
operational as of December 31, 2000. The Company utilizes a computerized
inventory control/tracking system which enables the Company to quickly access
its inventory levels and trace product shipments. See Item 2 - "PROPERTIES."
Customers
The Company markets its products to distributors, CEMs and OEMs. The
Company believes that its strategic purchasing policies allow the Company to
provide medium and smaller distributors, CEMs and OEMs competitive prices while
still maintaining an adequate profit margin. As a rule, the Company does not
impose minimum order limitations on its customers, which enables smaller
customers to avoid the cost of carrying large inventories. See "BUSINESS -
Strategy."
During 2000, the Company distributed its products to over 1,600 customers.
For the years ended December 31, 2000, 1999 and 1998, no one customer accounted
for more than 5.9%, 4.2% and 3.6%, respectively, of the Company's net sales.
The Company does not believe that the loss of any one customer would have a
material adverse effect on its business.
Historically, distributors have accounted for a much larger percentage of
the Company's net sales than CEMs and OEMs. However, as the Company has
expanded its customer base, the Company's customer mix has become more balanced,
with distributors representing approximately 44% and CEMs and OEMs representing
approximately 56% of the Company's net sales in 2000.
The Company historically has not required its distributor customers to
provide any point of sale reporting and therefore the Company does not know the
different industries which its products are sold by its distributor customers.
However, based on its sales to CEMs and OEMs, the Company believes that no one
industry accounted for a majority of the applications of the products sold in
2000, 1999 or 1998.
Taitron offers its customers with inventory support which includes carrying
inventory for their specific needs and providing free samples of the products
the Company distributes. The Company also offers its customers a limited range
of value added services, such as wire or lead cutting and bending for specific
applications, enhanced quality monitoring and product source tracing, but, to
date, these value added services have not been material to the Company's
business or results of operations.
The Company believes that exceptional customer service and customer
relations are key elements of its success, and trains its sales force to provide
prompt, efficient and courteous service to all customers. See "BUSINESS - Sales
and Marketing." The Company has the ability to ship most orders the same day
they are placed and, historically, most of its customers' orders have been
shipped within the requested delivery schedule.
6
As the Company's customers grow in size, the Company may lose its larger
customers to its suppliers and as the electronics distribution industry
consolidates some of the Company's customers may be acquired by competitors.
See "BUSINESS Cautionary Statements and Risk Factors - Competition."
Sales and Marketing
During 2000, the Company continued expanding its outside sales force by
opening additional sales offices in Illinois and New England. The Company's
outside sales personnel grew from 5 in 1998 to 13 in 1999 and to 15 in 2000. The
Company's inside sales department is divided into regional sales territories
throughout North America. The regional sales managers are responsible for
maintaining relationships and providing support to existing key CEMs and OEMs,
as well as Taitron's franchised distributors. The outside sales account
managers are also responsible for developing new CEM and OEM accounts, as well
as working locally with our independent sales representatives and franchised
distributors.
The Company also supplies products to National Distributors who share
franchised lines with Taitron. National Distributors usually have many office
locations throughout the United States and are among the "Electronic Buyers
News" Top 50 Distributors of the year. The Company services the National
Distributors by providing easy access to discrete products they choose not to
inventory, as well as supporting their needs in shortage inventory situations.
Sales to National Distributors were $1.4 million in 2000.
Salespeople are generally compensated by a combination of salary and
incentives based upon the sales growth and profits obtained from their sales.
The Company has recognized that there is a growing market for discrete
components in South America. To take advantage of this opportunity, Taitron
opened a branch office in Sao Paulo, Brazil in May 1995, and entered into a
joint venture in Mexico City, Mexico in September 1998. South American sales
were $594,000, $489,000 and $376,000 in 2000, 1999 and 1998, respectively.
Independent sales representatives have played an important role in
developing the Company's client base, especially with respect to OEMs. Many
OEMs want their suppliers to have a local presence and the Company's network of
independent sales representatives are responsive to these needs. Independent
sales representatives are primarily responsible for face-to-face meetings with
the Company's customers, and for developing new customers. Independent sales
representatives are each given responsibility for a specific geographical
territory. Historically, sales representatives were paid a commission of 5% on
all sales made in their territory, regardless of whether they were involved in
the sales process. Since 1998, sales representatives are no longer compensated
for sales made to non-franchised distributors. The Company believes that this
new commission policy re-directs independent sales representatives attention to
CEMs, OEMs and franchised distributors, thereby increasing the Company's market
share with end users. The Company and its independent sales representatives
also jointly advertise and participate in trade shows.
As of March 15, 2001, the Company's sales and marketing department
consisted of 19 employees, including 14 that are located outside of Valencia,
California, and the Company utilized 13 independent sales representatives to
develop new OEM customers and to provide a more direct link to existing OEM
customers.
The Company provides customers with catalogs that are specially designed to
aid customers in quickly finding the types and brands of discrete
semiconductors, passive and optoelectronic devices that they need.
To attract new customers, the Company has advertised in national industry
publications such as Electronic Buyer's News, EEM Local Sources, Electronic
Source Book, and, in Canada, Electronic Products and Technology. The Company
also participates in regional and national trade shows and jointly advertises
with suppliers and independent sales representatives.
Suppliers
The Company believes that it is important to develop and maintain good
relationships with its suppliers. Historically, the Company did not have long-
term supply, distribution or franchise agreements with its suppliers, but
instead cultivated strong working relationships with each of its suppliers.
However, since 1997 the Company has entered into franchise agreements with
certain of its suppliers. Such franchise agreements have terms from one to two
years. See "BUSINESS - Cautionary Statements and Risk Factors - Relationship
with Suppliers."
In order to facilitate good relationships with its suppliers, the Company
typically will carry a complete line of each supplier's discrete products. The
Company also supports its suppliers by increasing their visibility through
advertising and participation in regional and national trade shows. The Company
generally orders components far in advance, helping suppliers plan production.
Also, the Company has distribution agreements with certain suppliers whereby the
terms of the
7
agreement provides stock-rotation, price protection and stock buy back terms.
See "BUSINESS - Cautionary Statements and Risk Factors - Need to Maintain Large
Inventory; Price Fluctuations" and "BUSINESS - Strategy."
The Company purchases components from over 75 different suppliers,
including Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation,
General Semiconductor Inc., Samsung Electro-Mechanics Co. and Vishay Americas
Inc. The Company is continually attempting to build relationships with
suppliers and from time to time adds new suppliers in an attempt to provide its
customers with a better product mix. Also, the Company's relationships with
suppliers have been terminated from time to time. The possibility exists that
the loss of one or more supplier distribution relationships might have a
material adverse effect on the Company and its results of operations. See
"BUSINESS - Cautionary Statements and Risk Factors - Relationship with
Suppliers."
For the year ended December 31, 2000, the Company's four largest suppliers,
Fairchild Semiconductor Corporation, General Semiconductor Inc., Samsung
Electro-Mechanics Co., and Vishay Americas Inc. accounted for approximately 65%
of the Company's net purchases. However, the Company does not regard any one
supplier as essential to its operations, since equivalent replacements for most
of the products the Company markets are either available from one or more of the
Company's other suppliers or are available from various other sources at
competitive prices. The Company believes that, even if it loses its direct
relationship with a supplier, there exist alternative sources for a supplier's
products. No assurance can be given that the loss or a significant disruption
in the relationship with one or more of the Company's suppliers would not have a
material adverse effect on the Company's business and results of operations.
See "BUSINESS - Cautionary Statements and Risk Factors - Relationship with
Suppliers."
Competition
The Company operates in a highly competitive environment. The Company
faces competition from numerous local, regional and national distributors (both
in purchasing and selling inventory) and electronic component manufacturers,
including some of its own suppliers. Many of the Company's competitors are more
established and have greater name recognition and financial and marketing
resources than the Company. The Company believes that competition in the
electronic industry is based on breadth of product lines, product availability,
choice of suppliers, customer service, response time, competitive pricing and
product knowledge, as well as value-added services. The Company believes it
competes effectively with respect to breadth and availability of inventory,
response time, pricing and product knowledge. To the Company's knowledge, no
other national distributor focuses its business on discrete semiconductors to
the same extent as does the Company. Generally, large component manufacturers
and large distributors do not focus their internal selling efforts on small to
medium sized OEMs and distributors, which constitute the vast majority of the
Company's customers; however, as the Company's customers increase in size,
component manufacturers may find it cost effective to focus direct selling
efforts on those customers, which could result in the loss of customers or
decreased selling prices. See "BUSINESS - Cautionary Statements and Risk
Factors - Competition" and "BUSINESS - Electronic Distribution Channels."
