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, 2005
[ ] 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: $8,400,000
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 1, 2006 was approximately $8.2 million based upon the
closing price of $2.21 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, 2006
------------------------------------- ----------------------------
Class A common stock, $.001 par value 4,711,811
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.
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 electronic components, primarily focused
on transistors, diodes and other discrete semiconductors, optoelectronic devices
and passive components with a reputation of in-depth inventories and knowledge
of the products it 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
manufacture electronic components based on our engineering specifications under
the brands "TCI" or "PSD" through outsourcing. At December 31, 2005, our
inventory consisted of over 14,000 different products manufactured by more than
100 different suppliers. 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 for supporting our purchasing of components and manufactured
products.
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 efforts
almost exclusively on the distribution of discrete semiconductors,
optoelectronic devices and passive components, a small subset of the electronic
components market.
We continue to be impacted by the severe decline in demand from the U.S.
market, which began in late 2000. As a result, we have experienced declining
sales since early 2001. In response to this declining demand, we expect to
increase 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 to traditional component fulfillment, we are continuing to develop
our market role into value-added engineering services for existing OEM and CEM
customers through partnership agreements with offshore solution providers.
Discrete Semiconductors
Semiconductors can be broadly divided into two categories - discrete
semiconductors, including transistors, diodes, rectifiers and bridges, which are
packaged individually to perform a single or limited function, and integrated
circuits, such as
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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.
While integrated circuits may garner more public exposure, discrete
semiconductors, the ancestral root of integrated circuits, have been a core
element of electric equipment for more than 35 years. Discrete semiconductors
are found in most consumer, industrial and military electrical and electronic
applications.
Discrete semiconductors represent only a small subset of the different
types of semiconductors currently available. Discrete semiconductors are
generally more mature products with a more predictable demand, more stable
pricing and more constant sourcing than other products in the semiconductor
industry, and are thus less susceptible to technological obsolescence than
integrated circuits.
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 45% and 41% of our total sales for the years ended December 31, 2005 and
2004, respectively. During 2005, we purchased $2,240,000 of inventory for these
components, to facilitate our market for these products.
Electronic 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 CEMs 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.
Strategy
Our preliminary goal was to become one of the leading distributors of
discrete semiconductors in North America. In 2004, we began providing design and
engineering services to support our existing OEM and CEM customers by
outsourcing their product design and manufacturing assembly work offshore. Sales
of these products were $440,000 and $985,000 in 2004 and 2005. In order to
facilitate this outsourcing program, in 2005, we opened an engineering design
center in Shanghai, China. Strategic allies such as Princeton Technology
Corporation, a company controlled by one of our directors, and Teamforce Co.
Ltd., both Taiwan-based companies, will assist us with this program. Our goal is
to have 50% component sales and 50% design and manufacturing sales within 3
years.
We initially gained market share by concentrating on selling discrete
semiconductors at competitive prices. 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 strategy include:
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Inventory. Our core strategy includes maintaining a substantial inventory
of discrete and passive components purchased at prices generally lower than
those commonly available to its competitors. This strategy allows us to fill
customer orders immediately from stock held in inventory. We believe that our
most important competitive advantage is the depth of our inventory. Unlike other
distributors who carry only the best-selling discretes, our entire inventory
consists of a wide range of discrete semiconductors, optoelectronic devices and
passive components. However, we are also focusing on lowering our inventory
levels to balance with the weakened demand experienced throughout 2005. 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 them under the "TCI" or "PSD" brand. These private
label products are manufactured according to our specification under a special
contract agreement with certain manufacturers. Custom made parts are also
available by following either customer's specification or specially made
engineering specification. We believe custom made parts business is more stable
and profitable than the traditional commodity type business.
Strategic Purchasing. When the opportunity presented itself, we made
opportunistic purchases of a supplier's uncommitted inventory in order to take
advantage of favorable pricing. We also made significant purchases in advance in
an attempt to maintain consistent inventory levels and meet anticipated orders.
