UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-25844
TAITRON COMPONENTS INCORPORATED
(Name of Small Business Issuer in Its Charter)
California 95-4249240
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
28040 West Harrison Parkway, Valencia, California 91355-4162
(Address of Principal Executive Offices, Zip Code)
(Issuer's Telephone Number, Including Area Code) (661) 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 Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(f) of the Exchange Act. |_|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Registrant's revenues for its most recent fiscal year: $9,559,000
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 1, 2007 was approximately $9.4 million based upon the
closing price of $2.51 per share.
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date:
Class Outstanding on March 1, 2007
------------------------------------- ----------------------------
Class A common stock, $.001 par value 4,765,144
Class B common stock, $.001 par value 762,612
Transitional Small Business Disclosure Format: Yes |_| No |X|
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to registrant's
Annual Meeting of Shareholders are incorporated by reference in Part III of this
Form 10-KSB, which will be filed within 120 days of the registrant's fiscal year
end.
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FORWARD-LOOKING STATEMENTS
This document, press releases and certain information provided
periodically in writing or orally by the Company's officers or its agents may
contain statements which constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and involve a number of
risks and uncertainties. Forward-looking statements are usually denoted by words
or phrases such as "believes," "expects," "thinks," "projects," "estimates,"
"anticipates," "will likely result," or similar expressions. We wish to caution
readers that all forward-looking statements are necessarily speculative and not
to place undue reliance on 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 our future results are set forth in detail in this
document. In addition to the other information contained in this document,
readers should carefully consider the information appearing in Part II, Item 6
of this document under the heading "Cautionary Statements and Risk Factors."
References to "Taitron," "the Company," "we," "our" and "us" refer to
Taitron Components Incorporated and its majority-owned subsidiary, unless the
context otherwise requires.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
We are a national distributor of brand name electronic components and
supplier of original designed and manufactured (ODM) electronic components ("ODM
Components"), with our product offerings ranging from discrete semiconductors
through small electronic devices. Prior to 2003, we were primarily focused on
the distribution of transistors, diodes and other discrete semiconductors,
optoelectronic devices and passive components. Commencing in 2003, we
implemented a strategy to expand our business into value-added engineering and
turn-key services, focusing on providing existing contract electronic
manufacturers (CEMs) and original equipment manufacturers (OEMs) with original
design and manufacturing (ODM) services for their multi-year turn-key projects.
Our ODM services, and the distribution of products manufactured to
specifications developed as a result of our ODM services ("ODM Products")
accounted for 25% of our revenue during our fiscal year ended December 31, 2006.
We have developed a reputation for maintaining in-depth inventories and
knowledge of the products in our markets. Our "superstore" strategy consists of
carrying a large quantity and variety of components in inventory to meet the
rapid delivery requirements of our customers. To differentiate from other
distributors, we also offer ODM Components, which are manufactured electronic
components based on our own engineering specifications under the private label
brands "TCI" or "PSD" through outsourcing. At December 31, 2006, our inventory
consisted of over 14,000 different products manufactured by more than 100
different suppliers. In 2006, we offered approximately 45 that are ODM Products
to specifications developed as a result of our ODM services. We are incorporated
in California, and were originally formed in 1989. We maintain a majority-owned
subsidiary in Mexico and three divisions in each of Taiwan, Brazil and China.
Our Mexico and Brazil locations are for regional distribution, sales and
marketing purposes and our Taiwan and China locations are for supporting
inventory sourcing and purchases and coordinating the manufacture of our ODM
Components and ODM Products. Our China location also serves as the engineering
center responsible for making component datasheets and test specifications,
arranging pre-production and mass production at our outsourced manufacturers,
preparing samples, monitoring quality of shipments, performing failure analysis
reports, and designing circuits with partners for ODM projects.
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 products as diverse 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 U.S. 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. We focus our distribution
efforts almost exclusively on discrete semiconductors, optoelectronic devices
and passive components, a small subset of the electronic components market.
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We continue to be impacted by the severe decline in demand for discrete
semiconductors from the U.S. market, which began in late 2000. As a result, we
have experienced declining sales is such components since early 2001. In
response to this declining demand, we placed emphasis on increasing our sales to
existing customers through further expansion of the number of different types of
discrete components and other integrated circuits in our inventory and by
attracting additional contract electronic manufacturers (CEMs), original
equipment manufacturers (OEMs) and electronics distributor customers. In
addition, over the last three years we have developed our ODM service
capabilities and added products developed through partnership agreements with
offshore solution providers (OEMs and CEMs). We also plan to begin offering
commodity integrated circuits (ICs) as an extension of our current discrete
semiconductor lines in 2007.
Discrete Semiconductors and Commodity Integrated Circuits
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 several million transistors and other elements in a single package, and
usually are designed to perform complex tasks. However, the commodity ICs, a
combination of a limited number of discrete and passive components in one
package, are far less sophisticated than other integrated circuits and perform
simple tasks in circuits similar to discrete components.
While other integrated circuits may garner more public exposure, discrete
semiconductors and commodity ICs, the ancestral root of today's complicated
integrated circuits, have been a core element of electric equipment for more
than 30 years. Discrete semiconductors and commodity ICs are found in most
consumer, computer, communication, automotive, instrumentation, medical,
industrial and military electrical and electronic applications.
Discrete semiconductors and commodity ICs represent only a small subset of
the different types of semiconductors currently available. Discrete
semiconductors and commodity ICs 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 other, more complex, integrated circuits.
Optoelectronic Devices and Passive Components
In addition to discrete semiconductors, we offer optoelectronic devices
such as LED's, infrared sensors and opto couplers, along with passive devices,
such as resistors, capacitors and inductors which are electronic components
manufactured with non-semiconductor materials. We market these optoelectronic
devices and passive components through the same channels, as the discrete
semiconductors. Sales of these optoelectronic devices and passive components
were 41% and 45% of our total sales for the years ended December 31, 2006 and
2005, respectively. During 2006, we purchased $2,553,000 of inventory for these
components, to facilitate our market for these products.
Electronics Distribution Channels
Electronic component manufacturers, which we refer to as suppliers, sell
components directly to CEMs and OEMs, as well as to distributors. The practice
among the major suppliers is generally to focus their direct selling efforts on
larger volume customers, while utilizing distributors to reach small and
medium-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 small 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 suppliers.
Distributors offer product availability, selection and more rapid and flexible
delivery schedules keyed to meet the requirements of their CEM and OEM
customers. Also, they often rely upon electronic distributors to provide timely,
knowledgeable access to electronic components.
There is also pressure on 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 the 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.
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ODM Service Industry
ODM service providers have experienced rapid change and growth over most
of the past decade as an increasing number of OEMs outsourced their
manufacturing requirements. In mid-2001, the domestic market of this industry's
revenue declined as a result of significant cut backs in its customers'
production requirements, which was consistent with the overall global economic
downturn. Nonetheless, OEMs have continued to turn to outsourcing in order to
reduce product cost; achieve accelerated time-to-market and time-to-volume
production; access advanced design and manufacturing technologies; improve
inventory management and purchasing power; and reduce their capital investment
in manufacturing resources. This enables OEMs to concentrate on what they
believe to be their core strengths, such as new product definition, design,
marketing and sales. We believe further growth opportunities exist for ODM
providers to penetrate the worldwide electronics. By designing private brand
products to ODM customers in the US, we are able to expand export sales to
overseas CEM customers.
"Superstore" Strategy
Since 1997, we have marketed ourselves as the "discrete components
superstore," with an in-depth focus on discrete semiconductors, passive and
optoelectronic components and extensive inventory of a wide variety of these
products. In creating the "superstore" strategy, we have attempted to develop a
more efficient link between suppliers and the small and medium-sized customers
which generally do not have direct access to large suppliers and must purchase
exclusively through distributors. The primary aspects of our "superstore"
strategy include:
Reliable One Stop Shopping: Large Inventory. We believe that our most
important competitive advantage is the depth of our inventory. Unlike other
distributors who carry only the best-selling discrete components, we offer a
large selection of different name-brand discrete semiconductors, optoelectronic
devices and passive components. Because of its large inventory, we often can
fill a significant portion, or all, of a customer's order from stock. Also, we
have been able to fill most of our customers' orders within 24 hours and in
compliance with their requested delivery schedules. However, we are also
focusing on lowering our inventory levels to balance the weakened demand we have
experienced for our products over the past several years. With immediate
availability of a wide selection of products and brands, we believe that sales
may grow if the market rebounds. See Part II, Item 6 - "Management's Discussion
and Analysis - Liquidity and Capital Resources".
Private Brands and Custom Made Parts. To assure the best quality of the
product with the most competitive price, we choose the best product lines among
existing suppliers and market it under the "TCI" or "PSD" brand. These private
label products, or ODM Components, are manufactured according to our
specifications under a special contract agreement with outsourcing partners.
Custom made parts are also available by following either customer's
specification or specially made engineering specification. We believe the ODM
Components business is more stable and profitable than the traditional commodity
type business. The export sales are driven primarily from private brand products
designed in the US by OEMs who later outsource the production to their overseas
CEMs.
Support Small Distributors, CEMs and OEMs. We focus our marketing efforts
on small 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.
Web Order Entry (WOE) and Customer Drop Shipment (CDS). The demand of web
purchasing from buyers around the world is growing rapidly. We have developed a
web order entry system for existing customers to access our inventory and to
place purchase orders in real time. Not only they will get the sales order and
shipment confirmation on the same day, but also be able to assign the drop
shipments to their customers directly. We believe this is a new trend to many
local distributors and brokers who want to serve their customers more
effectively and efficiently without material handling costs.
