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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For fiscal year ended August 31, 1999
Commission File Number: 2-91218-B
International Electronics, Inc.
(Name of small business issuer in its charter)
Massachusetts 04-2654231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
427 Turnpike Street
Canton, Massachusetts 02021
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(Address of principal executive office) (Zip code)
Issuer's telephone number: (781) 821-5566
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-B is not contained in this form and will not be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year: $9,425,569
As of November 11, 1999, 1,365,020 shares of the registrant's voting stock
was held by non-affiliates of the registrant. In arriving at this number,
registrant has considered officers and directors to be affiliates. Based on a
price of $2.28 per share, (the average of the closing bid and asked price on
November 11, 1999) the aggregate market value of the non-affiliate shares so
held was approximately $3,100,000.
As of November 11, 1999, 1,524,968 shares of the registrant's common stock
were outstanding.
Documents incorporated by reference: None
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PART I
BUSINESS
ITEM 1.
International Electronics, Inc. (the "Company") was formed in 1977 as a
Massachusetts corporation. The Company designs, manufactures, markets and sells
electronic products for the security industry and other commercial applications.
The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard/TM/ and Secured Series/TM/.
The Company also manufactures and markets electronic glassbreak detectors sold
under the trade names Tri-Gard/TM/ and Viper. The Company's subsidiary, Ecco
Industries, Inc. ("Ecco"), owns voice verification technology.
The Company's products are sold principally in the United States to many of
the leading distributors and installation companies servicing the security
industry. The financial information relating to the Company is set forth in Item
7.
PRODUCTS
ACCESS CONTROL AND DIGITAL KEYPAD PRODUCTS AND TECHNOLOGY
The Company manufactures and markets a line of access control and digital
keypad products sold under the trade names Door-Gard/TM/ and Secured Series/TM/.
These products are sold in a variety of configurations including indoor and
outdoor models, with magnetic card readers, proximity readers and keypads. They
are also sold with several different hardware and software configurations. The
Company also sells to OEM customers private label products containing its access
control and keypad based technology.
The command and control software can be used to add programmability by user
and time to any existing switch. This software allows for up to 120 different
users, each with his/her own unique code and can be used to control machinery,
lights, closed circuit TV or doors. The Company markets a line of industrial
access control products sold under the trade name PowerKey/TM/.
The access control version of the Door-Gard/TM/ software includes features,
which apply specifically to electronic door access control. These features
include request to exit input, door ajar and door position monitoring.
The Company also has a Secured Series /TM/ access control product line.
This line of products includes magnetic card readers and proximity readers as
well as digital keypads. Features in the Secured Series product line include:
500 users, transaction buffer for up to 500 events, hard copy printing via hand
held infrared printer, 8 time zones and the ability to tie up to 8 doors
together.
Approximate prices paid by installing dealers for the digital keypads are
$50 to $300 and for the Secured Series product line $150 to $400.
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GLASSBREAK DETECTOR PRODUCTS
A detector is the component in an alarm system that is activated by an
intrusion or entry into a protected premises. When activated, it sends a signal
to a central control panel, the portion of the system that triggers the alarm.
The Company's glassbreak products serve only the detection function, but are
compatible with systems made and sold by most major manufacturers of central
control panels, and can be incorporated into both hard wired and certain
wireless systems. These products are used in a system in conjunction with other
forms of detectors such as those which detect the opening of a door or window.
TRI-GARD/TM/
In 1987, the Company began to market an audio glassbreak detector under the
trade name Tri-Gard/TM/. Audio detectors work much like the human ear. All
noises are heard by the detector and then compared to a certain set of criteria.
If the sound made meets certain criteria, then the unit determines the sound is
breaking glass and activates an alarm. Because of the wide variety of noise in
the background, which can easily confuse an audio detector, stability is a major
factor if the unit is to be successful. The Tri-Gard/TM/ can be installed on
either a wall or ceiling. Because the Tri-Gard/TM/ detects the sound signals
produced by breaking glass, it can cover a bank of windows or multi-pane
windows. Audio detectors are used in residential, commercial and industrial
applications. The cost of these units to the installing dealers is
approximately $22 to $40 per unit. The Tri-Gard/TM/ models: 550, 552, 510 and
511 have received Underwriters Laboratories listing.
In November 1986, the Company signed an agreement with A American Automatic
Alarm Co. ("AAAA") of Westminister, Colorado to act as its exclusive worldwide
sales agent for AAAA's passive audio glassbreak detector. While the Company did
not sell enough units manufactured by AAAA to meet its minimum purchase
obligations under the agreement, the Company believes that it had the right
under the agreement to manufacture and sell the product. The Company in 1988
redesigned the Tri-Gard/TM/ audio detector in order to reduce both the physical
size of the detector and the manufacturing cost. The Company does not have a
royalty agreement with AAAA for the circuit design of this product, however the
Company makes royalty payments to AAAA for all sales of the redesigned unit.
The Company believes its royalty payments to AAAA, which are based on a
percentage of sales, have been reasonable.
In 1992 the Company began selling an additional audio detector which
utilizes microprocessor technology developed by the Company. The Company has
received a utility patent on this new detector. In 1994, the Company introduced
an additional microprocessor-based audio detector.