When possible, we attempt to control our inventory risks by matching large
customer orders with simultaneous purchases from suppliers. See Part II, Item 6
- "Management's Discussion and Analysis - Cautionary Statements and Risk Factors
- Need to Maintain Large Inventory; Price Fluctuations".
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. During the last few years, there
have been substantial consolidations within the electronics distribution
industry creating very large distributors. This trend to consolidate creates
opportunities for us since suppliers do not usually direct sales efforts toward
small and medium-sized CEMs and OEMs and often the larger distributors no longer
adequately service small customers. We believe that our strategic purchasing
policies enable us to provide small and medium-sized CEMs and OEMs and
distributors competitive prices while maintaining adequate profit margins. We
generally do not impose minimum order limitations on our customers, which
enables smaller customers to avoid the costs of carrying large inventories. We
also offer our customers a limited range of value-added services such as cutting
and forming, quality monitoring and product source tracing. We intend to grow by
developing our market role into value-added design and engineering services for
the small OEMs and CEMs.
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 selected
distributors. We intend to maintain only a few preferred distributors in each
geographical region.
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. Since 2001, we have been aggressively pursuing new distribution
agreements that provide us with stock rotation and price protection privileges.
These distribution agreements also provide stock buy back terms where suppliers
will buy back inventory from the distributor if either the supplier or
distributor terminates the distribution agreement. We also 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".
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Reliable One Stop Shopping. We offer a large selection of different
name-brand discrete semiconductors, optoelectronic devices and passive
components at competitive prices which reduce the number of suppliers a buyer
must use to purchase these devices and components. We provide customers with
catalogs that are specially designed to aid customers in quickly locating the
types and brands of products that they need. Because of our large inventory, we
often can fill a significant portion, or all, of a customer's order from stock.
Historically, we have been able to fill most of our customers' orders within 24
hours and in compliance with their requested delivery schedules. See Part II
Item 6 - "Management's Discussion and Analysis - Results of Operations",
"Business - Customers" and "Business - Sales and Marketing Channels".
Broken Package Sales. From time to time, we have broken the minimum
package for specific customers who demanded only a partial reel or bag for their
prototype or pilot run. With the new development of web order entry system (WOE)
and the completion of warehouse management system (WMS), we are able to perform
the broken package sales more economically and efficiently. We will target local
distributors, OEMs and CEMs to release their financial burden of carrying
unwanted parts in their stock.
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.
Vendor Managed Inventory (VMI). A special VMI contract is available for
our major OEM customers who often release their purchase orders based on short
notice, usually within 24 hours. Based on their non-cancelable and
non-returnable purchase orders, we allocate these products in advance within a
separate VMI storage area in our warehouse to ensure we cover any short term
demand. Our VMI system is fully operational from web by mangers who could be our
customers, sales representatives or employees.
Products
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, 2005, our inventory consisted of over 14,000 different products
manufactured by more than 100 different suppliers.
In 2005, we purchased products from over 50 suppliers, including Everlight
Electronics Co, Ltd., KEC America Corporation, 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".
Discretes are categorized based on various factors, including capacity,
construction, 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, varistor diodes, germanium diodes and zener
diodes.
Transistors. Transistors are used in, among other applications, the
processing or amplification of electric current and electronic signals,
including data, television, sound and power. 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.
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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. As a result, we have not experienced any
material amount of product obsolescence, and do not expect to experience any
material amount of product obsolescence in the foreseeable future. However, we
cannot assure you that over time the functions for which discretes 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 originates from our 55,000 square-foot facility located
in Santa Clarita, California. We utilize a computerized inventory
control/tracking system which enables us to quickly access inventory levels and
trace product shipments. See Item 2 - "Properties."
Customers
We market our products to distributors, CEMs and OEMs. We believe that our
strategic purchasing policies allow us to provide smaller and medium-sized
distributors, CEMs and OEMs competitive prices 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 2005, we distributed our products to approximately 750 customers.
For the years ended December 31, 2005 and 2004, no one customer accounted for
more than 8.5% and 6.2%, respectively, of our net sales. We do not believe that
the loss of any one customer would have a material adverse effect on our
business.