Master Distributor. We distribute electronic components to other
distributors, including nationwide distributors, when their inventory cannot
fulfill immediate customer orders. With its higher volume, lower cost inventory,
we act as a master distributor for certain of its component suppliers. We
estimate that approximately 35% of our sales are a direct result of being a
master distributor.
Preferred Distributors. We developed a Preferred Distributor Agreement
with certain selective distributor customers to promote a much stronger business
relationship. Under these agreements, our preferred distributors provide point
of sales (POS) reports which identify the distributor's customers and we provide
the preferred distributors with limited price protection, limited stock
rotations and return privileges among other benefits. As of the date of this
Report, we maintain Preferred Distributor Agreements with 9 selective
distributors. We intend to maintain only a few preferred distributors in each
geographical region.
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Relationships with 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 reducing
the risks and costs associated with over-purchasing or obsolescence. Price
protection mitigates the risks of falling prices of components held in
inventory. We believe that we have been able to gain a competitive advantage
over other distributors by sometimes foregoing or not demanding these privileges
(and thus assuming the risk for over-purchasing, product obsolescence and price
fluctuations) in order to obtain better pricing. See Part II, Item 6 -
"Management's Discussion and Analysis - Cautionary Statements and Risk Factors -
Need to Maintain Large Inventory; Price Fluctuations" and "Business -
Suppliers".
Third Party Warehouse. Paying a percentage of the transaction, some of our
principals use our warehouse to hold their inventory and to ship to their
customers in North America. Our ability of tracking the products and the
convenience of the real-time web order entry make the third party warehouse more
attractive to many component manufacturers overseas. We believe this service
will enhance our market position as the discrete components superstore.
Vendor managed Inventory (VMI). As a part of our WMS system, VMI not only
allocates the forecasted inventory by the contract but also guarantees the same
day shipment for customers who frequently change their shipping schedule driven
by MRP demand. The VMI system is fully operational from the web by VMI managers
who could either be our sales representatives, customers or employees.
Service Strategy and ODM Products
We have historically offered our customers a limited range of value-added
services such as cutting and forming, quality monitoring and product source
tracing. Beginning in 2003, we significantly expanded our value-added services
by offering our existing OEM and CEM customers outsourced product design and
manufacturing assembly services. Our ODM (original design and manufacturing)
services have grown since 2003 and sales of our ODM products and services were
$2,354,000 and $985,000 in 2006 and 2005, respectively. In order to support our
ODM service offerings, we opened an engineering design center in Shanghai, China
in 2005. Strategic allies such as Princeton Technology Corporation, a company
controlled by one of our directors, and Teamforce Co. Ltd., both Taiwan-based
companies, assist us with this program. We plan to joint venture with Teamforce
Co. Ltd. to set up an ODM product design and manufacturing plant in China by the
end of 2007. As a franchise distributor of Princeton Technology Corporation in
the US, we receive engineering support using their products in our ODM projects
in order to lower costs and to shorten the design cycle. Our goal is to have 50%
component sales and 50% ODM service and products sales by the end of 2010.
Offering application engineering service to current customers, we were
often involved in reviewing their bill of materials (BOMs) and circuit diagrams.
Based upon their credit history, type of the products, production volume,
profitability of the industry and circuit schematics, we offer different
solutions for quality improvement, additional functions and cost savings through
the re-design processes such as component replacement, digital circuit instead
of analog circuit, microprocessor instead of logic circuit, integrated circuit
instead of discrete components. Our preference is to target at low but
increasing volume, high margin, stable demand, profitable and specialty products
and financially stable customers who know how to market their products. Our
strengths are microprocessor programming, power supply, power management, LED
message sign, RF transmission and receiving, encoder and decoder, remote
controller, DC motor control and power amplifier. In many cases, we were able to
take the advantage of our component distribution capability by using current
stock to reduce lead time and choosing the low cost components we currently
sell. We depend on our outsourcing partners in mold design, plastic injection,
metal stamping, wire hardness and final assembly. We ask between 15% to 30% down
payment before accepting a purchasing order and offer customers 30 to 60 days
payment terms. All purchasing orders must have a firm delivery schedule under a
non-cancelable and non-returnable (NCNR) agreement. To reduce the manufacturing
and handling cost, we arrange production of the same model once a year and keep
product in our warehouse to be released according to the predetermined schedule.
We utilize our existing inventory management system and established
distribution relationships to facilitate the manufacturing and distribution of
such products. Our ODM Service complements our "Superstore" strategy and
facilitates additional utilization of electronic components for the manufacture
of our ODM Products.
Products
Electronic Components - Discrete
We market a wide variety of discrete semiconductors, including rectifiers
(or power diodes), diodes, transistors, optoelectronic devices and passive
components, to other electronic distributors, contract electronic manufacturers
and original equipment manufacturers, who incorporate them in their products. At
December 31, 2006, our inventory consisted of over
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14,000 different products manufactured by more than 100 different suppliers.
In 2006, we purchased electronic component products from over 40
suppliers, including Everlight Electronics Co, Ltd., Samsung Electro-Mechanics
Co., Vishay Americas Inc. and Zowie Technology Corporation. See Part II, Item 6
- "Management's Discussion and Analysis - Cautionary Statements and Risk Factors
- Suppliers", "Business - Customers" and "Business - Suppliers".
Discrete semiconductors are categorized based on various factors,
including current handling capacity, construction, packaging, fabrication and
function. The products we sell include:
Rectifiers. Rectifiers generally are utilized in power supply and other
high power applications to convert alternating current to direct current. We
sell 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 us include switching diodes, varistors, 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. We currently sell 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 fiber optic transmission of computer signals to pattern sensing for
regulation, such as is found in automobile cruise controls. Optoelectronic
devices generally are not 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 us are mature products that are used in a wide
range of commercial and industrial products and industries. We believe that a
majority of the products we distribute are used in applications where integrated
circuits are not viable alternatives. However, we cannot assure you that over
time the functions for which our discrete electronic components are used will
not eventually be displaced by integrated circuits.
We purchase products from reliable manufacturers who provide warranties
for their products that are common in the industry and therefore we conduct
limited quality monitoring of our products. We are certified according to the
International Standardization Organization (ISO) and we maintain our certificate
under the quality standard ISO 9001:2000.
Our distribution of electronic components originates from our 50,000
square-foot facility located in Valencia, California. We utilize a computerized
inventory control/tracking system which enables us to quickly access inventory
levels and trace product shipments. See Item 2 - "Description of Property."
ODM Products
Most of the ODM Products are custom made and are marketed in specific
industries such as wild animal feeders, timers for DC motor, public street light
controllers, battery testers, universal remote control devices and battery
chargers.
Our distribution of ODM Products originates from our 50,000 square-foot
facility located in Valencia, California. We utilize a computerized inventory
control/tracking system which enables us to quickly access inventory levels and
trace product shipments. See Item 2 - "Description of Property."
Customers
We market our products to distributors, CEMs and OEMs, and our ODM
Services to CEMs and OEMs. We believe that our strategic purchasing policies
allow us to provide smaller and medium-sized distributors, CEMs and OEMs
competitive
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prices on discrete electronic components while maintaining an adequate profit
margin. As a rule, we do not impose minimum order limitations, which enable
customers to avoid the cost of carrying large inventories. See "Business -
Strategy."
During 2006, we distributed its discrete electronic component products to
approximately 680 customers. During the year ended December 31, 2006 and 2005,
we had one customer accounting for 22% and 8% of our net sales, respectively.
Other than this customer, for the years ended December 31, 2006 and 2005, no
other customer accounted for more than 4.2% and 5.4%, respectively, of our net
sales.
In 2006, sales of brand name electronic component products and our ODM
Components together represented approximately 75% of our net sales, while sales
of our ODM Products represented the remaining 25% of our net sales. Distributors
represented approximately 41% and both CEMs and OEMs together represented
approximately 40% of our net sales of electronic component products. The
remaining 19% of our electronic component sales were made to other exporters and
overseas customers.
We historically have not required our distributor customers to provide any
point of sale reporting and therefore we do not know the different industries in
which its products are sold by our distributor customers. However, based on our
sales to CEMs and OEMs, we believe that no any single industry accounted for a
majority of the applications of our discrete electronic component products sold
in 2006 or 2005.
We offer customers inventory support which includes carrying inventory for
their specific needs and providing free samples of our products. We also offer
customers a limited range of value-added services, such as 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 our business or results of operations.
We believe that exceptional customer service and customer relations are
key elements of our success, and train our sales force to provide prompt,
efficient and courteous service to all customers. See "Business - Sales and
Marketing Channels." We have the ability to ship most orders the same day they
are placed and, historically, most of our customers' orders have been shipped
within the requested delivery schedule.
As our customers grow in size, we may lose our larger customers to our own
discrete electronic components suppliers and as the electronics distribution
industry consolidates, some of our customers may be acquired by competitors. See
Part II, Item 6 - "Management's Discussion and Analysis - Cautionary Statements
and Risk Factors - Competition".
Sales and Marketing Channels
As of March 1, 2007, our sales and marketing department consisted of 11
employees. We have centralized our sales order processing and customer service
department into our headquarters at Valencia, California. However, we retained
outside sales account managers in the states of Massachusetts and Georgia. Our
inside sales and customer service departments are divided into regional sales
territories throughout North America. The outside sales account managers are
also responsible for developing new CEM and OEM accounts, as well as working
locally with our independent sales representatives and preferred distributors.