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VIPER VIBRATION DETECTOR
A vibration sensor is used to detect vibrations of a set magnitude in
certain materials such as glass, wood, plastic, concrete, or metal. The Viper
has a custom integrated circuit that does internal signal processing so that it
can be adjusted for different materials and shock values. The cost of these
units to the installing dealers is approximately $15 to $20 per unit.
Prior to November 1992 the Company had an agreement with Weyrad
Electronics, Ltd. ("Weyrad") of Weymouth, England to act as a distributor for
their Viper vibration detector in North, South and Central America. In 1999 the
Viper product line was sold to Chloride Safety Systems. The Company believes
the agreement continues in force unless either the Company or Weyrad terminate
by providing three months written notice.
VOICE VERIFICATION PRODUCTS AND TECHNOLOGY
In June 1990, the Company acquired substantially all of the outstanding
common, and all preferred stock of Ecco in exchange for 379,699 unregistered
shares of the Company's common stock. Ecco is engaged in designing,
manufacturing, and selling voice verification systems. Ecco, which was founded
in 1983, financed its operations and development efforts through private sales
of securities resulting in net proceeds of approximately $5,500,000. The
acquisition has been accounted for under the purchase method of accounting.
During fiscal 1994, Ecco signed a contract for its voice verification
technology with BI, Inc. ("BI") of Boulder, Colorado for use in conjunction with
substance abuse in the home incarceration market. The agreement provided for a
one-time license fee, ongoing royalty payments and an order for the manufacture
of voice verification boards. In September 1996, BI informed the Company that
effective January 1997, BI would no longer make royalty payments
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to the Company,but would continue to utilize the Company to manufacture its
voice verification boards. In October 1998, BI informed the Company that it was
working to develop its own voice verification technology. The Company
anticipates that if the BI development effort is successful after beta testing,
BI will no longer purchase any of Ecco's products.
In November 1999 the Company entered a development project with HID
Corporation (the industry leader in card access technology). The Company's
voice verification technology is to be incorporated in the jointly developed
product.
SALES AND MARKETING
The principal market for the Company is the United States, where it sells
its products through a network of security equipment distributors and
installation companies. The Company also sells and markets its products in
North and South America, Europe, Asia, South Africa, Middle East and
Australia/New Zealand.
The Company presently employs thirteen people in sales and marketing. The
Company's Vice President of Sales and Marketing coordinates the activities of
the outside sales representatives and inside sales personnel. The outside sales
personnel contact dealers and distributors to provide ongoing sales and
technical support for the Company's products. The inside sales personnel are
responsible for incoming sales calls and telemarketing. The Company also
utilizes manufacturer's representatives for certain territories.
The Company sells its products primarily to installers and distributors of
alarm security equipment. The Company's customers include: ADI, Clark Security
Products, and Security Lock. The Company's largest customer accounted for
approximately 40% of net sales for the fiscal year ended August 31, 1999.
While the Company's relationship with large customers provides it with a
substantial market for its products, the dependence on large volume sales to
such large customers creates a vulnerability. The loss of one such customer
could have a serious adverse effect on the Company's sales. In fiscal 1995, the
Company lost a major domestic distributor who filed for bankruptcy with accounts
receivable due the Company of approximately $80,000.
The Company is also aware that manufacturers in Europe, Asia and elsewhere
fabricate products similar to the Company's products. Some of these
manufacturers may produce their units at a lower cost than the Company's cost.
The introduction of such a product to the United States market could have a
substantial adverse effect on the Company's sales.
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The Company provides sales support through national advertising, periodic
national mailings, and by participation at national and regional industry trade
shows. The Company presently attends several national trade shows per year, and
complements these shows by displaying its products at regional alarm association
shows. Several visits to Europe are made each year including attending foreign
trade shows. In fiscal 1997, the Company established a wholly owned subsidiary,
International Electronics Europe Limited, located in the United Kingdom to
market and sell the Company's products. As of August 31, 1999, the Company had
no current employees at its European subsidiary. The Company also participates
with some of its distributors in cooperative advertising programs.
OVERSEAS COMPONENTS
The Company sources a significant amount of components and maintains
certain molds for its products in Asia. The Company believes that such sourcing
reduces its cost of sales through lower parts, labor, and tooling costs. There
can be no guarantee that the Asian political or economic environment will remain
sufficiently stable to allow reliable and consistent delivery of product.
PRODUCT SOURCES OF REVENUE
The Company's various products have provided revenues during the last three
fiscal years as follows:
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VOICE
ACCESS CONTROL GLASSBREAK VERIFICATION
AND KEYPAD DETECTORS & OTHER TOTAL
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<S> <C> <C> <C> <C>
1997 $7,036,132 $1,806,972 $330,476 $9,173,580
1998 8,066,417 1,272,313 312,873 9,651,603
1999 8,464,419 898,157 62,993 9,425,569
</TABLE>
DOMESTIC AND FOREIGN SALES
The percentages of domestic and foreign sales for the Company's products
for the last three fiscal years are as follows:
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DOMESTIC FOREIGN
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<S> <C> <C>
1997 84% 16%
1998 88 12
1999 90 10
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MANUFACTURING AND RAW MATERIALS
The Company performs in-house manufacturing for its Access Control, Keypad,
Glass-Gard/TM/, Tri-Gard/TM/ and VoiceKey/TM/ product lines.
