<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended May 31, 1998
-------------------------------------
Commission File Number 2-91218-B
------------------------------------
International Electronics, Inc.
-------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2654231
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
427 Turnpike Street, Canton, Massachusetts 02021
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(781) 821-5566
--------------
(Issuer's telephone number, including area code)
Not applicable
--------------
(former name, former address and former fiscal year,
if changed since last report)
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 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
----- -----
1,493,301 common shares were outstanding at July 7, 1998.
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
Index
-----
Part I. Financial Statements (unaudited)
--------------------------------
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets, May 31, 1998
and August 31, 1997 2
Condensed Consolidated Statements of Operations, three and
nine months ended May 31, 1998 and 1997 3
Condensed Consolidated Statement of Shareholders' Equity,
nine months ended May 31, 1998 4
Condensed Consolidated Statements of Cash Flows, nine
months ended May 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 10-14
---------------------------------------------
Part II. Other Information:
Item 4: Submission of Matters to a Vote of Security Holders 15
---------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K 15
---------------------------------------------------
Signature 15
---------
</TABLE>
-1-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------
(unaudited)
<TABLE>
<CAPTION>
May 31, 1998 August 31, 1997
------------- ----------------
<S> <C> <C>
ASSETS
- --------------------------------------
Current assets:
Cash and equivalents $ 557,175 $ 160,075
Accounts receivable, net 992,816 1,035,596
Inventories 1,041,930 1,078,561
Other current assets 166,191 133,274
----------- -----------
Total current assets 2,758,112 2,407,506
Equipment, furniture and
improvements, net 410,024 357,289
Other assets:
Goodwill and other intangibles, net 170,052 235,029
Other 17,405 26,349
----------- -----------
187,457 261,378
----------- -----------
$ 3,355,593 $ 3,026,173
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------
Current liabilities:
Accounts payable $ 411,028 $ 684,431
Accrued expenses 1,010,176 847,210
Income taxes 100,000 39,000
Current portion of long-term
obligations 63,126 36,212
----------- -----------
Total current liabilities 1,584,330 1,606,853
Long-term obligations 99,200 68,369
Commitments
Shareholders' equity:
Common stock, $.01 par value:
Authorized 5,984,375 shares
Issued 1,528,301 shares 15,283 15,283
Capital in excess of par value 4,785,679 4,784,267
Accumulated deficit (3,090,255) (3,409,955)
Less treasury stock, at cost:
35,000 shares (38,644) (38,644)
----------- -----------
Total shareholders' equity 1,672,063 1,350,951
----------- -----------
$ 3,355,593 $ 3,026,173
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-2-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $2,437,287 $2,334,115 $7,030,239 $6,818,952
Cost of sales 1,287,497 1,392,871 3,793,812 4,086,951
---------- ---------- ---------- ----------
Gross profit 1,149,790 941,244 3,236,427 2,732,001
Research and development costs 158,106 132,548 386,866 383,429
Selling, general and
administrative expenses 868,001 794,191 2,430,298 2,351,211
---------- ---------- ---------- ----------
Income (loss) from operations 123,683 14,505 419,263 (2,639)
Interest expense (4,650) (3,617) (11,108) (27,683)
Other income (expense), net 10,965 9,375 11,545 20,489
---------- ---------- ---------- ----------
Income (loss) before
extraordinary gain and taxes 129,998 20,263 419,700 (9,833)
Extraordinary gain, net of
income tax expense of $1,000 - - - 10,446
---------- ---------- ---------- ----------
Income before taxes 129,998 20,263 419,700 613
Provision for taxes 28,000 10,000 100,000 32,000
---------- ---------- ---------- ----------
Net income (loss) $ 101,998 $ 10,263 $ 319,700 $ (31,387)
========== ========== ========== ==========
Net income (loss) per share:
Basic $.07 $.01 $.21 $(.02)
Diluted $.06 $.01 $.20 $(.02)
========== ========== ========== ==========
Shares used in computing
net income (loss) per share:
Basic 1,493,301 1,492,551 1,493,301 1,492,524
Diluted 1,586,750 1,642,894 1,582,728 1,492,524
========== ========== ========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-3-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Common Stock Capital in Treasury Stock
------------------ excess of Accumulated ------------------
Shares Amount par value Deficit Shares Cost Total
--------- ------- ---------- ------------ ------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances,
September 1, 1997 1,528,301 $15,283 $4,784,267 $(3,409,955) 35,000 $(38,644) $1,350,951