We also supply products to national distributors who share our franchised
lines. These national distributors usually have many office locations throughout
the United States and are larger than us. We serve the national distributors by
providing easy access to discrete products that they choose not to stock, as
well as supporting their needs in inventory shortage situations. Sales to
national distributors were $24,000 in 2006 and $51,000 in 2005.
We have sales channels into Central America through our majority-owned
subsidiary in Mexico City, Mexico. Central American sales were $842,000 and
$625,000 in 2006 and 2005, respectively.
We have sales channels into Asia through our branch offices in Shanghai,
China and Taipei, Taiwan. Sales to Asian customers were $362,000 and $439,000 in
2006 and 2005, respectively.
We also have sales channels into South America through our branch office
in Sao Paulo, Brazil. South American sales were $422,000 and $351,000 in 2006
and 2005, respectively.
Independent sales representatives have played an important role in
developing our client base, especially with respect to OEMs. Many OEMs want
their suppliers to have a local presence and our network of independent sales
representatives is responsive to those needs. Independent sales representatives
are primarily responsible for face-to-face meetings with our
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customers, and for developing new customers. Independent sales representatives
are each given responsibility for a specific geographic territory. Typically,
sales representatives are only compensated for sales made to CEMs, OEMs and
preferred distributors. We believe that this commission policy directs
independent sales representatives' attention to those end users with potential
to increase market share. Along with our independent sales representatives, we
jointly advertise and participate in trade shows. We utilized 8 independent
sales representatives during 2006.
We provide customers with catalogs that are specially designed to aid them
to quickly find the types and brands of discrete semiconductors and passive and
optoelectronic devices that they need.
Suppliers
We believe that it's important to develop and maintain good relationships
with our discrete electronic component suppliers. We do not typically enter into
long-term supply, distribution or franchise agreements with our suppliers, but
instead cultivate strong working relationships with each of our suppliers.
However, we have entered into franchise agreements with some of our suppliers.
The franchise agreements have terms from one to two years with inventory and
price protection programs. See Part II, Item 6 - "Management's Discussion and
Analysis - Cautionary Statements and Risk Factors - Relationship with
Suppliers".
In order to facilitate good relationships with our suppliers, we typically
will carry a complete line of each supplier's discrete products. We also support
our suppliers by increasing their visibility through advertising and
participation in regional and national trade shows. We generally order
components far in advance, helping suppliers plan their production. Outstanding
commitments to purchase inventory from suppliers as of March 1, 2007 were
approximately $1,300,000. In addition, we have distribution agreements with
certain suppliers which provide stock-rotation, price protection and stock buy
back terms. See Part II, Item 6 - "Management's Discussion and Analysis -
Cautionary Statements and Risk Factors - Need to Maintain Large Inventory; Price
Fluctuations" and "Business - Strategy".
In 2006, we purchased components from over 42 different suppliers,
including Samsung Electro-Mechanics Co., Everlight Electronics Co, Ltd.,
Princeton Technology, Vishay Americas Inc. and Zowie Technology Corporation.
While we are continually attempting to build relationships with suppliers and
from time to time add new suppliers in an attempt to provide our customers with
a better product mix, the possibility exists that our relationship with a
supplier may be terminated. See Part II, Item 6 - "Management's Discussion and
Analysis - Cautionary Statements and Risk Factors - Relationship with
Suppliers".
For the year ended December 31, 2006, the following name brands, Samsung
Electro-Mechanics Co., Princeton Technology, Everlight Electronics Co, Ltd. and
Vishay Americas Inc. accounted for approximately 18% of our net purchases for
name brand distributed components. However, we do not regard any one supplier as
essential to our operations, since equivalent replacements for most of the
products we market are either available from one or more of our other suppliers
or are available from various other sources at competitive prices. We believe
that, even if we lose a direct relationship with a supplier, there exist
alternative sources for another supplier's products. See Part II, Item 6 -
"Management's Discussion and Analysis - Cautionary Statements and Risk Factors -
Relationship with Suppliers."
In connection with our ODM services, we have built special partnership
agreements with few selected system integration companies in China. These
agreements ensure the quality of the products and services and also provide a
warranty on the finished products. Most of the projects involve multiple years
of cooperation among components suppliers, overseas partners and the end
customers in the US, and therefore, increase business stability and reduce the
financial risk of excess inventory.
Competition
We operate our discrete electronic components business in a highly
competitive environment and face competition from numerous local, regional and
national distributors (both in purchasing and selling inventory) and electronic
component manufacturers, including some of our own suppliers. Many of our
competitors are more established and have greater name recognition and financial
and marketing resources than us. We believe that competition in the electronic
industry is based on breadth of product lines, product availability, choice of
brand name, customer service, response time, competitive pricing and product
knowledge, as well as value-added services. We believe we compete effectively
with respect to breadth and availability of inventory, response time, pricing
and product knowledge. Generally, large component manufacturers and large
distributors do not focus their internal selling efforts on small and
medium-sized OEMs and distributors, which constitute the vast majority of our
customers. However, should our customers increase in size, component
manufacturers may find it cost effective to focus direct sales efforts on those
customers, which could result in the loss of customers or decreased selling
prices. See Part II, Item 6 - "Management's Discussion and Analysis - Cautionary
Statements and Risk Factors - Competition" and "Business - Electronic
Distribution Channels".
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The ODM services we provide are available from many independent sources as
well as from the in-house manufacturing capabilities of current and potential
customers. Our competitors may be more established in the industry and have
substantially greater financial, manufacturing, or marketing resources than we
do. We believe that the principal competitive factors in our targeted markets
are engineering capabilities, product quality, flexibility, cost and timeliness
in responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing, technological sophistication and geographic
location. In addition, in recent years, original design manufacturers that
provide design and manufacturing services to OEMs have significantly increased
their share of outsourced manufacturing services provided to OEMs in the
consumer electronic product market. Competition from ODMs may increase if our
business in these markets grows or if ODMs expand further into these markets.
Management Information Systems
We have made a significant investment in computer hardware, software and
personnel. The Management Information Systems (MIS) department is responsible
for software and hardware upgrades, maintenance of current software and related
databases, and designing custom systems. We believe that our MIS department is
crucial to our success and believe in continually upgrading our hardware and
software. We also developed a vendor management inventory software program which
allows participating customers to access and manage their own inventory through
the internet. The web site also provides users with other current information
about us.
Warehouse Management System
We utilize a wireless, fully bar-coded warehouse tracking system that
greatly enhances the processing speed, accuracy of product quantity and location
control within the warehouse. It also reduces potential errors and accelerates
the delivery of components to our customers. We continuously improve our
warehouse management system with custom programming features.
Foreign Trade Regulation
A large portion of the products we distribute are manufactured in Asia,
including Taiwan, Hong Kong, Japan, China, South Korea, Thailand and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls, and changes in governmental policies, any of which
could have a material adverse effect on our business and results of operations.
Sales to Asian customers were 3.8% and 5.2% of our total sales in 2006 and
2005, respectively.
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. We 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 our 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 U.S. legislation with respect to pricing and import quotas on products
from foreign countries. For example, it is possible that political or economic
developments in China, or with respect to the United States' relationship with
China, could have an adverse effect on our business. Our ability to remain
competitive also could be affected by other governmental actions related to,
among other things, anti-dumping legislation and international currency
fluctuations. While we do not believe that any of these factors adversely impact
our business at present, we cannot assure you that these factors will not
materially adversely affect us in the future. Any significant disruption in the
delivery of merchandise from our suppliers, substantially all of whom are
foreign, could have a material adverse impact on our business and results of
operations. See Part II, Item 6 - "Management's Discussion and Analysis -
Cautionary Statements and Risk Factors - Foreign Trade Regulation."
Employees
At March 1, 2007, we had 31 employees, all of whom are employed on a full
time basis. None of our employees are covered by a collective bargaining
agreement and we consider our relations with employees to be good.
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Website Availability of Our Reports Filed with the Securities and Exchange
Commission
We maintain a website with the address www.taitroncomponents.com. We are
not including the information contained on this website as a part of, or
incorporating it by reference into, this annual report on Form 10-KSB. We make
available free of charge through this website our annual reports, quarterly
reports and current reports on Form 8-K, and amendments to these reports, as
soon as reasonably practicable after it electronically files that material with,
or furnish the material to, the Securities and Exchange Commission.
ITEM 2. DESCRIPTION OF PROPERTY.
We own our headquarters and main distribution facility which is located in
approximately 50,000 square feet at 28040 West Harrison Parkway, Valencia,
California. We believe this facility is adequately covered by insurance (except
earthquake coverage). We also own 15,000 square feet of office and distribution
space through our subsidiary in Mexico and 2,500 square feet of office space in
Taipei, Taiwan (currently leased to an unrelated tenant). We believe these
existing facilities are adequate for the foreseeable future and have no plans to
renovate or expand them.
On September 21, 2006, we entered into a real estate purchase contract
related to the acquisition of approximately 4,500 square feet of office space
(consisting of 2 separate units on the same floor) in Shanghai, China with a
total purchase price of $1,230,000. The overall office building project is under
construction and is estimated to be completed and ready for occupancy by June
2007. This investment will be used as rental property for lease to others and
for the Company's project design and engineering center. Currently, we are
leasing 1,400 square feet of other office space in Shanghai, China on monthly
lease terms that will be terminated when we move into the new office space upon
ready for occupancy.
