<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, 1999
--------------------------------------------------------------
Commission File Number 2-91218-B
---------------------------------------------------------
International Electronics, Inc.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2654231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
427 Turnpike Street, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(781) 821-5566
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(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 June 24, 1999.
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
Index
-----
<TABLE>
<S> <C>
Part I. Financial Statements (unaudited)
--------------------------------
Condensed Consolidated Balance Sheets, May 31, 1999
and August 31, 1998 2
Condensed Consolidated Statements of Income, three and nine
months ended May 31, 1999 and 1998 3
Condensed Consolidated Statement of Shareholders' Equity,
nine months ended May 31, 1999 4
Condensed Consolidated Statements of Cash Flows, nine
months ended May 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 10-15
---------------------------------------------
Part II. Other Information:
Item 6: Exhibits and Reports on Form 8-K 16
--------------------------------
Signature 16
---------
</TABLE>
-1-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------
(unaudited)
<TABLE>
<CAPTION>
May 31, 1999 August 31, 1998
------------- ----------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and equivalents $ 1,293,024 $ 895,876
Accounts receivable, net 881,261 986,403
Inventories 1,030,924 746,570
Other current assets 200,296 153,816
----------- -----------
Total current assets 3,405,505 2,782,665
Equipment, furniture and
improvements, net 451,793 368,965
Other assets:
Goodwill and other intangibles, net 83,571 148,432
Other 11,950 11,950
----------- -----------
95,521 160,382
----------- -----------
$ 3,952,819 $ 3,312,012
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------
Current liabilities:
Accounts payable $ 592,580 $ 138,894
Accrued expenses 981,654 1,089,267
Income taxes 63,836 44,000
Current portion of long-term
obligations 83,485 64,030
----------- -----------
Total current liabilities 1,721,555 1,336,191
Long-term obligations 86,610 82,859
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 4,806,819 4,796,149
Accumulated deficit (2,638,804) (2,879,826)
Less treasury stock, at cost:
35,000 shares (38,644) (38,644)
----------- -----------
Total shareholders' equity 2,144,654 1,892,962
----------- -----------
$ 3,952,819 $ 3,312,012
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-2-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- ----------------------------
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $2,416,590 $2,437,287 $6,950,862 $7,030,239
Cost of sales 1,298,016 1,287,497 3,697,865 3,793,812
---------- ---------- ---------- ----------
Gross profit 1,118,574 1,149,790 3,252,997 3,236,427
Research and development costs 176,491 158,106 502,098 386,866
Selling, general and
administrative expenses 870,071 868,001 2,481,161 2,430,298
---------- ---------- ---------- ----------
Income from operations 72,012 123,683 269,738 419,263
Interest expense (3,973) (4,650) (11,354) (11,108)
Other income 16,979 10,965 46,438 11,545
---------- ---------- ---------- ----------
Income before taxes 85,018 129,998 304,822 419,700
Provision for taxes 19,800 28,000 63,800 100,000
---------- ---------- ---------- ----------
Net income $ 65,218 $ 101,998 $ 241,022 $ 319,700
========== ========== ========== ==========
Net income per share:
Basic $.04 $.07 $.16 $.21
Diluted $.04 $.06 $.15 $.20
========== ========== ========== ==========
Shares used in computing
Net income per share:
Basic 1,493,301 1,493,301 1,493,301 1,493,301
Diluted 1,569,074 1,586,750 1,570,300 1,582,728
========== ========== ========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-3-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
-----------------------------------------------
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, 1998 1,528,301 $15,283 $4,796,149 ($2,879,826) 35,000 ($38,644) $1,892,962
Issuance of stock
warrants and options - - 10,670 - - - 10,670
Net income - - - 241,022 - - 241,022
--------- ------- ---------- ------------ ------ -------------- ----------
Balances,
May 31, 1999 1,528,301 $15,283 $4,806,819 ($2,638,804) 35,000 ($38,644) $2,144,654
========= ======= ========== =========== ====== ============== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-4-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
----------------------------
May 31, 1999 May 31, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 241,022 $ 319,700
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 211,703 212,618
Stock warrants and options issued
for professional services 10,670 1,412
Changes in operating assets and liabilities:
Accounts receivable 105,142 42,780
Inventories (284,354) 36,631
Other current assets (46,480) (32,917)
Income taxes 19,836 61,000
Accounts payable and accrued
expenses 346,073 (110,437)
---------- ---------
Net cash provided by
operating activities 603,612 530,787
CASH FLOWS FROM INVESTING ACTIVITIES
AND OTHER:
Net purchase of equipment,
furniture and improvements (229,670) (200,376)
Other assets - 8,944
---------- ---------
Net cash used in investing
activities and other (229,670) (191,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions of long-term
obligations 77,342 89,214
Reduction of long-term
obligations (54,136) (31,469)
---------- ---------
Net cash provided by
financing activities 23,206 57,745
---------- ---------
CASH AND EQUIVALENTS:
Net increase during period 397,148 397,100
Balances, beginning of period 895,876 160,075
---------- ---------
Balances, end of period $1,293,024 $ 557,175
========== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-5-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
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,
1999 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, 1998.
