U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25844
TAITRON COMPONENTS INCORPORATED
(Exact 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)
(661) 257-6060
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
Check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- ---------
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class A Common Stock, $.001 par value, 5,353,996 shares outstanding as of
April 30, 1998
Class B Common Stock, $.001 par value, 762,612 shares outstanding as of
April 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TAITRON COMPONENTS INCORPORATED
Condensed Balance Sheets
(Dollars in Thousands)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
----------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 50 $ 364
Trade accounts receivable, net 3,877 4,528
Inventory 33,231 34,868
Prepaid expenses 337 360
Deferred income taxes and other current assets 1,423 1,151
----------------- -----------------
Total current assets 38,918 41,271
Property and equipment, net 2,879 2,976
Other assets 362 336
----------------- -----------------
Total assets $ 42,159 $ 44,583
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of bank revolving line of credit and long term debt 10,130 10,920
Trade accounts payable 2,439 4,407
Accrued liabilities 822 705
----------------- -----------------
Total current liabilities 13,391 16,032
----------------- -----------------
Long-term debt, less current portion 3,450 3,455
----------------- -----------------
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;
issued and outstanding 5,353,996 and 5,376,096 shares as of March 31, 5 5
1999 and December 31, 1998, respectively.
Class B common stock, $.001 par value. Authorized, issued and
outstanding 762,612, shares as of March 31, 1999 and 1998. 1 1
Additional paid-in capital 12,139 12,179
Accumulated comprehensive income (15) (13)
Retained earnings 13,188 12,924
----------------- -----------------
Total shareholders' equity 25,318 25,096
----------------- -----------------
Total liabilities and shareholders' equity $ 42,159 $ 44,583
----------------- -----------------
----------------- -----------------
See accompanying notes to financial statements
2
TAITRON COMPONENTS INCORPORATED
Condensed Statements of Earnings
(Dollars in thousands, except per share amounts)
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1999 1998
------------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 6,809 $ 8,574
Cost of goods sold 4,775 6,074
------------------- ------------------
Gross profit 2,034 2,500
Selling, general and administrative expenses 1,389 1,364
------------------- ------------------
Operating earnings 645 1,136
Interest expense, net 219 290
Other expense (income), net (23) 8
------------------- ------------------
Earnings before income taxes 449 838
Income tax expense 185 335
------------------- ------------------
Net earnings $ 264 $ 503
------------------- ------------------
Earnings Per Share:
Basic $ .04 $ .08
------------------- ------------------
------------------- ------------------
Diluted $ .04 $ .08
------------------- ------------------
------------------- ------------------
Weighted average common shares outstanding:
Basic 6,118,608 6,366,141
------------------- ------------------
------------------- ------------------
Diluted 6,118,608 6,393,702
------------------- ------------------
------------------- ------------------
See accompanying notes to financial statements
3
TAITRON COMPONENTS INCORPORATED
Condensed Statements of Cash Flows
(Dollars in Thousands)
THREE MONTHS ENDED MARCH 31
---------------------------------------
1999 1998
------------------ ------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net earnings $ 264 $ 503
------------------ ------------------
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization 111 44
Deferred income taxes -- (33)
Changes in:
Trade accounts receivable 651 (340)
Inventory 1,637 (1,785)
Prepaid expenses 23 307
Other current assets (272) --
Other assets (26) (7)
Trade accounts payable (1,968) 2,387
Accrued and other liabilities 117 276
------------------ ------------------
Total adjustments 273 849
------------------ ------------------
Net cash provided by operating activities 537 1,352
------------------ ------------------
Cash flows from investing activities -
Acquisitions of property and equipment (14) (238)
------------------ ------------------
Cash flows from financing activities:
Borrowings made on revolving line of credit and long term debt 600 600
Payments made on revolving line of credit and long term debt (1,397) (1,455)
Repurchase of Class A Common Stock (40) (349)
------------------ ------------------
Net cash used in financing activities (837) (1,204)
------------------ ------------------
Net decrease in cash and cash equivalents (314) (90)
Cash and cash equivalents, beginning of period 364 163
------------------ ------------------
Cash and cash equivalents, end of period $ 50 $ 73
------------------ ------------------
------------------ ------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 150 $ 217
------------------ ------------------
------------------ ------------------
Cash paid for income taxes $ -- $ 8
------------------ ------------------
------------------ ------------------
See accompanying notes to financial statements
4
TAITRON COMPONENTS INCORPORATED
Notes to Financial Statements
March 31, 1999
(1) BASIS OF PRESENTATION
The financial information furnished herein is unaudited, and, in the
opinion of the management, includes all adjustments (all of which are
normal, recurring adjustments) in conformity with the accounting
principles reflected in the financial statements included in the Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1998. The results of operations for interim
periods are not necessarily indicative of results to be achieved for full
fiscal years.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation
of financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. The financial statements
and notes should, therefore, be read in conjunction with the financial
statements and notes thereto in the Annual Report on Form 10-K for the
year ended December 31, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized upon shipment of the merchandise. Reserves for
sales allowances and customer returns are established based upon
historical experience and management's estimates as shipments are made.