In 2005, distributors represented approximately 35% and both CEMs and OEMs
together represented approximately 50% of our net sales. The remaining 15% sales
represented other brokers, 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 our products are sold by our distributor customers. However, based on our
sales to CEMs and OEMs, we believe that no single industry accounted for a
majority of the applications of the products sold in 2005 or 2004.
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
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, 2006, our sales and marketing department consisted of 11
employees. We have centralized our sales order processing and customer service
department into our headquarters at Santa Clarita, 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.
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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 $51,000 in 2005 and $100,000 in 2004.
We have sales channels into Central America through our majority-owned
subsidiary in Mexico City, Mexico. Central American sales were $626,000 and
$514,000 in 2005 and 2004, respectively.
We have sales channels into Asia through our branch office in Taipei,
Taiwan. Sales to Asian customers were $439,000 and $507,000 in 2005 and 2004,
respectively.
We also have sales channels into South America through our branch office
in Sao Paulo, Brazil. South American sales were $351,000 and $322,000 in 2005
and 2004, 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 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 7 independent sales representatives
during 2005.
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 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 certain 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, 2006 were
approximately $2,054,000. 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 2005, we purchased components from over 50 different suppliers,
including Everlight Electronics Co, Ltd., Samsung Electro-Mechanics Co. and
Vishay Americas Inc. 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. Also, our relationships with suppliers have
been terminated from time to time. The possibility exists that the loss of one
or more distribution relationships with a supplier might have a material adverse
effect on us and our results of operations. See Part II, Item 6 - "Management's
Discussion and Analysis - Cautionary Statements and Risk Factors - Relationship
with Suppliers".
For the year ended December 31, 2005, Samsung Electro-Mechanics Co. and
Everlight Electronics Co, Ltd., together accounted for approximately 31% of our
net purchases. 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 believes 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 design and engineering services, we have built relationships with few
selected system integration vendors in China providing quality service and
warranty of the finished products. Most of our current projects involve multiple
year cooperation
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among components suppliers, overseas vendors and our end customers in the
U.S.A., therefore, we believe such arrangements may increase the business
stability and reduce the financial risk of excess inventory.
Competition
We operate 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, CEMs 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".
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 5.2% and 5.4% of our total sales in 2005 and
2004, 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."
- 8 -
Employees
At March 1, 2006, we had 27 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.
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 55,000 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.
In addition, we lease 350 square feet of office space for sales and
marketing functions in Brazil, expiring in May 2006 and 1,400 square feet of
office space for engineering services support in China, expiring in September
2006.
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, 2004:
First Quarter $ 2.49 $ 1.75
Second Quarter 3.57 2.00
Third Quarter 2.50 1.62
Fourth Quarter 2.55 1.82
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 (through March 1, 2006) $ 2.50 $ 1.75
On March 1, 2006, the last sale price of the Class A common stock as
reported by Nasdaq was $2.21 per share.
- 9 -
Holders
As of March 1, 2006, there were 42 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
To date, we have not declared nor paid any cash dividends to our
shareholders. However, under our current cash flow and financial position, we
are considering a cash dividend policy considering the recent advantageous tax
law treatment for cash dividends paid before 2008. We are not aware of any
contractual or similar restrictions that limit our ability to pay dividends,
currently or in the future. 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 2005 that
were not registered under the Securities Act of 1933.
Repurchase of Equity Securities
We have not repurchased any shares during fiscal 2005.
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 year ended December
31, 2005 were $90,000 compared to $86,000 for 2004. The allowance for sales
returns and doubtful accounts at December 31, 2005 was $64,000. We review the
actual sales returns and bad debts for our customers and establish an estimate
of future returns and allowance for doubtful accounts.
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 $16,681,000 at December 31, 2005, which is presented net of valuation
allowances of $1,267,000. We evaluate inventories to identify excess, high-cost,
slow-moving or other factors rendering inventories as unmarketable at normal
profit margins. For inventories supplied under franchise agreements, we take
into account our contractual rights to receive compensation for price
differences caused by market fluctuations. 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
- 10 -
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.
