TAITRON COMPONENTS INC — Interim / Quarterly Report 2004

Aug 16, 2004

10QSB 1 e18775_10qsb.htm FORM 10-QSB *********** MARKER PAGE="sheet: 1; page: 1" MARKER FORMAT-SHEET="Center Head 2 Bold" FSL="Workstation"

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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FORM 10-QSB

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|X| QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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For the quarterly period ended June 30, 2004

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|_| TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission File Number 0-25844

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TAITRON COMPONENTS INCORPORATED (Exact name of small business issuer as specified in its charter)

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California (State or Other Jurisdiction of Incorporation or Organization) 95-4249240 (I.R.S. Employer Identification No.)

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28040 West Harrison Parkway Valencia, California 91355-4162 (Address Of Principal Executive Offices)

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(661) 257-6060 (Issuer’s Telephone Number)

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NONE (Former Name, Address and Fiscal Year, if Changed Since Last Report)

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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.

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Yes |X| No | |

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State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class	Outstanding on July 31, 2004
Class A Common Stock, $.001 par value	4,697,646
Class B Common Stock, $.001 par value	762,612

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Transitional Small Business Disclosure Format (check one): Yes | | No |X|

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PART I. FINANCIAL INFORMATION

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Item 1. Financial Statements

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TAITRON COMPONENTS INCORPORATED Condensed Consolidated Balance Sheet (Dollars in Thousands)

Assets	June 30, 2004 (Unaudited)
Current assets:
Cash and cash
equivalents	$ 3,022
Trade accounts
receivable, net	1,384
Inventory,
net	18,710
Prepaid expenses
and other current assets	330
Total
current assets	23,446
Property and equipment, net	4,758
Other assets	167
Total
assets	$ 28,371
Liabilities
and Shareholders’ Equity
Current liabilities:
Trade accounts
payable	$ 1,050
Accrued liabilities
and other	205
Current portion
of long term debt	72
Total
current liabilities	1,327
Long-term debt, less current portion	3,306
Total
liabilities	4,633
Commitments and contingencies (Notes
3 and 4)
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
issued
and outstanding 4,697,646 shares
Class
B common stock, $.001 par value. Authorized, issued and	1
outstanding
762,612, shares
Additional
paid-in capital	10,414
Accumulated
other comprehensive loss, net of tax	(11	)
Retained earnings	13,329
Total
shareholders’ equity	23,738
Total
liabilities and shareholders’ equity	$ 28,371

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See accompanying notes to condensed consolidated financial statements.

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TAITRON COMPONENTS INCORPORATED Condensed Consolidated Statements of Operations (Dollars in thousands, except per share amounts)

	Three months ended June 30, — 2004 (Unaudited)		2003 (Unaudited)		Six months ended June 30, — 2004 (Unaudited)		2003 (Unaudited)
Net sales	$ 2,647		$ 2,324		$ 5,138		$ 5,479
Cost of goods sold	1,888		1,594		3,730		3,782
Gross
profit	759		730		1,408		1,697
Selling, general and administrative expenses	662		768		1,271		1,617
Operating
income (loss)	97		(38	)	137		80
Interest expense, net	(54	)	(91	)	(116	)	(199	)
Other (expense) income, net	(19	)	37		13		33
Income
(loss) before income taxes	24		(92	)	34		(86	)
Income tax provision	—		—		—		—
Net
income (loss)	$ 24		$ (92	)	$ 34		$ (86	)
Net income (loss) per share
Basic	$ .00		$ (.02	)	$ .01		$ (.02	)
Diluted	$ .00		$ (.02	)	$ .01		$ (.02	)
Weighted average common shares outstanding
Basic	5,459,425		5,682,401		5,469,566		5,666,667
Diluted	6,008,425		5,682,401		6,038,566		5,666,667

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See accompanying notes to condensed consolidated financial statements.

