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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, 1998
/ / 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.)
25202 ANZA DRIVE, SANTA CLARITA, CALIFORNIA 91355
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 257-6060
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 March 15, 1999 was $4,500,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Number of shares outstanding on March 15, 1999:
Class A Common Stock, $.001 par value 5,376,096
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 11, 1999 are incorporated by reference in Part III of this Form 10-K.
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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 11 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, 1998, the Company's
inventory consisted of over 1.4 billion components. The Company distributes
over 12,000 different products manufactured by more than 65 different
suppliers. The Company's per unit sales price of components for the net
sales made during the year ended December 31, 1998 averaged approximately 3.1
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. Based on 1997 sales in North America, ELECTRONIC
BUYERS NEWS ranked the Company 50th among the top 50 distributors and 18th
for distribution of discrete semiconductors. The largest single distributor
reported sales for 1997 of over $4.9 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 1998, approximately 58% 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. The Company has historically sold its products
through a national network of independent sales representatives. To better
service its customers, the Company, during the last fiscal year, expanded its
direct sales force geographically to cover portions of the United States.
In 1998, the Company has invested substantially in a warehouse
management system, computer upgrades, software enhancements, 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.
-1-
The demand for discrete semiconductors in the U.S. market has slowed
down since 1996. The Company sold more units of components in fiscal year
1998 than 1997, but has been unable to offset the price reductions that have
occurred. Management believes, with the stronger infrastructure and it's
strong financial position, the Company anticipates managing the Company's
future growth through mergers and acquisitions including potential candidates
overseas.
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
During 1994, the Company introduced optoelectronic devices in a new
catalog. The catalog contains a wide selection of optoelectronic devices
such as LED's, infrared sensors and opto couplers. During 1997, the Company
introduced a new catalog of all passive components. The catalog began an
aggressive marketing campaign to sell passive components, such as resistors,
capacitors and inductors, a type of electronic component manufactured with
non-semiconductor materials. The Company believes that optoelectronic
devices, passive components and discrete semiconductors can be marketed
through existing channels, which in turn will reinforce the Company's current
relationship with its customers. Sales of optoelectronic devices were
$1,972,000, $1,721,000 and $1,675,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Sales of passive components during 1998 and 1997
were $ 1,046,000 and $799,000, respectively. The Company purchased inventory
of $1,642,000 of passive components to facilitate planned increases in sales
of passive components in the future. This is a forward looking statement and
the Company cannot guarantee that sales of passive 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.
-2-
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 1997's 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.
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 also 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 15% of its sales
are a direct result of being a master distributor.
FRANCHISED DISTRIBUTORS. This year, the Company is developing 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 1998, over 40
Preferred Distributors signed the Franchised Agreement.
-3-
RELATIONSHIPS WITH SUPPLIERS. During 1998, the Company entered
into agreements with certain suppliers that provide the Company with
stock rotation and price protection privileges. The amount of inventory
subject to these agreements that provide stock rotation and price
protection privileges was approximately $17.1 million of total inventory
at December 31, 1998. For the balance of the Company's inventory,
unlike most other distributors, the Company does not 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. Approximately $13.5
million of the Company's inventory at December 31, 1998 was subject to
price protection arrangements with suppliers. 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.
Since 1997, the Company has operated an office in Taipei, Taiwan. 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 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."
-4-
PRODUCTS
The Company markets a wide variety of discrete semiconductors, including
rectifiers (or power diodes), diodes and transistors, optoelectronic devices
and passive components. The Company maintains a broad line of brands and
products including a "Taitron" label produced by certain suppliers on
selected products in order not to conflict with their own marketing channels.
The Company attempts to maintain at least ten months of inventory for each
component in its catalogs. At December 31, 1998, the Company's inventory
contained over 1.4 billion separate components and over 12,000 distinct
products. In 1998, the average component sales price of the products sold
by the Company was approximately 3.1 cents.
In 1998, the Company purchased products from over 65 suppliers,
including Everlight Electronics Co, Ltd., Fairchild Semiconductor
Corporation, Frontier Electronics Co., Ltd., General Semiconductor, Inc.,
Hi-Sincerity Microelectronics, Samsung Semiconductor, Inc., United Parts Mart
and Vishay Electronic Components. 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 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.
-5-
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.
The Company's distribution originates from a 24,500 square foot owned
facility and a 30,000 square foot leased facility, both located in Santa
Clarita, California. 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 1998, the Company distributed its products to over 2,000
customers. For the years ended December 31, 1998, 1997 and 1996, no one
customer accounted for more than 3.6%, 3.3% 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, over time, as the
Company has expanded its customer base, the Company's customer breakdown has
become somewhat more balanced, with distributors accounting for approximately
58% and CEMs and OEMs accounting for approximately 42% of the Company's net
sales in 1998.
The Company historically has not required its distributor customers to
provide any point of sale reporting and therefore the Company does not know
the breakdown of industries into which its products are sold. 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 which it sold in
1998, 1997 or 1996.
Taitron offers sales support to its customers through its sales
department and a network of 13 independent sales representatives. Inventory
support provided to customers 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.
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."
-6-
SALES AND MARKETING
The Company's inside sales department, located in Santa Clarita,
California, 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 company also has outside account
managers 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 from National Distributors increased from $2.8
million in 1997 to $3.9 million in 1998.
Salespeople are generally compensated by a combination of salary and
incentives based upon the growth and profits obtained from their sales.
The Company has recognized that there is a rapidly 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 $376,000 in 1998, $438,000 in 1997 and $391,000 in 1996.
The 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. The
independent sales representatives are primarily responsible for face-to-face
meetings with the Company's customers, and for developing new customers. The
Company's 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. During 1998, sales
representatives were 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.
At March 15, 1999, the Company's sales and marketing department
consisted of 20 employees, including 4 that are located outside of Santa
Clarita, 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 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.
-7-
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, during 1997 and 1998 the Company did enter 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, and it generally does not require
stock-rotation or return privileges, all of which are costly to the supplier.
The Company requests and will accept price protection from its suppliers.
See "BUSINESS - Cautionary Statements and Risk Factors - NEED TO MAINTAIN
LARGE INVENTORY; PRICE FLUCTUATIONS" and "BUSINESS - Strategy."
The Company purchases components from over 65 different suppliers,
including Everlight Electronics Co., Ltd., Fairchild Semiconductor
Corporation, Frontier Electronics Co., Ltd., General Semiconductor, Inc.
Hi-Sincerity Microelectronics, Samsung Semiconductors Inc., United Parts Mart
and Vishay Electronic Components. 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, 1998, the Company's four largest
suppliers, General Semiconductor, Inc., Samsung Semiconductors, Inc.,
Fairchild Semiconductor Corporation and Vishay Electronic Components
accounted for approximately 60% 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,
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 - Semiconductor 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
-8-
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 1998 the Company
has acquired and fully implemented an Oracle Applications System. The
Company believes that this system has the capabilities to serve the Company
for future anticipated needs including capabilities of net working with
remote locations.
WAREHOUSE MANAGEMENT SYSTEM
Taitron has invested approximately $100,000 for the installation of a
Warehouse Management System. In return, the wireless radiofrequency bar-coded
system will greatly enhance the accuracy of quantity and location control of
the inventory. It will also reduce the errors in delivering components to
customers. The complete Warehouse Management System is expected to be
operational by the third quarter of 1999. See "MANAGEMENT'S DICUSSION AND
ANALYSIS "Year 2000 Issues ."