Also, 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"). Effective July 1,
2006, this directive restricts 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. Upon effectiveness
of the RoHS legislation, some of our inventory may become obsolete and
unsaleable and, as a result, have to be written off. While we are working
closely with our customers and suppliers to minimize this impact, at this time,
it is difficult to quantify the financial impact, if any, of such obsolete
inventory.
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 December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment"
("SFAS 123(R)") which establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services. This
SFAS 123(R) standard requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS 123(R), only certain pro forma disclosures of fair
value were required. SFAS 123(R) shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement may
have a material impact on our financial statements during the next year ended
December 31, 2006.
Overview
We distribute a wide variety of transistors, diodes and other discrete
semiconductors, optoelectronic devices and passive components to other
electronic distributors, contract electronic manufacturers (CEMs) and original
equipment manufacturers (OEMs), who incorporate them in their products.
We believe that demand for discrete semiconductors in the U.S. market
began to diminish towards the end of 2000 and the demand through today has
drastically declined. In addition, we believe the declining demand in the U.S.
market has resulted from the accelerated trend of moving the production capacity
of OEM/CEM customers abroad and the consolidation of CEM customers domestically.
In response, we have focused our business strategy beyond the traditional role
of electronic components fulfillment to the additional role of engineering and
turn-key services for the existing OEM and CEM customers. We formed few
strategic business partnerships with a few selected existing customers and
provide them with original design and manufacturing (ODM) services for their
multi-year turn-key projects. We expect to see more ODM opportunities and the
results from our existing ODM services during 2006.
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 2005, we
focused on lowering our inventory balances and changing our product mix. As a
result, net inventory levels decreased throughout the year by $1,572,000,
including a non-cash provision of approximately $486,000 during 2005 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, 2005, consolidated
financial statements representing approximately 82% of current assets and 67% 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.
- 11 -
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, manufacturer's price protection programs,
our ability to purchase inventory at favorable prices and our sales product mix.
Results of Operations
The Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 decreased by 10.2% to
$8,400,000 from $9,352,000 in the prior year. The overall decrease came from
declining domestic sales of our components by $1,497,000, or 16.8%, offset by an
increase of $545,000, or 123.9%, in our manufactured products, compared with the
year-earlier period..
Gross margins were 27.5% for the year ended December 31, 2005, compared to
28.4% for the year ended December 31, 2004. The decrease can be primarily
attributed to pricing pressures for our components sold in the domestic market.
Selling, general and administrative expenses increased by $9,000 or .4%
for 2005 as compared to the prior year. While the overall expenditure remained
at approximately the same level for the years ended December 31, 2005 and 2004,
our headcount and related salaries decreased by $80,000, offset by $89,000 of
increase in professional fees.
Operating loss was $289,000 or 3.4% of net sales for 2005, as compared to
$84,000 in the prior year. Operating loss increased primarily as a result of
lower gross margins discussed above.
Interest expense was $12,000 for 2005 as compared to $171,000 in the prior
year. The decrease is due to lowered borrowing levels related to repayment of
our long-term debt obligations. As of December 31, 2005, we have no outstanding
borrowings on interest-bearing debt.
Income tax provision was $14,000 for 2005, as compared to $33,000 for the
prior year. Our tax provision is primarily based upon our state income tax
liabilities for both 2005 and 2004.
We incurred net losses of $205,000 for 2005 as compared with net losses of
$248,000 for the prior year, a decrease of $43,000 or 17.3%. Net loss as a
percentage of net sales decreased to 2.4% from 2.7%.
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, 2005 and 2004 were as follows:
Year Ended December 31,
----------------------------
2005 2004
---- ----
Operating activities........................... $1,798,000 $ 1,711,000
Investing activities........................... (31,000) (117,000)
Financing activities........................... (324,000) (4,032,000)
Cash flows provided by operating activities increased to $1,798,000 during
2005, as compared to $1,711,000 in the prior year.
Cash flows used in investing activities was $31,000 during 2005, as
compared to $117,000 in the prior year.
Cash flows used in financing activities decreased to $324,000 in 2005 as
compared with $4,032,000 in the prior year.