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TAITRON COMPONENTS INCORPORATED Condensed Consolidated Statements of Cash Flows (Dollars in thousands)

	Six months ended June 30, — 2004 (Unaudited)		2003 (Unaudited)
Cash flows from operating activities:
Net income
(loss)	$ 34		$ (86	)
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
and amortization	128		212
Amortization
of debt discount related to options issued with notes payable	7		7
Provision
for sales returns and doubtful accounts	50		148
Changes in
assets and liabilities:
Trade
accounts receivable	(218	)	523
Income
tax receivable	—		310
Inventory	1,006		1,661
Prepaid
expenses and other current assets	(135	)	100
Other
assets	1		(3	)
Trade
accounts payable	215		(346	)
Accrued
liabilities and other	(44	)	(126	)
Total
adjustments	1,010		2,486
Net
cash provided by operating activities	1,044		2,400
Cash flows from investing activities:
Acquisitions
of property and equipment	(26	)	(14	)
Net
cash used in investing activities	(26	)	(14	)
Cash flows from financing activities:
Payments on
revolving line of credit	—		(3,935	)
Borrowings
on notes payable	—		1,955
Payments on
notes payable	(664	)	—
Proceeds from
exercise of stock options	27		—
Repurchase
of Class A Common Stock	(322	)	(74	)
Net
cash used in financing activities	(959	)	(2,054	)
Impact of exchange rate changes on
cash	10		(20	)
Net
increase in cash and cash equivalents	69		312
Cash and cash equivalents, beginning
of period	2,953		326
Cash and cash equivalents, end of
period	$ 3,022		$ 638
Supplemental disclosure of cash flow
information:
Cash paid
for interest	$ 115		$ 222
Cash paid
(refunded) for income taxes	$ 30		$ (315	)

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See accompanying notes to condensed consolidated financial statements.

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TAITRON COMPONENTS INCORPORATED

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Notes to Condensed Consolidated Financial Statements June 30, 2004 (All amounts are unaudited)

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Note 1 - Basis of Presentation

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The accompanying unaudited condensed consolidated financial statements of Taitron Components Incorporated (“the Company”) were prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments, consisting of normal recurring accruals and adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations at and for the periods presented. Such financial statements do not include all the information or footnotes necessary for a complete presentation and, accordingly, should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003, and the notes thereto, which include significant accounting policies and estimates. The results of operations for the interim periods are not necessarily indicative of results for the full year.

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Note 2 - Summary of Significant Accounting Policies and Estimates

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Principles of Consolidation

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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.

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Revenue Recognition

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Revenue is typically recognized upon shipment of merchandise and sales are recorded net of discounts, rebates, and returns. 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 June 30, 2004 and 2003 were $5,000 and $71,000, respectively and for the six months ended June 30, 2004 and 2003 aggregated to $53,000 and $117,000, respectively.

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Allowance for Sales Returns and Doubtful Accounts

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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 15% 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 June 30, 2004 aggregated $127,000.

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Inventory

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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. Inventory is presented net of valuation allowances of $1,006,000 at June 30, 2004.

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Income Taxes

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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

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be realized. The Company has fully reserved against its deferred income tax assets, as management could not determine that it was more likely than not such assets would be realized.

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Net Income (Loss) Per Share

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Basic income (loss) per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Common equivalent shares for the quarter and six months ended June 30, 2003, of approximately 405,000 and 419,000, respectively, are excluded from the computation of diluted (loss) per share as their effect is anti-dilutive.

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Stock Option Plan

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The Company has adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation--Transition and Disclosure” and SFAS No. 123. SFAS No. 123 allows companies to choose whether to account for employee stock-based compensation on a fair value method, or to continue to account for stock-based compensation under the current intrinsic value method as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company has elected to continue to follow the provisions of APB Opinion No. 25. SFAS No. 123, as amended by SFAS No. 148, requires interim disclosures regarding the pro forma effects of compensation expense had the Company’s 1995 Stock Incentive Plan been determined based on the fair value at the grant date consistent with SFAS No. 123.