Issuance of stock
warrants - - 1,412 - - - 1,412
Net income - - - 319,700 - - 319,700
--------- ------- ---------- ------------ ------ -------------- ----------
Balances,
May 31, 1998 1,528,301 $15,283 $4,785,679 $(3,090,255) 35,000 $(38,644) $1,672,063
========= ======= ========== =========== ====== ============== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-4-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
----------------------------
May 31, 1998 May 31, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 319,700 ($31,387)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 212,618 203,508
Stock warrants issued for professional
services 1,412 -
Changes in operating assets and liabilities:
Accounts receivable 42,780 (19,954)
Inventories 36,631 (266,120)
Other current assets (32,917) 3,884
Income taxes 61,000 (8,000)
Accounts payable and accrued
expenses (110,437) 538,258
--------- ---------
Net cash provided by
operating activities 530,787 420,189
CASH FLOWS FROM INVESTING ACTIVITIES
AND OTHER:
Net purchase of equipment,
furniture and improvements (200,376) (130,593)
Other assets 8,944 (25,363)
--------- ---------
Net cash used in investing
activities and other (191,432) (155,956)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions of notes payable
and debt obligations 89,214 -
Issuance of common stock - 4,045
Reduction of notes payable and debt
obligations (31,469) (437,854)
--------- ---------
Net cash provided by (used in)
financing activities 57,745 (433,809)
--------- ---------
CASH AND EQUIVALENTS:
Net increase (decrease) during period 397,100 (169,576)
Balances, beginning of period 160,075 556,745
--------- ---------
Balances, end of period $ 557,175 $ 387,169
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
TRANSACTIONS:
Equipment acquired under capitalized leases $ - $ 42,326
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-5-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
(unaudited)
A. Financial Statements:
---------------------
In the opinion of the Company, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position
as of May 31, 1998 and the results of operations for the three and nine
months then ended.
Certain disclosures normally included have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although the Company believes the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-KSB
for the year ended August 31, 1997.
B. Income Taxes:
-------------
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year.
Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rate is
determined.
C. Net Income (Loss) per Share:
----------------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS
No. 128 replaced the previously reported primary and fully diluted income
(loss) per share with basic and diluted income (loss) per share. Unlike
primary income (loss) per share, basic income (loss) per share excludes any
dilutive effects of options and warrants. Diluted income (loss) per share
is very similar to the previously reported fully diluted income (loss) per
share. All income (loss) per share amounts for all periods have been
presented, and, where necessary, restated to conform to SFAS No. 128
requirements.
Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average common shares outstanding during the periods. Diluted
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and dilutive option and warrant shares
outstanding based on the average market price of the Company's common stock
(under the treasury stock method).
-6-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
(continued)
(unaudited)
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ---------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 101,998 $ 10,263 $ 319,700 $(31,387)
========== ========== ========== =========
Shares used in computation:
Weighted average
shares outstanding for
basic income (loss) per share 1,493,301 1,492,551 1,493,301 1,492,524
Effect of dilutive option
and warrant shares 93,449 150,343 89,427 -
---------- ---------- ---------- ---------
Total shares for diluted income
(loss) per share 1,586,750 1,642,894 1,582,728 1,492,524
========== ========== ========== =========
Basic income (loss) per share:
Income (loss) before
extraordinary gain $ .07 $ .01 $ .21 $(.03)
Extraordinary gain - - - .01
---------- ---------- ---------- ---------
Net income (loss) $ .07 $ .01 $ .21 $(.02)
========== ========== ========== =========
Diluted income (loss) per share:
Income (loss) before
extraordinary gain $ .06 $ .01 $ .20 $(.03)
Extraordinary gain - - - .01
---------- ---------- ---------- ---------
Net income (loss) $ .06 $ .01 $ .20 $(.02)
========== ========== ========== =========
</TABLE>
The calculations for diluted income (loss) per share did not include an
aggregate out of the money options and warrants of 98,037, 118,871 and 97,537
for the three months ended November 30, 1997, February 28, 1998 and May 31,
1998, respectively.