B. 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.
C. 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.
D. Significant Estimates and Assumptions:
--------------------------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
-6-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
E. Net Income per Share:
---------------------
Basic net income per share is computed by dividing net income by the weighted
average common shares outstanding during the periods. Diluted net income per
share is computed by dividing net income 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).
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------- --------------------------
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 65,218 $ 101,998 $ 241,022 $ 319,700
========== ========== ========== ==========
Shares used in computation:
Weighted average
shares outstanding for
basic income per share 1,493,301 1,493,301 1,493,301 1,493,301
Effect of dilutive option
and warrant shares 75,773 93,449 76,999 89,427
---------- ---------- ---------- ----------
Total shares for diluted income
per share 1,569,074 1,586,750 1,570,300 1,582,728
========== ========== ========== ==========
Net income per share:
Basic $ .04 $ .07 $ .16 $ .21
Diluted $ .04 $ .06 $ .15 $ .20
========== ========== ========== ==========
</TABLE>
The calculations for diluted net income per share did not include an aggregate
out of the money options and warrants of 140,104 and 97,537 for the three months
ended May 31, 1999 and 1998, respectively.
-7-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
F. Long-term Obligations:
----------------------
Long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
May 31, 1999 Aug. 31, 1998
------------- --------------
<S> <C> <C>
Equipment -- borrowings collateralized by all
Company assets, 7.75-8.5% (Note G) $132,654 $ 90,160
7-18% capitalized lease obligations,
due through April 2001 (Note H) 22,722 38,134
8% equipment loan, collateralized
by equipment, final payment due
Nov., 2001 14,719 18,595
-------- --------
170,095 146,889
Less current portion (83,485) (64,030)
-------- --------
$ 86,610 $ 82,859
======== ========
</TABLE>
The aggregates principal payments on long-term obligations as of May 31,
1999, excluding capital leases are $69,201 (2000), $55,698 (2001) and $22,474
(2002).
G. Bank Arrangements:
------------------
The Company has available up to $1,000,000 for a bank demand line of credit.
The line of credit is at the bank's base rate of interest and all of the
Company's assets are collateralized under this arrangement. The credit
agreement contains certain restrictive covenants including covenants limiting
the payment of dividends, required minimum debt to tangible net worth ratio
and net income. As of May 31, 1999, no borrowings have been made under the
demand line of credit and the Company has $132,654 in equipment borrowings.
-8-
<PAGE>
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
H. 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, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 15,959
2001 8,362
2002 604
--------
Total minimum lease payments $ 24,925
Less interest (2,203)
--------
Net minimum lease payments 22,722
Less current portion (14,284)
--------
Long-term portion $ 8,438
========
</TABLE>
-9-
<PAGE>
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Liquidity and Capital Resources
- -------------------------------
As of May 31, 1999, the Company had working capital of $1,683,950 compared to
$1,446,474 at August 31, 1998. The ratio of current assets to current
liabilities was 2.0 at May 31, 1999 and 2.1 at August 31, 1998. The debt to
equity ratio was .8 at May 31, 1999 and .7 at August 31, 1998. The increase in
working capital is primarily the result of the Company's operating cash flow,
offset in part by the purchase of fixed assets for fiscal 1999. The decrease in
current ratio and increase in debt to equity ratio is primarily the result of an
increase in cash and equivalents, accounts payable, and inventories.