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Accordingly, under SFAS No. 123, the Company’s net income (loss) and diluted income (loss) per share for the quarter and six months ended June 30, 2004 and 2003, would have been changed to the pro forma amounts indicated below:

	Three Month Period Ended June 30, — 2004	2003		Six Month Period Ended June 30, — 2004	2003
Net income (loss) As reported	$24,000	$(92,000	)	$34,000	$(86,000	)
Pro
Forma	34,000	(81,000	)	54,000	(64,000	)
Diluted income (loss) As reported	$ .00	$ (.02	)	$ .01	$ (.02	)
per
share Pro
Forma	$ .01	$ (.01	)	$ .01	$ (.01	)

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The total fair value of options granted for both the quarter and six months ended June 30, 2004 was $.63. At June 30, 2004, the number of options exercisable was 581,800 and weighted average exercise prices of those options were $1.82.

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Reclassification

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Certain amounts in the 2003 condensed consolidated financial statements have been reclassified to conform with the 2004 presentation.

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Use of Estimates

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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 condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. These estimates have a significant impact on the Company’s 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.

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Note 3 - Long-Term Debt

Long-term debt is summarized as follows:	June 30, 2004
Note payable collateralized
by real property, due December 31, 2009, bearing an interest rate of 6.875%	1,899,000
Subordinated note, due
September 30, 2005, bearing an interest rate of 4.75% per annum.*	1,000,000
Subordinated note, due
February 20, 2006, bearing an interest rate of 4.75% per annum.**	500,000
	3,399,000
Less current maturities	(72,000	)
	3,327,000
Less unamortized debt discount	(21,000	)
	3,306,000

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• The subordinated note of $1,000,000, due September 30, 2005, is from K.S. Best International Co. Ltd., a company controlled by the brother of the Company’s Chief Executive Officer. In connection with the subordinated note, the Company issued 100,000 stock options with a relative estimated fair value of $29,000. The amount has been presented as debt discounts and accreted through periodic interest charges through the maturity date of these notes.

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** The subordinated note of $500,000, due February 20, 2006, is from an un-related third party. In connection with the subordinated note, the Company issued 50,000 stock options with a relative estimated fair value of $15,000. The amount has been presented as debt discounts and accreted through periodic interest charges through the maturity date of these notes.

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Note 4 - Subsequent Events

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On July 8, 2004, we entered into a revolving line of credit facility providing up to $3 million for operating purposes. As of the date of this Report, we have not used this credit facility. The agreement governing this credit facility contains security agreements covering essentially all assets of the Company and covenants that require the Company to be in compliance with certain financial ratios.

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On July 16, 2004, we made an early principal repayment of $500,000 on our note payable collateralized by real property.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of this report as well as our most recent annual report on Form 10-KSB. 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 our most recent annual report on Form 10-KSB. In addition to the other information contained in this document, readers should carefully consider the information contained in our Form 10-KSB for the year ended December 31, 2003 under the heading “Cautionary Statements and Risk Factors.”

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References to “Taitron,” “the Company,” “we,” “our” and “us” refer to Taitron Components Incorporated and its majority-owned subsidiary, unless the context otherwise requires.

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Overview

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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 we sell. Our customers consist of other electronic distributors, contract electronic manufacturers (CEMs) and original equipment manufacturers (OEMs).

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The demand for electronic components drastically decreased beginning in 2001 and continued through most of 2003. This downturn was marked by oversupply of components, excess manufacturing capacity, accelerated migration of the manufacturing capacity of OEM/CEM customers abroad and the consolidation of CEM customers domestically. In response, we are refocusing 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 intend to form 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 some new opportunities and results from these additional services during 2004.

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We believe that the overall market demand for our products has increased during the first six months of 2004, as we continue to experience some business improvement in shipments and bookings and our supplier’s lead times have been stretching out with prices steadily increasing. Under these market conditions and the results of our cost-cutting efforts accomplished during the past few years, we believe these factors may help us continue consistent profitability in 2004.

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Our core strategy consists of carrying a substantial quantity and variety of products in inventory to meet the rapid delivery requirements of our customers. This strategy allows us to fill customer orders immediately from stock on hand. However, while we believe strong market demand is returning, we are focused on lowering our inventory balances and increasing our cash holdings. Our long-term growth strategy is to rely not only on the existing component fulfillment service, but also the value-added engineering service to support our existing small and medium size OEM customers in outsourcing their product design and manufacturing work offshore. In accordance with Generally Accepted Accounting Principles, we classify inventory as a current asset. 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.