FOREIGN TRADE REGULATION
A large portion of the products distributed by the Company are
manufactured in the Far East, including Taiwan, Japan, China, 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 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 are experiencing financial problems. Mounting
trade deficits have sent interest rates soaring and local currencies
plunging. The US dollar's rise compared with Asian currencies may reduce
exports to Asia in the future. 1998 sales to Asian customers was 4.3% of the
Company's total sales. Management believes that the decline in 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, 1999, the Company had a total of 51 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.
-9-
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. The Company is highly dependent upon the
services of Stewart Wang, its Chief Executive Officer and President. The
success of the Company 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 the Company. In addition, the
Company's work force includes executives and employees with significant
knowledge and experience in the electronics distribution industry. The
Company's future success will be strongly influenced by its ability to
continue to recruit, train and retain a skilled work force. While the
Company believes that it would be able to locate suitable replacements for
its executives or other personnel if their services were lost to the Company,
there can be no assurance that the Company would be able to do so on terms
acceptable to the Company. In particular, the location and hiring of a
suitable replacement for Mr. Wang could be very difficult. The Company has
purchased and currently intends to maintain a key-man life insurance policy
on Mr. Wang's life with benefits of $2,000,000 payable to the Company in the
event of Mr. Wang's death. The benefits received under this policy might not
be sufficient to compensate the Company for the loss of Mr. Wang's services
should a suitable replacement not be employed.
RELATIONSHIP WITH SUPPLIERS. Typically, the Company does not have
written long-term supply or distribution agreements with any of its
suppliers. Although the Company believes that it has established close
working relationships with its principal suppliers, the Company's success
will depend, in large part, on maintaining these relationships and developing
new supplier relationships for its existing and future product lines.
Because of the lack of long-term contracts, there can be no assurance that
the Company will be able to maintain these relationships. For example, in
1992, ITT Semiconductors, which was then one of the Company's principal
suppliers, consolidated its United States distribution network into a limited
number of distribution channels and the Company was not among the
distributors chosen. The Company believes that, even if it loses its direct
relationship with a supplier, there exist alternative sources for 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.
NEED TO MAINTAIN LARGE INVENTORY; PRICE FLUCTUATIONS. To adequately
service its customers, the Company believes that it is necessary to maintain
a large inventory of its product offerings, and the Company generally
attempts to maintain approximately ten months inventory of most products in
its catalogs. The Company's inventory level is higher than this due to its
decision to maintain inventory levels and intensify its long standing
purchasing strategy by making opportunistic purchases of suppliers'
uncommitted capacity, at favorable pricing. The Company is focusing its
efforts to maintain or gradually reduce its inventory. If prices of
components held in inventory by the Company decline or if new technology is
developed that displaces products distributed by the Company and held in
inventory, the Company's business could be materially adversely affected.
See "BUSINESS - Strategy."
PRODUCT MIX; PRODUCT MARGINS. The Company's gross profit margins in
general have decreased since 1995, principally due to a weaker product demand
and competitive pricing pressures within the electronics industry. The
Company's gross profit margins are subject to a number of factors, including
product demand, the ability of the Company to purchase inventory at favorable
prices and the Company's favorable sales mix, all of which could adversely
impact margins. Generally optoelectronic devices and passive components have
a lower gross margin than other products that the Company sells. See Part II
Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."
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 the Company believes that, due
to the depth of its inventory, it has not been adversely affected by past
shortages in certain discrete
-10-
components, no assurance can be given that future shortages will not
adversely impact the Company. See "BUSINESS - Suppliers."
FOREIGN TRADE REGULATION. A significant number of the products
distributed by the Company are manufactured in Taiwan, China, 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 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 also have a material adverse
impact on the Company's business and results of operations. See "BUSINESS -
Suppliers" and "BUSINESS - Foreign Trade Regulation."
MANAGEMENT OF GROWTH. The Company's ability to effectively manage
future growth, if any, will require it to continue to implement and improve
its operational, financial and management information systems and to train,
motivate and manage a larger number of employees. There can be no assurance
that the Company will be able to preserve the revenue growth experienced in
prior years, continue its profitable operations or manage future growth
successfully. As an example, sales decreased from 1995 to 1996 principally
as a result of the soft market demand for discrete semiconductors. See Part
II Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."
COMPETITION. The Company faces intense competition, both in its 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 those of the Company. Many competing distributors
also carry product lines which the Company does 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 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 decrease on profit margins. There
can be no assurance that the Company will be able to continue to compete
effectively with existing or potential competitors. See "BUSINESS -
Competition."
-11-
CONTROL BY CLASS B COMMON STOCK SHAREHOLDER; POSSIBLE DEPRESSIVE EFFECT
ON THE PRICE OF THE CLASS A COMMON STOCK. Stewart Wang, the Company's Chief
Executive Officer and President, beneficially owns all of the Class B Common
Stock of the Company, which carries ten votes per share, and he thus controls
approximately 58% of the voting power of the Company's Common Stock. As a
result, Mr. Wang is able to control the Company and its operations, including
the election of at least a majority of the Company's Board of Directors and
the policies of the Company. Also, at any time while the Company has at
least 800 shareholders who beneficially own shares of the Company's Common
Stock, the Company's 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 the Company 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. The Company maintains a "no hassle" return policy. On
a case-by-case basis, the Company accepts returns of products from its
customers, without restocking charges, where 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. With respect to CEMs and OEMs, acceptable causes are generally
limited to loss of orders for products in which the components were to be
incorporated and errors in specifications of the CEMs and OEMs orders to the
Company (e.g. when the CEM or OEM erroneously orders the wrong product). The
Company will also, on a case-by-case basis, accept returns of products upon
payment of a restocking fee, which generally is set at 15% of the sales
price. The Company will not accept returns of any products which were
special ordered by a customer, or which are otherwise not generally included
in the Company's inventory. During the fiscal years ended December 31, 1998,
1997 and 1996, sales returns aggregated $1,128,000, $1,110,000 and $1,536,000
or 3.7%, 3.3% and 5.1% of net sales, respectively. Historically, most
allowable returns occur during the first two months following shipment.
While the Company maintains reserves for product returns which it considers
to be adequate, the possibility exists that the Company could experience
returns in any period at a rate significantly in excess of historical levels,
which could materially and adversely impact the Company's results of
operations for that period. See Part II Item 7 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS - Results of Operations" and "BUSINESS - Customers."
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 the Company.
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 the Company's
business and results of operations. See "BUSINESS - Semiconductor
Distribution Channels."
NO EARTHQUAKE INSURANCE. The Company's principal executive offices are
located in a Company-owned facility in Santa Clarita, California - an area
which experienced significant damage in the 1994 Northridge, California
earthquake. During 1994, the Company spent approximately $145,000 in repair
costs and renovations to its facility resulting from that earthquake, none of
which were covered by insurance. The Company believes that it is
economically a better decision to self insure against any future earthquake
losses than to pay the expensive earthquake insurance premiums.
-12-
ITEM 2. PROPERTIES.
The Company's executive offices and warehouse facilities, covering
approximately 24,500 square feet, are located in Santa Clarita, California.
