<PAGE>
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 September 30, 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
(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)
(805) 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, 5,421,596 shares outstanding as of
October 23, 1998
Class B Common Stock, $.001 par value, 762,612 shares outstanding as of
October 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE NO.
- ---- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION 14
Item 6. 14
</TABLE>
Page 2 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TAITRON COMPONENTS INCORPORATED
Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 63 163
Trade accounts receivable, net 5,958 5,398
Inventory 34,931 35,757
Prepaid expenses 120 169
Other current assets 85 436
--------- ---------
Total current assets 41,157 41,923
Property and equipment, net 2,965 2,309
Deferred income taxes 716 716
Other assets 181 37
--------- ---------
Total assets $ 45,019 44,985
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 13,719 12,969
Trade accounts payable 2,329 3,235
Accrued liabilities 592 935
--------- ---------
Total current liabilities 16,640 17,139
--------- ---------
Long-term debt, less current portion 3,460 3,475
--------- ---------
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; 5,423,162 and
5,685,062 shares issued and outstanding at
September 30, 1998 and December 31, 1997,
respectively 5 5
Class B common stock, $.001 par value.
Authorized, issued and outstanding 762,612
shares at September 30, 1998 and December 31,
1997, respectively 1 1
Additional paid-in capital 12,284 12,997
Foreign currency translation adjustment (74) (57)
Retained earnings 12,703 11,425
--------- ---------
Total shareholders' equity 24,919 24,371
--------- ---------
Total liabilities and shareholders'
equity $ 45,019 44,985
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements
Page 3 of 15
<PAGE>
TAITRON COMPONENTS INCORPORATED
Statements of Earnings
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 7,789 $ 8,675 $ 24,008 $ 25,193
Cost of goods sold 5,522 6,343 16,988 17,898
------------ ------------ ------------ ------------
Gross profit 2,267 2,332 7,020 7,295
Selling, general and administrative
expenses 1,347 1,639 3,924 4,166
------------ ------------ ------------ ------------
Operating earnings 920 693 3,096 3,129
Interest expense, net 324 223 932 679
Other expense (income), net 9 6 24 (4)
------------ ------------ ------------ ------------
Earnings before income taxes 587 464 2,140 2,454
Income tax expense 239 187 862 987
------------ ------------ ------------ ------------
Net earnings $ 348 $ 277 $ 1,278 $ 1,467
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share $ .06 $ .04 $ .21 $ .22
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings per share $ .06 $ .04 $ .21 $ .22
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic weighted average shares
outstanding 6,202,000 6,533,000 6,202,000 6,533,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted weighted average shares
outstanding 6,202,000 6,639,000 6,229,000 6,617,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
Page 4 of 15
<PAGE>
TAITRON COMPONENTS INCORPORATED
Statements of Shareholders' Equity
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
(Unaudited)
CLASS A CLASS B ADDITIONAL FOREIGN TOTAL
COMMON COMMON PAID-IN RETAINED CURRENCY SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS TRANSLATION EQUITY
------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $5 $1 $12,997 $11,425 $(57) $24,371
Repurchase of Class A Common (350) (350)
Foreign currency translation - -
Net earnings 503 503
------- ------- ---------- -------- ----------- -------------
Balance at March 31, 1998 $5 $1 $12,647 $11,928 $(57) $24,524
Options exercised 12 12
Repurchase of Class A Common (301) (301)
Comprehensive income (12) (12)
Net earnings 428 428
------- ------- ---------- -------- ----------- -------------
Balance at June 30, 1998 $5 $1 $12,358 $12,356 $(69) $24,651
Repurchase of Class A Common (74) (74)
Comprehensive income (5) (5)
Net earnings 347 347
------- ------- ---------- -------- ----------- -------------
Balance at September 30, 1998 $5 $1 $12,284 $12,703 $(74) $24,919
------- ------- ---------- -------- ----------- -------------
------- ------- ---------- -------- ----------- -------------
Balance at January 1, 1997 $6 $1 $14,531 $9,575 - $24,113
Repurchase of Class A Common (404) (404)
Net earnings 609 609
------- ------- ---------- -------- ----------- -------------
Balance at March 31, 1997 $6 $1 $14,127 $10,184 - $24,318
Repurchase of Class A Common (622) (622)
Net earnings 581 581
------- ------- ---------- -------- ----------- -------------