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Critical Accounting Policies and Estimates

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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 in conformity with accounting principles generally accepted in the U.S. 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.

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Revenue Recognition — Revenue is recognized 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 quarters ended June 30, 2004 and 2003 were $5,000 and $71,000, respectively, and for the six months ended June 30, 2004 and 2003 aggregated to $53,000 and $117,000, respectively. The allowance for sales returns and doubtful accounts at June 30, 2004 aggregated $127,000.

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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 $18,710,000 at June 30, 2004, which is presented net of valuation allowances of $1,006,000. 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 rely upon our contractual rights to receive compensation for price differences caused by market fluctuations. Due to the large number of transactions

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and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or estimated market value. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.

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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 previously reported continuous net losses, we have fully reserved a $652,000 allowance against our net deferred tax assets.

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Results of Operations

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Three month Period Ended June 30, 2004 Compared To The Three month Period Ended June 30, 2003.

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Net sales for the three months ended June 30, 2004 were $2,647,000, compared with $2,324,000 for the same period last year, an increase of $323,000 or 13.9%. The increase is primarily due to an industry-wide increase in demand for discrete and passive and semiconductor components.

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Cost of goods sold for the quarter ended June 30, 2004 increased to $1,888,000 from $1,594,000 for the same period last year, an increase of $294,000 or 18.4%. Consistent with the increase in net sales, cost of goods sold increased, however at a faster rate, resulting in gross profit decreasing as a percentage of net sales to 28.7% for the quarter ended June 30, 2004 from 31.4% for the same period last year. Gross profit increased by $29,000 to $759,000 for the quarter ended June 30, 2004 from $730,000 for the same period in 2003.

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Selling, general and administrative (“SG&A”) expenses decreased by $106,000 or 13.8% for the quarter ended June 30, 2004 compared to the same period of 2003. The decrease is primarily attributable to personnel-related expenses decreasing by $40,000 and depreciation decreasing by $42,000, with no other individual item significantly impacting the change during the quarter ended June 30, 2004. As a percentage of net sales, SG&A decreased to 25% for the three months ended June 30, 2004 compared to 33% for the three months ended June 30, 2003.

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Operating income was $97,000 for the quarter ended June 30, 2004 as compared to operating losses of $38,000 for the same period last year. The increase in operating income results from the increase in gross profits and from the decrease in SG&A expenses, as discussed above.

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Interest expense, net of interest income, for the quarter ended June 30, 2004 decreased by $37,000 compared to the same period last year. The decrease is primarily due to lower outstanding borrowing levels incurred during the current quarter, when compared to the same period last year.

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No income tax provision or benefit was recorded during the quarters ended June 30, 2004 and 2003.

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Net income was $24,000 for the quarter ended June 30, 2004 as compared to a net loss of $92,000 for the same period last year.

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Six month Period Ended June 30, 2004 Compared To The Six month Period Ended June 30, 2003.

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Net sales for the six months ended June 30, 2004 were $5,138,000 compared with net sales for the six months ended June 30, 2003 of $5,479,000, a decrease of $341,000 or 6.2%.

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Cost of goods sold decreased by $52,000 to $3,730,000 for the six months ended June 30, 2004, a decrease of 1.4% from the same period in 2003. Consistent with the decrease in net sales, cost of goods sold decreased,

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however at a slower rate, resulting in gross profit decreasing as a percentage of net sales to 27.4% for the first six months of this year from 31% for the same period last year. Gross profit decreased by $289,000 to $1,408,000 for the six months ended June 30, 2004 from $1,697,000 for the same period in 2003.

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SG&A expenses decreased by $346,000 or 21.4% for the six months ended June 30, 2004 compared to the same period in 2003. The decrease is primarily attributable to personnel-related expenses decreasing by $144,000, depreciation decreasing by $85,000 and bad debt expenses decreasing by $56,000, with no other individual item significantly impacting the change during the quarter ended June 30, 2004. As a percentage of net sales, SG&A decreased to 24.7% for the six months ended June 30, 2004 from 29.5% for the same period last year.