In addition, we lease 350 square feet of office space for sales and
marketing functions in Brazil, expiring annually each year in May.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, we may become involved in legal
proceedings from time to time. As of the date of this report, we are not aware
of any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
Our Class A common stock is traded on the Nasdaq Smallcap Market under the
symbol "TAIT". The following table sets forth for the periods indicated the high
and low sale prices of the Common Stock as reported by Nasdaq:
High Low
---- ---
Year Ended December 31, 2005:
First Quarter $2.60 $1.65
Second Quarter 2.20 1.52
Third Quarter 2.10 1.70
Fourth Quarter 2.05 1.75
Year Ended December 31, 2006:
First Quarter $2.49 $1.75
Second Quarter 2.50 1.86
Third Quarter 2.13 1.80
Fourth Quarter 2.50 1.86
Year Ended December 31, 2007:
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First Quarter (through March 1, 2007) $3.19 $2.10
On March 1, 2007, the last sale price of the Class A common stock as
reported by Nasdaq was $2.51 per share.
Holders
As of March 1, 2007, there were 41 registered holders of our Class A
common stock (not including those holders whose shares of common stock are held
in street name) and one holder of our Class B common stock.
Dividends and Dividend Policy
On January 10, 2007 we declared an annual cash dividend of $0.10 per share
of Class A Common Stock and Class B Common Stock, paid on January 31, 2007, to
shareholders of record at the close of business on January 22, 2007. The
dividend was declared in connection with our decision to establish an annual
cash dividend of up to $0.10 per share on Class A and Class B Common Stock for a
period of five years. The payment of future cash dividends under the policy is
subject to the continuing determination that the policy remains in the best
interest of our shareholders and complies with laws and any agreements we may
enter into applicable to the declaration and payment of cash dividends. The
maintenance of the dividend policy will depend on factors that we deem relevant,
including our cash earnings, financial condition and cash requirements in any
given year. Our ability to declare dividends could be affected by a variety of
factors affecting cash flow, including required capital expenditures, increased
or unanticipated expenses, additional borrowings and future issuances of
securities. See "Management's Discussion and Analysis - Results of Operations;
Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
We have not issued or sold any of our securities during fiscal 2006 that
were not registered under the Securities Act of 1933.
Repurchase of Equity Securities
We have not repurchased any shares during fiscal 2006 and through March 1,
2007.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the
consolidated financial statements, including the related notes, appearing in
Item 7 of this report. Also, several of the matters discussed in this document
contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements usually are denoted by words or phrases such as
"believes," "expects," "projects," "estimates," "anticipates," "will likely
result" or similar expressions. We wish to caution readers that all
forward-looking statements are necessarily speculative and not to place undue
reliance on 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 our future results are set forth in detail in this report. In addition to
the other information contained in this report, readers should carefully
consider the following information appearing under the heading "Cautionary
Statements and Risk Factors."
Critical Accounting Policies and Estimates
Use of Estimates - We have 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 our financial statements included
in Item 7 of this report in conformity with generally accepted accounting
principles. These estimates have a significant impact on our valuation and
reserve accounts relating to the allowance for sales returns, doubtful accounts,
inventory reserves and deferred income taxes. Actual results could differ from
these estimates.
Revenue Recognition - We recognize revenue when we have evidence of an
arrangement, a determinable fee, and when collection is considered to be
probable and products are delivered, This occurs upon shipment of the
merchandise, which is when legal transfer of title occurs. Reserves for sales
allowances and customer returns are established based upon historical experience
and our estimates of future returns. Sales returns for the years ended December
31, 2006 and 2005 aggregated $131,000 and $90,000, respectively. The allowance
for sales returns and doubtful accounts at December 31, 2006 aggregated $76,000.
We review the actual sales returns and bad debts for our customers and establish
an estimate of future returns and allowance for doubtful accounts.
-11-
Inventory - Inventory, consisting principally of products held for resale,
is recorded at the lower of cost (determined using the first in-first out
method) or estimated market value. We had inventory balances in the amount of
$15,693,000 at December 31, 2006, which is presented net of valuation allowances
of $1,154,000. We evaluate inventories to identify excess, high-cost,
slow-moving or other factors rendering inventories as unmarketable at normal
profit margins. Due to the large number of transactions and the complexity of
managing and maintaining a large inventory of product offerings, estimates are
made regarding adjustments to the cost of inventories. If our assumptions about
future demand change, or market conditions are less favorable than those
projected, additional write-downs of inventories may be required. In any case,
actual amounts could be different from those estimated.
Our worldwide operations are subject to local laws and regulations. As
such, of particular interest is the European Union ("EU") directive relating to
the Restriction of Certain Hazardous Substance ("RoHS"). On July 1, 2006, this
directive restricted the distribution of products within the EU containing
certain substances, including lead. At the present time, much of our inventory
contains substances prohibited by the RoHS directive. Further, many of our
suppliers are not yet supplying RoHS compliant products. The legislation is
effective and some of our inventory has become obsolete. Management has
estimated the impact of the legislation and have written down or reserved for
related inventories based on amounts expected to be realized given all available
current information. Actual amounts realized from the ultimate disposition of
related inventories could be different from those estimated.
Deferred Taxes - We review the nature of each component of our deferred
income taxes for reasonableness. If determined that it is more likely than not
that we will not realize all or part of our net deferred tax assets in the
future, we record a valuation allowance against the deferred tax assets, which
allowance will be charged to income tax expense in the period of such
determination. We also consider the scheduled reversal of deferred tax
liabilities, tax planning strategies and future taxable income in assessing the
realizability of deferred tax assets. We also consider the weight of both
positive and negative evidence in determining whether a valuation allowance is
needed. However, due to the continued net losses, we have fully reserved a
$721,000 allowance against our net deferred tax assets.
Recent Accounting Policies
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.156, "Accounting for
Servicing of Financial Assets," ("SFAS No. 156"), which amends SFAS No. 140,"
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 156 permits an entity to choose either of the
following subsequent measurement methods for each class of separately recognized
servicing assets and servicing liabilities: (1) Amortization Method or (2) Fair
Value Measurement Method. SFAS No. 156 is effective as of the beginning of an
entity's first fiscal year that begins after September 15, 2006 and we do not
expect that the pronouncement will have a significant impact on our financial
statements.
In June 2006, the FASB issued SFAS Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB No. 109. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. We are
currently reviewing the effect, if any, that this new pronouncement will have on
our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosure about fair value measurements. This statement does not require any
new fair value measurements. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We are currently reviewing the
effect, if any, that this new pronouncement will have on our financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106 and 123(R)." This statement improves financial
reporting by requiring an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multi-employer
plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity or changes in unrestricted net
assets for a not-for-profit organization. We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.
-12-
Overview
We distribute discrete semiconductors, optoelectronic devices and passive
components to other electronic distributors, CEMs and OEMs, who incorporate them
in their products and supply ODM products for our customer's multi-year turn-key
projects.
We continue to be impacted by the severe decline in demand for discrete
semiconductors from the U.S. market, which began in late 2000. As a result, we
have experienced declining sales is such components since early 2001. In
response to this declining demand, we placed emphasis on increasing our sales to
existing customers through further expansion of the number of different types of
discrete components and other integrated circuits in our inventory and by
attracting additional contract electronic manufacturers (CEMs), original
equipment manufacturers (OEMs) and electronics distributor customers. In
addition, over the last three years we have developed our ODM service
capabilities and added products developed through partnership agreements with
offshore solution providers (OEMs and CEMs). Looking forward, we plan to offer
commodity Integrated Circuits (ICs) as an extension of current discrete
semiconductor lines in 2007.
Our core strategy still includes maintaining a substantial inventory of
electronic components that allows us to fill customer orders immediately from
stock held in inventory. However, since demand remained weak throughout 2006, we
continue to focus on lowering our inventory balances and changing our product
mix. As a result, net inventory levels decreased throughout the year by
$988,000, including a non-cash provision of approximately $480,000 during 2006
to increase our inventory reserves for price declines and slow-moving
components. This provision is mainly used to increase our inventory reserve in
anticipation of future inventory value fluctuation and excess inventory.
In accordance with Generally Accepted Accounting Principles, we have
classified inventory as a current asset in our December 31, 2006, consolidated
financial statements representing approximately 79% of current assets and 62% of
total assets. However, if all or a substantial portion of the inventory was
required to be immediately liquidated, the inventory would not be as readily
marketable or liquid as other items included or classified as a current asset,
such as cash. We cannot assure you that demand in the discrete semiconductor
market will increase and that market conditions will improve. Therefore, it is
possible that further declines in our carrying values of inventory may result.
Since the beginning of 2001, our gross profit margins in general have been
stable. Our gross profit margins are subject to a number of factors, including
product demand, a strong U.S. dollar, our ability to purchase inventory at
favorable prices and our sales product mix.
Results of Operations
The Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
Net sales for the year ended December 31, 2006 increased by $1,159,000 or
13.8% to $9,559,000 from $8,400,000 in the prior year. The overall increase came
from our ODM product sales by $1,370,000 or 139% compared with the prior year.
Gross margins were 29.2% for the year ended December 31, 2006, compared to
27.5% for prior year. The increase was primarily attributed to our ODM product
sales, which earn a higher average margin relative to our component product
sales.
Selling, general and administrative expenses increased by $296,000 or
11.4% for 2006 as compared to the prior year. The increase was primarily
attributed to our salaries and benefits costs by $127,000, repairs and
maintenance expenses by $60,000 and trade commission fees by $50,000. On January
1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R)
"Share-Based Payment" and recognized $17,000 of stock-based compensation as a
result of this new accounting pronouncement.