D. Principles of Consolidation:
----------------------------
The accompanying condensed consolidated financial statements include the
accounts of the Company, its majority owned subsidiary, Ecco Industries,
Inc. and its wholly owned subsidiary, International Electronics Europe
Limited. All material intercompany transactions, balances and profits have
been eliminated.
-7-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
(continued)
(unaudited)
<TABLE>
<CAPTION>
E. Long-term Obligations:
----------------------
Long-term obligations are summarized as follows:
May 31, 1998 Aug. 31, 1997
------------- --------------
<S> <C> <C>
Equipment line of credit, 8.5% (Note F) $ 99,627 $ 24,352
7-18% capitalized lease obligations,
due through April 2001 (Note G) 42,863 60,627
8 - 13% equipment loans, collateralized
by equipment, final payment due
Nov., 2001 19,836 5,602
Other - 14,000
-------- --------
162,326 104,581
Less current portion (63,126) (36,212)
-------- --------
$ 99,200 $ 68,369
======== ========
</TABLE>
Federal Deposit Insurance Corporation (FDIC) Agreement - In February, 1997
------------------------------------------------------
the Company repaid approximately $358,000 representing the balance due the
FDIC for the outstanding note originally payable in full on December 31,
1997. The Company recognized an extraordinary gain of $10,446 on this
transaction representing a prepayment discount from the FDIC (Note F).
The aggregate principal payments on long-term obligations as of May 31,
1998, excluding capital leases are $42,984 (1999), $43,401 (2000), $29,897
(2001), and $3,181 (2002).
F. Bank Arrangements:
------------------
The Company has available up to $1,000,000 for a working capital demand
line of credit. The Company also had approximately $225,000 available for
equipment financing as of May 31, 1998. Available borrowings under the
working capital line are based on a percentage of eligible accounts
receivable and inventory. Both lines of credit are at the bank's prime rate
of interest and all the Company's assets are collateralized under these
arrangements. The credit agreements contain certain restrictive covenants
including covenants limiting the payment of dividends and required minimum
current ratio and debt to tangible net worth ratio. As of May 31, 1998, no
borrowings have been made under the working capital line of credit and the
Company has $99,627 in borrowings under the equipment line of credit at an
interest rate of 8.5% which is payable in monthly installments through
February 2001.
-8-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------
(continued)
(unaudited)
G. Capital Lease Commitments:
--------------------------
The Company leases certain equipment under capital leases and, accordingly,
the present value of the net minimum payments has been reflected in
equipment, furniture and improvements and capitalized lease obligations.
Future minimum capital lease payments under lease terms in excess of one
year at May 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 24,486
2000 15,959
2001 8,361
2002 604
--------
Total minimum lease payments 49,410
Less interest (6,547)
--------
Net minimum lease payments 42,863
Less current portion (20,142)
--------
Long-term portion $ 22,721
========
</TABLE>
-9-
<PAGE>
Management's Discussion and Analysis of
---------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
- -------------------------------
As of May 31, 1998, the Company had working capital of $1,173,782 compared to
$800,653 at August 31, 1997. The ratio of current assets to current liabilities
was 1.7 at May 31, 1998 as compared to 1.5 at August 31, 1997. The debt to
equity ratio was 1.0 at May 31, 1998 and 1.2 at August 31, 1997. The increase
in working capital and current ratio and the decrease in the debt to equity are
the result of the Company's net income for the first nine months of fiscal 1998.
Capital expenditures were $155,388 and $172,919 for the nine months ended May
31, 1998 and 1997, respectively. The Company has no current commitments for any
material capital expenditures, but the Company anticipates up to $400,000 in
capital expenditures for the purchase of office and manufacturing equipment,
regulatory testing and tooling costs over the next twelve months.
As of May 31, 1998, the Company had available bank lines of credit for working
capital financing of up to $1,000,000 and $225,248 for equipment purchases. See
Notes E and F to Unaudited Condensed Consolidated Financial Statements.