Management Information Systems
The Company has made a significant investment in computer hardware,
software and personnel. The MIS department is responsible for software and
hardware upgrades, maintenance of current software and related databases, and
designing custom systems. The Company believes that its MIS department is
crucial to the Company's success and believes in continually upgrading its
hardware and software. To that end, during 2000 the Company upgraded its Oracle
Applications System which was originally acquired and fully implemented in 1998.
The Company believes that this system has the capabilities to serve the Company
for future anticipated needs including capabilities of networking with remote
locations. Also, during 2000, the Company created a new web site which allows
customers internet access to its inventory. The new web site also provides
users with other information about the Company.
Warehouse Management System
During 1998 through 2000, Taitron installed a Warehouse Management System which
greatly enhances the accuracy of quantity and location control of the inventory.
It also reduces potential errors in delivering components to customers. The
first phase of the Warehouse Management System was completed during the first
quarter of 2000. Custom software is being developed to complete the final phase
which is to link the system with the Company's Oracle Applications System. The
final phase is expected to be completed in the second quarter of 2001.
Foreign Trade Regulation
A large portion of the products distributed by the Company are manufactured
in the Far East, including Taiwan, Japan, China, South Korea, Thailand and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate
8
fluctuations, imposition of tariffs and import and export controls, and changes
in governmental policies, any of which could have a material adverse effect on
the Company's business and results of operations.
Many of the Company's suppliers have their manufacturing facilities in
countries whose economies continue to be volatile while recovering from recent
years of financial concerns. Although local currencies have stabilized, the US
dollar's strength compared with Asian currencies may further reduce exports to
Asia in the future. Sales to Asian customers were 4.4%, 1.1% and 4.3% of the
Company's total sales in 2000, 1999 and 1998, respectively. Conversely, the
Company believes that the weaker Asian currencies may actually benefit the
Company in the short-term by providing opportunities for the Company to purchase
products at lower prices.
From time to time, protectionist pressures have influenced U.S. trade
policy concerning the imposition of significant duties or other trade
restrictions upon foreign products. The Company cannot predict whether
additional U.S. Customs quotas, duties, taxes or other charges or restrictions
will be imposed upon the importation of foreign components in the future or what
effect any of these actions would have on its business, financial condition or
results of operations.
The ability to remain competitive with respect to the pricing of imported
components could be adversely affected by increases in tariffs or duties,
changes in trade treaties, strikes in air or sea transportation, and possible
future United States legislation with respect to pricing and import quotas on
products from foreign countries. For example, it is possible that political or
economic developments in China, or with respect to the United States'
relationship with China, could have an adverse effect on the Company's business.
The Company's ability to remain competitive could also be affected by other
governmental actions related to, among other things, anti-dumping legislation
and international currency fluctuations. While the Company does not believe
that any of these factors adversely impact its business at present, there can be
no assurance that these factors will not materially adversely affect the Company
in the future. Any significant disruption in the delivery of merchandise from
the Company's suppliers, substantially all of whom are foreign, could have a
material adverse impact on the Company's business and results of operations.
See "BUSINESS - Cautionary Statements and Risk Factors - Foreign Trade
Regulation."
Employees
At March 15, 2001, the Company had a total of 55 employees. None of the
Company's employees are covered by a collective bargaining agreement and the
Company considers its relations with its employees to be excellent.
Cautionary Statements and Risk Factors
Several of the matters discussed in this document contain forward looking
statements that involve risks and uncertainties. Factors associated with the
forward looking statements which could cause actual results to differ materially
from those projected or forecast in the statements appear below. In addition to
other information contained in this document, readers should carefully consider
the following cautionary statements and risk factors:
Dependence Upon Key Personnel. We are highly dependent upon the services
of Stewart Wang, our Chief Executive Officer and President. Our success to date
has been largely dependent upon the efforts and abilities of Mr. Wang and the
loss of Mr. Wang's services for any reason could have a material adverse effect
upon us. In addition, our work force includes executives and employees with
significant knowledge and experience in the electronics distribution industry.
Our future success will be strongly influenced by our ability to continue to
recruit, train and retain a skilled work force. While we believe that we would
be able to locate suitable replacements for our executives or other personnel if
their services were lost, there can be no assurance that we would be able to do
so on terms favorable to us. In particular, the hiring of a suitable
replacement for Mr. Wang could be very difficult. We have purchased and
currently intend to maintain a key-man life insurance policy on Mr. Wang's life
with benefits of $2,000,000 payable to us in the event of Mr. Wang's death. The
benefits received under this policy might not be sufficient to compensate us for
the loss of Mr. Wang's services should a suitable replacement not be employed.
Relationship with Suppliers. Typically, we do not have written long-term
supply or distribution agreements with any of our suppliers. Although we
believe that we have established close working relationships with our principal
suppliers, our success will depend, in large part, on maintaining these
relationships and developing new supplier relationships for our existing and
future product lines. Because of the lack of long-term contracts, there can be
no assurance that we will be able to maintain these relationships. However, we
believe that, even if we lose our direct relationship with a supplier, there
exists alternative sources for our products. No assurance can be given that the
loss or a significant disruption in the relationship with one or more of our
suppliers would not have a material adverse effect on our business and results
of operations.
9
Need to Maintain Large Inventory; Price Fluctuations. To adequately
service our customers, we believe that it is necessary to maintain a large
inventory of our product offerings and we generally attempt to maintain
approximately ten months inventory of most products in our catalogs. Our
inventory level is higher than this due to our decision to maintain inventory
levels and intensify our long standing purchasing strategy by making
opportunistic purchases of suppliers' uncommitted capacity, at favorable
pricing. If prices of components held in inventory by us decline or if new
technology is developed that displaces products distributed by us and held in
inventory, our business could be materially adversely affected.
Product Mix; Product Margins. Our gross profit margins in general have
decreased since 1995, principally due to a weaker product demand and competitive
pricing pressures within the electronics industry. Our gross profit margins are
subject to a number of factors, including product demand, our ability to
purchase inventory at favorable prices and our sales product mix, all of which
could adversely impact margins.
Availability of Components. The semiconductor component business has from
time to time experienced periods of extreme shortages in product supply,
generally as the result of demand exceeding available supply. When these
shortages occur, suppliers tend to either raise unit prices in order to reduce
order backlog or place their customers on "allocation," reducing the number of
units sold to each customer. While we believe that, due to the depth of our
inventory, we have not been adversely affected by past shortages in certain
discrete components, no assurance can be given that future shortages will not
adversely impact us.
Foreign Trade Regulation. A significant number of the products distributed
by us are manufactured in Taiwan, China, South Korea and the Philippines. The
purchase of goods manufactured in foreign countries is subject to a number of
risks, including economic disruptions, transportation delays and interruptions,
foreign exchange rate fluctuations, imposition of tariffs and import and export
controls and changes in governmental policies, any of which could have a
material adverse effect on our business and results of operations.
The ability to remain competitive with respect to the pricing of imported
components could be adversely affected by increases in tariffs or duties,
changes in trade treaties, strikes in air or sea transportation, and possible
future United States legislation with respect to pricing and import quotas on
products from foreign countries. For example, it is possible that political or
economic developments in China, or with respect to the United States'
relationship with China, could have an adverse effect on our business. Our
ability to remain competitive could also be affected by other governmental
actions related to, among other things, anti-dumping legislation and
international currency fluctuations. While we do not believe that any of these
factors adversely impact our business at present, there can be no assurance that
these factors will not materially adversely affect us in the future. Any
significant disruption in the delivery of merchandise from our suppliers,
substantially all of whom are foreign, could also have a material adverse impact
on our business and results of operations.
Management of Growth. Our ability to effectively manage future growth, if
any, will require us to continue to implement and improve our operational,
financial and management information systems and to train, motivate and manage a
larger number of employees. There can be no assurance that we will be able to
preserve the revenue growth experienced in prior years, continue our profitable
operations or manage future growth successfully. As an example, sales decreased
from 1995 to 1996 and then from 1997 to 1998 principally as a result of the soft
market demand for discrete semiconductors.
Competition. We face intense competition, both in our selling efforts and
purchasing efforts, from the significant number of companies that manufacture or
distribute discrete products. Many of these companies have substantially
greater assets and possess substantially greater financial and personnel
resources than us. Many competing distributors also carry product lines which
we do not carry. Generally, large component manufacturers and large
distributors do not focus their direct selling efforts on small to medium sized
OEMs and distributors, which constitute the vast majority of our customers.
However, as our customers increase in size, component manufacturers may find it
cost effective to focus direct selling efforts on those customers, which could
result in the loss of customers or decrease on profit margins. There can be no
assurance that we will be able to continue to compete effectively with existing
or potential competitors.