Operating loss was $100,000 or 1.05% of net sales for 2006, as compared to
$289,000 loss in the prior year. Operating loss decreased primarily as a result
of higher gross margins discussed above.
Net interest income was $68,000 for 2006 as compared to $12,000 net
interest expense in the prior year. The interest income was due to investment
income earned from cash on hand.
Income tax provision was $1,000 for 2006, as compared to $14,000 for the
prior year. Our tax provision is primarily based upon our state income tax
liabilities for both 2006 and 2005.
We incurred net losses of $29,000 for 2006 as compared with net losses of
$205,000 for the prior year, a decrease of $176,000 or 85.9%. Net loss as a
percentage of net sales decreased to 0.3% from 2.44%.
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Liquidity and Capital Resources
We historically have satisfied our liquidity requirements through cash
generated from operations, short-term commercial loans, subordinated promissory
notes and issuance of equity securities. A summary of our cash flows resulting
from our operating, investing and financing activities for the years ended
December 31, 2006 and 2005 were as follows:
Year Ended December 31,
-------------------------
2006 2005
---- ----
Operating activities................................. $ 1,538,000 $1,798,000
Investing activities................................. (1,432,000) (31,000)
Financing activities................................. 622,000 (324,000)
Cash flows provided by operating activities decreased to $1,538,000 during
2006, as compared to $1,798,000 in the prior year.
Cash flows used in investing activities increased to $1,432,000 during
2006, as compared to $31,000 in the prior year. The increase was primarily
attributed to the deposit of $1,230,000 for the real estate purchase contract of
office space in Shanghai, China in September 2006 and $125,000 for upgrading our
computer server equipment and Oracle ERP software in the third quarter of 2006.
Cash flows provided by financing activities was $622,000 in 2006 as
compared cash used in financing activities of $324,000 in the prior year. The
increase was primarily attributed to borrowing $620,000, or approximately 50% of
the $1,230,000 deposit on real estate purchase contract for office space in
Shanghai, China in September 2006 and repayments on notes payable in the prior
year.
We believe that funds generated from operations, existing cash balances
and short-term commercial loans, are likely to be sufficient to finance our
working capital and capital expenditure requirements for the foreseeable future.
If these funds are not sufficient, we may secure new sources of asset-based
lending on accounts receivables or issue debt or equity securities. Otherwise,
we may need to liquidate assets to generate the necessary working capital.
Inventory is included and classified as a current asset. As of December
31, 2006, inventory represented approximately 79% of current assets and 62% of
total assets. However, it is likely to take over one year for the inventory to
turn and therefore is likely not to be saleable within a one-year time frame.
Hence, inventory would not be as readily marketable or liquid as other items
included in current assets, such as cash.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements that have, or are likely
to have, a current or future material effect on our operations.
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:
If environmental laws and regulations restrict the ability to distribute
our products, our inventory may become obsolete and unsaleable. Our worldwide
operations are subject to local laws and regulations, compliance with which may
require substantial expense. As such, of particular interest is the European
Union ("EU") directive relating to the Restriction of Certain Hazardous
Substance ("RoHS"). Effective July 1, 2006, this directive restricted the
distribution of products within the EU containing certain substances, including
lead. At the present time, much of our inventory contains substances prohibited
by the RoHS directive. Further, many of our suppliers are not yet supplying RoHS
compliant products. The legislation is effective and some of our inventory has
become obsolete. Management has estimated the impact of the legislation and have
written down or reserved for related inventories based on amounts expected to be
realized given all available current information. Actual amounts realized from
the ultimate disposition of related inventories could be different from those
estimated.
If we fail to retain key personnel our operations could suffer and our
stock price could be negatively impacted. We are highly dependent upon the
services of Stewart Wang, our Chief Executive Officer and President. Our success
to date has been largely dependent upon the efforts and abilities of Mr. Wang
and the loss of Mr. Wang's services for any reason could have a
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material adverse effect upon us. In addition, our work force includes executives
and employees with significant knowledge and experience in the electronics
distribution industry. Our future success will be strongly influenced by our
ability to continue to recruit, train and retain a skilled work force. While we
believe that we would be able to locate suitable replacements for our executives
or other personnel if their services were lost, we cannot assure you that we
would be able to do so on terms favorable to us. In particular, the hiring of a
suitable replacement for Mr. Wang could be very difficult. We have purchased and
currently intend to maintain a key-man life insurance policy on Mr. Wang's life
with benefits of $2 million payable to us in the event of Mr. Wang's death. The
benefits received under this policy might not be sufficient to compensate us for
the loss of Mr. Wang's services should a suitable replacement not be employed.
Difficulties with or termination of our relationship with our suppliers
could adversely impact our ability to provide sufficient quantities of our
products on a timely basis. Typically, we do not have written long-term supply
or distribution agreements with any of our non-franchise suppliers and our
written franchise supplier agreements have limited protection terms. Although we
believe that we have established close working relationships with our principal
suppliers, our success will depend, in large part, on maintaining these
relationships and developing new supplier relationships for our existing and
future product lines. Because of the lack of long-term contracts, we cannot
assure you that we will be able to maintain these relationships. However, we
believe that, even if we lose our direct relationship with a supplier,
alternative sources exist for our products. We cannot assure you that the loss
or a significant disruption in the relationship with one or more of our
suppliers would not have a material adverse effect on our business and results
of operations.
We may not receive the full value of our inventory if we are forced to
liquidate within a limited time period. Inventory, according to Generally
Accepted Accounting Principles, is included and classified as a current asset in
our December 31, 2006 consolidated financial statements. However, if all or a
substantial portion of the inventory was required to be immediately liquidated,
the inventory would not be as readily marketable or liquid as other items
included or classified as a current asset, such as cash. Further, we may not
realize the full carrying value of our reported inventories.
Our revenues and operating results have been and may again be adversely
affected by downturns or other changes in the general economy or in the
semiconductor industry. The electronics distribution industry has been affected
historically by general economic downturns, which have had an adverse economic
effect upon manufacturers and end-users of discrete components, as well as
electronic distributors such as us. In addition, the life-cycle of existing
electronic products and the timing of new product development and introduction
can affect demand for electronic components. Downturns in the electronics
distribution industry, or the electronics industry in general, could adversely
affect our business and results of operations.
Our gross margins may decline as we increasingly compete with larger
companies with greater financial resources and foreign distributors. We face
intense competition, both in our selling efforts and purchasing efforts, from
the significant number of companies that manufacture or distribute discrete
products. Many of these companies have substantially greater assets and possess
substantially greater financial and personnel resources than we do. Many
competing distributors also carry product lines which we do not carry.
Generally, large component manufacturers and large distributors do not focus
their direct selling efforts on smaller and medium-sized CEMs, OEMs and
distributors, which constitute the vast majority of our customers. However,
should our customers increase in size, component manufacturers may find it cost
effective to focus direct selling efforts on those customers, which could result
in the loss of customers or decrease on profit margins. We cannot assure you
that we will be able to continue to compete effectively with existing or
potential competitors. Also, we have seen new competition from Asia in two major
areas: (a) more Asian manufacturers competing directly with U.S. distributors
and (b) more OEMs and CEMs moving production capacity to Asia for cost savings.
Because we maintain a large inventory, price fluctuations can
significantly affect our results of operations. To adequately service our
customers, we believe that it is necessary to maintain a significant inventory
supply of our product offerings. However, if prices of components held in our
inventory supply decline or if new technology is developed that displaces
products distributed by us and held in inventory, our business and results of
operations could be materially adversely affected.
An unanticipated shortage of products may cause us to fall short of
expected quarterly revenues and operating results. The semiconductor component
business has from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend to either raise unit prices in order
to reduce order backlog or place their customers on "allocation," reducing the
number of units sold to each customer. While we believe that, due to the depth
of our inventory, we have not been adversely affected by past shortages in
certain discrete components, we cannot assure you that future shortages will not
adversely impact us.
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Because we depend on international suppliers for a significant amount of
our products, we are subject to all of the risks and uncertainties associated
with the conduct of international business. A significant number of the products
distributed by us are manufactured in Taiwan, China, South Korea and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls and changes in governmental policies, any of which
could have a material adverse effect on our business and results of operations.
The ability to remain competitive with respect to the pricing of imported
components could be adversely affected by increases in tariffs or duties,
changes in trade treaties, strikes in air or sea transportation, and possible
future U.S. 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 U.S. relationship with China,
could have an adverse effect on our business. Our ability to remain competitive
could also be affected by other governmental actions related to, among other
things, anti-dumping legislation and international currency fluctuations. While
we do not believe that any of these factors adversely impact our business at
present, we cannot assure you that these factors will not materially adversely
affect us in the future. Any significant disruption in the delivery of
merchandise from our suppliers, substantially all of whom are foreign, could
also have a material adverse impact on our business and results of operations.
Because one shareholder holds the majority of the voting power of our
common stock, we may not be an attractive candidate for acquisition, which may
have a negative effect on our stock price. Stewart Wang, our Chief Executive
Officer and President, beneficially owns all of our Class B common stock, which
carries ten votes per share, and he thus controls approximately 62% of the
voting power of our common stock. As a result, Mr. Wang is able to control us
and our operations, including the election of at least a majority of our Board
of Directors. Also, at any time while we have at least 800 shareholders who
beneficially own shares of our common stock, our Articles of Incorporation
provide for the automatic elimination of cumulative voting, which would allow
Mr. Wang to elect all of our directors. The disproportionate vote afforded the
Class B common stock could also serve to discourage potential acquirers from
seeking to acquire control of us through the purchase of the Class A common
stock, which might have a depressive affect on the price of the Class A common
stock.
