<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 November 30, 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
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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 January 5, 1999.
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
Index
-----
<TABLE>
<CAPTION>
Part I. Financial Information: Page No.
--------
<S> <C> <C>
Item 1: Financial Statements (unaudited)
--------------------------------
Condensed Consolidated Balance Sheets, November 30, 1998
and August 31, 1998 2
Condensed Consolidated Statements of Operations, three months
ended November 30, 1998 and 1997 3
Condensed Consolidated Statement of Shareholders' Equity,
three months ended November 30, 1998 4
Condensed Consolidated Statements of Cash Flows, three
months ended November 30, 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 10-15
---------------------------------------------
Part II. Other Information:
Item 6: Exhibits and Reports on Form 8-K 16
--------------------------------
Signature 16
---------
</TABLE>
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<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
----------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Nov. 30, 1998 August 31, 1998
-------------- ----------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and equivalents $ 1,152,283 $ 895,876
Accounts receivable, net 845,966 986,403
Inventories 999,356 746,570
Other current assets 156,327 153,816
----------- -----------
Total current assets 3,153,932 2,782,665
Equipment, furniture and
improvements, net 367,522 368,965
Other assets:
Goodwill and other intangibles, net 126,812 148,432
Other 11,950 11,950
----------- -----------
138,762 160,382
----------- -----------
$ 3,660,216 $ 3,312,012
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------
Current liabilities:
Accounts payable $ 377,634 $ 138,894
Accrued expenses 1,114,683 1,089,267
Income taxes 64,232 44,000
Current portion of long-term
obligations 62,713 64,030
----------- -----------
Total current liabilities 1,619,262 1,336,191
Long-term obligations 68,493 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 4,796,620 4,796,149
Accumulated deficit (2,800,798) (2,879,826)
Less treasury stock, at cost:
35,000 shares (38,644) (38,644)
----------- -----------
Total shareholders' equity 1,972,461 1,892,962
----------- -----------
$ 3,660,216 $ 3,312,012
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------------------
Nov. 30, 1998 Nov. 30, 1997
-------------- --------------
<S> <C> <C>
Net sales $2,131,113 $2,360,932
Cost of sales 1,098,303 1,297,351
---------- ----------
Gross profit 1,032,810 1,063,581
Research and development costs 144,122 102,723
Selling, general and
administrative expenses 797,200 805,701
---------- ----------
Income from operations 91,488 155,157
Interest expense (4,089) (3,136)
Other income 15,629 1,043
---------- ----------
Income before taxes 103,028 153,064
Provision for taxes 24,000 44,000
---------- ----------
Net income $ 79,028 $ 109,064
========== ==========
Net income per share:
Basic $.05 $.07
Diluted .05 .07
========== ==========
Shares used in computing
net income per share:
Basic 1,493,301 1,493,301
Diluted 1,558,242 1,591,633
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-3-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
-------------------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Capital in
Common Stock excess of Accumulated Treasury Stock
------------------ ---------------
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 - - 471 - - - 471
Net income - - - 79,028 - - 79,028
--------- ------- ---------- ----------- ------ -------- ----------
Balances,
November 30, 1998 1,528,301 $15,283 $4,796,620 ($2,800,798) 35,000 ($38,644) $1,972,461
========= ======= ========== =========== ====== ======== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE>
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three months ended
---------------------------------
Nov. 30, 1998 Nov. 30, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 79,028 $ 109,064
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 64,938 51,579
Stock warrants issued for professional
services 471 471
Changes in operating assets and liabilities:
Accounts receivable 140,437 17,828
Inventories (252,786) (52,364)
Other current assets (2,511) 3,030
Income taxes 20,232 5,000
Accounts payable and accrued
expenses 264,156 25,780
---------- ---------
Net cash provided by
operating activities 313,965 160,388
CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER:
Net purchase of equipment,
furniture and improvements (41,875) (114,281)
Other assets - 7,351
---------- ---------
Net cash used in investing
activities and other (41,875) (106,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt obligations - 22,250
Reduction of notes payable and debt
obligations (15,683) (12,166)
---------- ---------
Net cash provided by (used in)
financing activities (15,683) 10,084
CASH AND EQUIVALENTS:
Net increase during period 256,407 63,542
Balances, beginning of period 895,876 160,075
---------- ---------
Balances, end of period $1,152,283 $ 223,617
========== =========
</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
November 30, 1998 and the results of operations for the three 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.
E. Net Income per Share:
---------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Unlike
primary net income per share, basic net income per share excludes any
dilutive effects of options and warrants. Diluted net income per share is
very similar to the previously reported fully diluted net income per share.
The net income per share amount for the three months ended November 30, 1997
has been restated to conform to the SFAS No. 128 requirements.
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<PAGE>
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
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
---------------------------------------
Nov. 30, 1998 Nov. 30, 1997
------------------ ------------------
<S> <C> <C>
Net income $ 79,028 $ 109,064
========== ==========
Shares used in computation:
Weighted average
shares outstanding for
basic net income per share 1,493,301 1,493,301
Effect of dilutive option
and warrant shares 64,941 98,332
---------- ----------
Total shares for diluted net
income per share 1,558,242 1,591,633
========== ==========
Net income per share:
Basic $ .05 $ .07
Diluted .05 .07
========== ==========
</TABLE>
The calculations for diluted net income per share did not include an aggregate
out of the money options and warrants of 156,304 and 91,037 for the three
months ended November 30, 1998 and 1997, respectively.