Control by Class B Common Stock Shareholder; Possible Depressive Effect on
the Price of the Class A Common Stock. Stewart Wang, our Chief Executive
Officer and President, beneficially owns all of our Class B Common Stock, which
carries ten votes per share, and he thus controls approximately 61% of the
voting power of our common stock. As a result, Mr. Wang is able to control us
and our operations, including the election of at least a majority of our Board
of Directors. Also, at any time while we have at least 800 shareholders who
beneficially own shares of our Common Stock,
10
our Articles of Incorporation provide for the automatic elimination of
cumulative voting, which would allow Mr. Wang to elect all of the Directors. The
disproportionate vote afforded the Class B Common Stock could also serve to
discourage potential acquirers from seeking to acquire control of us through the
purchase of the Class A Common Stock, which might have a depressive effect on
the price of the Class A Common Stock.
Product Returns. We maintain a "no hassle" return policy. On a case-by-
case basis, we accept returns of products from our customers, without restocking
charges, when they can demonstrate an acceptable cause for the return. Requests
by a distributor to return products purchased for its own inventory are
generally not included under this policy. We will also, on a case-by-case
basis, accept returns of products upon payment of a restocking fee, which
generally is set at 15% to 30% of the sales price. We will not accept returns of
any products which were special ordered by a customer, or which are otherwise
not generally included in our inventory. During the fiscal years ended December
31, 2000, 1999 and 1998, sales returns aggregated $631,000, $715,000 and
$1,128,000 or 1.9%, 2.4%, and 3.7% of net sales, respectively. Historically,
most allowable returns occur during the first two months following shipment.
While we maintain reserves for product returns which we consider to be adequate,
the possibility exists that we could experience returns in any period at a rate
significantly in excess of historical levels, which could materially and
adversely impact our results of operations for that period.
Cyclical Nature of Electronics Industry. The electronics distribution
industry has been affected historically by general economic downturns, which
have had an adverse economic effect upon manufacturers and end-users of discrete
components, as well as electronic distributors such as us. In addition, the
life-cycle of existing electronic products and the timing of new product
development and introduction can affect demand for electronic components. Any
downturns in the electronics distribution industry, or the electronics industry
in general, could adversely affect our business and results of operations.
No Earthquake Insurance. Our former principal executive offices are
located in Santa Clarita, California - an area which experienced significant
damage in the 1994 Northridge, California earthquake. During 1994, we spent
approximately $145,000 in repair costs and renovations to our facility resulting
from that earthquake, none of which were covered by insurance. We believe that
it is economically a better decision to self insure against any future
earthquake losses than to pay the expensive earthquake insurance premiums.
During 1999, we also purchased our new 55,000 square foot warehouse and
headquarters which is also located in Valencia, California. The newly purchased
facility is also self insured against future earthquake loss.
11
ITEM 2. PROPERTIES.
The Company's executive offices and warehouse facility, covering
approximately 55,000 square feet, are now located in Valencia, California. Upon
completion of interior improvements in the approximate amount of $1.0 million,
the Company moved into its new 55,000 square foot location in the fourth quarter
of 2000. The Company purchased the facility in 1999 for $3.3 million and is not
subject to any debt.
The Company still owns its previous warehouse facility, covering
approximately 23,191 feet, located in Santa Clarita, California. This property
subject to a mortgage held by a bank with an outstanding principal balance of
approximately $434,000 as of December 31, 2000 and due on December 1, 2013 (the
"Mortgage"). Pursuant to the Mortgage, the Company is obligated to make monthly
payments of $4,349, which includes interest at 6.359% per annum. As of March 15,
2001, the Company has entered into an agreement to lease this facility for three
years.
During 1998, the Company invested $519,000 in its Taiwan office,
principally for acquisition of office and warehouse space that is owned by the
Company and not subject to any debt.
During 1999 and 2000, the Company opened sales offices in Chandler,
Arizona; Hauppauge, New York; Orange County, California; Melbourne, Florida;
Marlborough, Massachussets; and Elgin, Illinois. Each office is approximately
1,000 to 2,800 square feet and accommodates between two to three sales
employees. Each of the leases are for a term of one to three years, all
expiring at different times during 2001 and 2002 with monthly rental expense
ranging from $500 to $2,500 per lease.
ITEM 3. LEGAL PROCEEDINGS.
In March 1999, the Company filed a lawsuit in Los Angeles Superior Court
against QT Optoelectronic ("QT")(formerly known as Questus Corporation), a
manufacturer of optoelectronic semiconductors. In October 2000, the Company
and QT entered into a confidential settlement agreement resolving all claims
asserted in the lawsuit. In accordance with the terms of the settlement
agreement, the Company dismissed the lawsuit with prejudice in November 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 2000.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 19, 1995, the Company's Class A Common Stock has been traded on
the Nasdaq National Market under the symbol "TAIT". The following table sets
forth the range of high and low sale prices per share for the Class A Common
Stock as quoted on the Nasdaq National Market, for the periods indicated
High Low
-------- --------
Year Ended December 31, 1998
First Quarter 3 1/8 2 1/8
Second Quarter 3 1/8 2 1/4
Third Quarter 3 1 11/16
Fourth Quarter 2 3/8 1 1/4
Year Ended December 31, 1999
First Quarter 1 15/16 1 1/8
Second Quarter 2 9/16 1 1/16
Third Quarter 3 3/4 2 1/8
Fourth Quarter 2 3/8 1 5/16
Year Ended December 31, 2000
First Quarter 5 1/2 1 13/16
Second Quarter 4 1/4 2 1/4
Third Quarter 8 21/32 3
Fourth Quarter 3 13/16 1 7/8
At February 28, 2001, there were approximately 100 holders of record of the
Company's Common Stock. The Company estimates that there are approximately
1,000 beneficial owners of its Class A Common stock.
The Company's Board of Directors is considering whether or not to pay
dividends. At this time, the Company does not plan to pay cash dividends. The
present policy of the Company is to retain earnings to finance the development
of its operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations; Liquidity and Capital Resources."
In November 1996, the Board of Directors approved a program to repurchase
up to 500,000 shares of its Class A common stock. In February 1998, September
1999 and September 2000 the Board of Directors again approved additional
repurchases of up to $1,500,000, $500,000 and $1,000,000, respectively, of the
Company's Class A common stock. As of February 28, 2001, the Company had
repurchased approximately 1.3 million shares of its Class A common stock in open
market purchases for an approximate aggregate amount of $3.7 million.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial and
operating data for the Company as of and for each of the years in the five year
period ended December 31, 2000. The selected consolidated financial and
operating data in the table should be read in conjunction with the Company's
Financial Statements and the notes thereto included elsewhere herein and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Statements of Income and Per Share Data:
(Dollars in thousands, except per share data)
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- -------- ---------
Net sales $ 32,948 $ 29,326 $ 30,828 $ 33,945 $ 30,128
Cost of goods sold 22,663 20,930 21,991 24,293 20,744
Gross profit 10,285 8,396 8,837 9,652 9,384
Selling, general and administrative expenses
6,668 6,053 5,333 5,641 4,870
Operating earnings 3,617 2,343 3,504 4,011 4,514
Income tax expense 1,025 759 1,023 1,220 1,424
Net earnings $ 1,663 $ 1,029 $ 1,499 $ 1,850 $ 2,158
Earnings per share:
Basic $ .29 $ .17 $ .24 $ .28 $ .31
Diluted $ .28 $ .17 $ .24 $ .27 $ .31
Weighted average common shares outstanding
Basic 5,800 6,006 6,278 6,644 6,930
Diluted 5,922 6,050 6,287 6,733 7,004
Balance Sheet Data: December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- --------- --------- ---------
Working capital $ 19,559 $ 22,396 $ 25,239 $ 25,500 $ 25,923
Total assets 44,400 41,081 44,583 44,985 42,315
Total debt 14,364 12,774 14,375 16,444 13,510
Stockholders' equity 26,639 25,440 25,096 24,371 24,113
14
ITEM 7. 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 discrete
semiconductors, optoelectronic devices and passive components to other
electronic distributors, contract electronic manufacturers (CEMs) and original
equipment manufacturers (OEMs), who incorporated them in their products.