The Company is dependent upon sole source suppliers for a number of key
components and parts used in the Company's products. Some of the Company's
largest principal suppliers include Future Electronics, Inc. and Multinational
Resources, Inc.
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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 of any such components could have a material adverse effect on the
Company's operating results in any given period.
BACKLOG
The Company's backlog of firm scheduled orders as of August 31, 1999, was
approximately $293,000. Its backlog as of August 31, 1998, was approximately
$420,000. The decrease in 1999 from 1998 is primarily due to a reduction in OEM
orders. The Company believes that the majority of the 1999 backlog will be
shipped during fiscal 2000.
COMPETITION
Other companies in the security and related industries 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. 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.
There are numerous manufacturers of audio detectors and shock sensors
selling in the United States market. Competitors selling audio detectors
include: Sentrol, Inc., Visonic Ltd., Litton Security Products, Inc.
("Litton"), Detection Systems, Inc., Intellisense, Inc., Ademco Manufacturing,
Inc. ("Ademco"), DSC and Caddx-Caddi Controls, Inc. There are several
competitors selling vibration detectors including: Ultrak, Inc., Sentrol, Inc.,
Ademco, United Security Products, Inc. ("USP") and Litton.
There are many manufacturers of access control equipment including
Westinghouse, Casi Rusco Electronics Systems, Inc., Northern Computers, Inc.,
Cardkey, Inc., Software House, Inc., Continental Instruments, Inc., American
Magnetics Corporation, Keri Systems, Kantech, Radionics, Ademco and Corby, Inc.
There are numerous manufacturers of keypads selling in the United States
market including the following competitors: Corby, Inc., Visonic Ltd., USP,
Inc., Crow Electronics Engineering, Inc., Aleph, Inc., Securitron Magnalock
Corp., Locknetics Security Engineering, Security Door Controls, Alarm Lock,
Inc., Ilco Unican Engineering, Inc., Essex Electronics, Inc., Nel-Tec, Inc.,
STA, Inc., and Sentrol, Inc.
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To the best of the Company's knowledge, the Company's voice verification
product line has competition from: Voice Strategies, Inc., T-Netix, Inc.,
Keyware Technologies, Q Voice, ITT, VeriVoice, Inc., Princeton Voice Radar,
Veritel Corporation of America, Electronic Warfare Assoc., Inc. and Technologia
Systems Limited in the United States, and Zetetic International Limited in the
United Kingdom and ABS, Inc. in Germany.
The Company also faces competition in the positive identification access
control market from other biometric systems. Some of these other biometric
systems, and some of the companies that produce them include: fingerprint, (BII,
Inc., Identix, Inc., American Biometric Company, Keytronics, Sony, Ultra-Scan,
NRI, and Thompson-CFS), hand geometry (Recognition Systems), palm print, optical
systems (Eye Dentify Systems), signature (Pen Op, Communication Intelligence and
AEA) and facial recognition (Miros, Inc., Visionics and Viisage).
WORKING CAPITAL
During fiscal 1999, the Company depended on its existing cash balances to
provide working capital. As of August 31, 1999, the Company has a demand bank
line of credit available for borrowings of up to $1,000,000 which may be used
for working capital purposes and an additional line of credit for $170,000 for
equipment purchases. The Company expects its working capital requirements for
fiscal 2000 to be provided from its cash reserves and its line of credit plus
anticipated cash from operations. As of August 31, 1999, there were no
borrowings outstanding under the demand line of credit and approximately
$195,000 in borrowings outstanding as equipment debt. See "Item 6-Management's
Discussion and Analysis of Financial Condition and Results of Operations".
RESEARCH AND DEVELOPMENT
The Company presently employs ten people in research and development. The
Company also utilizes certain consultants and subcontractors on an as-needed
basis with the Company's employees supervising such work. Research and
development expenditures were approximately $731,000, $537,000 and $521,000
during fiscal 1999, 1998 and 1997, respectively.
EMPLOYEES
As of November 1, 1999, the Company had 67 employees, of which 63 were
full-time employees. Of these 67 employees, 13 were engaged in sales and
marketing, 10 were involved in product development, 29 in manufacturing, 5 in
customer service and 10 employees were providing management and administrative
services.
SEASONALITY
The Company is subject to normal business slowdowns during the summertime
and around the Christmas holiday season. In addition, overseas sales,
specifically to Europe, slow down in the summer because some European companies
take substantial vacation time in July and August.
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GOVERNMENTAL CONTROLS/ENVIRONMENTAL COMPLIANCE
None of the Company's business is subject to renegotiation of profits or
termination of contracts at the election of the Government. The Company has not
been materially affected by compliance with any governmental regulation relating
to protection of the environment, and no material capital expenditures are
expected by the Company for environmental control facilities.
ITEM 2. PROPERTIES
The Company's administrative and manufacturing operations are located at
427 Turnpike Street, Canton, Massachusetts, and currently consist of
approximately 20,740 square feet of space. The Company occupies this facility
under a lease expiring April 30, 2002, at monthly rents changing from $10,370 up
to $12,098 plus utilities, maintenance and certain real estate taxes.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting in lieu of annual meeting of
stockholders on April 7, 1999. The following directors were elected to that
office and the votes for, against or abstained are indicated next to their name.