Management believes that its current cash position, together with internally
generated funds at present sales levels and its available bank financing, will
provide adequate cash reserves to satisfy its cash requirements for the next
twelve months. Depending upon whether or not sufficient revenue and working
capital is generated from profitable operations, the Company may require
additional external funding. There is no assurance that profits will be
generated, or additional external funding will be obtainable, if such a need
should arise.
Results of Operations
- ---------------------
Net sales for the third quarter of fiscal 1998 increased 4% as compared to the
third quarter of fiscal 1997. Net sales for the first nine months of fiscal
1998 increased 3% as compared to the comparable periods of fiscal 1997. The
increases in sales for the third quarter and first nine months of fiscal 1998
primarily reflect increases in access control and keypad sales, offset in part
by a reduction in glassbreak detector sales.
The ratios of gross profit to sales for the three months ended May 31, 1998 and
1997 were 47% and 40%, respectively. The ratios of gross profit to sales for
the nine months ended May 31, 1998 and 1997 were 46% and 40%, respectively. The
increases in gross profits are primarily the results of decreases in warranty
costs, a reduction in product costs resulting from favorable pricing terms from
vendors and an increase in the price of the Company's products to its customers
effective January 1998. The Company expects a reduction in its current gross
profit percentage in the future and believes that such percentage will be
comparable to its past historical levels.
Research and development expenses were $158,106 and $386,866 for the third
quarter and nine months ended May 31, 1998, respectively, compared to $132,548
and $383,429 for the comparable periods of fiscal 1997. The increase in costs
for the third quarter of 1998 as compared to the prior year period is primarily
due to project costs associated with customization of the Company's voice
verification product.
As a percentage of net sales, selling, general and administrative expenses were
36% and 34% for the three months ended May 31, 1998 and 1997, respectively and
were 35% and 34% for the nine months ended May 31, 1998 and 1997, respectively.
The increase in expenses as a percentage of net sales is primarily the result of
increased personnel and related expenses.
-10-
<PAGE>
The gain on extinguishment of debt for the nine months ended May 31, 1997 of
$10,446 represents a prepayment discount from the FDIC. The provision for
income taxes for the third quarter and first nine months of fiscal 1998
represents foreign, federal alternative minimum taxes and state tax expense.
The Company's effective income tax rate for the nine months ended May 31, 1998
of 24% was less than the combined federal and state statutory income tax rates,
primarily as a result of the utilization of available net operating loss
carryforwards.
YEAR 2000 COMPLIANCE
The Company is in the process of reviewing its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is analyzing its
computer systems to determine what kind of implementation plan is necessary to
address the issue. The Company presently believes, with modifications to its
existing software, the Year 2000 problem will not pose significant operational
problems and is not anticipated to be material to its financial position or
results of operations in any given year.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" will be effective for fiscal years beginning after
December 15, 1997. SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" is effective for periods beginning after December 15,
1997. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for all quarters of fiscal years beginning after June
15, 1999. The Company has not determined the effects, if any, that SFAS Nos.
130, 131, and 133 will have on its consolidated financial statements and
disclosures.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company in writing and orally, from time to time may
contain certain "forward-looking" information as this term is defined by: (1)
the Private Securities Litigation Reform Act of 1995 (the "Act") and (2) in
releases made by the Securities and Exchange Commission. These Cautionary
Statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of the "safe harbor" provisions of the Act.
The Company cautions investors that any forward-looking statements made by the
Company involve risks and uncertainties, which could cause actual results to
differ materially from those projected.
The Company has identified certain factors that may affect the Company's stock
price which are detailed below.
MAINTAIN LISTING ON NASDAQ. In March 1992, the NASD established higher standards
for a company's stock to maintain its listing on NASDAQ. The revised standards
include maintaining a minimum bid price of $1.00 per share for ten consecutive
trading days and shareholders' equity with a minimum balance of $1,000,000.
Although the Company has maintained its NASDAQ listing, the Company has, at
times, been unable to maintain the $1.00 minimum bid price criteria.
Effective February 23, 1998, the NASD adopted new more stringent standards for a
company to maintain its stock listing on NASDAQ. One of the newly adopted
standards includes maintaining minimum net tangible shareholders' equity of
$2,000,000. As of May 31, 1998, the Company had net tangible shareholders'
equity of approximately $1,502,000. The Company does not presently meet the
standard and, unless the Company increases its net tangible shareholders' equity
to $2,000,000, the Company's common stock will no longer be listed on NASDAQ.