The following table sets forth, for the periods indicated, certain operating
amounts and ratios:
Year Ended December 31,
------------------------------------------
2000 1999 1998
----------- ---------- ---------
(dollars in thousands)
Net sales $ 32,948 $ 29,326 $ 30,828
Cost of goods sold 22,663 20,930 21,991
% of net sales 68.8% 71.4% 71.3%
Gross profit 10,285 8,396 8,837
% of net sales 31.2% 28.6% 28.7%
Selling, general and administrative expenses 6,668 6,053 5,333
% of net sales 20.2% 20.6% 17.3%
Operating earnings 3,617 2,343 3,504
% of net sales 11.0% 8.0% 11.4%
Income tax expense 1,025 759 1,023
Effective tax rate as a % of
earnings before income taxes 38.1% 42.45% 40.6%
Net earnings $ 1,663 $ 1,029 $ 1,499
% of net sales 5.1% 3.5% 4.9%
The Year Ended December 31, 2000 Compared to The Year Ended December 31, 1999
Net sales for the year ended December 31, 2000 were $32,948,000 compared
with net sales for the year ended December 31, 1999 of $29,326,000, an increase
of $3,622,000 or 12.4%. This increase was primarily attributable to (a) growth
in our domestic passive components sales volume by $5,189,000 or 263% when
comparing $7,165,000 and $1,976,000 of passive sales, for the year 2000 and
1999, respectively and (b) increase in our export sales by $1,895,000 or 53%
when comparing $5,484,000 and $3,589,000 of export sales, for the year 2000 and
1999, respectively. However, the overall average per unit sales price of
components decreased to 1.8 cents for the current year from 2.7 cents during the
same time last year. The decrease was primarily the result of selling more
passive components, which have a lower average per unit sales price.
Cost of goods sold increased by $1,733,000 to $22,663,000 for the year
ended December 31, 2000, an increase of 8.3 % from the year ended December 31,
1999. Cost of goods sold increased with the increase in net sales, however at a
slower rate due to higher sales, resulting in gross profits increasing as a
percentage of net sales to 31.2% for the current year from 28.6% for the same
period last year. Gross profits increased by $1,889,000 to $10,285,000 for the
current year from $8,396,000 for the same period in 1999.
Selling, general and administrative expenses increased by $615,000 or 10.2%
for 2000 compared to 1999. The increase is primarily attributable to increased
payroll and new opening costs incurred from opening two more sales offices in
the United States (New England and Illinois) and additional selling, general and
administrative expenses from our subsidiary in Mexico. We have continued to
invest in sales and marketing personnel, which we believe is required to
15
achieve growth. Also, contributing to the increase are additional depreciation
and expenses related to the purchase of our new warehouse and headquarters.
These expenses, as a percentage of net sales, decreased to 20.2% for the year
ended December 31, 2000 compared to 20.6% for the year ended December 31, 1999.
Operating earnings increased by $1,274,000 or 54.4% between the years ended
December 31, 2000, and 1999, and increased as a percentage of net sales to 11.0%
from 8.0%. Operating earnings increased principally as a result of higher net
sales with higher gross margins discussed above.
Interest expense for the year ended December 31, 2000 increased by $67,000
compared to the year ended December 31, 1999. The increase is primarily due to
higher average interest rates incurred on our bank revolving line of credit.
Income taxes were $1,025,000 for the year ended December 31, 2000,
representing an effective tax rate of 38.1%, compared to $759,000 for the year
ended December 31, 1999, an effective tax rate of 42.45%.
The Company had net earnings of $1,663,000 for the year ended December 31,
2000 as compared with net earnings of $1,029,000 for the year ended December 31,
1999, an increase of $634,000 or 61.6%. The increase in net earnings is
primarily attributable to higher gross profit dollars discussed above. Net
earnings as a percentage of net sales increased to 5.1% from 3.5%.
The Year Ended December 31, 1999 Compared to The Year Ended December 31, 1998
Net sales for the year ended December 31, 1999 were $29,326,000 compared
with net sales for the year ended December 31, 1998 of $30,828,000, a decrease
of $1,502,000 or 4.9%. This decrease in net sales during 1999 was attributable
principally to a decline in the Company's domestic sales volume by approximately
$2,480,000. For most of 1999, the supply for discrete semiconductors was greater
than the demand. The overall sales decrease was mainly attributable to a
decrease in the average per unit sales price to 2.7 cents for the current year
from 3.1 cents during the same time last year. The decrease in sales was
partially offset by an increase in export sales of approximately $980,000 or 37%
as compared to the year ended December 31, 1998. The decline in net sales was
principally a result of a continued industry wide decline in demand for discrete
semiconductors.
Cost of goods sold decreased by $1,061,000 to $20,930,000 for the year
ended December 31, 1999, a decrease of 4.8 % from the year ended December 31,
1998. Consistent with the decrease in net sales, the Company was able to reduce
the cost of goods sold. Gross profit decreased as a percentage of net sales to
28.6% from 28.7%. Primarily due to inventory price protection programs, the
Company was able reduce cost of sales, thus, able to maintain its gross profit
margins despite the decrease in net sales and cost of goods sold of
approximately 4.9% and 4.8%, respectively.
Selling, general and administrative expenses increased by $720,000 or 13.5%
for 1999 compared to 1998. These expenses, as a percentage of net sales,
increased to 20.6% for the year ended December 31, 1999 compared to 17.3% for
the year ended December 31, 1998. The increase is primarily attributable to
increased payroll and new operating costs incurred from opening the Company's
four new offices in the United States and additional selling, general and
administrative expenses from our subsidiary in Mexico. Also, contributing to
the increase is additional depreciation expense related to the Oracle
Application System ("Oracle") purchased last year. In July 1998, we implemented
Oracle which resulted in increased depreciation expense and maintenance fees
beginning in the same month. As such, there were no Oracle related depreciation
and maintenance fees during the first six months of 1998. Also, contributing to
the increase are additional expenses related to the purchase of our new
warehouse and headquarters. At the end of June 1999, we purchased our new
facilities for $3.3 million which increased depreciation and maintenance fees
during the last six months of the year ended December 31, 1999. There was no
such purchase or related depreciation during the same period last year.
Operating earnings decreased by $1,161,000 or 33.1% between the years ended
December 31, 1999, and 1998, and decreased as a percentage of net sales to 8.0%
from 11.4%. Operating earnings decreased principally as a result of higher
selling, general and administrative expenses discussed above.
Interest expense for the year ended December 31, 1999 decreased by $211,000
compared to the year ended December 31, 1998. The decrease is due to lower
borrowings as smaller purchases of inventory were made during the year ended
December 31, 1999 as compared to 1998. Additionally, the decrease in borrowings
were partially offset by financing the purchase of our new warehouse and
headquarters mentioned above.
16
Income taxes were $759,000 for the year ended December 31, 1999,
representing an effective tax rate of 42.45%, compared to $1,023,000 for the
year ended December 31, 1998, an effective tax rate of 40.6%.
The Company had net earnings of $1,029,000 for the year ended December 31,
1999 as compared with net earnings of $1,499,000 for the year ended December 31,
1998, a decrease of $470,000 or 31.4%. The decrease in net earnings are
primarily attributable to lower gross profit dollars and higher selling, general
and administrative expenses both discussed above. Net earnings as a percentage
of net sales decreased to 3.5% from 4.9%.
Supply and Demand Issues
Background
----------
In 1996, suppliers increased capacity and the weak demand left suppliers
with large amounts of uncommitted products. During 1996 and continuing into
1997, the Company decided to take advantage of this situation by intensifying
its long standing purchasing strategy by making opportunistic purchases of
suppliers' uncommitted capacity, at favorable pricing. The Company believes
this strategy of opportunistic purchasing postures the Company to be price
competitive, while still maintaining acceptable profit margins.
The demand for discrete semiconductors in the U.S. market decreased from
1996 through the middle of 1999. Since then, demand had increased as a result
of industry wide shortages. As such, the Company has sold more units of
components in 2000 than 1999. However, the industry wide shortage began to
diminish towards the end of 2000 resulting in weaker demand.
Current Issues
--------------
The Company's core strategy is to maintain a substantial inventory of
discrete semiconductors purchased at prices generally lower than those commonly
available to its competitors. This strategy allows the Company to fill customer
orders immediately from stock held in inventory. During 2000, the Company took
advantage of the strong demand in the discrete semiconductor market, as such,
inventory levels increased throughout the year from $29,153,000 to $30,609,000
at December 31, 1999 and 2000, respectively. Since demand started to weaken
towards the end of 2000, the Company expects to lower inventory balances
throughout 2001. There are no assurances that demand in the discrete
semiconductor market will increase and that market conditions will improve in
2001.
Several of the matters discussed under Supply and Demand Issues contain
forward looking statements that involve risks and uncertainties with respect to
growth and relationships with suppliers. Many factors could cause actual
results to differ materially from these statements. See "BUSINESS - Cautionary
Statements and Risk Factors - Relationship with Suppliers; Need to Maintain
Large Inventory; Price Fluctuations."