If our customers return products at a rate significantly in excess of
historical levels, our reserves for returns may not be adequate. On a
case-by-case basis, we accept returns of products from our customers, without
restocking charges, when they can demonstrate an acceptable cause for the
return. Requests by a distributor to return products purchased for its own
inventory generally are not included under this policy. We also will, on a
case-by-case basis, accept returns of products upon payment of a restocking fee,
which generally is set at 15% to 30% of the sales price. We will not accept
returns of any products that were special-ordered by a customer, or that
otherwise are not generally included in our inventory. During the fiscal years
ended December 31, 2006 and 2005, sales returns aggregated $131,000 and $90,000,
or 1.3% and 1.1% of net sales, respectively. Historically, most allowable
returns occur during the first two months following shipment. While we maintain
reserves for product returns which we consider to be adequate, the possibility
exists that we could experience returns in any period at a rate significantly in
excess of historical levels, which could materially and adversely impact our
results of operations for that period.
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
TAITRON COMPONENTS INCORPORATED
Page
Report of Independent Registered Public Accounting Firm ................... 17
Consolidated Balance Sheet at December 31, 2006 ........................... 18
Consolidated Statements of Operations for the Years
Ended December 31, 2006 and 2005 ........................................ 19
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 2006 and 2005 .............................. 20
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2006 and 2005 ........................................ 21
Notes to Consolidated Financial Statements ............................. 22-28
-16-
Report Of Independent Registered Public Accounting Firm
The Board of Directors
Taitron Components Incorporated:
We have audited the accompanying consolidated balance sheet of Taitron
Components Incorporated (the "Company") as of December 31, 2006, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits include consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Taitron Components
Incorporated as of December 31, 2006, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.
As described in Note 1 of the consolidated financial statements, on January 1,
2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004) "Shared-Based Payment".
/s/ Haskell & White LLP
Irvine, California
April 2, 2007
-17-
TAITRON COMPONENTS INCORPORATED
Consolidated Balance Sheet
December 31, 2006
Assets
Current assets:
Cash and cash equivalents $ 2,727,000
Trade accounts receivable, net 1,247,000
Inventory, net 15,693,000
Prepaid expenses and other current assets 105,000
-----------
Total current assets 19,772,000
Property and equipment, net 4,396,000
Other assets 1,326,000
-----------
Total assets $25,494,000
===========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable $ 1,220,000
Accrued liabilities 380,000
Current portion of long-term debt 89,000
-----------
Total current liabilities 1,689,000
Long-term debt, less current portion 509,000
-----------
Total liabilities 2,198,000
-----------
Commitments and contingencies (Notes 3, 6 and 9)
Shareholders' equity:
Preferred stock, $.001 par value
Authorized 5,000,000 shares; None issued
or outstanding --
Class A common stock, $.001 par value
Authorized 20,000,000 shares;
4,716,811 shares issued and outstanding 5,000
Class B common stock, $.001 par value
Authorized, issued and outstanding
762,612 shares 1,000
Additional paid-in capital 10,457,000
Accumulated other comprehensive income 20,000
Retained earnings 12,813,000
-----------
Total shareholders' equity 23,296,000
-----------
Total liabilities and shareholders' equity $25,494,000
===========
See accompanying notes to consolidated financial statements.
-18-
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Operations
Year ended December 31,
2006 2005
----------- -----------
Net sales $ 9,559,000 $ 8,400,000
Cost of goods sold 6,766,000 6,092,000
----------- -----------
Gross profit 2,793,000 2,308,000
Selling, general and administrative expenses 2,893,000 2,597,000
----------- -----------
Operating loss (100,000) (289,000)
Interest income (expense), net 68,000 (12,000)
Other income, net 4,000 110,000
----------- -----------
Loss before income taxes (28,000) (191,000)
Income tax provision (1,000) (14,000)
----------- -----------
Net loss $ (29,000) $ (205,000)
=========== ===========
Loss per share: Basic & Diluted: $ (.01) $ (.04)
=========== ===========
Weighted average common shares outstanding:
Basic & Diluted 5,477,016 5,462,153
=========== ===========
See accompanying notes to consolidated financial statements.
-19-
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Shareholders' Equity
Two years ended December 31, 2006
Accumulated
Class A common stock Class B common stock Other Total
--------------------- -------------------- Additional Comprehensive Retained Shareholders'
Shares Amount Shares Amount Paid-in capital Income (Loss) Earnings Equity
------ ------ ------ ------ --------------- ------------- -------- ------
Balances at
December 31, 2004 4,697,646 $ 5,000 762,612 $1,000 $ 10,414,000 $ 3,000 $13,047,000 $ 23,470,000
Issuances of common
stock 2,499 -- -- -- 2,000 -- -- 2,000
Comprehensive loss:
Foreign currency
translation
adjustment -- -- -- -- -- (20,000) -- (20,000)
Net loss -- -- -- -- -- -- (205,000) (205,000)
--------- ------- ------- ------ ------------ ---------- ----------- -------------
Comprehensive
loss -- -- -- -- -- -- -- (225,000)
--------- ------- ------- ------ ------------ ---------- ----------- -------------
Balances at
December 31, 2005 4,700,145 $ 5,000 762,612 $1,000 $ 10,416,000 $ (17,000) $12,842,000 $ 23,247,000
Issuances of
common stock 16,666 -- -- -- 24,000 -- -- 24,000
Amortization of stock
based compensation -- -- -- -- 17,000 -- -- 17,000
Comprehensive income:
Foreign currency
translation
adjustment -- -- -- -- -- 37,000 -- 37,000
Net loss -- -- -- -- -- -- (29,000) (29,000)
--------- ------- ------- ------ ------------ ---------- ----------- -------------
Comprehensive
income -- -- -- -- -- -- -- 8,000
--------- ------- ------- ------ ------------ ---------- ----------- -------------
Balances at
December 31, 2006 4,716,811 $ 5,000 762,612 $1,000 $ 10,457,000 $ 20,000 $12,813,000 $ 23,296,000
========= ======= ======= ====== ============ ========== =========== =============
See accompanying notes to consolidated financial statements.
-20-
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Cash Flows
Year ended December 31,
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $ (29,000) $ (205,000)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 234,000 236,000
Provision for inventory reserve 480,000 486,000
Provision for sales returns and doubtful accounts 131,000 90,000
Stock based compensation 17,000 --
Changes in assets and liabilities:
Trade accounts receivable 174,000 (543,000)
Inventory 508,000 1,086,000
Prepaid expenses and other current assets 46,000 266,000
Other assets (18,000) (14,000)
Trade accounts payable 200,000 214,000
Accrued liabilities (205,000) 182,000
----------- -----------
Total adjustments 1,567,000 2,003,000
----------- -----------
Net cash provided by operating activities 1,538,000 1,798,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (202,000) (31,000)
Deposit on real estate acquisition under construction (1,230,000) --
----------- -----------
Net cash used in investing activities (1,432,000) (31,000)
----------- -----------
Cash flows from financing activities:
Borrowing (payments) on notes payable 598,000 (1,326,000)
Decrease of restricted cash -- 1,000,000
Exercise of Class A common stock options 24,000 2,000
----------- -----------
Net cash provided by (used in) financing activities 622,000 (324,000)
----------- -----------
Impact of exchange rates on cash 37,000 (20,000)
----------- -----------
Net increase in cash and cash equivalents 765,000 1,423,000
Cash and cash equivalents, beginning of year 1,962,000 539,000
----------- -----------
Cash and cash equivalents, end of year $ 2,727,000 $ 1,962,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 11,000 $ 48,000
=========== ===========
Cash paid for income taxes, net $ 13,000 $ 10,000
=========== ===========
See accompanying notes to consolidated financial statements.
-21-
TAITRON COMPONENTS INCORPORATED
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Description of Business
Taitron Components Incorporated ("Taitron" or the "Company") is a national
distributor of brand name electronic components and supplier of original
designed and manufactured (ODM) electronic components ("ODM Components")
based on our own engineering specifications under private label brands,
with product offerings ranging from discrete semiconductors through small
electronic devices. The Company also provides value-added engineering and
turn-key services, focused on providing existing contract electronic
manufacturers (CEMs) and original equipment manufacturers (OEMs) with
original design and manufacturing (ODM) services for their multi-year
turn-key projects ("ODM Products"). In order to meet the rapid delivery
requirements of its customers for electronic components, the Company
maintains a significant inventory.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 60% majority-owned subsidiary, Taitron Components Mexico, SA de
CV. All significant intercompany transactions and balances have been
eliminated in consolidation. The ownership interests of the minority
investors in Taitron Components Mexico, SA de CV are recorded in the
accompanying consolidated balance sheet as minority interests, which have
a balance of $107,000 as of December 31, 2006, and are presented in
accrued liabilities.
Concentration of Risk
A significant number of the products distributed by the Company are
manufactured in Taiwan, Hong Kong, China, South Korea and the Philippines.
The purchase of goods manufactured in foreign countries is subject to a
number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs
and import and export controls and changes in governmental policies, any
of which could have a material adverse effect on the Company's business
and results of operations.
The ability to remain competitive with respect to the pricing of imported
components could be adversely affected by increases in tariffs or duties,
changes in trade treaties, strikes in air or sea transportation, and
possible future U.S. 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
relationship of the United States 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, the Company cannot assure you 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 90% of the Company's products
were produced in Asia.