The Company has requested an exception to the $2,000,000 minimum net tangible
shareholders' equity requirement to allow the Company time to comply with such
requirement. The Company has received a temporary exception to the net tangible
shareholders' equity requirement until the NASD holds an oral hearing on July
30, 1998. Any delisting action will not occur until the NASD makes a written
determination. The Company cannot evaluate the prospects of receiving an
exception from the NASD. If the Company is unable to maintain its listing on
NASDAQ, holders of the Company's common stock may have additional difficulty
selling their shares.
-11-
<PAGE>
LIMITED MARKET FOR COMMON STOCK. There is a limited market for the Company's
common stock and there can be no assurance that even this limited market will be
sustained. Holders of the Company's common stock may have difficulty selling
their shares or may have difficulty selling them at a favorable price.
VOLATILITY OF STOCK PRICE. The Company's stock price is subject to significant
volatility. If revenues or earnings in any quarter fail to meet the investment
community's expectations, announcements of new products by the Company or its
competitors and other events or factors could have an immediate impact on the
Company's stock price. The stock price may also be affected by broader market
trends unrelated to the Company's performance.
The Company has identified certain risks and uncertainties as factors which may
impact on its operating results which are detailed below. All of these factors
are difficult for the Company to forecast, and these or other factors can
materially adversely affect the Company's business and operating results for one
quarter or a series of quarters.
LIMITED FINANCIAL RESOURCES AND LOSSES FROM OPERATIONS. The Company has limited
financial resources. It is therefore subject to all the risks generally
associated with a small business having limited financial resources. The
Company experienced a loss of approximately ($231,000) for the year ended August
31, 1995. For the years ended August 31, 1996, and 1997, and for the nine
months ended May 31, 1998, the Company had net income of approximately $162,000,
$70,000 and $320,000, respectively. There can be no assurance that the Company
will continue profitable operations. Continued operations after the expenditure
of the Company's existing cash reserves may require additional working capital
to be generated by profitable operations or use of the bank lines of credit
and/or additional financing. There can be no assurance that profits will
continue or that additional external funding will be obtainable, if such a need
should arise.
DEPENDENCE ON KEY EMPLOYEES. The business of the Company is dependent upon the
efforts of John Waldstein and certain other key management and technical
employees. The loss or prolonged disability of such personnel could have a
significant adverse effect on the business of the Company. The Company
presently maintains a key man life insurance policy of $1,000,000 on John
Waldstein, President and Treasurer.
LIMITED DESIGN ENGINEERING STAFF. The Company is engaged in an industry which,
as a result of extensive research and development, introduces new products on a
regular basis. Current competitors or new market entrants may develop new
products with features that could adversely affect the competitive position of
the Company's products. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products or
enhancing its existing products or that the Company will be able to respond
effectively to technological changes or product announcements by competitors.
Any failure or delay in these goals could have a material adverse effect on the
Company.
FLUCTUATIONS IN SALES AND OPERATING RESULTS. The quarterly growth rates
recently experienced by the Company are not necessarily indicative of future
quarterly growth rates. Operating results may also fluctuate due to factors
such as the timing of new product announcements and introductions by the
Company, its major customers and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in the product mix of
sales, changes in the relative proportions of sales among distribution channels
or among customers within each distribution channel, changes in manufacturing
costs, competitive pricing pressures, the gain or
-12-
<PAGE>
loss of significant customers, increased research and development expenses
associated with new product introductions and general economic conditions. A
limited number of customers have accounted for a significant portion of sales in
any particular quarter. In addition, the Company typically operates with a
relatively small backlog. As a result, quarterly sales and operating results
generally depend on the volume, timing of, and ability to fulfill orders
received within the quarter which are difficult to forecast. In this regard, the
Company may recognize a substantial portion of its sales in a given quarter from
sales booked and shipped in the last weeks of that quarter. A delay in customer
orders, resulting in a shift of product shipment from one quarter to another,
could have a significant effect on the Company's operating results. In addition,
competitive pressure on pricing in a given quarter could adversely affect the
Company's operating results, or such price pressure over an extended period
could adversely affect the Company's long-term profitability.