1,340,447 shares for John Waldstein
2,697 shares against John Waldstein
0 shares abstain John Waldstein
1,340,497 shares for Heath Paley
2,647 shares against Heath Paley
0 shares abstain Heath Paley
1,340,447 shares for Diane Balcom
2,697 shares against Diane Balcom
0 shares abstain Diane Balcom
1,340,447 shares for Kenneth Moyes
2,697 shares against Kenneth Moyes
0 shares abstain Kenneth Moyes
At the meeting on April 7, 1999 the stockholders acted upon a proposal
adopting a 1999 stock option plan (the "1999 Plan"), authorizing the issuance of
175,000 shares of the Company's $.01 par value Common Stock under the Plan. The
stockholders voted 700,468 shares for this proposal, 69,588 shares against this
proposal and 14,109 shares abstained from voting on this proposal. The proposal
was approved.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities have been traded in the over-the-counter market
since July 5, 1983. Since October 30, 1987, the Company's common stock has been
quoted by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). The Company's common stock trades on the NASDAQ SmallCap
Market.
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. In fiscal 1999
the Company met both the $500,000 net income and the $2,000,000 minimum tangible
shareholders' equity standards.
However, there can be no assurance that the Company will continue to meet
the NASDAQ standards to maintain its listing on 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.
The prices set forth below are based on information provided to the Company
by NASDAQ. These sales prices reflect interdealer prices, without retail mark-
ups, markdowns or commissions.
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SALES PRICES
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HIGH LOW
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FISCAL YEAR 1998:
First Quarter $2.13 $1.50
Second Quarter 2.13 1.06
Third Quarter 2.06 1.38
Fourth Quarter 2.00 1.00
FISCAL YEAR 1999:
First Quarter 2.63 1.00
Second Quarter 2.00 1.19
Third Quarter 2.25 1.19
Fourth Quarter 2.00 1.50
</TABLE>
In January 1996, the Company sold, in a private placement, 68,182 shares of
unregistered common stock at $1.32 per share for net proceeds of $89,057 with
issuance costs of $943. There was no underwriter involved in this transaction.
John Waldstein, President and Treasurer, purchased 7,576 shares of restricted
common stock in this private placement. The other purchasers were accredited
investors or sophisticated private investors familiar with the affairs of the
Company. The Company relied on Section 4(2) of the Securities Act of 1934 or
Regulation D thereof for the exemption from registration.
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As of November 11, 1999 there were approximately 480 shareholders of record
of the Company's common stock. The Company believes that a substantial number of
shares of the Company's common stock are held by nominees and estimates that
there are approximately 1,700 beneficial owners of the Company's shares. The
Company has never paid dividends to its shareholders. The Company's credit
agreements contain certain restrictive covenants including restricting the
payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1999, the Company had $1,938,435 in working capital as
compared to $1,446,474 at August 31, 1998. The ratio of current assets to
current liabilities as of August 31, 1999 was 2.2, as compared to 2.1 in 1998
and 1.5 in 1997. The debt to equity ratio was .7 at August 31, 1999 and 1998 as
compared to 1.2 in 1997. The increases in working capital and current ratio in
1999 from 1998 are the result of the Company's operating income and the deferred
income tax benefit for fiscal year 1999. The increase in current ratio and the
decrease in debt to equity ratio in 1998 from 1997 are the results of the
Company's net income and cash flow for the year.
Net capital expenditures were $346,679, $214,156 and $251,217 in fiscal
years ending August 31, 1999, 1998 and 1997, respectively. The Company
anticipates having up to $420,000 in total capital expenditures for the purchase
of equipment, regulatory testing and tooling costs during the next twelve
months.
As of August 31, 1999, the Company has available a demand line of credit of
up to $1,000,000 and a $170,000 equipment line of credit. See Notes 5 and 6 to
the Consolidated Financial Statements. As of August 31, 1999, the Company had
no outstanding borrowings under the demand line of credit and had approximately
$195,000 in borrowings outstanding as equipment debt.
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
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generate erroneous data or cause a system to fail. The Company considers its
products to be Year 2000 compliant.
The Company has addressed the Year 2000 problem regarding its internal
systems which include the manufacturing and inventory control system, internal
reporting and the Company's existing manufacturing equipment. The Company
relies on commercially distributed software and has installed and tested
upgrades to these systems to comply with any Year 2000 requirements. Based on
its review of these systems, the Company does not believe there will be any Year
2000 issues related to its manufacturing systems or equipment, or other non-
information technology systems which would have a material impact on the
Company's results of operations.
During the year, the Company surveyed its largest 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 should fail due to their noncompliance with Year 2000
requirements. Based upon the results of this survey, the Company is not aware
of any significant vendor issue that would materially impact the Company's
results of operations or financial position.
However, 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.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
Net sales in 1999 decreased 2% from 1998 while 1998 sales increased 5% from
1997. The decrease in sales for 1999 is due to a decline in foreign and
glassbreak sales, partially offset by an increase in access control and keypad
sales. The increase in sales for 1998 is primarily the result of increases in
access control and keypad product sales of 15%, offset in part by reductions in
glassbreak detector sales.