Samsung Electro-Mechanics Co. and Everlight Electronics Co, Ltd., together
accounted for approximately 25.9% and 31% of all Taitron's net purchases
for 2006 and 2005, respectively. However, Taitron does not regard any one
supplier as essential to its operations, since equivalent replacements for
most of the products Taitron markets are either available from one or more
of Taitron's other suppliers or are available from various other sources
at competitive prices. Taitron believes that, even if it loses its direct
relationship with a supplier, there exist alternative sources for a
supplier's products.
During the year ended December 31, 2006 and 2005, Taitron had one customer
accounting for 22% and 8% of our net sales, respectively. Other than this
customer, for the years ended December 31, 2006 and 2005, no other
customer accounted for more than 4.2% and 5.4%, respectively, of our net
sales.
-22-
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents.
The Company maintains cash balances in multiple accounts at several banks.
Accounts at the various financial institutions are insured by the Federal
Deposit Insurance Corporation up to $100,000 in the aggregate. From time
to time, the Company has uninsured amounts on deposit in excess of
insurable limits. Management does not believe that there is a significant
credit risk with respect to the non-performance of these institutions
based on their respective creditworthiness and liquidity.
Revenue Recognition
The Company recognizes revenue when it has evidence of an arrangement, a
determinable fee, and when collection is considered to be probable and
products are delivered. This occurs upon shipment of the merchandise,
which is when legal transfer of title occurs. Reserves for sales
allowances and customer returns are established based upon historical
experience and management's estimates of future returns. Sales returns for
the years ended December 31, 2006 and 2005 aggregated $131,000 and
$90,000, respectively.
Allowance for Sales Returns and Doubtful Accounts
On a case-by-case basis, the Company accepts returns of products from its
customers, without restocking charges, when they can demonstrate an
acceptable cause for the return. Requests by a distributor to return
products purchased for its own inventory generally are not included under
this policy. The Company will, on a case-by-case basis, accept returns of
products upon payment of a restocking fee, which is generally 10% to 30%
of the net sales price. The Company will not accept returns of any
products that were special-ordered by a customer or that otherwise are not
generally included in our inventory. The allowance for sales returns and
doubtful accounts at December 31, 2006 aggregated $76,000.
Inventory
Inventory, consisting principally of products held for resale, is stated
at the lower of cost, using the first-in, first-out method, or market. The
amount presented in the accompanying consolidated balance sheet is net of
valuation allowances of $1,154,000 at December 31, 2006. The Company uses
a systematic methodology that includes regular evaluations of inventory to
identify costs in excess of the lower of cost or market and slow-moving
inventory.
Depreciation and Amortization
Depreciation and amortization of property and equipment are computed
principally using accelerated and straight-line methods using lives from 5
to 7 years for furniture, machinery and equipment and 31.5 years for
building and building improvements. Renewals and betterments, which extend
the life of an existing asset, are capitalized while normal repairs and
maintenance costs are expensed as incurred.
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 these 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-Based Compensation
In March 1995, the Company established the 1995 Stock Incentive Plan (the
"1995 Plan") that expired in March 2005. In September 2006, the Company'
2005 Stock Incentive Plan (the "2005 Plan") was approved by state
regulators, which authorizes the issuance of up to 1,000,000 shares
pursuant to options or awards granted under the plan. We granted 70,000
shares under the 2005 Plan on December 2, 2006.
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised
2004), "Share-Based Payment" (SFAS 123R). SFAS 123R requires that the
Company account for all stock-based compensation using a fair-value method
-23-
and recognize the fair value of each award as an expense over the service
period. The adoption of SFAS 123R for the year ended December 31, 2006
increased stock-based compensation expense by $17,000. For the year ended
December 31, 2005 and earlier years, the Company accounted for employee
stock-based compensation using the intrinsic value method of APB Opinion
No. 25 and followed the disclosure requirements of SFAS No. 123, as
amended by SFAS 148.
The Company elected to adopt SFAS 123R using the "modified prospective
application." Under that method, compensation expense includes the fair
value of new awards, modified awards and any unvested awards outstanding
at January 1, 2006. However, the consolidated financial statements for
periods prior to the adoption of SFAS 123R have not been restated to
reflect the fair value method of accounting for stock-based compensation,
but rather disclosed the cost in accordance with APB 25.
The following table illustrates the effect on net loss and net loss per
share as if compensation expense for all awards of stock-based employee
compensation had been determined under the fair value-based method
prescribed by SFAS 123 for periods prior to the adoption of SFAS 123R:
Year Ended December 31,
-----------------------
2005
---------
Net loss As reported $(205,000)
Pro forma $(235,000)
Loss per share As reported $ (.04)
Pro forma $ (.04)
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 the
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.
Valuation allowances are recorded, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
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 estimated fair value of long-term debt approximates its carrying value
because the interest rate associated with the instrument fluctuates with
market conditions. All financial instruments are held for purposes other
than trading.
Net Loss Per Share
Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding
during the period. Common equivalent shares, consisting primarily of stock
options, of approximately 446,000 and 534,000 for the years ended December
31, 2006 and 2005, respectively, are excluded from the computation of
diluted loss per share as their effect is anti-dilutive.
Foreign Currency Translation
The financial statements of the Company's majority-owned subsidiary in
Mexico and divisions in Taiwan, Brazil and China, which were established
in 1998, 1997, 1996 and 2005, respectively, are translated into U.S.
dollars for financial reporting purposes. 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 accumulated other 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. The transactional gains and losses are not
significant to the consolidated financial statements.
-24-
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 accounting principles generally accepted in the United
States of America. These estimates have a significant impact on the
Company's valuation and reserve accounts relating to the allowance for
sales returns, doubtful accounts and inventory reserves. Actual results
could differ from these estimates.
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.156, "Accounting
for Servicing of Financial Assets," ("SFAS No. 156"), which amends SFAS
No. 140," Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 156 permits an entity to choose
either of the following subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities: (1)
Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is
effective as of the beginning of an entity's first fiscal year that begins
after September 15, 2006 and the Company does not expect that the
pronouncement will have a significant impact on its financial statements.
In June 2006, the FASB issued SFAS Board Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
statement No. 109" ("FIN 48"), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB No. 109. The interpretation prescribes
a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Management is currently
reviewing the effect, if any, that this new pronouncement will have on its
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosure about fair value measurements. This statement does not
require any new fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Management is
currently reviewing the effect, if any, that this new pronouncement will
have on its financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment
of FASB Statements No. 87, 88, 106 and 123(R)." This statement improves
financial reporting by requiring an employer to recognize the overfunded
or underfunded status of a defined benefit postretirement plan (other than
a multi-employer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income of a business
entity or changes in unrestricted net assets for a not-for-profit
organization. The Company does not expect the adoption of this
pronouncement to have a material impact on its financial statements.
Note 2 - Property and Equipment
Property and equipment, at cost, is summarized as follows:
12/31/2006
-----------
Land $ 1,294,000
Buildings and improvements 3,706,000
Furniture and equipment 934,000
Computer software and equipment 2,297,000
-----------
Total Property and Equipment 8,231,000
Less: Accumulated depreciation and amortization (3,835,000)
-----------
Property and Equipment, net $ 4,396,000
===========
-25-
Note 3 - Note Payable
12/31/06
--------
Bank loan collateralized by real property,
payable in fixed monthly principal
installments of $7,381, plus interest at the
rate of one year LIBOR + 1.8% per annum, due
September 20, 2013. $598,000
Less current portion (89,000)
--------
Long-term debt, less current portion $509,000
========
On September 21, 2006, the Company borrowed $620,000 in connection with
its deposit on a real estate purchase contract related to the acquisition
of approximately 4,500 square feet of office space (consisting of 2
separate units on the same floor) in Shanghai, China with a total purchase
price of $1,230,000. The overall office building project is under
construction and is estimated to be completed in June 2007. The investment
will be used as rental property for lease to others and for the Company's
project design and engineering center.
Note 4 - Shareholders' Equity
There are 5,000,000 shares of authorized preferred stock, par value $.001
per share, with no shares of preferred stock outstanding. The terms of the
shares are subject to the discretion of the Board of Directors.
There are 20,000,000 shares of authorized Class A common stock, par value
$.001 per share, with 4,716,811 issued and outstanding as of December 31,
2006. Each holder of Class A common stock is entitled to one vote for each
share held.
There are 762,612 shares of authorized Class B common stock, par value
$.001 per share, with 762,612 shares issued and outstanding as of December
31, 2006. Each holder of Class B common stock is entitled to ten votes for
each share held. The shares of Class B common stock are convertible at any
time at the election of the shareholder into one share of Class A common
stock, subject to certain adjustments. The Company's Chief Executive
Officer is the sole beneficial owner of all the outstanding shares of
Class B common stock.
During 2006 and 2005, the Company did not repurchase any shares of its
Class A common stock. However, the Company issued 16,666 shares of common
stock upon the exercise of stock options (Note 7).