The Company establishes its expenditure levels for sales and marketing and other
expenses based, in large part, on its expected future results. As a result, if
sales fall below expectations, there would likely be a material adverse effect
on operating results because only a small portion of the Company's expenses vary
with its sales in the short-term.
CONCENTRATION OF CUSTOMERS. Although the Company has a substantial number of
customers, a significant portion of the Company's sales are to a small number of
large customers. This concentration of customers may cause net sales and
operating results to fluctuate from quarter to quarter based on major customers'
requirements and the timing of their orders and shipments. Sales to the
Company's largest customer accounted for approximately 36% of the Company's
total net sales for the fiscal year ended August 31, 1997. The Company's
agreements with its customers generally do not include minimum purchase
requirements. There can be no assurance that the Company's major customers will
place additional orders, or that the Company will obtain orders of similar
magnitude from other customers. The Company's operating results could be
materially and adversely affected if any present or future major customer were
to choose to reduce its level of orders, were to experience financial,
operational or other difficulties that resulted in such a reduction in orders to
the Company or were to delay paying or fail to pay the Company's receivables
from such customer. In fiscal 1995, the Company lost a major domestic
distributor who filed for bankruptcy with accounts receivable due the Company of
approximately $80,000.
COMPETITION. Other companies in the industry offer products in competition with
those of the Company. Many of the companies with which the Company competes are
substantially larger, have greater resources and market a larger line of
products. The Company expects competition to increase significantly in the
future from existing competitors and new companies that may enter the Company's
existing or future markets. Increased competition could adversely affect the
Company's sales and profitability. There can be no assurance that the Company
will be able to continue to compete successfully with its existing competitors
or with new competitors.
LACK OF PATENT PROTECTION. Although the Company has obtained some patent and
copyright protection for certain of its products and software, management
believes that competitors may be able to market certain products similar to
those sold by the Company.
PRODUCTION IN ASIA. The Company presently maintains certain manufacturing molds
in Asia and has a significant amount of components for some products
manufactured in Asia. There can be no assurance that the Asian political or
economic environment will remain sufficiently stable to allow reliable and
consistent delivery of product.
DEPENDENCE ON SINGLE SOURCE OF SUPPLY. The Company is dependent upon sole
source suppliers for a number of key components and parts used in the Company's
products. There can be no assurance that these suppliers will be able to meet
the Company's future requirements for such components or that the components
will be available to the Company at favorable prices. Any extended interruption
in the supply or significant increase in price of any such components could have
a material adverse effect on the Company's operating results in any given
period.
-13-
<PAGE>
FOREIGN SALES. During the year ended August 31, 1997, the Company's foreign
sales represented approximately 16% of net sales. There may be a reduction in
the Company's foreign sales in the event of significant changes in foreign
exchange rates or political and economic instability in foreign countries.
-14-
<PAGE>
Part II. Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On June 26, 1998, the Company held its Special Meeting in Lieu of
the Annual Meeting of Shareholders. At the meeting, shareholders
elected the following Board of Directors for the ensuing year:
John Waldstein, Heath Paley and Diane Balcom
The meeting was adjourned for the proposals relating to the
authorization of preferred stock and amendments to the Company's
Articles of Organization until July 14, 1998. On July 14, 1998,
those proposals were defeated because the Company did not receive
a two-thirds vote in favor of such proposals.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Second Amendment to Employment, Non-Disclosure and Non-
Compete Agreement for John Waldstein dated May 1,1998.
(b) There were no reports on Form 8-K filed for the
three months ended May 31, 1998.
SIGNATURE
---------
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign and is Chief Financial and Accounting Officer.
International Electronics, Inc.
Date: 7/14/98 /s/ John Waldstein
------- -------------------
John Waldstein, President,
Treasurer & Chief Financial and Accounting
Officer and duly authorized to sign.