The Company owns this property subject to a mortgage held by a bank with an
outstanding principal balance of $475,000 as of December 31, 1998 and due on
December 1, 2013 (the "Mortgage"). Pursuant to the Mortgage, the Company is
obligated to make monthly payments of $4,390, which includes interest at
6.359% per annum. Payments by the Company under the Mortgage are currently
unconditionally guaranteed by both the Chairman of the Board of the Company
and the President of the Company. Neither of the officers has any intention
of guaranteeing obligations of the Company in the future. 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.
In May, 1996, the Company increased its warehouse space by entering into
a two year lease, with an option for one additional year, for warehouse space
of approximately 30,000 square feet located in Santa Clarita, California.
All of the space is currently occupied by the Company. In January 1998, the
Company exercised its option extending the lease to June 1999. The monthly
rental expense is $13,000.
The Company currently anticipates that it will need to relocate its
executive offices and/or leased warehouse operations to a larger facility
sometime during the second quarter of fiscal 1999. When the lease on the
Company's 30,000 square foot warehouse expires in June 1999, the Company will
either relocate to another leased facility with approximately the same square
footage, or combine both of it's Santa Clarita facilities into a newly
purchased or leased facility with approximately 60,000 square feet. In that
event, the single location will then accommodate all of the Company's
executive offices and warehouse facilities now currently located in Santa
Clarita, California.
The Company currently does not anticipate that the costs to obtain new
facilities will adversely affect its overall financial condition or results
of operations. However, the actual relocation and lease costs will be
subject to real estate market conditions at the time of the move. If the
Company combines both it's current Santa Clarita facilities into one
location, the Company anticipates that it will attempt to either sell or
lease its owned facility. While the Company believes that the disposition or
leasing of its owned facilities should not adversely impact the results of
operations, there is a possibility that the Company could realize a loss with
respect thereto.
ITEM 3. LEGAL PROCEEDINGS.
In September 1997, the Company filed a lawsuit in Los Angeles Superior
Court against Taiwan Semiconductor Co. Ltd. ("TSCL"), TSC America, Inc.
("TSC"), an officer of these companies and a former employee of the Company.
On August 12, 1998, a settlement agreement was entered into between the
Company and TSCL and TSC and, accordingly, on August 18, 1998, a Request For
Dismissal with prejudice was filed in the Los Angeles Superior Court.
In March 1999, the Company filed a lawsuit in Los Angeles Superior Court
against QT Optoelectronic ("QT"), a manufacturer of optoelectronic
semiconductors. The lawsuit arose from QT's decision to terminate its
distributor agreement with the Company, and QT's refusal to accept return of
QT inventory of approximately $800,000 which the Company stocked in reliance
on a continuing distributor relationship with QT. In the lawsuit, the
Company asserts claims of breach of contract, fraud, negligent
misrepresentation and declaratory relief against QT and seeks compensatory
and punitive damages. The lawsuit is currently in the discovery stage and
the company does not anticipate incurring any unrecoverable losses related to
this litigation.
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 1998.
-13-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON 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, 1996
First Quarter 8 6
Second Quarter 7 1/4 4 7/8
Third Quarter 5 3/4 2 7/8
Fourth Quarter 4 1/4 2 1/16
Year Ended December 31, 1997
First Quarter 3 7/8 2 25/64
Second Quarter 3 7/8 2 35/64
Third Quarter 4 1/8 2 7/8
Fourth Quarter 4 1/4 2 1/2
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
At March 15, 1999, there were approximately 105 holders of record of the
Company's Common Stock. The Company estimates that there are approximately
1,815 beneficial owners of its Class A Common stock.
The Company's Board of Directors ("BOD") is considering whether or not
to pay dividends. However, bank credit facility may prohibit the Company
from paying cash dividends on its common stock. 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 BOD approved a program to repurchase up to 500,000
shares of its Class A common stock. In February 1998, the BOD again
approved an additional repurchase of up to $1,500,000 of the Company's Class
A common stock. As of March 15, 1999, the Company had repurchased 823,513
shares of its Class A common stock in open market purchases for an
approximate aggregate amount of $2.4 million.
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, 1998. 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.
-14-
STATEMENTS OF INCOME AND PER SHARE DATA:
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- --------- ---------
Net sales $30,828 $33,945 $30,128 $35,936 $24,588
Cost of goods sold 21,991 24,293 20,744 23,303 17,220
Gross profit 8,837 9,652 9,384 12,633 7,368
Selling, general and
administrative expenses 5,333 5,641 4,870 5,424 3,879
Operating earnings 3,504 4,011 4,514 7,209 3,489
Income tax expense 1,023 1,220 1,424 2,807 1,229
Net earnings $ 1,499 $ 1,850 $ 2,158 $ 4,304 $ 1,775
Earnings per share:
Basic $ .24 $ .28 $ .31 $ .68 $ .41
Diluted $ .24 $ .27 $ .31 $ .68 $ .41
Weighted average common shares
outstanding (1)
Basic 6,278 6,644 6,930 6,297 4,287
Diluted 6,287 6,733 7,004 6,297 4,287
BALANCE SHEET DATA:
Working capital (1) $25,239 $25,500 $25,923 $20,838 $ 5,883
Total assets (1) 44,583 44,985 42,315 36,380 18,494
Total debt (1) 14,375 16,444 13,510 527 6,561
Stockholder's equity (1) 25,096 24,371 24,113 21,955 6,342
(1) On April 19, 1995, the Company sold 2,530,000 shares of Class A common
stock at $5.25 per share in connection with its initial public offering. The
$11.3 million net proceeds from this offering were used to pay off the bank
line of credit, to retire long-term debt and to expand inventory.
-15-
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
semiconductors and optoelectronic devices to other electronic distributors,
contract electronic manufacturers (CEMs) and original equipment manufacturers
(OEMs), who incorporate them in their products.
The following table sets forth, for the periods indicated, certain operating
amounts and ratios:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------- --------------- -------------
(dollars in thousands)
Net sales $30,828 $33,945 $30,128
Cost of goods sold 21,991 24,293 20,744
% of net sales 71.3% 71.6% 68.9%
Gross profit 8,837 9,652 9,384
% of net sales 28.7% 28.4% 31.1%
Selling, general and administrative expenses 5,333 5,641 4,870
% of net sales 17.3% 16.6% 16.2%
Operating earnings 3,504 4,011 4,514
% of net sales 11.4% 11.8% 15.0%
Income tax expense 1,023 1,220 1,424
Effective tax rate as a % of earnings
before income taxes 40.6% 39.7% 39.8%
Net earnings $ 1,499 $ 1,850 $2,158
% of net sales 4.9% 5.5% 7.2%
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net sales for the year ended December 31, 1998 were $30,828,000 compared
with net sales for the year ended December 31, 1997 of $33,945,000, a
decrease of $3,117,000 or 9.2%. This decrease in net sales during 1998 was
attributable principally to a decline in the Company's domestic sales volume
of approximately $1,550,000. For most of 1998, the supply for discrete
semiconductors was greater than the demand. A decrease in export sales of
$1,500,000 also contributed to the decline in net sales. The Company has
continued to add new customers during 1998, but at a slower rate than during
in previous years. The decline in net sales was principally a result of an
industry wide decline in demand for discrete semiconductors.