The ratios of gross profit to sales were 47% in both 1999 and 1998 and 41%
in 1997. The increase in gross profit in 1998 from 1997 is the result 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.
Research and development expenses were $731,302 in 1999, as compared to
$537,426 in 1998 and $520,629 in 1997. The increase in costs in 1999 from 1998
is primarily due to the hiring of additional personnel and related expenses and
an increase in the use of consultants. The increase in costs in 1998 from 1997
is due to project costs associated with enhancing the Company's voice
verification technology.
As a percentage of net sales, selling, general and administrative expenses
were 36% in 1999, 35% in 1998, and 34% in 1997. The increase in expenses as a
percentage of net sales in
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1999 from 1998 is primarily due to an increase in compensation, advertising and
promotion expenses. The increase in 1998 from 1997 is primarily the result of
increased personnel and related expenses.
While other income in 1999 was comparable to 1998, the increase in other
income in 1998 from 1997 is due primarily to an increase in interest income.
The extraordinary gain of $10,446 in 1997 represents a prepayment discount from
the Federal Deposit Insurance Corporation, net of income tax expense of $1,000.
The current provision for income taxes represents foreign, federal
alternative minimum taxes, deferred taxes and state income tax expense. The
deferred tax benefit of $329,000 for the fiscal year ended August 31, 1999 was
derived from the reversal of previously established valuation allowances. These
allowances were adjusted to reflect a change in the amount of deferred income
taxes estimated to be realizable by the Company. The Company's effective income
tax rate is (89)% for 1999, 19% for 1998 and 39% for 1997. The Company's
effective tax rate in 1999 differs from the federal statutory rate because of
the deferred tax benefit recorded during the fiscal year and utilization of net
operating loss carryforwards. Differences between the effective tax rate and the
federal statutory rate for fiscal 1998 and 1997 are primarily the result of
permanent differences offset in part by the utilization of net operating loss
carryforwards.
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not believe that inflation or changing prices have had a
significant impact on its operations.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" will be effective in fiscal year
2001. The Company has not completed its evaluation of the impact of this
standard on its consolidated financial statements.
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 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.
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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, 1999, 1998 and 1997 the Company had net income of
approximately $555,000, $530,000 and $70,000, 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 effect 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
affect 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 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
14
<PAGE>
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. The Company has a substantial number of
customers but principally sells its products 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 40% of the Company's
total net sales for the fiscal year ended August 31, 1999. 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 effected 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 or that other factors will
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, 1999, the Company's
foreign sales represented approximately 10% of net sales. There may be a
reduction in the Company's foreign sales from the 1999 level in the event of
significant changes in foreign exchange rates or political and economic
instability in foreign countries.
15
<PAGE>
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 has addressed the Year 2000 problem regarding its internal
systems which include the manufacturing and inventory control system, internal
reporting and the Company's existing manufacturing equipment. The Company
relies on commercially distributed software and has installed and tested
upgrades to these systems to comply with any Year 2000 requirements. Based on
its review of these systems, the Company does not believe there will be any Year
2000 issues related to its manufacturing systems or equipment, or other non-
information technology systems which would have a material impact on the
Company's results of operations.
During the year, the Company surveyed its largest 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 should fail due to their noncompliance with Year 2000 requirements.
Based upon the results of this survey, the Company is not aware of any
significant vendor issue that would materially impact the Company's results of
operations or financial position.
However, 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.
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 February 1998, the NASD adopted new more
stringent standards for a company to maintain its stock listing on NASDAQ. The
Company believes that it is in compliance with all NASDAQ SmallCap listing
requirements. However, there can be no assurance that the Company will continue
to meet the NASDAQ standards to maintain its listing on NASDAQ. If the Company
is unable to maintain its listing on NASDAQ, holders of the Company's common
stock may have difficulty selling their shares at a favorable price. See Item 5-
"Market for Registrant's Common Equity and Related Stockholder Matters."
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
16
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of International Electronics, Inc.
and subsidiaries filed as a part of this Annual Report on Form 10-KSB begin on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
17
<PAGE>
PART III
<TABLE>
<CAPTION>
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
FIRST ELECTED
NAME AGE DIRECTOR POSITION
- ---- --- -------- --------
<S> <C> <C> <C>
John Waldstein 46 1982 President, Chief Executive
Officer, Treasurer and
Chairman of the Board
James C. Brierley, Jr. 48 - Vice President of Sales and
Marketing
Christopher Hentschel 55 - Vice President of Engineering
Heath Paley 51 1990 Director
Diane Balcom 57 1989 Director
Kenneth Moyes 43 1998 Director
</TABLE>
The term of office of each director expires on the date of the next meeting
of shareholders, subject to Massachusetts law. The Company anticipates that an
annual meeting of shareholders will be held in April 2000.
John Waldstein has been employed by the Company since 1978, has been
Treasurer since March 1982, was Vice President between January 1983 and May
1988, Chief Operating Officer from February 1988 to May 1988, President and
Chief Executive Officer since May 1988, and Chairman of the Board since November
1990. Mr. Waldstein is a graduate of Harvard College. See "Item 10-Executive
Compensation."