We believe that funds generated from operations, our $3 million revolving
line of credit facility and existing cash balances, 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, 2005, inventory represented approximately 82% of current assets and 67% of
total assets. However, it is likely to take over one year for the inventory to
turn and therefore
- 12 -
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.
On July 15, 2005, we renewed our revolving line of credit facility
providing up to $3 million for operating purposes. The agreement governing this
credit facility contains security agreements covering essentially all our assets
and financial covenants requiring compliance with certain financial ratios. As
of the date of this report, we have not yet used, nor anticipate using this
credit facility before its renewal date on June 17, 2006.
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 restricts 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. Upon effectiveness of the RoHS legislation, some of our
inventory may become obsolete and unsaleable and, as a result, have to be
written off.
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 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 terms of one to two years. 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, 2005 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
- 13 -
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.
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
- 14 -
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, 2005 and 2004, sales returns aggregated $90,000 and $86,000,
or 1.1% and 0.9% 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 .......................................................... 16
Consolidated Balance Sheet at December 31, 2005 .................................................................. 17
Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004 ............................. 18
Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 2005 and 2004 .................... 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 ............................. 20
Notes to Consolidated Financial Statements ....................................................................... 21-27
- 15 -
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, 2005, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2005. 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 audit 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, 2005, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Haskell & White LLP
Irvine, California
March 9, 2006
- 16 -
TAITRON COMPONENTS INCORPORATED
Consolidated Balance Sheet
December 31, 2005
Assets
Current assets:
Cash and cash equivalents $ 1,962,000
Trade accounts receivable, net 1,552,000
Inventory, net 16,681,000
Prepaid expenses and other current assets 151,000
------------
Total current assets 20,346,000
Property and equipment, net 4,428,000
Other assets 78,000
------------
Total assets $ 24,852,000
============
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable $ 1,020,000
Accrued liabilities 585,000
------------
Total current liabilities 1,605,000
Total liabilities 1,605,000
------------
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; 5,000
4,700,145 shares issued and outstanding
Class B common stock, $.001 par value. Authorized, issued and outstanding 1,000
762,612 shares
Additional paid-in capital 10,416,000
Accumulated other comprehensive loss (17,000)
Retained earnings 12,842,000
------------
Total shareholders' equity 23,247,000
------------
Total liabilities and shareholders' equity $ 24,852,000
============
See accompanying notes to consolidated financial statements.
- 17 -
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Operations
Year ended December 31,
2005 2004
---------- ----------
Net sales $8,400,000 $9,352,000
Cost of goods sold 6,092,000 6,701,000
---------- ----------
Gross profit 2,308,000 2,651,000
Selling, general and administrative expenses 2,597,000 2,588,000
Impairment losses -- 147,000
---------- ----------
Operating loss (289,000) (84,000)
Interest expense, net (12,000) (171,000)
Other income, net 110,000 34,000
Gain on sale of assets -- 6,000
---------- ----------
Loss before income taxes (191,000) (215,000)
Income tax provision (14,000) (33,000)
---------- ----------
Net loss $(205,000) $ (248,000)
========== ==========
Loss per share: Basic & Diluted: $ (.04) $ (.05)
========== ==========
Weighted average common shares outstanding:
Basic & Diluted 5,462,153 5,464,912
========== ==========
See accompanying notes to consolidated financial statements.
- 18 -
TAITRON COMPONENTS INCORPORATED
Consolidated Statement of Shareholders' Equity
Two years ended December 31, 2005
Accumulated
Class A common stock Class B common stock Additional Other Total
-------------------- -------------------- Paid-in Comprehensive Retained Shareholders'
Shares Amount Shares Amount capital Income (Loss) Earnings Equity
--------- ------ ------- ------ ---------- ------------- -------- -------------
Balances at December 31, 2003 4,827,599 $5,000 762,612 $1,000 $10,709,000 $(21,000) $13,295,000 $23,989,000
Issuances of common stock 18,567 -- -- -- 27,000 -- -- 27,000
Repurchase of common stock (148,520) -- -- -- (322,000) -- -- (322,000)
Comprehensive loss:
Foreign currency -- -- -- -- -- 24,000 -- 24,000
translation adjustment
Net loss -- -- -- -- -- -- (248,000) (248,000)
Comprehensive loss -- -- -- -- -- -- -- (224,000)
--------- ------ ------- ------ ----------- -------- ----------- -----------
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 -- -- -- -- -- (20,000) -- (20,000)
translation adjustment
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
========= ====== ======= ====== =========== ======== =========== ===========
See accompanying notes to consolidated financial statements.