Balance at June 30, 1997 $6 $1 $13,505 $10,765 - $24,277
Repurchase of Class A Common (245) (245)
Net earnings 277 277
------- ------- ---------- -------- ----------- -------------
Balance at September 30, 1997 $6 $1 $13,260 $11,042 - $24,309
------- ------- ---------- -------- ----------- -------------
------- ------- ---------- -------- ----------- -------------
</TABLE>
Page 5 of 15
<PAGE>
Taitron Components Incorporated
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,277 $ 1,467
------------ ------------
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 190 128
Deferred income taxes (136)
Changes in:
Trade accounts receivable (560) (1,783)
Inventory 826 (684)
Prepaid expenses and other current assets 400 56
Other assets 6 (370)
Trade accounts payable (906) 2,253
Accrued liabilities (358) (168)
Income taxes payable 15 (7)
------------ ------------
Total adjustments (387) (711)
------------ ------------
Net cash provided by (used in) operating
activities 890 756
------------ ------------
Cash flows from investing activities - acquisitions of
property and equipment (846) (142)
------------ ------------
Cash flows from financing activities:
Net borrowings of notes payable 750 450
Repurchase of Class A Common Stock (725) (1,271)
Investment in Joint Venture (150)
Exercise of stock options 12 -
Change in foreign currency translation (17) -
Payments on long-term debt (14) (14)
------------ ------------
Net cash provided by (used in) financing
activities (144) (835)
------------ ------------
Net increase (decrease) in cash and cash
equivalents (100) (221)
Cash and cash equivalents, beginning of period 163 300
------------ ------------
Cash and cash equivalents, end of period $ 63 $ 79
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 947 $ 759
------------ ------------
------------ ------------
Cash paid for income taxes $ 812 $ 1,180
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
Page 6 of 15
<PAGE>
TAITRON COMPONENTS INCORPORATED
Notes to Financial Statements
(All amounts are unaudited except the balance sheet as of December 31, 1997)
(1) BASIS OF PRESENTATION
The financial information furnished herein is unaudited, but, in the
opinion of the management of Taitron Components Incorporated, 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, 1997. 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,
1997.
(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 September 30, 1998 and 1997 aggregated $258,000 and
$255,000, respectively and for the nine months ended September 30, 1998 and
1997 aggregated $763,000 and $756,000, respectively.
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The allowance for sales returns and doubtful accounts at September 30,
1998 and December 31, 1997 aggregated $165,000 and $135,000, 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 $1,438,000 and $1,291,000 at
September 30, 1998 and December 31, 1997, respectively.
(3) NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings Per Share" which replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and replaces the
presentation of fully diluted earnings per share with diluted 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 outstanding options, warrants,
convertible subordinated debentures or other contracts to issue common stock
were exercised or converted into common stock. Diluted earnings per share is
computed similarly to fully diluted earnings per share pursuant to APB
Opinion No. 15. Earnings per share for the three months and the nine months
ended September 30, 1998 and 1997 have been restated to comply with SFAS No.
128.
Page 7 of 15
<PAGE>
(4) SHAREHOLDERS' EQUITY
On April 19, 1995, the Company sold 2,530,000 shares of Class A Common
Stock at $5.25 per share in connection with its initial public offering. The
net proceeds from this offering aggregated approximately $11.3 million, net
of approximately $2 million of issuance costs, which proceeds were used to
pay off the previous bank line of credit, to retire long-term debt, to expand
inventory and for general corporate purposes.
(5) BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Second trust deed loan payable, bearing interest
at 6.359%, due December 1, 2013 $ 479,000 $ 494,000
Revolving line of credit, maximum of $16 million,
expires June, 2000 13,700,000 12,950,000
8% convertible subordinated debentures, due May 18, 2001 3,000,000 3,000,000
------------- -------------
17,179,000 16,444,000
Less current portion 13,719,000 12,969,000
------------- -------------
$ 3,460,000 $ 3,475,000
------------- -------------
------------- -------------
</TABLE>
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.