Cost of goods sold decreased by $2,302,000 to $21,991,000 for the year
ended December 31, 1998, a decrease of 9.5% from the year ended December 31,
1997. Consistent with the decrease in net sales, the Company was able to
reduce the cost of goods sold. Gross profit on net sales decreased by
$815,000 to $8,837,000 for the year ended December 31, 1998 from $9,652,000
for the same period in 1997, and increased as a percentage of net sales to
28.7% from 28.4%. The increase in gross profit as a percentage of net sales
is primarily due to inventory price protection programs from various
suppliers partially offset by lower selling
-16-
prices obtained in the market place.
Selling, general and administrative expenses decreased by $308,000 or
5.5% for 1998 compared to 1997. These expenses, as a percentage of net sales,
increased to 17.3% for the year ended December 31, 1998 compared to 16.6% for
the year ended December 31, 1997. The Company was able to reduce selling,
general and administrative expenses during 1998, principally by eliminating
non-essential expenditures and reducing other non-essential overhead.
Operating earnings decreased by $507,000 or 12.6% between the years
ended December 31, 1998, and 1997, and decreased as a percentage of net
sales to 11.4% from 11.8%. Operating earnings decreased principally as a
result of decreases in both domestic and export sales and market price
reductions. The decrease in revenue was offset somewhat by a reduction in
cost of goods sold and selling, general and administrative expenses.
Interest expense for the year ended December 31, 1998 increased by
$109,000 compared to the year ended December 31, 1997. This increase is
primarily due to higher average principal credit line borrowings of $12.9
million during the current year as compared to $9.9 million average principal
credit line borrowings during the same period last year. The borrowings were
made to finance the acquisition of the Oracle Application System, stock
repurchase program and investment in a joint venture in Mexico during the
current year.
Income taxes were $1,023,000 for the year ended December 31, 1998,
representing an effective tax rate of 40.6%, compared to $1,220,000 for the
year ended December 31, 1997, an effective tax rate of 39.7%.
The Company had net earnings of $1,499,000 for the year ended December
31, 1998 as compared with net earnings of $1,850,000 for the year ended
December 31, 1997 a decrease of $351,000 or 19% for the reasons discussed
above. Net earnings as a percentage of net sales decreased to 4.9% from 5.5%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased $3,817,000 or
12.7% to $33,945,000 from $30,128,000 for the year ended December 31, 1996.
The increase in net sales during 1997 was attributable principally to an
increase in the volume of products sold of $6.1 million, partially offset by
net price reductions of approximately $3.2 million. The Company also
experienced an increase in export sales volume of approximately $1.0 million
and a $426,000 reduction in sales returns and allowances from customers. The
increase in net sales was principally a result of sales made to new customers
during 1997.
Cost of goods sold increased by $3,549,000 to $24,293,000 for the year
ended December 31, 1997, an increase of 17.1% from the year ended December
31, 1996. Early in 1996, the demand for discrete semiconductors was greater
than the supply. The intense competition for available supply of discrete
semiconductors caused the Company to purchase products for prices that were
higher than normal market conditions. As the high priced inventory was sold
in late 1996 and all of 1997, it caused cost of goods sold to increase as a
percentage of sales. Gross profit on net sales increased by $268,000 to
$9,652,000 for the year ended December 31, 1997 from $9,384,000 from the year
ended December 31, 1996, and decreased, as a percentage of net sales, to
28.4% from 31.1%.
Gross profit as a percentage of net sales decreased to 28.4% for the
year ended December 31, 1997 from 31.1% for the year ended December 31, 1996
principally as a result of lower selling prices due to the competitive market
place and as a result of higher export sales which usually have a lower
profit margin than domestic sales.
Selling, general and administrative expenses increased by $771,000 or
15.8% in 1997 as compared to 1996. The increase was attributable to
increased payroll costs principally as a result of the geographic expansion
of its direct sales force and the addition of sales support staff. The
increase in net sales resulted in an increase in commissions paid to both
sales employees and independent sales representatives. In addition,
management decided to take a one-time impairment charge in connection with
the abandonment of the Company's prior computer software system in the amount
of $163,000. Selling, general and administrative expenses, as a percentage
of net sales, increased to 16.6% for the year ended December 31, 1997
compared to 16.2% for the year ended December 31, 1996
-17-
Operating earnings decreased by $503,000 or 11.1% between the years
ended December 31, 1997 and 1996, and decreased as a percentage of net sales
to 11.8% from 15.0%. Operating earnings decreased principally as a result of
increased cost of sales and increases in selling, general and administrative
expenses as described above.
Interest expense, net, for the year ended December 31, 1997 increased
$14,000 compared to the year ended December 31, 1996. Net interest expense
as a percentage of net sales, decreased to 2.8% for the year ended December
31, 1997 compared to 3.1% for the year ended December 31, 1996. During 1997,
interest expense resulted from borrowings incurred to finance increased
inventory levels, trade receivables, computer software, office space and
equipment in the Taiwan office and to finance the repurchase of 487,113
shares of the Company's Class A Common Stock.
Income taxes were $1,220,000 for the year ended December 31, 1997,
resulting in an effective tax rate of 39.7%, compared to $1,424,000 for the
year ended December 31, 1996, an effective tax rate of 39.8%.
The Company had net earnings of $1,850,000 for the year ended December
31, 1997 as compared with net earnings of $2,158,000 for the year ended
December 31, 1996, a decrease of $308,000 or 14.3% for the reasons discussed
above. Net earnings as a percentage of net sales decreased to 5.5% from 7.2%.
SUPPLY AND DEMAND ISSUES
BACKGROUND
The year 1995 was exceptionally good for the Company and other discrete
suppliers. For most of 1995, the demand for discrete semiconductors, in
general, was greater than the supply. The intense competition for the
available supply of discrete semiconductors pushed the prices higher than in
normal market conditions. The Company, from time to time, could not fulfill
some sales orders because of the limited supply of certain of these products.
The supply shortage of discrete semiconductors in 1995 caused many
customers to order more than their needs to prevent future shortages and
suppliers expanded their capacity to meet the strong market demands. However,
with a weak market demand in the later part of 1996, many distributors and
end-users had built-up excessive inventories and as a result, the majority of
Taitron's customers were struggling with inventory adjustments and
corrections. To help customers readjust their inventories, Taitron
strategically decided to accept more returns and order cancellations than it
normally would.
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 will posture the Company to be
price competitive, while still maintaining acceptable profit margins.
As a result, the Company's inventory has increased significantly during
1996 and continuing into 1997, leading to the leasing of additional warehouse
space in 1996 and full utilization of the space in 1997. The Company's
inventory level peaked in May 1996 at $39.2 million and has subsequently been
reduced to $34.9 million at December 31, 1998. The Company is focusing its
efforts to maintain or gradually reduce its inventory while keeping adequate
stock to accommodate the Company's future growth, if any, when demand
increases.
CURRENT ISSUES
Taitron's competitive edge is its ability to fill customer orders
immediately from stock held in inventory. Thus, management has structured
inventory levels in such a way as to poise the Company to take advantage of a
recovery in the discrete semiconductor market. At the same time, if the
market recovery is slow in taking place, inventory levels should not impose
an unwarranted financial burden on the Company's earnings.
