TAITRON COMPONENTS INC — Interim / Quarterly Report 2000

Nov 13, 2000

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 /_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-25844 TAITRON COMPONENTS INCORPORATED (Name of Registrant as specified in its charter) CALIFORNIA 95-4249240 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 25202 ANZA DRIVE SANTA CLARITA, CALIFORNIA 91355 (Address Of Principal Executive Offices) (661) 257-6060 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Address and Fiscal Year, if Changed Since Last Report) Check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

PART I. FINANCIAL INFORMATION Item 1. Financial Statements TAITRON COMPONENTS INCORPORATED Condensed Consolidated Balance Sheets (Dollars in thousands)

See accompanying notes to condensed consolidated financial statements Page 2 TAITRON COMPONENTS INCORPORATED Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Dollars in thousands, except per share amounts)

See accompanying notes to condensed consolidated financial statements Page 3 TAITRON COMPONENTS INCORPORATED Condensed Consolidated Statements of Cash Flows (Dollars in thousands)

See accompanying notes to condensed consolidated financial statements Page 4 TAITRON COMPONENTS INCORPORATED Notes to Condensed Consolidated Financial Statements As of and for the quarterly period ending September 30, 2000 (All amounts are unaudited, except for the balance sheet as of December 31, 1999) (1) BASIS OF PRESENTATION The condensed consolidated financial information furnished herein is unaudited and, in the opinion of management, includes all adjustments (consisting of normal recurring adjustments and accruals) in conformity with the accounting principles reflected in the financial statements included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited condensed consolidated financial statements and notes should, therefore, be read in conjunction with the financial statements and notes thereto in the Annual Report on Form 10-K for the year ended December 31, 1999. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The unaudited condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized upon shipment of the merchandise. Reserves for sales allowances and customer returns are established based upon historical experience and management's estimates as shipments are made. Sales returns for the quarters ended September 30, 2000 and 1999 aggregated to $175,000 and $298,000, respectively and for the nine months ended September 30, 2000 and 1999 aggregated to $421,000 and $692,000, respectively. ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS The allowance for sales returns and doubtful accounts at September 30, 2000 and December 31, 1999 was $140,000 and $120,000, respectively. INVENTORY Inventory, consisting principally of products for resale, is stated at the lower of cost or market, using the first-in, first-out method. The value presented is net of valuation allowances of $1,042,000 and $1,054,000 at September 30, 2000 and December 31, 1999, respectively. SUBORDINATED DEBENTURE During the third quarter ending September 30, 2000, the Company paid in its entirety, the $3,000,000 principal balance, including accrued interest payable, of the subordinated debenture note payable originally due May 18, 2001. RECLASSIFICATION The 2000 balances have been reclassified to conform with the 1999 balances where appropriate. Page 5 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating amounts and ratios as a percentage of net sales.