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL CONDITION AT MAY 31,
1998 (UNAUDITED) AND THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 557,175
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,041,930
<CURRENT-ASSETS> 2,758,112
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,355,593
<CURRENT-LIABILITIES> 1,584,330
<BONDS> 99,200
0
0
<COMMON> 15,283
<OTHER-SE> 1,656,780
<TOTAL-LIABILITY-AND-EQUITY> 3,355,593
<SALES> 7,030,239
<TOTAL-REVENUES> 7,041,784
<CGS> 3,793,812
<TOTAL-COSTS> 3,793,812
<OTHER-EXPENSES> 386,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,108
<INCOME-PRETAX> 419,700
<INCOME-TAX> 100,000
<INCOME-CONTINUING> 319,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 319,700
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT,
NON-DISCLOSURE AND NON-COMPETE AGREEMENT
----------------------------------------
This Amendment (which may hereinafter be referred to as the "Second
Amendment") is an amendment to the amended Employment, Non-Disclosure and Non-
Compete Agreement dated June 20, 1994 (referred to as the "1994 Agreement"),
between International Electronics, Inc., a duly authorized and existing
Massachusetts corporation with a usual place of business at 427 Turnpike Street,
Canton, Massachusetts 02021 (hereinafter referred to as "Company") and John
Waldstein of 97 Meadowbrook Road, Needham, Massachusetts 02192 (hereinafter
referred to as "Employee"). The 1994 Agreement was amended by a 1994 Amendment
dated December 7, 1994. For good and valuable consideration, including the
promises hereinafter made, the parties hereto hereby agree as follows:
Paragraph 6 of the 1994 Agreement and the 1994 Amendment are hereby deleted
and the following is substituted in its place:
6. Term/Termination. This Agreement shall have a term commencing on May
----------------
1, 1998 and shall continue until December 31, 2000, and shall be extended
as hereinafter provided in paragraph 6(g), provided that the Employee's
employment may be earlier terminated by the Company for cause, for
voluntary resignation, or upon death or permanent disability of the
Employee, all of which terms are defined as follows:
a. "Termination for Cause" shall mean the termination of employment
of the Employee because of the Employee's dereliction of duty,
dishonesty, theft, gross misconduct, disclosure of trade secrets or
aid of a competitor, or because of a breach by the Employee of the
terms of any agreement between the Employee and the Company.
b. "Termination by Voluntary Resignation" shall mean the termination
of employment as a result of the voluntary resignation or withdrawal,
for any reason, by the Employee.
c. "Termination by Death" shall mean the termination of employment as
a result of the death of the Employee.
d. "Termination by Disability" shall mean the termination of
employment as a result of the disability, as herein defined, of the
Employee.
e. "Disability" shall mean the Employee's inability to perform the
services which he is to provide to the Company
<PAGE>
for any one hundred weekdays in any continuous period of six months by
reason of physical or mental illness or incapacity. In the event of
any dispute between the parties regarding the existence of a permanent
disability, the matter shall be determined by a licensed physician
selected by the Company, and such determination shall be conclusive
and binding upon the Company and Employee.
f. In addition, on January 1, 1999 and each January 1 thereafter, the
base salary described in paragraph 5 of the 1994 Agreement shall be
adjusted at a minimum for inflation during the prior year. The
adjustment shall be based on the Consumer Price Index for Urban Wage
Earners and Clerical Workers for Boston, Massachusetts published by
the Bureau of Labor Statistics of the U.S. Department of Labor, all
items, unadjusted for seasonal variations (1982-1984=100) or any index
published by the United States government in substitution thereof.
The adjustment shall be based on the change in the Consumer Price
Index from January of the prior year to January of the year in which
the calculation is performed.
g. If on January 1, 1999 and on each January 1 thereafter, the
employment of the Employee has not been terminated, this Employment
Agreement will automatically extend itself for one additional year,
the effect of which will be that on each such January 1, the term of
this Agreement will be for three years and the Employee, until
terminated, will have an employment term of at least two years at all
times.
Other than as provided in this Second Amendment, all of the terms and
conditions of the 1994 Agreement as amended by the 1994 Amendment shall remain
in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
an officer duly authorized thereunto by its Board of Directors and the Employee
has hereunto set his hand and seal, all as of May 1, 1998.
International Electronics, Inc.
/s/ John Waldstein /s/ C. Hentschel
- -------------------------------------- -----------------------------------
John Waldstein, Employee By: C. Hentschel, Vice President