Management believes, that the strategies it has followed with its
customers and suppliers have cemented its relationships which will benefit
the Company in the future. The Company's core strategy has been to maintain
-18-
a substantial inventory of discrete semiconductors purchased at prices
generally lower than those commonly available to its competitors. The
Company has been able to offer its products to customers at competitive
prices and offers other incentives to customers, such as its no hassle
returns policy, which distinguishes the Company from most of its competitors.
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 and -
Need to Maintain Large Inventory; Price Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has satisfied its liquidity requirements
principally through cash generated from short-term commercial loans and the
sale of equity securities, including the initial public offering of its
common stock in April 1995. The Company's cash flows provided by (used in)
operating, financing and investing activities for the years ended December
31, 1998, 1997 and 1996 were as follows:
YEAR ENDED DECEMBER 31,
(In thousands)
--------------------------
1998 1997 1996
---- ---- ----
Operating activities....................... $ 4,220 $ (478) $(13,658)
Investing activities....................... (1,176) (998) (171)
Financing activities....................... (2,887) 1,398 12,984
In positioning itself as a "discrete components superstore," the Company
has been required to carry large inventory levels. However, since 1997, the
Company has focused on utilizing its current inventory, thereby reducing
inventory through 1998. As a result, inventory has decreased from $35.8
million at December 31, 1997 to $34.9 million at December 31, 1998.
The discrete semiconductor products distributed by the Company are
mature products, used in a wide range of commercial and industrial products
and industries. As a result, the Company has never experienced any material
amounts of product obsolescence. The Company also attempts to control its
inventory risks by matching large customer orders with simultaneous orders to
suppliers. Nonetheless, the high levels of inventory carried by the Company
increase the risks of price fluctuations and product obsolescence.
Investment activities consisted of the purchase of property and
equipment, principally computer equipment. Investment in computer systems
was $135,000, $424,000 and $957,000 for the years ended December 31, 1996,
1997 and 1998. During 1997, the Company invested $519,000 in its Taiwan
office, principally for acquisition of office and warehouse space. The
Company invested $957,000 in hardware and software for maintaining and
improving its new Oracle Applications System, which was implemented in the
second quarter of 1998. See "BUSINESS -Management Information Systems."
In May 1996, the Company issued a Convertible Subordinated Note (the
Note) for $3,000,000, with interest at 8% payable annually and the principal
is due May 2001. The Note is convertible into the Company's Class A Common
Stock at the conversion price of $5.25 per share. These securities have not
been registered under the Securities Act of 1933, as amended (the Act), and
the Company issued these securities in reliance upon exemption from
registration provided by Regulation S of the Act.
-19-
In May 1998, the Company renewed its $20 million 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 up to an additional $4 million for business acquisition purposes. Both
facilities mature on June 2, 2000. The agreement governing these credit
facilities contains covenants that require the Company to be in compliance
with certain financial ratios.
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 commitments for other
equity or debt financing or other capital expenditures.
YEAR 2000 ISSUES
GENERAL
The Company's Year 2000 Project (Project) is proceeding on schedule.
The Project is addressing the issue of computer chips being unable to
distinguish between the year 1900 and the year 2000. The Project consists of
three elements. First, the Company is evaluating its Year 2000 readiness in
both information technology ("IT") and non-IT systems. Non-IT systems
typically include embedded technology in electronic equipment, such as
microprocessors. Non-IT systems are more difficult to assess and repair than
IT systems. Second, for both IT and non-IT systems, the Company is planning
and implementing any necessary changes that the Company believes will make
the Company ready for the Year 2000. Third, the Company is evaluating the
effect that third-parties Year 2000 readiness may have on the Company's
business.
PROJECT
In 1997, in order to improve access to business information and to
prepare the Company for any future growth, the Company began a systems
replacement project to convert its then existing system to an Oracle based
system. Oracle was implemented during the third quarter of 1998. Oracle has
represented that their products used by the Company are Year 2000 fully
compliant meeting the requirements set out by the British Standards Institute
in DISC PD-2000-1 A DEFINITION OF YEAR 2000 CONFORMITY REQUIREMENTS. Year
2000 conformity means that neither performance nor functionality is affected
by dates prior to, during and after the year 2000. The other material
computer software programs utilized by the Company are supplied by vendors
that also publish that their products are Year 2000 compliant. The Company
believes that its IT systems are approximately 95% Year 2000 compliant now
and if further evaluation uncovers a problem the software will be replaced
before December 31, 1999. The Company has begun the evaluation of its non-IT
systems, but the Project plan is to have the evaluation completed and where
necessary replacement equipment installed and operational by the end of the
third quarter of 1999. The Company has also begun the evaluation of
third-parties Year 2000 readiness. This includes identifying and
prioritizing critical suppliers, customers and other third-parties by
communicating with them about their plans and progress in addressing the Year
2000 problem. These evaluations will be followed by the development of
contingency plans, which are scheduled to be developed in the second quarter
of 1999.
COSTS
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 Project is less than
$25,000 and consists principally of replacing old IT and Non-IT equipment
where compliance with Year 2000 is in doubt. The cost of implementing the
Oracle system and any resulting equipment replacement or upgrades are not
included in these costs estimates as the Company did not accelerate the
replacement of its old system due to Year 2000 issues.
RISKS The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
company's results of operations, liquidity or financial condition. The
Year 2000
-20-
Project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular, about the Year
2000 compliance and readiness of its material external third-parties. The
Company believes that, with the implementation of new business systems and
completion of the Project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Readers are cautioned that the foregoing statements contained in the
Year 2000 Update are forward looking and are necessarily speculative. There
can be no guarantee that the Company will not encounter a material Year 2000
problem that may adversely affect the Company's results of operations,
liquidity and financial position. In addition to the statements made under
the Year 2000 Update, several of the matters discussed in this document
contain forward looking statements that involve risks and uncertainties.
Such forward looking statements are usually denoted by words or phrases such
as "believes," "expects," "projects," "estimates," "anticipates," "will
likely result," "plans," or similar expressions. The Company wishes to
caution readers that all forward looking statements are necessarily
speculative and not to place undue reliance on such forward looking
statements, which speak only as of the date made, and to advise readers that
actual results could vary due to a variety of risks and uncertainties. In
addition, readers should carefully consider the information contained in the
heading "Cautionary Statements and Risk Factors" elsewhere provided herein.
ASIAN ECONOMIC ISSUES
Many of the Company's suppliers have their manufacturing facilities in
countries who's economies are experiencing financial problems. Mounting
trade deficits have sent interest rates soaring and local currencies
plunging. The US dollar's rise compared with Asian currencies may reduce
exports to Asia in the future. During 1998, the Company sold $1,339,000 or
4.3% of net sales to Asian customers and most of the products purchased by
the Company are manufactured in Asia. Management believes that the decline
in Asian currencies may actually benefit the Company in the short-term by
providing an opportunity for the Company to purchase products at lower
prices.