Net capital expenditures were $229,670 and $200,376 for the nine months ended
May 31, 1999 and 1998, 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.
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 and first nine months of fiscal 1999 decreased
1% as compared to the comparable periods of fiscal 1998. The decrease in sales
primarily reflects a decrease in access control, keypad, and glassbreak
products, offset in part by an increase in OEM and keypad accessory sales.
The ratios of gross profits to sales for the three months ended May 31, 1999 and
1998 were 46% and 47%, respectively. The ratios of gross profits to sales for
the nine months ended May 31, 1999 and 1998 were 47% and 46%, respectively. The
change in gross profit percentage is primarily the result of decreases in
warranty expense, lower product costs and product mix.
Research and development expenses were $176,491 and $502,098 for the third
quarter and nine months ended May 31, 1999, respectively, compared to $158,106
and $386,866 for the comparable periods of fiscal 1998. The increases in this
discretionary expense are primarily due to the hiring of additional personnel
and outside consultants. The Company anticipates that future research and
development costs will be comparable as a percentage of net sales to the amounts
incurred during this current fiscal quarter.
As a percentage of net sales, selling, general and administrative expenses were
36% for both the three months ended May 31, 1999 and 1998 and were 36% and 35%
for the nine months ended May 31, 1999 and 1998, respectively. The current
year's percentage of these expenses are comparable to the preceding year.
-10-
<PAGE>
Management's Discussion and Analysis of
-------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
The provision for income taxes represents foreign, federal alternative minimum
taxes and state income tax expense. The Company's effective income tax rate for
the nine months ended May 31, 1999 of 21% 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
There are issues associated with the programming code in existing computer
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two-digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company considers its products to
be Year 2000 compliant. The Company's products do not perform any date
calculations requiring the year digits, nor do they have any report generating
software that would present a problem with the Year 2000.
The Company is in the process of developing a definitive timetable, including a
contingency plan, to address the Year 2000 problem regarding both its internal
systems and external relationships. The Company's internal systems include the
manufacturing and inventory control system, internal reporting and the Company's
existing manufacturing equipment. The Company has been in contact with its
software vendors to plan the installation of upgrades to these systems. The
Company's testing and implementation of its business and manufacturing systems
is in process and, at this point, the Company cannot accurately quantify the
impact of its most likely worst case Year 2000 scenario. The Company relies on
commercially distributed software and has determined that upgrades, conforming
to the Year 2000 date function, exist. Based upon this information, the Company
does not anticipate that it will incur significant operating expenses or be
required to invest heavily in computer system improvements or new manufacturing
equipment to be Year 2000 compliant. However, significant uncertainty exists
concerning the potential costs and effects associated with Year 2000 compliance.
The Company has begun to survey its largest vendors, and is in the processs of
surveying its largest customers, to determine their state of readiness regarding
this issue and to estimate the impact, if any, on the Company's financial
position or results of operations if any of its vendors' or customers' systems
should fail due to their non-compliance with Year 2000 requirements. Based upon
the results of this survey, the Company will then plan its best course of action
to prevent any negative impact on its financial position and results of
operations.
The Company believes that the greatest potential risk is the failure of its
external business partners to achieve Year 2000 compliance in a timely manner.
Any Year 2000 compliance problem of either the Company or its users, customers,
vendors or advertisers could have a material, adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company may be affected by the failure of any global infrastructure including
national banking systems, communications and governmental activities.
The Company is in the process of developing a contingency plan to address the
most critical operational issues regarding the Year 2000. The Company plans to
communicate with its external business partners to determine their Year 2000
contingency plans and to coordinate, to the extent possible, with such plan.
However, there may be no practical alternative source of action available to the
Company.
-11-
<PAGE>
Management's Discussion and Analysis of
----------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
New Accounting Pronouncement
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for all quarters of
fiscal years beginning after June 15, 2000. The Company has not determined the
effects, if any, that SFAS No. 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 risks and uncertainties as factors which may
impact on its operating results that 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. For the
years ended August 31, 1996, 1997 and 1998, and the nine months ended May 31,
1999, the Company had net income of approximately $162,000, $70,000, $530,000
and $241,000, 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.