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 (8.25% at September 30, 1998 and 8.5% at September 30,
1997) or at the option of the Company, at LIBOR plus 1.35 % after May 6, 1997
and 1.5% prior to that date.
(6) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting comprehensive
income and its components in the financial statements. The adoption of SFAS
No. 130 has no material impact on the Company's balance sheets, statements of
earnings or statements of cash flows for the three months or the nine months
ended September 30, 1998 and 1997.
(7) CONTINGENT LIABILITY
In April, 1998 the Company was notified by the Internal Revenue Service
(IRS) that they are conducting an audit of the Company concerning excise
taxes imposed on chemicals that deplete the ozone layer. This tax is imposed
on imported products containing or manufactured with certain chemicals. The
Company believes that most of the products it imports do not contain and are
not manufactured with ozone depleting chemicals. However, the Company must
prove this to the satisfaction of the IRS. The Company is in the process of
obtaining the necessary information from its suppliers and is confident that
it can prove to the satisfaction of the IRS that the products carried by the
Company have not been manufactured using ozone depleting chemicals. If the
Company is unable to prove to the IRS that its products are free of ozone
depleting chemicals, the liability may be substantial and no provision has
been made in the accompanying financial statements for this tax.
Page 8 of 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Company distributes a wide variety of transistors, diodes and other
semiconductors and optoelectronic devices and beginning in 1997 passive
components to other electronic distributors, original equipment manufacturers
and to contract manufacturers who incorporate them in their products.
The following table sets forth, for the periods indicated, certain
operating amounts and ratios as a percentage of net sales.
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended Ended
September 30, September 30,
------------------ -----------------------
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------- ------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 7,789 $ 8,675 $ 24,008 $ 25,193
Cost of goods sold 5,522 6,343 16,988 17,898
Gross profit 2,267 2,332 7,020 7,295
% of net sales 29.1% 26.9% 29.2% 29.0%
Selling, general and
administrative expenses 1,347 1,639 3,924 4,166
% of net sales 17.3% 18.9% 16.3% 16.5%
Operating earnings 920 693 3,096 3,129
% of net sales 11.8% 8.0% 12.9% 12.4%
Interest expense, net 324 223 932 679
% of net sales 4.2% 2.6% 3.9% 2.7%
Net earnings $ 348 $ 277 $ 1,278 $ 1,467
% of net sales 4.5% 3.2% 5.3% 5.8%
</TABLE>
Page 9 of 15
<PAGE>
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1997
Net sales for the three months ended September 30, 1998 were $7,789,000,
compared with net sales for the three months ended September 30, 1997 of
$8,675,000, a decrease of $886,000 or 10.2%. This sales decrease was
attributable principally to a decrease in the per unit price on domestic
sales. Export sales also decreased by approximately 44.4% over the three
months ended September 30, 1997. For the three months ended September 30,
1998, the average unit selling price was approximately 6.1% less than for the
three months ended September 30, 1997. The Company believes the decrease in
the average unit selling price is a result of industry wide oversupply of
discrete semiconductors, resulting principally from the Asian economic crises.
Cost of goods sold decreased by $821,000 to $5,522,000 for the three
month period ended September 30, 1998, a decrease of 12.9% from the three
month period ended September 30, 1997. Cost of goods sold decreased
principally as a result of lower per unit costs. Gross profits decreased by
$65,000 to $2,267,000 for the three months ended September 30, 1998 from
$2,332,000 for the same period in 1997. Gross profit as a percentage of net
sales was 29.1% for the three months ended September 30, 1998, an increase
from 26.9% for the same period in 1997.