-21-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements as of December 31, 1998, 1997 and 1996 and for the years
then ended and the Independent Auditors' Report are included on pages 23 to 37
of this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS
TAITRON COMPONENTS INCORPORATED
Page
----
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Balance Sheets at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 25
Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996. . . . . . . . . 27
Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 . . . 28
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996. . . . . . . . 29
Notes to Financial Statements for the Years Ended December 31, 1998, 1997 and 1996 . . . . . 30
-22-
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taitron Components Incorporated:
We have audited the accompanying balance sheet of Taitron Components
Incorporated as of December 31, 1998 and the related statements of earnings,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taitron Components
Incorporated as of December 31, 1998 and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton
Los Angeles, California
February 19, 1999
-23-
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taitron Components Incorporated:
We have audited the accompanying balance sheet of Taitron Components
Incorporated as of December 31, 1997 and the related statements of earnings,
shareholders' equity and cash flows for each of the years in the two year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 financial position of Taitron Components
Incorporated as of December 31, 1997 and the results of its operations and
its cash flows for each of the years in the two year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
February 11, 1998
-24-
TAITRON COMPONENTS INCORPORATED
Balance Sheets
December 31, 1998 and 1997
1998 1997
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 364,000 $ 163,000
Trade accounts receivable, net 4,528,000 5,398,000
Inventory, net 34,868,000 35,757,000
Prepaid expenses 360,000 169,000
Deferred income taxes 861,000 716,000
Other current assets 290,000 436,000
----------------- -----------------
Total current assets 41,271,000 42,639,000
Property and equipment, net 2,976,000 2,309,000
Other assets 336,000 37,000
----------------- -----------------
Total assets $ 44,583,000 $ 44,985,000
----------------- -----------------
----------------- -----------------
-25-
Taitron Components Incorporated
Balance Sheets
December 31, 1998 and 1997
1998 1997
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 10,900,000 $ 12,950,000
Current portion of long-term debt 20,000 19,000
Trade accounts payable 4,407,000 3,235,000
Accrued liabilities 705,000 935,000
------------------ ------------------
Total current liabilities 16,032,000 17,139,000
Long-term debt, less current portion 3,455,000 3,475,000
------------------ ------------------
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; 5,376,096 and 5,685,062 shares issued
and outstanding at December 31, 1998 and 1997,
respectively 5,000 5,000
Class B common stock, $.001 par value. Authorized,
issued and outstanding 762,612 shares at December 31,
1998 and 1997 1,000 1,000
Additional paid-in capital 12,179,000 12,997,000
Accumulated other comprehensive income, net of tax (13,000) (57,000)
Retained earnings 12,924,000 11,425,000
------------------ ------------------
Total shareholders' equity 25,096,000 24,371,000
------------------ ------------------
Total liabilities and shareholders' equity $ 44,583,000 $ 44,985,000
------------------ ------------------
------------------ ------------------
See accompanying notes to financial statements.
-26-
TAITRON COMPONENTS INCORPORATED
Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------------- ---------------- ----------------
Net sales $ 30,828,000 $ 33,945,000 $ 30,128,000
Cost of goods sold 21,991,000 24,293,000 20,744,000
--------------- ---------------- ----------------
Gross profit 8,837,000 9,652,000 9,384,000
Selling, general and administrative expenses 5,333,000 5,641,000 4,870,000
--------------- ---------------- ----------------
Operating earnings 3,504,000 4,011,000 4,514,000
Interest expense, net 1,065,000 956,000 942,000
Other income (83,000) (15,000) (10,000)
--------------- ---------------- ----------------
Earnings before income taxes 2,522,000 3,070,000 3,582,000
Income tax expense 1,023,000 1,220,000 1,424,000
--------------- ---------------- ----------------
Net earnings $ 1,499,000 $ 1,850,000 $ 2,158,000
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Earnings Per Share:
Basic $ .24 $ .28 $ .31
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Diluted $ .24 $ .27 $ .31
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Weighted Average Common Shares Outstanding:
Basic 6,277,697 6,643,975 6,929,953
--------------- ---------------- ----------------
--------------- ---------------- ----------------
Diluted 6,286,912 6,732,856 7,003,883
--------------- ---------------- ----------------
--------------- ---------------- ----------------
See accompanying notes to financial statements.
-27-
TAITRON COMPONENTS INCORPORATED
Statement of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Accumulated
Class A common stock Class B common stock Other Total
-------------------- -------------------- Additional Retained Comprehensive Shareholders'
Shares Amount Shares Amount paid-in capital earnings Income Equity
------ ------ ------ ------ --------------- -------- ------ ------
Balances at
December 31, 1995 6,167,341 $6,000 762,612 $1,000 $14,531,000 $7,417,000 $ - $21,955,000
Net earnings - - - - - 2,158,000 - 2,158,000
--------- ------ ------- ------ ----------- ---------- -------- -----------
Balances at
December 31, 1996 6,167,341 6,000 762,612 1,000 14,531,000 9,575,000 - 24,113,000
Exercise of stock
options 4,834 - - - 11,000 - - 11,000
Repurchase of common
stock (487,113) (1,000) - - (1,548,000) - - (1,549,000)
Tax effect of
disqualifying
disposition
of stock options - - - - 3,000 - - 3,000
Comprehensive income:
Foreign currency
translation
adjustment - - - - - - (57,000) (57,000)
Net earnings - - - - - 1,850,000 - 1,850,000
Comprehensive income - - - - - - - 1,793,000
--------- ------ ------- ------ ----------- ---------- -------- -----------
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
--------- ------ ------- ------ ----------- ---------- -------- -----------
--------- ------ ------- ------ ----------- ---------- -------- -----------
See accompanying notes to financial statements.
-28-
TAITRON COMPONENTS INCORPORATED
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------------- ------------------ ----------------
Cash flows from operating activities:
Net earnings $ 1,499,000 $ 1,850,000 $ 2,158,000
------------------- ------------------ ----------------
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 309,000 348,000 139,000
Deferred income taxes (145,000) (104,000) (212,000)
Changes in assets and liabilities:
Trade accounts receivable 870,000 (1,288,000) 1,252,000
Inventory 889,000 (589,000) (7,416,000)
Prepaid expenses and other current assets (45,000) (42,000) (351,000)
Other assets (99,000) (12,000) (22,000)
Trade accounts payable 1,172,000 (502,000) (9,125,000)
Accrued liabilities (230,000) (139,000) (81,000)
------------------- ------------------ ----------------
Total adjustments 2,721,000 (2,328,000) (15,816,000)
------------------- ------------------ ----------------
Net cash provided by (used in) operating
activities 4,220,000 (478,000) (13,658,000)
Cash flows from investing activities
Acquisition of property and equipment (976,000) (998,000) (171,000)
Loans to others (200,000) - -
------------------- ------------------ ----------------
Net cash used in investing activities (1,176,000) (998,000) (171,000)
------------------- ------------------ ----------------
Cash flows from financing activities:
Borrowings on long-term debt 4,000,000 12,950,000 13,000,000
Proceeds from exercise of stock options 12,000 11,000 -
Tax effect of disqualifying dispositions of stock options - 3,000 -
Payments on long-term debt (6,069,000) (10,017,000) (16,000)
Repurchase of Company stock (830,000) (1,549,000) -
------------------- ----------------- ----------------
Net cash (used in) provided by financing
activities (2,887,000) 1,398,000 12,984,000
------------------- ------------------ ----------------
Impact of changes in exchange rates on cash 44,000 (59,000) -
Net increase (decrease) in cash and cash
equivalents 201,000 (137,000) (845,000)
Cash and cash equivalents, beginning of year 163,000 300,000 1,145,000
------------------- ------------------ ----------------
Cash and cash equivalents, end of year $ 364,000 $ 163,000 $ 300,000
------------------- ------------------ ----------------
------------------- ------------------ ----------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,182,000 $ 1,008,000 $ 758,000
Cash paid for income taxes $ 996,000 $ 1,410,000 $ 1,710,000
------------------- ------------------ ----------------
------------------- ------------------ ----------------
See accompanying notes to financial statements.