James C. Brierley, Jr. has been employed by the Company since October 1995.
Initially engaged as a consultant to develop a business strategy for the
Company's line of industrial access control products, he was appointed Director
of Sales and Marketing in October 1997 and was appointed Vice President of Sales
and Marketing in April 1998. Prior to joining the Company, from September 1994
to September 1995, he was the Vice President of Product Marketing for The
Shareholders Services Group, a division of First Data Corporation. From 1981 to
June 1994, he was employed by Digital Equipment Corporation where he became
Director of Product Management specializing in distributed database client
server products. Prior to that, Mr. Brierley was a Certified Public Accountant
with Coopers & Lybrand. See "Item 10-Executive Compensation."
Christopher Hentschel was appointed the Company's Vice President of
Engineering in March 1995 and had previously been Chief Engineer since 1989.
Before joining the Company, Mr. Hentschel was a founder and Vice President of
Engineering of Guard Aware, Inc. Mr. Hentschel is a graduate of Wentworth
Institute. See "Item 10-Executive Compensation."
Heath Paley became a member of the Board of Directors in 1990. Since May
1996, Mr. Paley has been a self-employed computer consultant. He had been the
Company's Director of Management Information Systems from September 1994 until
May 1996 and was the Company's Chief Operating Officer and Executive Vice
President from June 1990 to August 1994. From 1983 to June 1990, Mr. Paley was
President and a founder of Ecco Industries, Inc. From 1980 to 1983, he was
President of the Maine Woods Shoe Division of Bennett Industries. Heath Paley
18
<PAGE>
is the son of Warren Paley. See "Item 11-Security Ownership of Certain
Beneficial Owners and Management."
Diane Balcom became a member of the Board of Directors in July 1989. Since
October 1998, Ms. Balcom has been the Executive Director of the Pittsburgh Mercy
Foundation. From September 1997 to September 1998, she held the position of
Director of Development for Children's Hospital of Pittsburgh. From August 1994
to August 1997, Ms. Balcom was the Chapter Director of the Juvenile Diabetes
Foundation of Western Pennsylvania. She has been an adviser to the Company on
corporate and financial matters since 1985. From January 1989 to August 1994,
Ms. Balcom operated a consulting practice, which provided services related to
private and public financing for small and medium-sized companies. From March
1987 to January 1989, she served as Vice President and Chief Financial Officer
for Environmental Diagnostics, Inc., a publicly held company. Prior to that,
Ms. Balcom held various senior management positions in Corporate Finance and
Research for 13 years with brokerage firms on the West Coast.
Kenneth Moyes was appointed to the Board of Directors in October 1998.
Since August 1994, Mr. Moyes has been the President and founder of EH
Publishing, Inc., an information provider for the home systems industry. From
January 1990 to May 1994, Mr. Moyes served as President and Chief Executive
Officer of Arius, Inc., an international distributor of security products.
During May 1995, Arius filed for bankruptcy. Prior to that, Mr. Moyes was
employed by Geneva Merchant Bankers as a junior partner, founded Moyes and
Company, a management consulting firm, and was a Certified Public Accountant
with Peat, Marwick, Mitchell and Company.
In September 1999, Mr. Waldstein received an option under the Company's
non-qualified stock option plan (the "Plan") to purchase 12,500 shares of common
stock at an exercise price of $ 1.77 per share. In November 1999, Messrs.
Brierley and Hentschel each received options under the Plan to purchase 5,000
shares of common stock at an exercise price of $2.56 per share. All of the
aforemonetioned options vest over a four-year period.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
each of the last three fiscal years ended August 31, 1999, of the Company's
President and Chief Executive Officer, and three other executive officers of the
Company who received at least $100,000 of compensation during any of these years
(the "Named Executive Officers"):
19
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(2) ---------------
----------------------------------- OPTIONS ALL OTHER
NAME YEAR SALARY COMMISSION/BONUS(3) (SHARES) COMPENSATION(1)
- ---- ---- --------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
John Waldstein 1999 $141,014 $ 7,000 29,500 $16,233
President, 1998 137,947 27,000 15,000 16,892
Chief Executive Officer 1997 135,000 2,100 10,000(5) 8,021
James Brierley 1999 99,959 16,000 - -
Vice President of 1998 89,250 25,100 10,000 -
Sales and Marketing 1997 85,000 18,000 - -
Christopher Hentschel 1999 96,972 8,000 3,333 -
Vice President of 1998 86,317 7,500 7,000 -
Engineering 1997 82,125 1,800 - -
Robert Voosen (4) 1999 - - - -
Executive Vice 1998 51,539 - - -
President 1997 100,000 - 9,000(5) -
</TABLE>
(1) Represents the cost of a split dollar whole life insurance policy with a
face value of $1,005,000 as of August 31, 1999 and a long-term disability
policy. The Company is a beneficiary of such policy to the extent of all
premiums paid upon the death of John Waldstein. Mr. Waldstein may purchase
this policy upon termination of his employment for the then current cash
surrender value.
(2) Does not include perquisites which do not exceed 10% of annual salary.
(3) Amount represents commissions and/or bonus earned during the applicable
year.