The Company is currently undergoing an audit by the IRS concerning
excise taxes imposed on chemicals that deplete the ozone layer. This tax may
be imposed on products imported by the Company to the extent that products
that it imports contain or are manufactured with such chemicals. The Company
is in the process of obtaining the necessary information from its suppliers
and is confident that it can prove to the satisfaction of the IRS that the
products carried by the Company have not been manufactured using ozone
depleting chemicals. Should the Company not be successful in proving to the
IRS that the products it imports do not contain ozone depleting chemicals its
inventory values may increase and cost of goods sold may increase causing
both gross profit and net earnings to decrease. See Note 7 to the financial
statements for further description.
Selling, general and administrative expenses decreased by $292,000 or
17.8% for the three months ended September 30, 1998 compared to the same
period of 1997. The decrease was attributable principally to the write-off of
the computer application software in the third quarter of 1997, by decreased
commissions paid to outside representative firms and advertising expenses in
the three months ended September 30, 1998, offset by increased payroll costs
principally as a result of the geographic expansion of the Company's direct
sales force in 1998. These costs, as a percentage of net sales, decreased to
17.3% for the three months ended September 30, 1998 from 18.9% for the three
months ended September 30, 1997.
Operating earnings increased by $227,000 or 32.8% between the three
month period ended September 30, 1998 and 1997, and increased as a percentage
of net sales to 11.8% from 8.0%. Operating earnings increased principally as
a result of the one-time write-off of the computer application software in
the third quarter of 1997.
Interest expense, net of interest income for the three months ended
September 30, 1998 increased $101,000 compared to the three months ended
September 30, 1997. This increase is due to increased borrowings made to
implement the Oracle Applications System, repurchase shares of the Company's
Class A Common Stock and due to receivables increasing, offset by a slight
decline in effective interest rates.
Income taxes were $239,000 in the three months ended September 30,
1998, representing an effective tax rate of 40.7%, compared to $187,000 for
the same period in 1997, an effective tax rate of 40.3%.
The Company had net earnings of $348,000 for the three months ended
September 30, 1998 as compared with net earnings of $277,000 for the three
months ended September 30, 1997, an increase of $71,000 or 25.6% for the
reasons discussed above. Net earnings as a percentage of net sales increased
to 4.5% from 3.2%.
Page 10 of 15
<PAGE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997
Net sales for the nine months ended September 30, 1998 were $24,008,000,
compared with the nine months ended September 30, 1997 of $25,193,000, a
decrease of $1,185,000 or 4.7%. This sales decrease was attributable
principally to a decrease in the per unit price on domestic sales partially
offset by an increase in the volume of units sold. Export sales decreased by
16.5% over the nine months ended September 30, 1997. For the nine months
ended September 30, 1998, the average unit selling price was approximately
16.2% less than for the nine months ended September 30, 1997. The Company
believes the decrease in the average unit selling price is a result of
industry wide oversupply of discrete semiconductors, resulting principally
from the Asian economic crises.
Cost of goods sold decreased by $910,000 to $16,988,000 for the nine
months ended September 30, 1998, a decrease of 5.1% from the nine month
period ended September 30, 1997. Gross profits decreased by $275,000 to
$7,020,000 for the nine months ended September 30, 1998 from $7,295,000 for
the same period in 1997 and increased as a percentage of net sales to 29.2%
from 29.0%.
The Company is currently undergoing an audit by the IRS concerning
excise taxes imposed on chemicals that deplete the ozone layer. This tax may
be imposed on products imported by the Company to the extent that products
that it imports contain or are manufactured with such chemicals. The Company
is in the process of obtaining the necessary information from its suppliers
and is confident that it can prove to the satisfaction of the IRS that the
products carried by the Company have not been manufactured using ozone
depleting chemicals. Should the Company not be successful in proving to the
IRS that the products it imports do not contain ozone depleting chemicals its
inventory value may increase and cost of goods sold may increase causing both
gross profit and net earnings to decrease. See Note 7 to the financial
statements for further description.