29
TAITRON COMPONENTS INCORPORATED
Notes to 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 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.
CONCENTRATION OF RISK
A significant number of the products distributed by the Company are
manufactured in Taiwan, China, 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 made.
Sales returns for the years ended December 31, 1998, 1997 and 1996
aggregated $1,128,000, $1,110,000 and $1,536,000, respectively.
30
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The allowance for sales returns and doubtful accounts was $160,000 and
$135,000 at December 31, 1998 and 1997, respectively.
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
value presented in the accompanying financial statements is net of
valuation allowances of $1,593,000 and $1,291,000 at December 31, 1998
and 1997, respectively.
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 in the date of grant only if the current market price of the
underlying stock exceeded the exercise price, and provide 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 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.
31
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 division in Taiwan, which was
established in 1997, 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 immaterial to the financial statements for 1998, 1997 and
1996
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which prescribes standards for reporting comprehensive income and
its components. The Company's comprehensive income consists of net
earnings for the current period and the realized foreign currency
translation adjustments.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 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,
---------------------------------------
1998 1997
------------------ ------------------
Land $ 474,000 $ 474,000
Building and improvements 1,487,000 1,479,000
Furniture and equipment 524,000 514,000
Computer and test equipment 1,527,000 570,000
------------------ ------------------
4,012,000 3,037,000
Less accumulated depreciation and amortization 1,036,000 728,000
------------------ ------------------
$ 2,976,000 $ 2,309,000
------------------ ------------------
------------------ ------------------
(3) REVOLVING LINE OF CREDIT
On May 6, 1997, the Company replaced its $15 million revolving line of
credit with a new revolving line of credit facility which provides the
Company with up to $16 million for operating purposes and up to an
additional $4 million for business acquisition purposes, which matures on
June 2, 2000.
32
The agreement governing these credit facilities 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.
Both the old and new revolving lines of credit contain security
agreements which essentially cover all assets of the Company and bear
interest at the bank's prime rate (7.75% and 8.5% at December 31, 1998
and 1997, respectively) or at the option of the Company, at LIBOR
(weighted average of 5.34% and 5.65% at December 31, 1998 and 1997
respectively) plus 1.375% after May 6, 1997 and 1.5% prior to that date.
(4) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
1998 1997
----------------- -----------------
Second trust deed loan payable in monthly installments of
$4,390, bearing interest at the rate of 6.359% per annum,
due December 1, 2013 and guaranteed by certain officers
of the Company $ 475,000 $ 494,000
8% convertible subordinated debenture, interest
due May 18, 2001. 3,000,000 3,000,000
-------------- --------------
3,475,000 3,494,000
Less current portion 20,000 19,000
--------------- ---------------
$ 3,455,000 $ 3,475,000
-------------- --------------
-------------- --------------
Minimum future payments of long-term debt are summarized as follows:
Year ending December 31:
1999 $ 20,000
2000 21,000
2001 3,022,000
2002 24,000
2003 26,000
Thereafter 362,000
-----------------
$ 3,475,000
-----------------
-----------------
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 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.
(4) SHAREHOLDERS' EQUITY
There are 5,000,000 shares 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 authorized Class A common stock, par value
$.001 per share, with 5,376,096 and 5,685,062 shares issued and
outstanding as of December 31, 1998 and 1997, respectively. Each holder
of Class A common stock is entitled to one vote for each share held.
There are 762,612 shares authorized Class B common stock, par value $.001
per share, with 762,612 shares issued and outstanding as of December 31,
1998 and 1997. Each holder of Class B common stock is entitled to ten
votes for each share held. The shares of Class B common stock are
33
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 1998 and 1997, the Company repurchased 314,300 and 487,113 shares
of its Class A Common Stock on the open market for $830,000 and
$1,549,000 in the aggregate and permanently retired such shares.
(5) INCOME TAXES
Income tax expense is summarized as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Current:
Federal $ 867,000 $ 1,008,000 $ 1,272,000
State 301,000 316,000 392,000
---------------- ---------------- ---------------
1,168,000 1,324,000 1,664,000
Deferred:
Federal (80,000) (86,000) (197,000)
State (65,000) (18,000) (43,000)
---------------- ---------------- ---------------
(145,000) (104,000) (240,000)
---------------- ---------------- ---------------
$ 1,023,000 $ 1,220,000 $ 1,424,000
---------------- ---------------- ---------------
---------------- ---------------- ---------------
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
---------------------------------------------
1998 1997 1996
------------------ ---------------- ----------------
"Expected" income tax expense $ 857,000 $ 1,044,000 $ 1,218,000
State tax expense, net of Federal benefit 155,000 190,000 220,000
Other 11,000 (14,000) (14,000)
------------------ ---------------- ----------------
$ 1,023,000 $ 1,220,000 $ 1,424,000
------------------ ---------------- ----------------
------------------ ---------------- ----------------
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: 1998 1997
---------------- -----------------
Inventory reserves $ 586,000 $ 455,000
Section 263a adjustment 162,000 150,000
Allowances for bad debts and returns 69,000 84,000
Accrued expenses 78,000 49,000
Other 9,000 -
---------------- -----------------
Total deferred tax assets 904,000 738,000
Deferred tax liability - depreciation (43,000) (22,000)
---------------- -----------------
Net deferred tax assets $ 861,000 $ 716,000
---------------- -----------------
---------------- -----------------
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, 1998, it is more likely than not that the Company will realize the
benefits of these deductible differences.
34
(6) 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, 1998, 1997 and 1996 employer matching contributions
aggregated approximately $32,000, $29,000 and $30,000, respectively. The
plan purchased 17,942, 28,666 and 28,991 shares of the Company's common
stock on the open market for cash consideration of approximately $34,000,
$97,000 and $135,000 during the years ended December 31, 1998, 1997 and
1996, respectively.
(7) 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
SARs issued during 1995 and 1996 with exercise prices of $5.25 and $7.125
the right to receive, in place of such options, an 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.
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, $3,800 and $1,200 in 1998, 1997 and 1996,
respectively.
The fair value of options, SAR's and warrants used to compute pro forma
net income 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 for 1998, 1997 and 1996: 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:
35
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
Net earnings As reported $1,499,000 $1,850,000 $2,158,000
Pro forma $1,410,000 $1,482,000 $1,838,000
Diluted Earnings per share As reported $ .24 $ .27 $ .31
Pro forma $ .22 $ .22 $ .26
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, 1995 329,300 $ 6.44
Granted 162,050 2.34
Exercised - -
Forfeited (35,200) 6.44
Canceled (294,100) 6.44
-----------------
Balance at December 31, 1996 162,050 2.34
-----------------
Granted 253,400 2.51
Exercised (4,834) 2.25
Forfeited (33,066) 2.50
Canceled - -
-----------------
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
-----------------
The weighted average fair value of options granted in 1997 and 1996 was
$.94 and $.76, respectively. There were no options granted in 1998.