Sales returns for the quarters ended March 31, 1999 and 1998 aggregated
$211,000 and $285,000, respectively.
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The allowance for sales returns and doubtful accounts at March 31, 1999
and December 31, 1998 aggregated $149,000 and $160,000, respectively.
INVENTORY
Inventory, consisting principally of products for resale, is stated at
the lower of cost or market, using the first-in, first-out method. The
value presented is net of valuation allowances of $1,200,000 and
$1,593,000 at March 31, 1999 and December 31, 1998, respectively.
RECLASSIFICATION
The 1998 balances have been reclassified to conform with the 1999
balances where appropriate.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company distributes a wide variety of transistors, diodes and other
semiconductors, optoelectronic devices and passive components to other
electronic distributors and to original equipment manufacturers.
The following table sets forth, for the periods indicated, certain operating
amounts and ratios as a percentage of net sales.
THREE MONTH PERIOD ENDED
MARCH 31,
--------------------------------
1999 1998
-------------- -------------
(Dollars in Thousands)
Net sales $ 6,809 8,574
Cost of goods sold 4,775 6,074
Gross profit 2,034 2,500
% of net sales 29.9% 29.2%
Selling, general and administrative expenses 1,389 1,364
% of net sales 20.4% 15.9%
Operating earnings 645 1,136
% of net sales 9.5% 13.2%
Interest expense, net 219 290
% of net sales 3.2% 3.4%
Net earnings 264 503
% of net sales 3.9% 5.9%
THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTH PERIOD
ENDED MARCH 31, 1998
Net sales for the three months ended March 31, 1999 were $6,809,000,
compared with net sales for the three months ended March 31, 1998 of
$8,574,000, a decrease of $1,765,000 or 20.6%. This sales decrease was
attributable principally to a decline in the Company's domestic sales volume
of approximately $1,368,000. For most of the current quarter, the supply for
discrete semiconductors was greater than the demand. A decrease in export
sales of $413,000 also contributed to the decline in net sales. The decline
in net sales was principally a result of a continued industry wide decline in
demand for discrete semiconductors.
Cost of goods sold decreased by $1,299,000 to $4,775,000 for the
three month period ended March 31, 1999, a decrease of 21.4% from the three
month period ended March 31, 1998. Cost of goods sold decreased principally
as a result of the decrease in the number of units sold. Gross profit
decreased by $466,000 to $2,034,000 for the three months ended March 31, 1999
from $2,500,000 for the same period in 1998. Cost of goods sold as a
percentage of net sales was 70.1% in the first three months of 1998, a
decrease from 70.9% in the first three months of 1998.
6
Selling, general and administrative expenses increased by $25,000 or
1.8% for the three months ended March 31, 1999 compared to the same period of
1998. As expected, there was no significant change in the Company's operating
expenses during the current quarter ended March 31, 1999, when compared to
the same quarter last year.
Operating earnings decreased by $491,000 or 43.2% between the three
month period ended March 31, 1999 and 1998, and decreased as a percentage of
net sales to 9.5% from 13.2%. Operating earnings decreased principally as a
result of decreased net sales and a small increase in selling, general and
administrative expenses described above.
Interest expense, net of interest income for the three months ended
March 31, 1999 decreased by $71,000 compared to the three months ended March
31, 1998. The decrease is due to decreased borrowings as smaller purchases of
inventory were made during the current quarter as compared to the same
quarter last year.