(4) Mr. Voosen resigned as an officer of the Company in September 1997.
(5) Represents warrants to purchase 10,000 and 9,000 shares of common stock
granted to Messrs. Waldstein and Voosen, respectively, at an exercise price
of $2.12 per share exercisable for a ten-year period.
The Company's Board of Directors commencing in fiscal 1993, established an
annual bonus plan for officers and certain key employees. The available funds
for the plan shall be up to five percent of income before taxes. The final
amount and subsequent distribution to employees shall be determined by the
Company's Compensation Committee.
20
<PAGE>
OPTIONS GRANTED DURING FISCAL 1999
The following table sets forth certain information with respect to the
grant of stock options in fiscal 1999 to any of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE OF ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SHARES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE EXPIRATION OPTION TERM (2)
NAME GRANTED (1) IN YEAR PER SHARE DATE 5%($) 10%($)
- ---- ---------- ----------------- --------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
John Waldstein 4,500 6% $1.17 Oct. 13, 2008 $ 3,311 $ 8,391
Chris Hentschel 3,333 4% $1.64 Jan. 26, 2009 3,438 8,712
John Waldstein 25,000 33% $1.31 Apr. 14, 2009 20,596 52,195
</TABLE>
(1) The options vest annually over a 4-year period from the date of grant.
(2) Amount represents hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. This table does not take into account any
appreciation in the price of the common stock.
COMPENSATION ON INVOLUNTARY TERMINATION
John Waldstein has an employment contract with the Company which provides
for certain compensation to be paid to him if he is discharged by the Company
without cause, as defined before the end of the term of his contract. Mr.
Waldstein has a continuous three-year employment contract with a current minimum
annual salary of approximately $142,000, subject to adjustment for inflation.
The salary of Mr. Waldstein is subject to performance reviews and annual
adjustment as determined by the Company's Compensation Committee.
If the employment of John Waldstein is terminated by the Company without
cause, including a change in status as a result of an acquisition, merger or
sale of assets (an "Acquisition"), the Company is obligated to pay at such
termination an amount equal to his total salary and benefits to the conclusion
of the contract period. In the event of an Acquisition of the Company, Mr.
Waldstein's base salary shall increase to an annual salary of $175,000, subject
to future adjustments for inflation. As of November 1, 1999, John Waldstein's
base salary to the conclusion of his contract period is approximately $426,000,
plus future cost of living adjustments.
After an Acquisition of the Company, provided Mr. Waldstein continues his
employment for at least a six month period, and he subsequently voluntarily
resigns, he shall be paid one year's compensation and benefits. For each
additional six months that he works thereafter, he shall be paid an additional
six months compensation and benefits provided any such payments shall not exceed
three years of compensation.
21
<PAGE>
The Company also has employment arrangements with certain key management
(including Messrs. Brierley and Hentschel) that require salary and benefit
continuation for one year in the event of a termination of such employment as a
result of an Acquisition. As of August 31, 1999, the annual salaries of such
management personnel represent an aggregate of $367,000.
YEAR END OPTION TABLE
The following table sets forth the number and value of unexercised options held
as of August 31, 1999 by the Named Executive Officers:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT END OF FISCAL 1999 END OF FISCAL 1999 (2)
----------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
John Waldstein (1)(3) 112,417 45,750 $130,731 $45,380
James Brierley (1) 17,500 12,500 15,322 11,316
Christopher Hentschel(1) 18,584 9,083 17,571 7,486
</TABLE>
(1) There were no options exercised during fiscal 1999.
(2) Difference between the fair market value of the underlying common stock on
November 11, 1999 and the exercise price.
(3) Includes warrants to purchase an aggregate of 35,000 shares of common
stock. See "Summary Compensation Table - Note 5" herein and see Note 9 to
the Consolidated Financial Statements.
COMPENSATION OF DIRECTORS
Directors who are not officers receive $500 for each Board of Directors
meeting and $500 for each Committee meeting that they attend in person or by
telephone conference call. For the fiscal year ended August 31, 1999,
directors' fees were paid in the amounts of $2,500 to Ms. Balcom, $3,500 to Mr.
Paley, and $3,000 to Mr. Moyes. In April 1999, each of the Company's three non-
employee directors received options under the Company's non-qualified stock
option plan to purchase 2,000 shares of common stock at an exercise price of
$1.37. These options were fully vested upon the date of grant.
OTHER MATTERS
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
with the Securities and Exchange Commission ("SEC") and NASD. Executive
officers, directors, and greater than ten-percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
22
<PAGE>
The Company believes that all filing requirements applicable under Section
16(a) to its executive officers, directors and 10% stockholders were complied
with for fiscal 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning ownership of the Company's common
stock as of November 11, 1999, (i) by all persons known by the Company to own
beneficially 5% or more of the outstanding common stock, (ii) each director and
Named Executive Officer of the Company and (iii) by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF COMMON STOCK
NAME SHARES(1) OWNED
- ---------------------------------------------- --------------- -------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
John Waldstein 229,631(2) 14.1%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
James Brierley 32,576(5) 2.1%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
Heath Paley 42,722(3) 2.7%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
Kenneth Moyes 15,250(6) 1.0%
526 Boston Post Road
Wayland, Massachusetts
Diane Balcom 18,560(4) 1.2%
1709 Boulevard of the Allies, Suite 100
Pittsburgh, Pennsylvania
Christopher Hentschel 22,467(7) 1.5%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
All directors and executive officers
as a group (6 persons) 361,206(8) 20.9%
5% SHAREHOLDERS:
Warren Paley 217,267 14.2%
3 Mill Street
New Baltimore, New York
</TABLE>
(1) Except as otherwise indicated below, the named owner has sole voting and
investment power with respect to the shares set forth. No arrangements are
known to the Company,
23
<PAGE>
which may result in a change in control. The number
of shares shown does include shares which may be acquired through the
exercise of options and warrants which are exercisable currently or within
sixty (60) days after November 11, 1999.