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.25 to $3.25 and
19 months, respectively.
At December 31, 1998, 1997 and 1996, the number of options exercisable
was 251,566, 193,006 and 49,017, respectively, and weighted average
exercise prices of those options were $2.67, $2.36 and $2.25,
respectively.
(8) NET EARNINGS PER SHARE
The following data show 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,
---------------------------------------------------
1998 1997 1996
------------- ------------- --------------
Net earnings available to common
shareholders used in basic EPS $ 1,499,000 $ 1,850,000 $ 2,158,000
------------- ------------- --------------
------------- ------------- --------------
Weighted average number of common shares
used in basic EPS 6,277,697 6,643,975 6,929,953
------------- ------------- --------------
Basic EPS $ .24 $ .28 $ .31
------------- ------------- --------------
Effect of dilutive securities:
Warrants - - -
Options 9,215 88,881 73,930
------------- ------------- --------------
Weighted number of common shares and
dilutive potential common shares used in
diluted EPS 6,286,912 6,732,856 7,003,883
------------- ------------- --------------
------------- ------------- --------------
Diluted EPS $ .24 $ .27 $ .31
------------- ------------- --------------
------------- ------------- --------------
36
Warrants on 220,000 shares of common stock were not included in computing
diluted EPS for the years ended December 31, 1998, 1997 and 1996 because
their effects were antidilutive. 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, 1998
and 1997 because their effects were antidilutive.
(9) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases equipment under noncancelable operating leases
expiring on various dates through 1999 with total future commitments of
$95,000. In May 1996, the Company entered into a two year lease for
additional warehouse space of approximately 30,000 square feet located in
Santa Clarita, California which is now completely occupied by the
Company. Rental expense for the years ended December 31, 1998, 1997 and
1996 aggregated $175,000, $160,000 and $112,000, respectively.
At December 31, 1998 and 1997, the Company had no standby or commercial
letters of credit outstanding under the revolving line of credit
agreement with the bank (Note 3).
(10) 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, 1998,
1997 and 1996:
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
-------------- --------------- ---------------- --------------
Allowance for sales returns and
doubtful accounts:
1996 $ 138,000 $ 1,540,000 $ 1,543,000 $ 135,000
1997 $ 135,000 $ 1,169,000 $ 1,169,000 $ 135,000
1998 $ 135,000 $ 1,006,000 $ 981,000 $ 160,000
Inventory reserves:
1996 $ 447,000 $ 541,000 $ - $ 988,000
1997 $ 988,000 $ 303,000 $ - $ 1,291,000
1998 $ 1,291,000 $ 302,000 $ - $ 1,593,000
(11) SUBSEQUENT EVENTS
During February, 1999, the Company converted accounts receivable of
$346,000 and $87,000, due from two unrelated customers, into notes
receivable for the same amounts, bearing annual interest of 9% each and
due in February 2000 and May 1999, respectively.
37
ITEM 9.CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ACCOUNTING AND
FINANCIAL DISCLOSURES
On December 8, 1998, the Company filed on Form 8-K, dated December 2,
1998, reporting a change of the Company's accountants. KPMG, LLP (formerly known
as KPMG Peat Marwick LLP) ("KPMG") was previously the principal accountants for
the Company. On December 2, 1998, KPMG was dismissed by the Company as principal
accountants and Grant Thornton LLP was engaged as principal accountants to audit
the accounts of the company for the year ending December 31, 1998. The decision
to change accountants was approved by the Company's Audit Committee and the
Board of Directors.
During the fiscal years ended December 31, 1997 and 1996 and through
the date of this report, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure or audit
scope or procedure which disagreement, if not resolved to the satisfaction of
KPMG, would have caused them to make reference to the matter of such
disagreement in connection with the Form 8-K, dated December 2, 1998. The
accountant's report for the fiscal years ended December 31, 1997 and 1996 did
not contain an adverse opinion or a disclaimer of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
The Company had requested that KPMG furnish it with a letter addressed
to the Securities and Exchange Commission stating whether it agrees with the
above statements. A copy of that letter is filed as Exhibit 16 to the Form 8-K,
dated December 2, 1998, incorporated herein by reference.
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, 1998.
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.
38
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).*
3.2 Bylaws of the Registrant.*
4.1 Specimen certificate evidencing Class A Common Stock of the
Registrant.*
4.2 Form of Underwriter's Warrant.*
10.1 Form of Director and Officer Indemnification Agreement.*
10.2 1995 Stock Incentive Plan, As Amended *****
10.3 Form of Employment Agreement, dated as of January 1, 1995, by
and between the Registrant and Stewart Wang.*
10.4 Loan and Security Agreement, dated May 5, 1994, between the
Registrant and Union Bank.*
10.5 Loan Agreement, dated October 15, 1993, by and between the
Registrant and California Statewide Certified Development
Corporation.*
10.6 Wm Michaels Limited Regional Prototype Defined Contribution
Plan and Trust.****
10.7 Form of Sales Representative Agreement.*
10.8 Loan Agreement, dated June 16, 1995, between Registrant and
Union Bank.**
10.9 Convertible Subordinated Note Agreement, dated May 18, 1996,
by and between the Registrant and Tenrich Holdings.***
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.***
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.*****
10.12 Business Loan Agreement and Addendum, dated May 6, 1997,
between the Registrant and Comerica Bank - California. ****
10.13 Master Revolving Note and Addendum, dated May 6, 1997, between
the Registrant and Comerica Bank - California. ****
10.14 Security Agreement, dated May 6, 1997, between the Registrant
and Comerica Bank - California. ****
39
23.1 Consent of KPMG, LLP
24.1 Power of Attorney (see page 41 of this Annual Report on
Form 10-K).
27 Financial Data Schedule
- ------------------------------------------------------------------------------
* Incorporation by reference from Taitron Components
Incorporated Registration Statement on Form SB-2, Registration
No. 33-90294-LA.
** Incorporation by reference from Taitron Components
Incorporated Form 10-KSB for the Fiscal year ended
December 31, 1995.
*** Incorporated by reference from Taitron Components Incorporated
Form 10-QSB for the quarter ended June 30, 1996.
**** Incorporated by reference from Taitron Components Incorporated
Form 10-QSB for the quarter ended June 30, 1997.
***** Incorporated by reference from Taitron Components Incorporated
Form 10-QSB for the quarter ended June 30, 1998.
(b) REPORTS ON FORM 8-K:
None
40
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 29, 1999
--------------------------
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 29, 1999
- ------------------------------------------------
Johnson Ku
/s/ Stewart Wang Chief Executive Officer, President March 29, 1999
- ------------------------------------------------ and Director
Stewart Wang (Principal Executive Officer)
/s/ Steven H. Dong Chief Financial Officer March 29, 1999
- ------------------------------------------------ and Secretary
Steven H. Dong (Principal Financial and Accounting Officer)
/s/ Richard Chiang Director March 29, 1999
- ------------------------------------------------
Richard Chiang
/s/ Winston Gu Director March 29, 1999
- ------------------------------------------------
Winston Gu
/s/ Felix Sung Director March 29, 1999
- ------------------------------------------------
Felix Sung
41