- 19 -
TAITRON COMPONENTS INCORPORATED
Consolidated Statements of Cash Flows
Year ended December 31,
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $ (205,000) $ (248,000)
----------- -----------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 236,000 310,000
Amortization of debt discount related to options issued with notes payable -- 28,000
Provision for inventory reserve 486,000 585,000
Provision for sales returns and doubtful accounts 90,000 31,000
Impairment losses -- 147,000
Gain on sale of assets -- (6,000)
Changes in assets and liabilities:
Trade accounts receivable (543,000) 86,000
Inventory 1,086,000 878,000
Prepaid expenses and other current assets 266,000 (222,000)
Other assets (14,000) (3,000)
Trade accounts payable 214,000 (29,000)
Accrued liabilities 182,000 154,000
----------- -----------
Total adjustments 2,003,000 1,959,000
----------- -----------
Net cash provided by operating activities 1,798,000 1,711,000
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (31,000) (123,000)
Proceeds on sale of assets -- 6,000
----------- -----------
Net cash used in investing activities (31,000) (117,000)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (1,326,000) (2,737,000)
Repurchase of Class A common stock -- (322,000)
Decrease (increase) of restricted cash 1,000,000 (1,000,000)
Exercise of Class A common stock options 2,000 27,000
----------- -----------
Net cash used in financing activities (324,000) (4,032,000)
----------- -----------
Impact of exchange rates on cash (20,000) 24,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,423,000 (2,414,000)
Cash and cash equivalents, beginning of year 539,000 2,953,000
----------- -----------
Cash and cash equivalents, end of year $ 1,962,000 $ 539,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 48,000 $ 177,000
=========== ===========
Cash paid for income taxes, net $ 10,000 $ 30,000
=========== ===========
See accompanying notes to consolidated financial statements.
- 20 -
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
"discrete components superstore," which distributes a wide variety of
transistors, diodes and other discrete semiconductors, optoelectronic
devices and passive components to other electronic distributors, contract
electronic manufacturers (CEMs) and original equipment manufacturers
(OEMs), who incorporate these devices into their products. In order to
meet the rapid delivery requirements of its customers, the Company
maintains a significant inventory of discrete components.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 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 $0 as of December 31, 2005, based on the net losses
experienced by Taitron Components Mexico, SA de CV.
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 80% of the Company's products
were produced in Asia.
Samsung Electro-Mechanics Co. and Everlight Electronics Co, Ltd., together
accounted for approximately 31% and 27% of Taitron's net purchases for
2005 and 2004, 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.
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
- 21 -
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, 2005 and 2004 aggregated $90,000 and $86,000,
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, 2005 aggregated $64,000.
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 $1,267,000 at December 31, 2005. 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
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," permits entities to recognize as expense
the fair value of all stock-based awards. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion No. 25
to employee stock-based awards under which compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price, and provides for disclosure
of pro forma earnings and per share information for employee stock options
as if the fair-value-based method defined in SFAS No. 123 had been
applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123, as
amended by SFAS No. 148. If the Company had elected to recognize
compensation cost based on the fair value at the grant dates for
stock-based awards under the 1995 Stock Incentive Plan (including the
modified awards), consistent with the method prescribed by SFAS No. 123,
net loss and loss per share would have been changed to the pro forma
amounts indicated below:
- 22 -
For purposes of this pro-forma disclosure, the estimated fair value of the
stock-based awards is assumed to be amortized to expense over the
stock-based award's vesting periods.
Year Ended December 31,
-----------------------
2005 2004
---- ----
Net loss As reported $(205,000) $(248,000)
Pro forma $(235,000) $(278,000)
Loss per share As reported $ (.04) $ (.05)
Pro forma $ (.04) $ (.05)
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.