Liquidity and Capital Resources
The Company historically has satisfied its liquidity requirements
principally through cash generated from operations, short-term commercial loans
and the sale of equity securities, including the initial public offering of its
common stock in April 1995 and issuance of a convertible bond in 1996. The
Company's cash flows provided by (used in) operating, financing and investing
activities for the years ended December 31, 2000, 1999 and 1998 were as follows:
Year Ended December 31,
(In thousands)
-----------------------------
2000 1999 1998
------- ------- -------
Operating activities.......................................... $ 109 $ 6,054 $ 4,220
Investing activities........................................... (1,319) (3,858) (1,176)
Financing activities.......................................... 1,195 (2,323) (2,887)
17
Cash flows provided by operating activities decreased to $109,000 during
the year ended December 31, 2000, as compared to $6,054,000 during same period
last year. The decrease is primarily attributable to an increase in inventory
of $1.5 million and accounts receivable of $754,000 resulting from the increased
business and higher net sales during the current year which was partially offset
by an increase in accounts payable of $245,000. Additionally, during the year
ended December 31, 1999, inventory decreased by $5.7 million, creating a supply
of cash in 1999, where as during the year ended December 31, 2000, inventory
increased, thus contributing to the usage of cash in 2000.
Investment activities consisted of the purchase of property and equipment,
principally interior improvements to the Company's new warehouse and
headquarters. Cash flows used in investing activities decreased to $1,319,000
from $3,858,000 during the years ended December 31, 2000 and 1999, respectively.
The decrease is due to the purchase of our new warehouse and headquarters in the
approximate amount of $3,300,000 during the previous year 1999 and construction
of interior improvements during the current year 2000.
Cash flows provided from financing activities increased to $1,195,000 from
$2,323,000 cash used during the year ended December 31, 2000 and 1999,
respectively. The change resulted, primarily due to increased net borrowings to
our bank revolving line of credit during the current year of $1,590,000 and
fewer dollars spent repurchasing the Company's Class A Common Stock during the
current year 2000, as compared to the same period last year. In addition,
during the third quarter ending September 30, 2000, we paid in its entirety, the
$3,000,000 principal balance, including accrued interest payable, of the
subordinated debenture note payable originally due May 18, 2001.
The Company believes that funds generated from operations and the revolving
line of credit will be sufficient to finance its working capital and capital
expenditures requirements for the foreseeable future.
As of the date of this Report, the Company has no commitment for other
equity or debt financing or other capital expenditures.
In June 2000, the Company renewed its revolving line of credit that had
been in place since March 1996. The renewed revolving line of credit provides
the Company with up to $16 million for operating purposes and was renewed
through May 15, 2002. The Company's additional $4 million line of credit for
business acquisition purposes expired unrenewed. The agreement governing these
credit facilities contains covenants that require the Company to be in
compliance with certain financial ratios. As of December 31, 2000, borrowings
under the line of credit was $13.9 million in aggregate.
Year 2000 Issues
In 1999, we completed our remediation and testing of our systems. Because
of those planning and implementation efforts, we experienced no significant
disruptions in critical information technology and non-information technology
systems and those systems have successfully responded to the Year 2000 date
change. We did not incur any significant expenses during 1999 in connection
with remediating our systems. We are not aware of any material problems
resulting from Year 2000 issues, either with our products, internal systems, or
the products and services of our third parties. We will continue to monitor our
critical computer applications and those of our suppliers and vendors throughout
the year 2001 to ensure any latent Year 2000 matters arising are addressed
promptly.
Asian Economic Issues
Many of the Company's suppliers have their manufacturing facilities in
countries whose economies continue to be volatile while recovering from recent
years of financial concerns. Although local currencies have stabilized, the US
dollar's strength compared with Asian currencies may further reduce exports to
Asia in the future. Sales to Asian customers were 4.4% and 1.1% of the
Company's total sales in 2000 and 1999, respectively. Conversely, the Company
believes that the weaker Asian currencies may actually benefit the Company in
the short-term by providing opportunities for the Company to purchase products
at lower prices.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements as of December 31, 2000, 1999 and 1998 and for the years
then ended and the Independent Auditors' Report are included on pages 20 to 34
of this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS
TAITRON COMPONENTS INCORPORATED
Page
----
Independent Auditors' Reports.................................................................... 20
Consolidated Balance Sheets at December 31, 2000 and 1999........................................ 21
Consolidated Statements of Earnings for the Years Ended December 31, 2000, 1999 and 1998......... 23
Consolidated Statement of Shareholders' Equity for the Three Years Ended December 31, 2000....... 24
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998....... 25
Notes to Consolidated Financial Statements for the Years Ended December 31, 2000, 1999 and 1998.. 26
19
Report of Independent Certified Public Accountants
The Board of Directors
Taitron Components Incorporated:
We have audited the accompanying consolidated balance sheets of Taitron
Components Incorporated as of December 31, 2000 and 1999 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years ended December 31, 2000, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Taitron Components
Incorporated as of December 31, 2000 and 1999 and the consolidated results of
its operations and its consolidated cash flows for each of the years ended
December 31, 2000, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton
Los Angeles, California
February 9, 2001
20
TAITRON COMPONENTS INCORPORATED
Consolidated Balance Sheets
December 31,
2000 1999
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 190,000 $ 274,000
Trade accounts receivable, net 4,809,000 4,055,000
Inventory, net 30,609,000 29,153,000
Prepaid expenses 355,000 391,000
Deferred income taxes 694,000 496,000
Other current assets 251,000 234,000
------------ ------------
Total current assets 36,908,000 34,603,000
Property and equipment, net 7,205,000 6,392,000
Other assets 287,000 86,000
------------ ------------
Total assets $ 44,400,000 $ 41,081,000
============ ============
See accompanying notes to consolidated financial statements.
Continued next page
21
TAITRON COMPONENTS INCORPORATED
Consolidated Balance Sheets - continued
December 31,
2000 1999
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving line of credit $ 13,930,000 $ 9,319,000
Current portion of long-term debt 22,000 21,000
Trade accounts payable 2,495,000 2,250,000
Accrued liabilities and other 902,000 617,000
------------- -------------
Total current liabilities 17,349,000 12,207,000
Long-term debt, less current portion 412,000 3,434,000
------------- -------------
Commitments - -
Shareholders' equity:
Preferred stock, $.001 par value. Authorized 5,000,000 shares.
None issued or outstanding - -
Class A common stock, $.001 par value. Authorized 20,000,000 shares;
4,983,975 and 5,085,026 shares issued and outstanding at
December 31, 2000 and 1999, respectively 5,000 5,000
Class B common stock, $.001 par value. Authorized, issued and
outstanding 762,612 shares at December 31, 2000 and 1999 1,000 1,000
Additional paid-in capital 11,062,000 11,457,000
Accumulated other comprehensive income, net of tax (45,000) 24,000
Retained earnings 15,616,000 13,953,000
------------- -------------
Total shareholders' equity 26,639,000 25,440,000
------------- -------------
Total liabilities and shareholders' equity $ 44,400,000 $ 41,081,000
============= =============
See accompanying notes to consolidated financial statements.
22
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Earnings
Year ended December 31,
2000 1999 1998
------------- ------------- -------------
Net sales $ 32,948,000 $ 29,326,000 $ 30,828,000
Cost of goods sold 22,663,000 20,930,000 21,991,000
------------- ------------- -------------
Gross profit 10,285,000 8,396,000 8,837,000
Selling, general and administrative expenses 6,668,000 6,053,000 5,333,000
------------- ------------- -------------
Operating earnings 3,617,000 2,343,000 3,504,000
Interest expense, net 921,000 854,000 1,065,000
Other (income) expense 8,000 (299,000) (83,000)
------------- ------------- -------------
Earnings before income taxes 2,688,000 1,788,000 2,522,000
Income tax expense 1,025,000 759,000 1,023,000
------------- ------------- -------------
Net earnings $ 1,663,000 $ 1,029,000 $ 1,499,000
============= ============= =============
Earnings Per Share:
Basic $ .29 $ .17 $ .24
============= ============= =============
Diluted $ .28 $ .17 $ .24
============= ============= =============
Weighted Average Common Shares Outstanding:
Basic 5,799,786 6,006,436 6,277,697
============= ============= =============
Diluted 5,922,127 6,050,322 6,286,912
============= ============= =============
See accompanying notes to consolidated financial statements.