-7-
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
F. Long-term Obligations:
----------------------
Long-term obligations are summarized as follows:
<TABLE>
<CAPTION>
Nov. 30, 1998 Aug. 31, 1998
-------------- --------------
<S> <C> <C>
7-18% capitalized lease obligations,
due through April, 2001 (Note H) $ 33,184 $ 38,134
Equipment line of credit, 8.5% (Note G) 80,694 90,160
8% equipment loan, collateralized
by equipment, final payment due
Nov., 2001 17,328 18,595
-------- --------
131,206 146,889
Less current portion (62,713) (64,030)
-------- --------
$ 68,493 $ 82,859
======== ========
</TABLE>
The aggregate principal payments on long-term obligations, excluding capital
leases are $43,187 (1999), $41,601 (2000) and $13,234 (2001).
G. Bank Arrangements:
-----------------
As of November 30, 1998, the Company has available up to $1,000,000 for a
bank working capital demand line of credit and a $225,000 equipment line of
credit. 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 of the Company's
assets are collateralized under these arrangements. The credit agreements
contain certain restrictive covenants including covenants limiting the
payment of dividends, and a required minimum current ratio and debt to
tangible net worth ratio. As of November 30, 1998, no borrowings have been
made under the working capital line of credit and the Company has $80,694 in
borrowings under the equipment line of credit at an interest rate of 8.5%
which is payable in monthly installments through April 2001.
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<PAGE>
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
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 non-cancelable lease terms in
excess of one year at November 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 22,355
2000 10,584
2001 4,229
--------
Total minimum lease payments 37,168
Less interest (3,984)
--------
Net minimum lease payments 33,184
Less current portion (19,526)
--------
Long-term portion $ 13,658
========
</TABLE>
-9-
<PAGE>
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1998, the Company had working capital of $1,534,670 compared
to $1,446,474 at August 31, 1998. The ratio of current assets to current
liabilities was 1.9 at November 30, 1998 and 2.1 at August 31, 1998. The debt
to equity ratio was .9 at November 30, 1998 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 the first quarter
of fiscal 1999. The decrease in current ratio and increase in debt to equity
ratio is primarily the result of an increase in accounts payable and accrued
expenses.
Net capital expenditures were $41,875 and $114,281 for the three months ended
November 30, 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.
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 that additional external funding will be obtainable, if such a
need should arise.
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 the early stages 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
-10-
<PAGE>
uncertainty exists concerning the potential costs and effects associated with
Year 2000 compliance.
During the year the Company plans to survey its largest customers and vendors 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.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1999 decreased 10% as compared to the
first quarter of fiscal 1998. The decrease in sales for the first quarter of
fiscal 1999 reflects decreases in glassbreak detectors, access control and
keypad sales.
The ratios of gross profit to sales for the three months ended November 30, 1998
and 1997 were 48% and 45%, respectively. The increase in gross profit
percentage is primarily the result of decreases in warranty costs, product mix
and lower product costs.
Research and development expenses were $144,122 and $102,723 for the three
months ended November 30, 1998 and 1997, respectively. The increase in costs is
primarily due to the hiring of additional personnel and outside consultants.
As a percentage of net sales, selling, general and administrative expenses were
37% and 34% for the three months ended November 30, 1998 and 1997, respectively.
The increase in costs as a percentage of net sales is the result of lower sales
for the 1999 first quarter.
The provision for income taxes for the first quarter of fiscal 1999 represents
foreign, federal alternative minimum taxes and state income tax expense. The
Company's effective income tax rate for the three months ended November 30, 1998
of 23% 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.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards ("SFAS") 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 No. 133 will have on its consolidated financial
statements and disclosures.
-11-
<PAGE>
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(continued)
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 three months ended November
30, 1998, the Company had net income of approximately $162,000, $70,000,
$530,000 and $79,000, 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
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 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, 1998. 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
-13-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
(continued)
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.
FOREIGN SALES. During the year ended August 31, 1998, 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 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 the early stages 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
-14-
<PAGE>
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.
During the year the Company plans to survey its largest customers and vendors 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.
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.
MAINTAIN LISTING ON NASDAQ. In March 1992, the NASD changed its standards for a
company's stock to maintain its listing on NASDAQ. The revised standards
included 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. The Company is currently in
compliance with all NASDAQ SmallCap listing requirements.
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
(b) There were no reports on Form 8-K filed for the
three months ended November 30, 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: 1/13/99 /s/ John Waldstein
------- ---------------------------
John Waldstein, President,
Treasurer and Chief Financial and
Accounting Officer and duly authorized
to sign.
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL CONDITION AT NOV 30,
1998 (UNAUDITED) AND THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOV
30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,152,283
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 999,356
<CURRENT-ASSETS> 3,153,932
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,660,216
<CURRENT-LIABILITIES> 1,619,262
<BONDS> 68,493
0
0
<COMMON> 15,283
<OTHER-SE> 1,957,178
<TOTAL-LIABILITY-AND-EQUITY> 3,660,216
<SALES> 2,131,113
<TOTAL-REVENUES> 2,146,742
<CGS> 1,098,303
<TOTAL-COSTS> 1,098,303
<OTHER-EXPENSES> 144,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,089
<INCOME-PRETAX> 103,028
<INCOME-TAX> 24,000
<INCOME-CONTINUING> 79,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 79,028
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