Page 6 THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 Net sales for the quarterly period ended September 30, 2000 were $8,663,000, compared with $7,750,000 during the same period last year, an increase of $913,000 or 11.8%. This increase was primarily attributable to growth in our domestic passive components sales volume by $1,655,000 or 328% when comparing $2,159,000 and $504,000 of passive sales, for the three months ended September 30, 2000 and 1999, respectively. Domestic sales increased by $1,134,000 for the current three-month period, offset by export sales decreasing by $221,000 over the same period last year. We believe the overall increase in net sales is a result of industry-wide increase in demand for passive and discrete semiconductors. Cost of goods sold increased by $310,000 to $5,915,000 for the quarterly period ended September 30, 2000, an increase of 5.5% from the same period in 1999. Cost of goods sold increased with the increase in net sales, however at a slower rate due to increases in sales prices, resulting in gross profits increasing as a percentage of net sales to 31.7% for the current three month period this year from 27.7% for the same period last year. Gross profits increased by $603,000 to $2,748,000 for the three months ended September 30, 2000 from $2,145,000 for the same period in 1999. Selling, general and administrative ("SG&A") expenses increased by $205,000 or 13.6% for the three months ended September 30, 2000 compared to the same period of 1999. The increase is primarily attributable to increased payroll costs incurred from opening our four most recent sales offices in the United States (Florida; Arizona; Orange County, California; Massachusetts) during the four most recent quarters. We have continued to invest in sales and marketing personnel, which we believe is required for continued growth. SG&A expenses, as a percentage of net sales, increased to 19.8% for the three months ended September 30, 2000 from 19.4% for the same period in 1999. Operating earnings increased by $398,000 or 62.3% between the three month period ended September 30, 2000 and 1999, an increase as a percentage of net sales to 12.0% from 8.2%. Operating earnings increased primarily due to increased net sales. Interest expense, net of interest income for the three months ended September 30, 2000 increased by $23,000 compared to the three months ended September 30, 1999. Income taxes were $297,000 in the three months ended September 30, 2000, representing an effective tax rate of 36.2%, compared to $189,000 for the same period in 1999, an effective tax rate of 41.3%. Net earnings increased to $523,000 for the three months ended September 30, 2000 as compared with net earnings of $269,000 for the three months ended September 30, 1999, an increase of $254,000 or 94.4% for the reasons discussed above. Net earnings as a percentage of net sales increased to 6% from 3.5% over these same periods. Page 7 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 Net sales for the nine months ended September 30, 2000 were $25,837,000 compared with the nine months ended September 30, 1999 of $22,051,000, an increase of $3,786,000 or 17.2%. This increase was primarily attributable to growth in our domestic passive components sales volume by $3,639,000 or 288% when comparing $4,904,000 and $1,265,000 of passive sales, for the nine months ended September 30, 2000 and 1999, respectively. Domestic sales increased by $3,479,000 for the current nine-month period and export sales increased by $307,000 over the nine months ended September 30, 1999. We believe the overall increase in net sales is a result of industry-wide increase in demand for passive and discrete semiconductors. Cost of goods sold increased by $1,977,000 to $17,699,000 for the nine months ended September 30, 2000, an increase of 12.6% from the same period in 1999. Cost of goods sold increased with the increase in net sales, however at a slower rate due to higher sales prices, resulting in gross profits increasing as a percentage of net sales to 31.5% for the first nine months of this year from 28.7% for the same period last year. Gross profits increased by $1,809,000 to $8,138,000 for the nine months ended September 30, 2000 from $6,329,000 for the same period in 1999. SG&A expenses increased by $598,000 or 13.4% for the nine months ended September 30, 2000 compared to the same period in 1999. The increase is primarily attributable to increased payroll and new opening costs incurred from opening our four most recent sales offices in the United States (Florida; Arizona; Orange County, California; Massachusetts) during the four most recent quarters. We have continued to invest in sales and marketing personnel, which we believe is required for continued growth. SG&A expenses, as a percentage of net sales, decreased to 19.5% for the nine months ended September 30, 2000 from 20.2% for the same period in 1999. Operating earnings from operations increased by $1,211,000 or 64.4% for the nine months ended September 30, 2000 as compared to the same period in 1999 and also increased as a percentage of net sales to 12% from 8.5%. The increase is primarily due to higher overall net sales as discussed above. Interest expense, for the nine months ended September 30, 2000 increased by $8,000 compared to the nine months ended September 30, 1999. Income taxes were $981,000 for the nine months ended September 30, 2000, representing an effective tax rate of 39.4%, compared to $587,000 for the nine months ended September 30, 1999, an effective tax rate of 42.4%. Net earnings of $1,509,000 for the nine months ended September 30, 2000 compared to net earnings of $797,000 for the same period in 1999, an increase of $712,000 or 89.3% for the same reasons discussed above. Net earnings as a percentage of net sales increased to 5.8% for the nine months ended September 30, 2000 compared to 3.6% for the same period in 1999 over these same periods. SUPPLY AND DEMAND ISSUES During the first half of 2000, demand for discrete semiconductors increased which caused shortages and price increases. With $30 million of inventory on hand as of September 30, 2000, we expect to assist our customers in absorbing some of the price increases and still benefit from increasing profit margins. Readers are cautioned that the foregoing statements are forward looking and are necessarily speculative. There can be no guarantee that the recent shortages in the discrete semiconductor market will continue. Also, if prices of components held in our inventory decline or if new technology is developed that displaces products distributed by us and held in inventory, our business could be materially adversely affected. See "Cautionary Statement Regarding Forward Looking Information". Page 8 LIQUIDITY AND CAPITAL RESOURCES We have satisfied our liquidity requirements principally through cash generated from operations and short-term commercial loans. A summary of our cash flows resulting from our operating, investing and financing activities for the nine months ended September 30, 2000 and 1999 are as follows:

Cash flows provided by operating activities decreased to $1,258,000 during the nine months ended September 30, 2000, as compared to $4,555,000 during the nine months ended September 30, 1999. The decrease is primarily attributable to an increase in inventory and accounts receivable resulting from increased business and higher net sales during the current nine months ending September 30, 2000 which was partially offset by an increase in accounts payable. Additionally, during the first nine months of 1999, inventory decreased by $4.7 million, which also contributed to the overall decrease in cash flows when compared to last year. Cash flows used in investing activities was $1,230,000 during the nine months ended September 30, 2000 compared to $3,654,000 during the nine months ended September 30, 1999. The decrease is due to the purchase of our new warehouse and headquarters in the amount of $3.3 million during the nine month period ended September 30, 1999 and current construction of interior improvements during the current period ending September 30, 2000. We expect the improvements to be completed during the fourth quarter of 2000. As of the date of this Report, our interior improvements remain in the final stages of completion. Cash flows used in financing activities was $91,000 during the nine months ended September 30, 2000 compared to $1,221,000 during the nine months ended September 30, 1999. The change resulted, primarily due to lower net re-payments to our bank revolving line of credit and less repurchasing of our Class A Common Stock during the current nine months ended September 30, 2000, as compared to the same period last year. We believe that funds generated from operations and our bank revolving lines of credit will be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future. In addition, during the third quarter ending September 30, 2000, we paid in its entirety, the $3,000,000 principal balance, including accrued interest payable, of the subordinated debenture note payable originally due May 18, 2001. During the quarter ending September 30, 2000, our Board Of Directors approved an additional stock repurchase of up to $1 million. As of the date of this Report, we have no additional commitments for other equity or debt financing or other significant capital expenditures. Page 9 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Several of the matters discussed in this document contain forward looking statements that involve risks and uncertainties. Such forward looking statements are usually denoted by words or phrases such as "believes," "expects," "projects," "estimates," "anticipates," "will likely result," or similar expressions. We wish to caution readers that all forward looking statements are necessarily speculative and not to place undue reliance on such forward looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties. Factors associated with the forward looking statements that could cause the forward looking statements to be inaccurate and could otherwise impact our future results are set forth in detail in our most recent annual report on Form 10-K. In addition to the other information contained in this document, readers should carefully consider the information contained in our Form 10-K for the year ended December 31, 1999 under the heading "Cautionary Statements and Risk Factors." YEAR 2000 In 1999, we completed our remediation and testing of our systems. Because of those planning and implementation efforts, we experienced no significant disruptions in critical information technology and non-information technology systems and those systems have successfully responded to the Year 2000 date change. We did not incur any significant expenses during 1999 in connection with remediating our systems. We are not aware of any material problems resulting from Year 2000 issues, either with our products, internal systems, or the products and services of our third parties. We will continue to monitor our critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure any latent Year 2000 matters arising are addressed promptly. PART II. OTHER INFORMATION Item 1. Legal Proceedings In March 1999, the Company filed a lawsuit in Los Angeles Superior Court against QT Optoelectronic ("QT")(formerly known as Questus Corporation), a manufacturer of optoelectronic semiconductors. In October 2000, the Company and QT entered into a confidential settlement agreement resolving all claims asserted in the lawsuit. In accordance with the terms of the settlement agreement, the Company expects to dismiss the lawsuit with prejudice in November 2000, if QT complies with all the terms of the settlement agreement. Item 2. through Item 5. Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: None Page 10 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TAITRON COMPONENTS INCORPORATED Date: November 9, 2000 By: /s/ STEWART WANG ------------------------------------ Stewart Wang Chief Executive Officer and Director Date: November 9, 2000 By: /s/ STEVEN H. DONG ----------------------------------- Steven H. Dong Chief Financial Officer (Principal Accounting Officer)