23
TAITRON COMPONENTS INCORPORATED
Consolidated Statement of Shareholders' Equity
Three years ended December 31, 2000
Accumulated
other Total
Class A common stock Class A common stock Additional Retained comprehensive shareholders'
-------------------- --------------------
Shares Amount Shares Amount paid-in capital earnings income equity
------ -------- ------ ------ --------------- ---------- ------------- ---------------
Balances at December 31, 1997 5,685,062 $ 5,000 762,612 $1,000 $12,997,000 $11,425,000 $(57,000) $24,371,000
Exercise of stock options 5,334 - - - 12,000 - - 12,000
Repurchase of common stock (314,300) - - - (830,000) - - (830,000)
Comprehensive income:
Foreign currency
translation adjustment - - - - - - 44,000 44,000
Net earnings - - - - - 1,499,000 - 1,499,000
-----------
Comprehensive income - - - - - - - 1,543,000
--------- ------ -------- ------- ------------ ----------- --------- -----------
Balances at December 31, 1998 5,376,096 5,000 762,612 1,000 12,179,000 12,924,000 (13,000) 25,096,000
Repurchase of common stock (291,070) - - - (722,000) - - (722,000)
Comprehensive income:
Foreign currency
translation adjustment - - - - - - 37,000 37,000
Net earnings - - - - - 1,029,000 - 1,029,000
-----------
Comprehensive income - - - - - - - 1,066,000
--------- ------ -------- ------- ------------ ----------- --------- -----------
Balances at December 31, 1999 5,085,026 5,000 762,612 1,000 11,457,000 13,953,000 24,000 25,440,000
Exercise of stock options 52,549 - - - 100,000 - - 100,000
Repurchase of common stock (153,600) - - - (495,000) - - (495,000)
Comprehensive income:
Foreign currency
translation adjustment - - - - - - (69,000) (69,000)
Net earnings - - - - - 1,663,000 - 1,663,000
-----------
Comprehensive income - - - - - - - 1,594,000
--------- ------ -------- ------- ------------ ----------- --------- -----------
Balances at December 31, 2000 4,983,975 $5,000 762,612 $1,000 $11,062,000 $15,616,000 $(45,000) $26,639,000
========= ====== ======== ======= ============ =========== ========= ===========
See accompanying notes to consolidated financial statements.
24
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Cash Flows
Year ended December 31,
2000 1999 1998
------------- -------------- -------------
Cash flows from operating activities:
Net earnings $ 1,663,000 $ 1,029,000 $ 1,499,000
-------------- -------------- -------------
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 506,000 442,000 309,000
Deferred income taxes (198,000) 314,000 (145,000)
Changes in assets and liabilities:
Trade accounts receivable (754,000) 353,000 870,000
Inventory (1,456,000) 5,715,000 889,000
Prepaid expenses and other current assets 19,000 145,000 (45,000)
Other assets (201,000) 250,000 (99,000)
Trade accounts payable 245,000 (2,157,000) 1,172,000
Accrued liabilities 285,000 (37,000) (230,000)
-------------- -------------- -------------
Total adjustments (1,554,000) 5,025,000 2,721,000
-------------- -------------- -------------
Net cash provided by operating activities 109,000 6,054,000 4,220,000
Cash flows from investing activities:
Acquisition of property and equipment (1,319,000) (3,858,000) (976,000)
Loans to others - - (200,000)
-------------- -------------- -------------
Net cash used in investing activities (1,319,000) (3,858,000) (1,176,000)
Cash flows from financing activities:
Borrowings on long-term debt 14,056,000 8,986,000 4,000,000
Proceeds from exercise of stock options 100,000 - 12,000
Payments on long-term debt (12,466,000) (10,587,000) (6,069,000)
Repurchase of common stock (495,000) (722,000) (830,000)
-------------- -------------- -------------
Net cash (used in) provided by financing activities 1,195,000 (2,323,000) (2,887,000)
-------------- -------------- -------------
Impact of changes in exchange rates on cash 69,000 37,000 44,000
-------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents (84,000) (90,000) 201,000
Cash and cash equivalents, beginning of year 274,000 364,000 163,000
-------------- -------------- -------------
Cash and cash equivalents, end of year $ 190,000 $ 274,000 $ 364,000
============== ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest (net of capitalized interest of $33,000
and $38,000 in 2000 and 1999, respectively) $ 979,000 $ 954,000 $ 1,182,000
============== ============= =============
Cash paid for income taxes $ 1,017,000 $ 564,000 $ 996,000
============= ============= =============
See accompanying notes to consolidated financial statements.
25
TAITRON COMPONENTS INCORPORATED
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business
Taitron Components Incorporated ("Taitron" or the "Company") is a "discrete
components superstore," which distributes a wide variety of transistors,
diodes and other discrete semiconductors, optoelectronic devices and
passive components to other electronic distributors, contract electronic
manufacturers (CEMs) and original equipment manufacturers (OEMs), who
incorporate these devices into their products. In order to meet the rapid
delivery requirements of its customers, the Company maintains a significant
inventory of discrete components.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary. All significant intercompany
transactions have been eliminated in consolidation.
Concentration of Risk
A significant number of the products distributed by the Company are
manufactured in Taiwan, China, South Korea and the Philippines. The
purchase of goods manufactured in foreign countries is subject to a number
of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs
and import and export controls and changes in governmental policies, any of
which could have a material adverse effect on the Company's business and
results of operations.
The ability to remain competitive with respect to the pricing of imported
components could be adversely affected by increases in tariffs or duties,
changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and
import quotas on products from foreign countries. For example, it is
possible that political or economic developments in China, or with respect
to the United States relationship with China, could have an adverse effect
on the Company's business. The Company's ability to remain competitive
could also be affected by other government actions related to, among other
things, anti-dumping legislation and international currency fluctuations.
While the Company does not believe that any of these factors adversely
impact its business at present, there can be no assurance that these
factors will not materially adversely affect the Company in the future. Any
significant disruption in the delivery of merchandise from the Company's
suppliers, substantially all of whom are foreign, could also have a
material adverse impact on the Company's business and results of
operations. Management estimates that over 50% of the Company's products
are produced in Asia.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. Management of the
Company maintains a relatively low cash balance as cash is used to buy
inventory and to repay debt in order to reduce interest cost.
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
26
made. Sales returns for the years ended December 31, 2000, 1999 and 1998
aggregated $631,000, $715,000 and $1,128,000, respectively.
Allowance for Sales Returns and Doubtful Accounts
The allowance for sales returns and doubtful accounts was $120,000 at
December 31, 2000 and 1999.
Inventory
Inventory, consisting principally of products held for resale, is stated at
the lower of cost or market, using the first-in, first-out method. The
amount presented in the accompanying financial statements is net of
valuation allowances of $1,326,000 and $1,054,000 at December 31, 2000 and
1999, respectively. The Company uses a systematic methodology that includes
regular evaluations of inventory to identify obsolete, slow-moving and non-
saleable inventory
Depreciation and Amortization
Depreciation and amortization of property and equipment are computed
principally using the accelerated and the straight-line methods using lives
from 5 to 7 years for furniture, machinery and equipment and 31.5 years for
building and building improvements.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Stock Option Plan
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 allows entities to continue to apply the provisions of APB
Opinion No. 25, under which, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price, and provides pro forma net income and pro
forma earnings per share disclosures for employee stock options as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which such
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Financial Instruments
The estimated fair values of cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their
carrying value because of the short-term maturity of these instruments. The
fair value of long-term debt approximates its carrying value as the
interest rates are
27
comparable to rates currently offered to the Company for similar debt
instruments with similar maturities. All financial instruments are held for
purposes other than trading.
Net Earnings per Share
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the Company.
Foreign Currency Translation
The financial statements of the Company's majority owned subsidiary in
Mexico and division in Taiwan, which were established in 1998 and 1997,
respectively, are translated into United States dollars. Balance sheet
accounts are translated at year-end or historical rates while income and
expenses are translated at weighted-average exchange rates for the year.
Translation gains or losses related to net assets are shown as a separate
component of shareholders' equity as comprehensive income. Gains and losses
resulting from realized foreign currency transactions (transactions
denominated in a currency other than the entities' functional currency) are
included in operations. Such transactional gains and losses are not
significant to the financial statements for 2000, 1999 and 1998.
Segment Reporting
The Company is centrally managed and operates in one business segment:
distribution of discrete semiconductors.
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 financial statement presentation.
Use of Estimates
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. These estimates
have a significant impact on the Company's valuation and reserve accounts
relating to the Company's allowance for sales returns, doubtful accounts
and inventory reserves. Actual results could differ from these estimates.
(2) Property and Equipment
Property and equipment, at cost, is summarized as follows:
December 31,
----------------------------
2000 1999
------------ ------------
Land $ 1,643,000 $ 1,649,000
Building and improvements 4,881,000 3,934,000
Furniture and equipment 837,000 593,000
Computer software and equipment 1,828,000 1,694,000
Accumulated depreciation and amortization (1,984,000) (1,478,000)
------------- -------------
$ 7,205,000 $ 6,392,000
============= =============
28
(3) Revolving Line of Credit
The Company has a revolving line of credit facility which provides up to
$16 million for operating purposes which matures on May 15, 2002. The
agreement governing this credit facility contains covenants that require
the Company to be in compliance with certain financial ratios. Borrowings
on the line of credit are secured by substantially all of the Company's
assets.
The revolving line of credit contains security agreements which essentially
cover all assets of the Company and bear interest at the bank's prime rate
(9.50% at December 31, 2000) or at the option of the Company, at LIBOR
(weighted average of 6.7% at December 31, 2000) plus 1.35%.