Selling, general and administrative expenses decreased by $242,000 or
5.8% for the nine months ended September 30, 1998 compared to the same period
of 1997. These costs, as a percentage of net sales, were 16.3% for the nine
months ended September 30, 1998 and 16.5% for the nine months ended September
30, 1997. The decrease in selling, general and administrative expenses was
principally a result of the one-time write-off of the computer application
software in the third quarter of 1997, lower commissions and advertising
expenses in the third quarter of 1998, offset by increased payroll costs
principally as a result of the geographic expansion of the Company's direct
sales force.
Earnings from operations decreased by $33,000 or 1.1% for the period
ended September 30, 1998 compared to the same period of 1997 and increased as
a percentage of net sales to 12.9% from 12.4%. This decrease in earnings
from operations is due principally to lower gross selling prices of the
Company's products.
Interest expense, net of interest income, for the nine months ended
September 30, 1998 increased $253,000 compared to the nine months ended
September 30, 1997. This increase is due to increased borrowings made to
implement the Oracle Applications System, to repurchase shares of the
Company's Class A Common Stock and due to receivables increasing, offset by a
slight decline in effective interest rates.
Income taxes were $862,000 for the nine months ended September 30,
1998, representing an effective tax rate of 40.3% compared to $987,000 for
the nine months ended September 30, 1997, an effective tax rate of 40.2%.
The Company had net earnings of $1,278,000 for the nine months ended
September 30, 1998 compared to net earnings of $1,467,000 for the same period
in 1997, a decrease of $189,000 or 12.9% for the reasons discussed above.
Net earnings as a percentage of net sales decreased to 5.3% for the nine
months ended September 30, 1998 compared to 5.8% for the same period in 1997.
Page 11 of 15
<PAGE>
SUPPLY AND DEMAND ISSUES
Beginning in 1996 and continuing through September 30, 1998 the supply
of most products distributed by the Company has been more than sufficient to
meet customers demand for these products. The weak demand left suppliers
with large amounts of uncommitted production capacity. During the last
several years the Company has taken 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. The Company's competitive edge is its ability to fill customer
orders immediately from stock held in inventory. Thus, management believes it
has structured inventory levels in such a way as to poise the Company to take
advantage of a recovery in the discrete semiconductor market. The market
recovery has been slow in taking place, and management decided it was prudent
to reduce inventory levels during the first nine months of 1998. If
management deems such action prudent, the Company may reduce inventory levels
further in order to avoid an unwarranted financial burden on the Company's
earnings. There can be no guarantee that a recovery in the discrete
semiconductor market will take place.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has satisfied its liquidity requirements
principally through cash generated from operations, short-term commercial
loans and the sale of equity securities, including its initial public
offering in April 1995. A summary of the Company's cash flows provided by
(used in) operating, investing and financing activities for the nine months
ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------- --------------
(In thousands)
<S> <C> <C>
Operating activities.................. $ 890 $ 756
Investing activities.................. (846) (142)
Financing activities.................. (144) (835)
</TABLE>
In positioning itself as a "Discrete Components Superstore", the Company
has been required to significantly increase its inventory levels over the
past several years. Inventory levels may increase as the Company adds new
lines of product, such as passive components, and new suppliers.
The discrete semiconductor products distributed by the Company are
mature products, used in a wide range of commercial and industrial
applications. 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. 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 affected.
The use of cash in investing activities is principally a result of
implementing Oracle Applications Software and purchasing of computer
equipment.
In May 1997, the Company replaced its $15 million revolving line of
credit that had been in place since March 1996. The new 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 increase in cash provided by financing
activities is the result of additional bank borrowings.
The Company believes that funds generated from operations and the
amended bank revolving lines of credit will be sufficient to finance its
working capital and capital expenditure requirements for the foreseeable
future.
Page 12 of 15
<PAGE>
YEAR 2000 UPDATE
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 just 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 just 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 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.
Page 13 of 15
<PAGE>
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.
Factors 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, 1997 under the heading "Cautionary Statements and Risk
Factors."
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
Page 14 of 15
<PAGE>
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: November 12, 1998 By: /s/ David M. Batt
-----------------------------
David M. Batt
Chief Financial Officer
(Principal Financial Officer)
(Chief Accounting Officer)
Page 15 of 15
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