-12-
<PAGE>
Management's Discussion and Analysis of
----------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
Fluctuations in Sales and Operating Results. The quarterly growth rates
previously 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 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% and 38% of the
Company's total net sales for the fiscal year ended August 31, 1998 and nine
months ended May 31, 1999, respectively. 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.
-13-
<PAGE>
Management's Discussion and Analysis of
----------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
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.
Foreign Sales. During the year ended August 31, 1998 and the nine months ended
May 31, 1999, the Company's foreign sales represented approximately 12% 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.
Year 2000 Compliance. There are issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex, as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The
Company is in the process of developing a definitive timetable, including a
contingency plan, to address the Year 2000 problem regarding both its internal
systems and external relationships.
The Company believes that the greatest potential risk is the failure of its
external business partners to achieve Year 2000 compliance in a timely manner.
Any Year 2000 compliance problem of either the Company or its users, customers,
vendors or advertisers could have a material, adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company may be affected by the failure of any global infrastructure including
national banking systems, communications and governmental activities.
The Company is in the process of developing a contingency plan to address the
most critical operational issues regarding the Year 2000. The Company plans to
communicate with its external business partners to determine their Year 2000
contingency plans and to coordinate, to the extent possible, with such plan.
However, there may be no practical alternative source of action available to the
Company.
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.
-14-
<PAGE>
Management's Discussion and Analysis of
----------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
Maintain Listing on NASDAQ. In February, 1998, the NASD changed its 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 tangible shareholders' equity with a minimum balance of
$2,000,000 or alternatively net income of $500,000 for the last fiscal year.
The Company met the test of $500,000 of net income during fiscal 1998.
However, there can be no assurance that the Company will continue to meet the
new standards as implemented and maintain its listing in NASDAQ. 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 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.
-15-
<PAGE>
Part II. Other Information:
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
(27) Financial Data Schedule
Amendment to the Demand Loan and Security Agreement
with Eastern Bank dated May 20, 1999.
(b) There were no reports on Form 8-K filed for the
three months ended May 31, 1999.
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: 7/13/99 /s/ John Waldstein
------- ------------------------------------------
John Waldstein, President,
Treasurer & Chief Financial and Accounting
Officer and duly authorized to sign.
-16-
<PAGE>
Eastern Bank
Logo Appears Here
May 20, 1999
International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts 02021
Attn: John Waldstein, President and Treasurer
Gentlemen:
Reference is made to our Demand Loan and Security Agreement Accounts
Receivable and Inventory dated February 28, 1997, together with all amendments
and additions thereto (hereinafter called the "AGREEMENT"). Notwithstanding the
provisions of the Agreement, it is agreed, effective immediately, that the
Agreement shall be amended as follows:
1. Section 5.A. of the Agreement is hereby stricken in its entirety and
the following new Section 5.A. substituted therefor:
"A. Subject to the terms and provisions of this Agreement, the Bank
hereby establishes a discretionary revolving line of credit in Borrower's
favor in the amount set forth below, as determined by Bank from time to
time hereafter. Bank may make such loans to Borrower, based upon such
facts and circumstances existing at the time of the request, as from time
to time Bank elects to make which are secured by Borrower's Inventory,
Accounts and all other Collateral and the proceeds thereof. Without
limiting the discretionary nature of Bank's obligation to make loans
hereunder, or the demand feature of any loans that Bank does make
hereunder, Borrower agrees that the aggregate unpaid principal of all
direct loans plus the sum of the aggregate amount undrawn on all letters of
credit and acceptances shall not exceed the sum of One Million
($1,000,000.00) Dollars. All such loans shall bear interest and at the
option of Bank shall be evidenced by demand notes in form satisfactory to
Bank, but in the absence of notes shall be conclusively evidenced by the
Bank's record of disbursements and repayments and shall be payable ON
DEMAND. Interest will be charged to Borrower at a fluctuating rate which
is the daily equivalent to the Base Rate in effect from time to time, or at
such other rate agreed on from time to time by the parties, upon any
balance owing to Bank at the close of each day and shall be payable
monthly in arrears, on the first day of each month, until the Bank makes
demand. The rate of interest payable by Borrower shall be changed
effective as of that date in which a change in the Base Rate becomes
effective. Interest shall be computed on the basis of the actual number of
days
<PAGE>
elapsed over a year of three hundred sixty (360) days. The term "BASE
RATE" as used herein and in any supplement and amendment hereto shall mean
the rate of interest announced from time to time by Bank, at its head
office, as its Base Rate, it being understood that such rate is a reference
rate and not necessarily the lowest rate of interest charged by the Bank.