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Operating income was $137,000 for the six months ended June 30, 2004 as compared to $80,000 for the same period ended June 30, 2003. The increase resulted primarily due to the cost cutting measures, as discussed above.

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Interest expense, net of interest income for the six months ended June 30, 2004 decreased by $83,000 compared to the six months ended June 30, 2003. The decrease is primarily due to lower outstanding borrowing levels incurred during the current quarter, when compared to the same period last year.

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No income tax provision or benefit was recorded during the six months ended June 30, 2004 and 2003.

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Net income was $34,000 for the six months ended June 30, 2004 compared to a net loss of $86,000 for the same period in 2003, an increase of $120,000 resulting from the same reasons discussed above.

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Liquidity and Capital Resources

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We have satisfied our liquidity requirements principally 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 six months ended June 30, 2004 and 2003 are as follows:

(Dollars in thousands)	Six months ended June 30, — 2004 (Unaudited)		2003 (Unaudited)
Operating activities	$ 1,044		$ 2,400
Investing activities	(26	)	(14	)
Financing activities	(959	)	(2,054	)

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Cash flows provided by operating activities decreased to $1,044,00 during the six months ended June 30, 2004, as compared to $2,400,000 during the same period last year. The change is primarily due to a decrease in inventory of $1,006,000 during the first six months of 2004, as compared to a decrease of $1,661,000 during the same period last year. Additionally, the overall decrease in operating cash flow was affected by an increase in accounts receivable of $218,000 during the first six months of 2004, as compared to a decrease of $523,000 during the same period last year. The Company’s ability to continue generating cash from operations is dependent upon using its current inventory (as opposed to new purchases of inventory) for generating sales, collection of its receivables and extended payments of accounts payables.

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Cash flows used in investing activities was $26,000 during the six months ended June 30, 2004 compared to $14,000 during the same period last year.

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Cash flows used in financing activities decreased to $959,000 from $2,054,000 during the six months ended June 30, 2004 and 2003, respectively, as we repaid more borrowings during the 2003 period.

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Inventory is included in current assets, however, it may take over one year for the inventory to turn and therefore may not 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.

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We believe that funds generated from operations, in addition to existing cash balances, is likely to be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future or until principal payments are due under our outstanding obligations. 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.

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As of the date of this Report, we had no commitments for other equity or debt financing or other capital expenditures, except as noted in Subsequent Events.

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Subsequent Events

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On July 8, 2004, we entered into a revolving line of credit facility providing up to $3 million for operating purposes. However, as of the date of this Report, we have not used this credit facility. The agreement governing this credit facility contains security agreements covering essentially all assets of the Company and covenants that require the Company to be in compliance with certain financial ratios.

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On July 16, 2004, we made an early principal repayment of $500,000 on our note payable collateralized by real property.

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Item 3. Controls and Procedures

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As of the last day covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s Exchange Act filings.

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There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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PART II. OTHER INFORMATION

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Item 1. Legal Proceedings.

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None.

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Item 2. Changes In Securities and Small Business Issuer Purchases of Equity Securities.

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There were no issuances or sales of our securities by us during the second quarter of 2004 that were not registered under the Securities Act.

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There were no repurchases of our Class A common stock in the second quarter of 2004.

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Item 3. Defaults Upon Senior Securities.

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None.

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Item 4. Submission of Matters to a Vote of Security Holders.

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None.

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Item 5. Other Information.

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None.

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Item 6. Exhibits and Reports on Form 8-K.

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(a) Exhibits:

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a. Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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b. Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(b) Reports on Form 8-K:

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On May 11, 2004, the Company filed a Form 8-K reporting financial results for the first quarter ended March 31, 2004.

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No other reports on Form 8-K were filed during the quarter ended June 30, 2004.

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SIGNATURES

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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.

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Date: August 16, 2004	TAITRON COMPONENTS INCORPORATED — By:	/s/ Stewart Wang Stewart Wang Chief Executive Officer, Director, Chief Financial Officer and Principal Accounting Officer.

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