Note 5 - Income Taxes
Income tax provision is summarized as follows:
Year Ended December 31,
-----------------------
2006 2005
-------- --------
Current:
Federal $ -- $ --
State 1,000 14,000
-------- --------
1,000 14,000
-------- --------
Deferred:
Federal -- (40,000)
State (1,000) (12,000)
Increase in valuation allowance 1,000 52,000
-------- --------
-- --
-------- --------
Income tax provision $ 1,000 $ 14,000
======== ========
-26-
The actual income tax provision differs from the "expected" tax computed
by applying the Federal corporate tax rate of 34% to the loss before
income taxes as follows:
Year Ended December 31,
-----------------------
2006 2005
-------- --------
"Expected" income tax expense (benefit) $ (1,000) $(59,000)
State tax expense, net of Federal benefit 1,000 5,000
Foreign (income) loss (2,000) (2,000)
Increase in valuation allowance 1,000 52,000
Other 2,000 18,000
-------- --------
Income tax provision $ 1,000 $ 14,000
======== ========
The tax effects of temporary differences which give rise to significant
portions of the deferred taxes are summarized as follows:
Deferred tax assets: 12/31/2006
----------
Inventory reserves $ 494,000
Section 263a adjustment 89,000
Allowances for bad debts and returns 28,000
Accrued expenses 17,000
Asset valuation reserve 56,000
State net operating loss carry forward 79,000
Other 32,000
---------
Total deferred tax assets 795,000
Valuation allowance (721,000)
Deferred tax liabilities:
Deferred state taxes (74,000)
---------
Net deferred tax assets $ --
=========
The Company has a net operating loss carryforward aggregating
approximately $742,000 for state tax purposes that expires in 2015. In
assessing the realizability of the deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Management considers the
scheduled reversal of deferred tax assets, the level of historical taxable
income and tax planning strategies in making the assessment of the
realizability of deferred tax assets.
Note 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 the maximum allowed under the
Code. The plan also provides for safe harbor matching contributions,
vesting immediately, at the discretion of the Company. For the years ended
December 31, 2006 and 2005, employer matching contributions aggregated
approximately $36,000 and $8,000, respectively.
The plan invests a portion of its assets in the common stock of the
Company. The plan held 77,491 shares of the Company's Class A common stock
at December 31, 2006.
Note 7 - Stock Options
In September 2006, the Company' 2005 Stock Incentive Plan (the "Plan") was
approved by state regulators, which authorizes the issuance of up to
1,000,000 shares pursuant to options or awards granted under the plan.
Under the Plan, incentive stock and nonstatutory options were granted at
prices equal to at least the fair market value of the Company's Class A
common stock at the date of grant. Outstanding options vest in three equal
annual installments beginning one year from the date of grant and are
subject to termination provisions as defined in the Plan. The fair value
of options using the Black-Scholes option-pricing model with the following
weighted average assumptions used for 2006: dividend yield of 2%; expected
volatility of 33%; a risk free interest rate of approximately 4.4% and an
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expected holding period of five years; and for 2005: dividend yield of 0%;
expected volatility of 35%; a risk free interest rate of approximately 5%
and an expected holding period of five years.
As described in Note 1, for the year ended December 31, 2005 and earlier
years, the Company accounted for employee stock-based compensation using
the intrinsic value method of APB Opinion No. 25 and followed the
disclosure requirements of SFAS No. 123, as amended by SFAS 148.
Stock option activity during the periods indicated is as follows:
Weighted Average Aggregate Weighted
Number Weighted Average Years Remaning Intrinsic Average
of Shares Exercise Price Contractual Term Value Fair Value
--------- -------------- ---------------- --------- ------------
Outstanding at December 31, 2004 598,999 $1.81
Exercised (2,499) 1.06
Forfeited (70,334) 2.10
-------
Outstanding at December 31, 2005 526,166 1.78
Granted 70,000 2.52 9.93 $0.72
Exercised (16,666) 1.41
Forfeited (77,500) 2.32
-------
Outstanding at December 31, 2006 502,000 $1.82 5.28
=======
Exercisable at December 31, 2006 410,332 $1.70 4.24 $296,000
=======
At December 31, 2006, the range of individual weighted average exercise
prices was $1.60 to $2.45.
Note 8 - Net Loss Per Share
The following data shows a reconciliation of the numerators and the
denominators used in computing loss per share and the weighted average
number of shares of dilutive potential common stock.
2006 2005
----------- -----------
Net loss available to common shareholders
used in basic loss per share $ (29,000) $ (205,000)
Weighted average number of common shares
used in basic loss per share 5,477,016 5,462,153
----------- -----------
Basic loss per share $ (.01) $ (.04)
=========== ===========
Effect of dilutive securities:
Options -- --
----------- -----------
Weighted average number of common shares
and dilutive potential common shares
used in diluted loss per share 5,477,016 5,462,153
=========== ===========
Diluted loss per share $ (.01) $ (.04)
=========== ===========
Note 9 - Commitments and Contingencies
Legal and Regulatory Proceedings
The Company is engaged in various legal and regulatory proceedings
incidental to its normal business activities, none of which, individually
or in the aggregate, are deemed to be material risk to its financial
condition.
Inventory Purchasing
Outstanding commitments to purchase inventory from suppliers aggregated
$1,348,000 as of December 31, 2006.
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Software Upgrade
The Company is in process of upgrading its Oracle ERP software to a
current version and has outstanding commitments for professional
consulting services that aggregated $68,000 as of December 31, 2006.
Regulation
Effective July 1, 2006, the European Union ("EU") directive relating to
the Restriction of Certain Hazardous Substance ("RoHS") restricted the
distribution of products within the EU containing certain substances,
including lead. At the present time, much of our inventory contains
substances prohibited by the RoHS directive and some of our inventory may
become obsolete and unsaleable and, as a result, have to be written off.
Note 10 - Geographic information
The following table presents summary geographic information about revenues
and long-lived assets (land and property, net of accumulated depreciation)
attributed to countries based upon location of our customers:
Long-lived
Revenues Assets
-------- ------
United States $7,626,000 $3,915,000
Mexico 842,000 156,000
Brazil 422,000 --
China 185,000 16,000
Taiwan 177,000 309,000
Canada 56,000 --
Other foreign countries 251,000 --
---------- ----------
Total $9,559,000 $4,396,000
---------- ----------
Note 11 - Subsequent Events
On January 10, 2007 the Company declared an annual cash dividend of $0.10
per share of Class A Common Stock and Class B Common Stock, paid on
January 31, 2007, to shareholders of record at the close of business on
January 22, 2007. The dividend was declared in connection with the
Company's decision to establish an annual cash dividend of up to $0.10 per
share on Class A and Class B Common Stock for a period of five years. The
payment of future cash dividends under the policy is subject to the
continuing determination that the policy remains in the best interest of
the Company's shareholders and complies with laws and any agreements the
Company's may enter into applicable to the declaration and payment of cash
dividends. The maintenance of the dividend policy will depend on factors
that the Company deems relevant, including the Company's cash earnings,
financial condition and cash requirements in any given year. The Company's
ability to declare dividends could be affected by a variety of factors
affecting cash flow, including required capital expenditures, increased or
unanticipated expenses, additional borrowings and future issuances of
securities.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A. CONTROLS AND PROCEDURES.
As of the end of the fiscal period covered by this Annual Report on
Form 10-KSB, an evaluation was performed under the Securities Exchange Act
of 1934 under the supervision and with the participation of our
management, including the Principal Executive and Principal Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the
Principal Executive and Principal Financial Officer concluded that our
disclosure controls and procedures were effective. During the three-month
period ended December 31, 2006, no change in our internal control over
financial reporting occurred that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION.
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by Item 9, with the exception of the
information provided below concerning the Company's Code of Ethics, will
appear in the Proxy Statement for the 2007 Annual Meeting of Shareholders
(the "Proxy Statement") under the captions "Election of Directors",
"Compliance with Section 16(a) - Beneficial Ownership Reporting" and
"Report of the Audit Committee" and is incorporated herein by this
reference. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days following December 31, 2006.
The Company has adopted a Code of Ethics that applies to all
officers (including its principal executive officer, principal financial
officer, controller and any person performing similar functions). The Code
of Ethics is available on the Company's website at
www.taitroncomponents.com.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 will appear in the Proxy
Statement under the caption "Executive Compensation" and is incorporated
herein by this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by Item 11 will appear in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management" and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 will appear in the Proxy
Statement under the caption "Certain Relationships and Related
Transactions" and is incorporated herein by this reference.
ITEM 13. EXHIBITS.
3.1 Articles of Incorporation of Taitron Components Incorporated. (1)
3.2 Bylaws. (1)
4.1 Specimen certificate evidencing Class A common stock. (1)
4.2 Form of Underwriter's Warrant. (1)
10.1* Form of Director and Officer Indemnification Agreement. (1)
10.2* 1995 Stock Incentive Plan, as Amended. (2)
21.1** List of Subsidiaries.
23.1** Consent of Independent Registered Public Accounting Firm - Haskell &
White LLP.
24.1** Power of Attorney (contained on the signature page hereof).
31.1** Principal Executive and Financial Officer - Section 302 Certification.
32.1** Principal Executive and Financial Officer - Section 906 Certification.
--------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
(1) Incorporation by reference from the Company's Registration Statement
on Form SB-2, Registration No. 33-90294-LA.
(2) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services will appear
in the Proxy Statement for the 2007 Annual Meeting of Shareholders and is
incorporated herein by this reference.
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
Dated: April 2, 2007 By: /s/ Stewart Wang
----------------------------------
Stewart Wang
Chief Executive Officer, President
and Chief Financial Officer
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 April 2, 2007
-----------------------
Johnson Ku
/s/ Stewart Wang Chief Executive Officer, President, April 2, 2007
----------------------- Chief Financial Officer and Director
Stewart Wang (Principal Executive, Financial and
Accounting Officer)
/s/ Richard Chiang Director April 2, 2007
-----------------------
Richard Chiang
/s/ Craig Miller Director April 2, 2007
-----------------------
Craig Miller
/s/ Felix Sung Director April 2, 2007
-----------------------
Felix Sung
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