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 534,000 and 572,000 for the years ended December
31, 2005 and 2004, 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.
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 December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), "Share-Based Payment". This statement revises FASB
Statement No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123(R) focuses primarily on the accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires companies to recognize in the
statement of operations the cost of employee services
- 23 -
received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (with limited exceptions). For the
Company, this Statement is effective as of the first reporting period that
begins after December 15, 2005. Accordingly, the Company adopted SFAS
123(R) in its first quarter of fiscal 2006. The Company is currently
completing its evaluation of the provisions of SFAS 123(R), but expects
that stock-based compensation will increase in future periods should
employee stock options be granted.
Note 2 - Property and Equipment
Property and equipment, at cost, is summarized as follows:
12/31/2005
-----------
Land $ 1,293,000
Buildings and improvements 3,692,000
Furniture and equipment 903,000
Computer software and equipment 2,141,000
-----------
Total Property and Equipment 8,029,000
Less: Accumulated depreciation and amortization (3,601,000)
-----------
Property and Equipment, net $ 4,428,000
===========
Note 3 - Revolving Line of Credit
On July 15, 2005, the Company entered into a revolving line of credit
facility providing up to $3 million for operating purposes. As of the date
of this Report, the Company has not yet used this credit facility. The
agreement governing this credit facility contains security agreements
covering essentially all assets of the Company and financial covenants
that require the Company to maintain compliance with certain financial
ratios.
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 4,700,145 issued and outstanding as of December 31,
2005. 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, 2005. 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 2005, the Company did not repurchase any shares of its Class A
common stock. However, the Company issued 2,499 shares of common stock
upon the exercise of stock options (Note 7). During 2004, the Company
repurchased 148,520 shares of its Class A common stock on the open market
for $322,000, and permanently retired the shares. Additionally, the
Company issued 18,567 shares of common stock upon the exercise of stock
options (Note 7).
- 24 -
Note 5 - Income Taxes
Income tax provision is summarized as follows:
Year Ended December 31,
-----------------------
2005 2004
-------- --------
Current:
Federal $ -- $ --
State 14,000 33,000
-------- --------
14,000 33,000
-------- --------
Deferred:
Federal (40,000) (17,000)
State (12,000) --
Increase in valuation allowance 52,000 17,000
-------- --------
-- --
-------- --------
Income tax provision $ 14,000 $ 33,000
======== ========
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,
-------------------
2005 2004
-------- --------
"Expected" income tax expense (benefit) $(59,000) $(74,000)
State tax (benefit) expense, net of Federal benefit 5,000 4,000
Foreign (income)loss (2,000) 52,000
Increase in valuation allowance 52,000 17,000
Other 18,000 34,000
-------- --------
Income tax provision $ 14,000 $ 33,000
======== ========
The tax effects of temporary differences which give rise to significant
portions of the deferred taxes are summarized as follows:
Deferred tax assets: 12/31/2005
----------
Inventory reserves $ 543,000
Section 263a adjustment 96,000
Allowances for bad debts and returns 27,000
Accrued expenses 15,000
Asset valuation reserve 56,000
State net operating loss carry forward 64,000
Other 5,000
---------
Total deferred tax assets 806,000
Valuation allowance (721,000)
Deferred tax liabilities:
Depreciation (11,000)
Deferred state taxes (74,000)
---------
Net deferred tax assets $ --
=========
The Company has a net operating loss aggregating approximately $699,000
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.
- 25 -
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 15% of their compensation,
but not in excess of the maximum allowed under the Code. The plan also
provides for a 20% matching contribution vesting immediately, at the
discretion of the Company. For the years ended December 31, 2005 and 2004,
employer matching contributions aggregated approximately $8,000 and
$12,000, respectively.
The plan invests a portion of its assets in the common stock of the
Company. The plan held 77,243 shares of the Company's common stock at
December 31, 2005.