Income taxes were $185,000 in the three months ended March 31,
1999, representing an effective tax rate of 41.2%, compared to $335,000 for
the same period in 1998, an effective tax rate of 40.0%.
The Company had net earnings of $264,000 for the three months ended
March 31, 1999 as compared with net earnings of $503,000 for the three months
ended March 31, 1998, a decrease of $239,000 or 47.5% for the reasons
discussed above. Net earnings as a percentage of net sales decreased to 3.9%
from 5.9%.
SUPPLY AND DEMAND ISSUES
Beginning in 1996 and continuing through the current quarter ended
March 31, 1999, the supply of most products distributed by the Company has
been more than sufficient to meet customer's demand for these products. The
weak demand left suppliers with large amounts of uncommitted products. When
the opportunity arises, the Company may consider taking advantage of this
situation by making opportunistic purchases of suppliers' uncommitted
capacity at favorable pricing, however, since the later part of 1997, the
Company also has focused on reducing it's overall inventory on hand.
Management attempts to structure 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.
Readers are cautioned that the foregoing statements are forward
looking and are necessarily speculative. There can be no guarantee that a
recovery in the discrete semiconductor market will take place. Also, 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 "-Cautionary Statement Regarding Forward Looking Information".
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its liquidity requirements principally
through cash generated from operations and short-term commercial loans. A
summary of the Company's cash flows resulting from its operating, investing
and financing activities for the three months ended March 31, 1999 and 1998
were as follows:
7
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
------ -------
(Dollars in Thousands)
Operating activities.......................................... $ 537 $ 1,352
Investing activities.......................................... (14) (238)
Financing activities.......................................... (837) (1,204)
Cash flows from operating activities decreased to $537,000 from
$1,352,000 during the three months ended March 31, 1999 and 1998,
respectively, which is partially due to the over all decline in sales during
the current quarter as compared to the same quarter last year. Moreover, 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 1999. As a result, inventory has decreased from $34.9
million at December 31, 1998 to $33.2 million at March 31, 1999. Cash flows
generated by the decrease in inventory was offset by a greater decrease in
accounts payable during the current quarter ended March 31, 1999, compared to
the same quarter last year.
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.
Cash flows used in investing activities decreased to $14,000 from
$238,000 during the three months ended March 31, 1999 and 1998, respectively,
primarily due to fewer purchases of fixed assets during the current quarter
ended March 31, 1999, as compared to the same period last year. During the
first quarter of fiscal 1998, the Company began to purchase its Oracle
Application System, which was fully implemented in the second quarter of
fiscal 1998. There were no such purchases during the current quarter ended
March 31, 1999.
Cash flows used in financing activities decreased to $837,000 from
$1,204,000 during the three months ended March 31, 1999 and 1998,
respectively, primarily due to less repurchases of the Company's Class A
common stock and less payments on the Company's bank revolving lines of
credit and long term debt during the current quarter ended March 31, 1999, as
compared to the same quarter ended March 31, 1998.
The Company believes that funds generated from operations and it's
bank revolving lines of credit will be sufficient to finance its working
capital and capital expenditure requirements for the foreseeable future.
As of the date of this Report, the Company has no commitments for
other equity or other debt financing or other capital expenditures.
8
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
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," 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. Factors associated with the forward looking
statements that could cause the forward looking statements to be inaccurate
and could otherwise impact the Company's future results are set forth in
detail in the Company's most recent annual report on Form 10-K. In addition
to the other information contained in this document, readers should carefully
consider the information contained in the Company's Form 10-K for the year
ended December 31, 1998 under the heading "Cautionary Statements and Risk
Factors."
YEAR 2000
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.
9
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 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.
PART II. OTHER INFORMATION
Item 1. through Item 5.
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
10
SIGNATURES
In accordance with the requirements of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TAITRON COMPONENTS INCORPORATED
Date: May 12, 1999 By: /s/ Stewart Wang
-------------------------------------
Stewart Wang
Chief Executive Officer
and Director
Date: May 12, 1999 By: /s/ Steven H. Dong
-------------------------------------
Steven H. Dong
Chief Financial Officer
(Principal Accounting Officer)
11