The Base Rate on the date hereof is agreed to be eight and one-quarter (8
1/4%) percent."
2. Section 6 of the Agreement is hereby stricken in its entirety and the
following new Section 6 substituted therefor:
"6. DEFINITIONS OF QUALIFIED ACCOUNT. This section has been
intentionally reserved."
3. Section 7 of the Agreement is hereby stricken in its entirety and the
following new Section 7 substituted therefor:
"7. DEFINITION OF ELIGIBLE INVENTORY. This section has been
intentionally reserved."
4. Section 13(d) of the Agreement is hereby stricken in its entirety and
the following new Section 13(d) substituted therefor:
"(d) Borrower will at all times keep accurate and complete records of
Borrower's Inventory, Accounts and other Collateral, and Bank, or any of
its agents, shall have the right to call at Borrower's place or places of
business at intervals to be determined by Bank, and without hindrance or
delay, to inspect, audit, check, and make extracts from any copies of the
books, records, journals, orders, receipts, correspondence which relate to
Borrower's Accounts, and other Collateral or other transactions, between
the parties thereto and the general financial condition of the Borrower and
Bank may remove any of such records temporarily for the purpose of having
copies made thereof. Absent the occurrence of an Event of Default which is
continuing, Borrower shall not be obligated to pay Bank an audit fee in
connection with any such audit or inspection."
5. Section 14(a) of the Agreement is hereby stricken in its entirety and
the following new Section 14(a) substituted therefor:
"(a) (Debt to Worth) permit the aggregate amount of its indebtedness
to be more than one and one-half (1 1/2) times the amount of its tangible
net worth on the last day of any fiscal year beginning with the fiscal year
ending August 31, 1998, or the last day of the month of February, 1999,
commencing February 28, 1999;"
<PAGE>
6. The Agreement is hereby amended by adding the following new Section
14(m) thereto:
"(m) (Minimum Net Earnings) permit the net after tax earnings of
Borrower for the six (6) month period ending on the last day of February of
each year or the twelve (12) month period ending on the last day of August
of each year to be less than One ($1.00) Dollar."
Kindly note that the alterations contained herein do not in any way alter,
release or change any other sections contained in the Agreement.
Please acknowledge your agreement to the foregoing by signing the enclosed
copy of this letter and returning the same to the undersigned.
Very truly yours,
EASTERN BANK
By: /s/ Alan Roberts
----------------------------
Alan Roberts, Vice President
UNDERSTOOD AND AGREED TO:
INTERNATIONAL ELECTRONICS, INC.
By: /s/ John Waldstein
---------------------------------------
John Waldstein, President and Treasurer
<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,
1999 (UNAUDITED) AND THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31,
1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 1,293,024
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,030,924
<CURRENT-ASSETS> 3,405,505
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,952,819
<CURRENT-LIABILITIES> 1,721,555
<BONDS> 86,610
0
0
<COMMON> 15,283
<OTHER-SE> 2,129,371
<TOTAL-LIABILITY-AND-EQUITY> 3,952,819
<SALES> 6,950,862
<TOTAL-REVENUES> 6,997,300
<CGS> 3,697,865
<TOTAL-COSTS> 3,697,865
<OTHER-EXPENSES> 502,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,354
<INCOME-PRETAX> 304,822
<INCOME-TAX> 63,800
<INCOME-CONTINUING> 241,022
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241,022
<EPS-BASIC> .16
<EPS-DILUTED> .15
</TABLE>