Note 7 - Stock Options
In March 1995, the Company established the 1995 Stock Incentive Plan (the
Plan) that expired in March 2005. The Plan provided for the issuance of an
aggregate 1,080,000 incentive stock options, nonstatutory options or stock
appreciation rights (SAR's) to directors, officers and other employees of
the Company. Under the Plan, incentive stock options 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. Nonstatutory options and stock
appreciation rights were granted at prices equal to at least 85% and 100%,
respectively, of the fair market value of the Company's Class A common
stock at the date of grant. Outstanding options and rights vest 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 Plan
also provided for automatic grants of nonstatutory options to purchase
5,000 shares of Class A common stock to all members of the committee
administering the Plan, upon their initial election to the committee and
each year thereafter. The exercise prices of these options are equal to
the fair market value of the Company's Class A common stock at the date of
grant.
The fair value of options and SAR's used to compute pro forma loss and
loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted
average assumptions used for 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; and for 2004: dividend yield of 0%;
expected volatility of 24%; a risk free interest rate of approximately 5%
and an expected holding period of five years.
As described in Note 1, the Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan options and SAR's.
Stock option and SAR activity during the periods indicated is as follows:
Number Weighted Average
of Shares Exercise Price
--------- ----------------
Balance at December 31, 2003 567,899 $1.84
Granted 80,000 1.74
Exercised (18,567) 1.46
Forfeited (30,333) 2.14
-------
Balance at December 31, 2004 598,999 1.81
Exercised (2,499) 1.06
Forfeited (70,334) 2.10
-------
Balance at December 31, 2005 526,166 $1.78
=======
The weighted average fair value of options granted in 2004 was $0.55.
At December 31, 2005, the range of individual weighted average exercise
prices was $1.29 to $2.17. The remaining contractual life of outstanding
options is 90 days after termination of employment of option holder.
At December 31, 2005, the number of options exercisable was 431,000 and
the weighted average exercise prices of those exercisable options were
$1.85.
- 26 -
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.
2005 2004
---------- ----------
Net loss available to common shareholders used in basic loss per share $ (205,000) $ (248,000)
Weighted average number of common shares used in basic loss per share 5,462,153 5,464,912
---------- ----------
Basic loss per share $ (.04) $ (.05)
========== ==========
Effect of dilutive securities:
Options -- --
---------- ----------
Weighted average number of common shares and dilutive potential
common shares used in diluted loss per share 5,462,153 5,464,912
========== ==========
Diluted loss per share $ (.04) $ (.05)
========== ==========
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
$1,110,000 as of December 31, 2005.
Regulation
----------
Effective July 1, 2006, the European Union ("EU") directive relating to
the Restriction of Certain Hazardous Substance ("RoHS") will restrict 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 2005
revenues and long-lived assets (land and property, net of accumulated
depreciation) as of December 31, 2005, attributed to countries based upon
location of our customers:
Long-lived
Revenues Assets
-------- ----------
United States $6,775,000 $3,794,000
Mexico 626,000 163,000
Brazil 351,000 --
Taiwan 247,000 314,000
China 170,000 --
Canada 98,000 --
Other foreign countries 133,000 --
---------- ----------
Total $8,400,000 $4,271,000
---------- ----------
- 27 -
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, 2005, 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
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 2006 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, 2005.
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.
- 28 -
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services will appear
in the Proxy Statement for the 2006 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: March 31, 2006 By: /s/ Stewart Wang
----------------------------------
Stewart Wang
Chief Executive Officer, President
and Chief Financial Officer
- 29 -
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stewart Wang his attorney-in-fact and agent, with
full power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Johnson Ku Chairman of the Board March 31, 2006
-------------------------------------------------------------------------------
Johnson Ku
/s/ Stewart Wang Chief Executive Officer, President, March 31, 2006
--------------------------------------------------------------------------------
Stewart Wang Chief Financial Officer and Director
(Principal Executive, Financial and Accounting Officer)
/s/ Richard Chiang Director March 31, 2006
--------------------------------------------------------------------------------
Richard Chiang
/s/ Craig Miller Director March 31, 2006
--------------------------------------------------------------------------------
Craig Miller
/s/ Felix Sung Director March 31, 2006
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Felix Sung
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