(4) Long-Term Debt
Long-term debt at December 31, 2000 and 1999 consists of the following:
2000 1999
---------- -----------
First trust deed loan payable in monthly installments
of $4,349, bearing interest at the rate of 6.359%
per annum, due December 1, 2013. $ 434,000 $ 455,000
8% convertible subordinated debenture, principal due May 18, 2001. - 3,000,000
---------- -----------
434,000 3,455,000
Less current portion 22,000 21,000
---------- -----------
$ 412,000 $ 3,434,000
========== ============
Minimum future payments of long-term debt are summarized as follows:
Year ending December 31:
2001 $ 22,000
2002 24,000
2003 25,000
2004 27,000
2005 29,000
Thereafter 307,000
----------
$ 434,000
==========
Convertible Subordinated Debenture
In May 1996, the Company issued a Convertible Subordinated Debenture (the
"Note") for $3,000,000 with interest at 8% payable annually and the
principal due in May 2001. The Note is convertible into the Company's Class
A Common Stock at the conversion price of $5.25 per share, the market price
of the stock on the date of issuance. 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.
In September 2000, the Company paid in its entirety, the $3,000,000
principal balance, including accrued interest payable with none of the
debentures converted.
29
(5) Shareholders' Equity
There are 5,000,000 shares of authorized preferred stock, par value $.001
per share, with no shares of preferred stock outstanding. The terms of the
shares are subject to the discretion of the Board of Directors.
There are 20,000,000 shares of authorized Class A common stock, par value
$.001 per share, with 4,983,975 and 5,085,026 shares issued and outstanding
as of December 31, 2000 and 1999, respectively. Each holder of Class A
common stock is entitled to one vote for each share held.
There are 762,612 shares of authorized Class B common stock, par value
$.001 per share, with 762,612 shares issued and outstanding as of December
31, 2000 and 1999. Each holder of Class B common stock is entitled to ten
votes for each share held. The shares of Class B common stock are
convertible at any time at the election of the shareholder into one share
of Class A common stock, subject to certain adjustments. The Company's
Chief Executive Officer is sole beneficial owner of all the outstanding
shares of Class B common stock.
During 2000, 1999, and 1998 the Company repurchased 153,600, 291,070 and
314,300 shares of its Class A Common Stock on the open market for $495,000,
$722,000 and $830,000, respectively, and permanently retired such shares.
(6) Income Taxes
Income tax expense is summarized as follows:
Year Ended December 31
--------------------------------------
2000 1999 1998
----------- ----------- -----------
Current:
Federal $ 993,000 $ 351,000 $ 867,000
State 213,000 94,000 301,000
----------- ----------- -----------
1,206,000 445,000 1,168,000
Deferred:
Federal (168,000) 237,000 (80,000)
State (13,000) 77,000 (65,000)
----------- ----------- -----------
(181,000) 314,000 (145,000)
----------- ----------- -----------
$ 1,025,000 $ 759,000 $ 1,023,000
=========== =========== ===========
The actual income tax expense differs from the "expected" tax expense
computed by applying the Federal corporate tax rate of 34% to earnings before
income taxes as follows:
Year Ended December 31
-------------------------------------
2000 1999 1998
----------- --------- -----------
"Expected" income tax expense $ 913,000 $ 645,000 $ 857,000
State tax expense, net of Federal benefit 148,000 110,000 155,000
Other (36,000) 4,000 11,000
----------- --------- -----------
$ 1,025,000 $ 759,000 $ 1,023,000
=========== ========= ===========
30
The tax effects of temporary differences which give rise to significant portions
of the deferred tax assets are summarized as follows:
December 31
-------------------------
Deferred tax assets: 2000 1999
----------- -----------
Inventory reserves $ 560,000 $ 434,000
Section 263a adjustment 170,000 141,000
Allowances for bad debts and returns 63,000 51,000
Accrued expenses 76,000 26,000
Other 32,000 36,000
----------- -----------
Total deferred tax assets 901,000 688,000
Deferred tax liability:
Depreciation (161,000) (101,000)
Other (46,000) (91,000)
----------- -----------
Net deferred tax assets $ 694,000 $ 496,000
=========== ===========
Based upon the level of historical taxable earnings and projections of
future taxable earnings over the periods in which the temporary differences
are deductible, management has concluded that, as of December 31, 2000, it
is more likely than not that the Company will realize the benefits of these
deductible differences.
(7) 401(k) Profit Sharing Plan
In January 1995, the Company implemented a defined contribution profit
sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the
Code) covering all employees of the Company. Participants once eligible, as
defined by the plan, may contribute up to 15% of their compensation, but
not in excess of the maximum allowed under the Code. The plan provides for
a matching contribution at the discretion of the Company which vests
immediately, as defined by the plan. For the years ended December 31, 2000,
1999 and 1998 employer matching contributions aggregated approximately
$36,000, $24,000 and $32,000, respectively. The plan sold 39,929 shares of
the Company's common stock on the open market for cash consideration of
approximately $117,000 during the year ended December 31, 2000. The plan
purchased 9,780 and 17,942 shares of the Company's common stock on the open
market for cash consideration of approximately $19,000 and $34,000 during
the years ended December 31, 1999 and 1998, respectively.
(8) Stock Options and Warrants
In March 1995, the Company established the 1995 Stock Incentive Plan (the
Plan) expiring in March, 2005. The Plan provides for the issuance of an
aggregate of 740,000 incentive stock options, nonstatutory options or stock
appreciation rights (SAR's) to directors, officers and other employees of
the Company. Under the Plan, incentive stock options may be granted at
prices equal to at least the fair market value of the Company's Class A
common stock at the date of grant. Nonstatutory options and stock
appreciation rights may be granted at prices equal to at least 85% and
100%, respectively, of the fair market value of the Company's Class A
common stock at the date of grant. Outstanding options and rights vest
ratably over three years commencing one year from the date of grant and are
subject to termination provisions as defined in the Plan. The Plan also
provides for automatic grants of nonstatutory options to purchase 5,000
shares of Class A common stock to all members of the committee
administering the Plan, upon their initial election to such committee and
each year thereafter. The exercise price of these options will be equal to
the fair market value of the Company's Class A common stock at the date of
grant.
In November 1996, the Company gave each employee who held options and SAR's
issued during 1995 and 1996 with exercise prices of $5.25 and $7.125 the
right to receive, in place of such options, an
31
amended option for half the shares covered by the original option but with
a reduced exercise price of $2.25 (the market price on November 21, 1996).
In connection with the Company's initial public offering, the Company
issued warrants exercisable over a period of four years commencing April
19, 1996 to purchase 220,000 shares of the Company's Class A common stock
at a price of $6.30, which is 120% of the initial public offering price.
These warrants expired unexercised on April 19, 2000.
In April 1995, the Company granted 6,600 stock appreciation rights to
certain employees at an exercise price of $5.25. Compensation expense
related to these rights was $0 in 2000, 1999 and 1998.
The fair value of options, SAR's and warrants used to compute pro forma net
earnings and earnings per share disclosures is the estimated present value
at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions used for 2000: dividend yield of 0%;
expected volatility of 70%; a risk free interest rate of approximately 5%
and an expected holding period of five years; assumptions for 1999:
dividend yield of 0%; expected volatility of 72%; a risk free interest rate
of approximately 7% and an expected holding period of five years;
assumptions for 1998 and 1997: dividend yield of 2%; expected volatility of
40%; a risk free interest rate of approximately 6% and an expected holding
period of five years. The incremental fair value of the modified options
substituted for options issued during 1995, used to compute pro forma net
earnings and earnings per share disclosures was determined using the Black-
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 2%; expected volatility of 40%; a risk free
interest rate of approximately 6%; and an expected holding period of 3.5
years, adjusted to reflect the remaining period to maturity of the modified
options.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its Plan SAR's and warrants. If the Company had elected to recognize
compensation cost based on the fair value at the grant dates for awards
under the Plan SAR's and warrants (including the modified awards),
consistent with the method prescribed by SFAS No. 123, net earnings and
earnings per share would have been changed to the pro forma amounts
indicated below:
Year Ended December 31,
---------------------------------
2000 1999 1998
---------- ---------- ----------
Net earnings As reported $1,663,000 $1,029,000 $1,499,000
Pro forma $1,498,000 $ 765,000 $1,410,000
Diluted Earnings per share As reported $ .28 $ .17 $ .24
Pro forma $ .25 $ .13 $ .22
The disclosure of compensation cost under this pronouncement may not be
representative of the effects on net earnings for future years. Stock
option and SAR activity during the periods indicated is as follows:
Weighted Average
Number Exercise
of Shares Price
---------- ---------
Balance at December 31, 1997 377,550 $2.44
Granted -- --
Exercised (5,334) 2.25
Forfeited (36,966) 2.67
Canceled -- --
--------
Balance at December 31, 1998 335,250 2.66
Granted 375,400 1.67
Exercised -- --
Forfeited (73,800) 1.92
Canceled -- --
32
Weighted Average
Number Exercise
of Shares Price
--------- --------
Balance at December 31, 1999 636,850 $1.69
Granted 110,800 $3.19
Exercised (60,515) $1.90
Forfeited (46,799) $1.58
Canceled -- --
-----------
Balance at December 31, 2000 640,336 $2.52
===========
The weighted average fair value of options granted in 2000 and 1999 was
$2.30 and $1.17, respectively. There were no options granted in 1998.
At December 31, 2000, the range of exercise prices was $1.31 to $6.82 and
the remaining contractual life of outstanding options is 90 days after
termination of employment of option holder.
At December 31, 2000, 1999 and 1998, the number of options exercisable was
469,235, 442,383 and 251,566, respectively, and weighted average exercise
prices of those options were $2.61, $2.58 and $2.67, respectively.
(9) Net Earnings per Share
The following data shows a reconciliation of the numerators and the
denominators used in computing earnings per share and the weighted average
number of shares of dilutive potential common stock.
Year Ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Net earnings available to common
Shareholders used in basic EPS $ 1,663,000 $ 1,029,000 $ 1,499,000
============ ============ ============
Weighted average number of common shares
used in basic EPS 5,799,786 6,006,436 6,277,697
------------ ------------ ------------
Basic EPS $ .29 $ .17 $ .24
------------ ------------ ------------
Effect of dilutive securities:
Warrants - - -
Options 122,341 43,886 9,215
------------ ------------ ------------
Weighted number of common shares and
Dilutive potential common shares used in
Diluted EPS 5,922,127 6,050,322 6,286,912
------------ ------------ ------------
Diluted EPS $ .28 $ .17 $ .24
============ ============ ============
Warrants on 220,000 shares of common stock were not included in computing
diluted EPS for the years ended December 31, 2000, 1999 and 1998 because
their effects were antidilutive. These warrants expired unexercised on
April 19, 2000.
Also, convertible subordinated debentures convertible into 571,429 shares
of common stock were not included in computing diluted EPS for the years
ended December 31, 2000, 1999 and 1998 because their effects were
antidilutive. In September 2000, the Company paid in its entirety, the
$3,000,000 principal balance of the convertible subordinated debentures
with none of the debentures converted.
33
(10) Commitments
Operating Leases
----------------
The Company leases property and equipment under non-cancelable operating
leases expiring on various dates through 2004 with total future commitments
of $128,000. The new operating leases entered in 2000 were for the
Company's new outside sales offices located in New England and Illinois.
Each lease expires April 17, 2001 and December 10, 2001, respectively.
Rental expense for the years ended December 31, 2000, 1999 and 1998
aggregated $89,000, $134,000 and $175,000, respectively.
At December 31, 2000, 1999 and 1998, the Company had no standby or
commercial letters of credit outstanding under the revolving line of credit
agreement with the bank (Note 3).
(11) Valuation and Qualifying Accounts and Reserves
The following is the Company's schedule of activity in the valuation and
qualifying accounts and reserves for the years ended December 31, 2000, 1999 and
1998:
Balance at Charged to Balance
Beginning Costs and At end
of year Expenses Deductions of year
------------- ------------- ------------- -------------
Allowance for sales returns and doubtful
accounts:
1998 $ 135,000 $ 1,006,000 $ 981,000 $ 160,000
1999 $ 160,000 $ 800,000 $ 840,000 $ 120,000
2000 $ 120,000 $ 662,000 $ 662,000 $ 120,000
Inventory reserves:
1998 $ 1,291,000 $ 302,000 $ - $ 1,593,000
1999 $ 1,593,000 $ - $ 539,000 $ 1,054,000
2000 $ 1,054,000 $ 436,000 $ 164,000 $ 1,326,000
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS, OF THE REGISTRANT
Information regarding directors and executive officers of the Company
will appear in the Proxy Statement of the Annual Meeting of Shareholders
under the caption "Election of Directors" and is incorporated herein by this
reference. The Proxy Statement will be filed with the SEC within 120 days
following December 31, 200 0.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Shareholders under the caption "Executive
Compensation" and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will appear in the Proxy Statement for the Annual Meeting of
Shareholders under the caption "Security Ownership of Certain Beneficial
Owners and Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will appear in the Proxy Statement for the Annual Meeting of Shareholders
under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by this reference.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List the following documents filed as part of this report:
(1) Financial Statements:
Reference is made to the Financial Statements provided under Item 8 of this
report.
(2) Financial Statement Schedules:
Reference is made to the Financial Data Schedule provided as Exhibit 27.
(3) Exhibits:
3.1 Articles of Incorporation of Taitron Components Incorporated (the
Registrant). (a)
3.2 Bylaws of the Registrant. (a)
4.1 Specimen certificate evidencing Class A Common Stock of the
Registrant. (a)
4.2 Form of Underwriter's Warrant. (a)
10.1 Form of Director and Officer Indemnification Agreement. (a)
10.2 1995 Stock Incentive Plan, As Amended (e)
10.3 Form of Employment Agreement, dated as of January 1, 1995, by and
between the Registrant and Stewart Wang. (a)
10.4 Loan and Security Agreement, dated May 5, 1994, between the
Registrant and Union Bank. (a)
10.5 Loan Agreement, dated October 15, 1993, by and between the Registrant
and California Statewide Certified Development Corporation. (a)
10.6 Wm Michaels Limited Regional Prototype Defined Contribution Plan and
Trust (d)
10.7 Form of Sales Representative Agreement. (a)
10.8 Loan Agreement, dated June 16, 1995, between Registrant and Union
Bank. (b)
10.9 Convertible Subordinated Note Agreement, dated May 18, 1996, by and
between the Registrant and Tenrich Holdings. (c)
10.10 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. (c)
10.11 Amended Loan Agreement and Note, dated January 2, 1997, between
Registrant and Union Bank; Amended Loan Agreement and Note, dated
March 13, 1997, between Registrant and Union Bank. (e)
10.12 Business Loan Agreement and Addendum, dated May 6, 1997, between the
Registrant and Comerica Bank - California. (d)
10.13 Master Revolving Note and Addendum, dated May 6, 1997, between the
Registrant and Comerica Bank - California. (d)
10.14 Security Agreement, dated May 6, 1997, between the Registrant and
Comerica Bank -
36
California. (d)
10.15 Amendment to Business Loan Agreement and Master Revolving Note, dated
June 9, 1999, between the Registrant and Comerica Bank - California.
(f)
10.16 Amendment to Business Loan Agreement, dated December 27, 1999,
between the Registrant and Comerica Bank - California. (f)
10.17 Amendment to Business Loan Agreement, dated May 5, 2000, between the
Registrant and Comerica Bank - California.
24.1 Power of Attorney (see page 38 of this Annual Report on Form 10-K).
____________________________________________________________________________
(a) Incorporation by reference from Taitron Components Incorporated
Registration Statement on Form SB-2, Registration No. 33-90294-LA.
(b) Incorporation by reference from Taitron Components Incorporated Form
10-KSB for the Fiscal year ended December 31, 1995.
(c) Incorporated by reference from Taitron Components Incorporated Form
10-QSB for the quarter ended June 30, 1996.
(d) Incorporated by reference from Taitron Components Incorporated Form
10-QSB for the quarter ended June 30, 1997.
(e) Incorporated by reference from Taitron Components Incorporated Form
10-QSB for the quarter ended June 30, 1998
(f) Incorporated by reference from Taitron Components Incorporated Form
10-K for the Fiscal year ended December 31, 1999.
Reports on Form 8-K:
None
37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Taitron Components Incorporated
(Registrant)
By /s/ Stewart Wang
----------------------------------
Stewart Wang
Its: Chief Executive Officer
Date: March 23, 2001
--------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stewart Wang his attorney-in-fact and agent, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Johnson Ku Chairman of the Board March 23, 2001
- ----------------------------
Johnson Ku
/s/ Stewart Wang Chief Executive Officer, President March 23, 2001
- ---------------------------- and Director
Stewart Wang (Principal Executive Officer)
/s/ Steven H. Dong Chief Financial Officer March 23, 2001
- ---------------------------- and Secretary
Steven H. Dong (Principal Financial and Accounting Officer)
/s/ Richard Chiang Director March 23, 2001
- ----------------------------
Richard Chiang
/s/ Winston Gu Director March 23, 2001
- ----------------------------
Winston Gu
/s/ Felix Sung Director March 23, 2001
- ----------------------------
Felix Sung
38