(2) Includes vested options and warrants to purchase an aggregate 108,125
shares of the Company's common stock granted at prices ranging from $.74-
$2.12 per share. Includes 6,234 shares of common stock held by Mr.
Waldstein's wife. Mr. Waldstein disclaims beneficial ownership of these
shares.
(3) Includes vested options to purchase an aggregate 34,037 shares of the
Company's common stock granted at prices ranging from $.75 - $6.48 per
share.
(4) Includes vested options and warrants to purchase an aggregate 12,012 shares
of the Company's common stock granted to Diane Balcom and Balcom &
Associates at prices ranging from $.72 - $2.12 per share.
(5) Includes vested options to purchase an aggregate 25,000 shares of the
Company's common stock granted at prices ranging from $1.35-$1.58 per
share.
(6) Includes 4,000 shares of common stock held in trust for the benefit of Mr.
Moyes' minor children. Mr. Moyes serves as co-trustee of two such trusts.
Includes vested options to purchase an aggregate 1,250 shares of the
Company's common stock at $1.17 per share.
(7) Includes vested options to purchase an aggregate 20,834 shares of the
Company's common stock at prices ranging from $.75 to $2.07 per share.
(8) Includes vested options and warrants to purchase an aggregate 201,258 shares
of the Company's common stock granted at prices ranging from $.72 - $6.48
per share.
24
<PAGE>
PART IV
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)1. The following Consolidated Financial Statements are included in Item
7:
Independent Auditors' Report
Consolidated Balance Sheets as of August 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended August 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
August 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended August 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)2. The following schedule is included in Item 7:
Valuation and qualifying accounts
(a)3. Exhibits:
(3) Restated Articles of Organization and By-Laws are incorporated
by reference to Exhibit 3 to the Company's Registration
Statement on Form S-18 (2-91218-B), filed on May 18, 1984
(hereinafter referred to as the Company's S-18).
(3)(a) Amendment to Articles of Organization are incorporated by
reference to Exhibit 3.1(a) of the Company's Registration
Statement on Form S-1 (Registration No. 33-16333 which became
effective on October 8, 1987 hereinafter referred to as the
Company's S-1).
(4) Instruments defining the rights of securities holders include
the Restated Articles of Organization, By-Laws, Stock
Certificate and Stock Purchase Warrant which are incorporated
by reference to Exhibits 3, 4b and 4c to the Company's S-18.
(10)(a) A American Automatic Alarm Company Supplies Contract and Non-
Competition Agreement is incorporated by reference to Exhibit
(10)(w)
25
<PAGE>
of the Company's Annual Report on Form 10-K for the year
ended August 31, 1986.
(10)(b) Nonqualified Stock Option Plan is incorporated by reference to
Exhibit 10.1(ll) of Post-Effective Amendment No. 2 of the
Company's S-1.
(10)(c) Stock Purchase Agreement dated as of June 19, 1990 by and
among the Company and Ecco Industries, Inc. is incorporated by
reference to Exhibit (2.1) on Form 8-K dated July 2, 1990.
(10)(d) Lease, Canton, Massachusetts between Turnpike Realty Trust and
the Registrant dated March 6, 1991, is incorporated by
reference to Exhibit 6.1 on Form 10-Q for the quarter ended
February 28, 1991.
(10)(e) Distributor Agreement between the Registrant and Weyrad
Electronics, Limited dated November 3, 1992 is incorporated by
reference to Exhibit 10(V) on Form 10-K for the year ended
August 31, 1992.
(10)(f) Distributor Agreement between the Registrant and Weyrad
Electronics, Limited dated April 1, 1993 is incorporated by
reference to Exhibit 6.1 on Form 10-Q for the quarter ended
February 28, 1993.
(10)(g) Employment, Non-Disclosure and Non-Compete Agreement for John
Waldstein dated June 20, 1994 and amendment dated December 8,
1994 is incorporated by reference to Exhibit 10(t) on Form 10-
KSB for the year ended August 31, 1994.
(10)(h) Employment, Non-Disclosure and Non-Compete Agreement for
Robert Voosen dated January 15, 1995 is incorporated by
reference to Exhibit 6.1 on Form 10-QSB for the quarter ended
February 28, 1995.
(10)(i) Lease, Canton, Massachusetts between 427 Turnpike Street
Realty Trust and the Registrant dated March 28, 1995 is
incorporated by reference to Exhibit 10(w) on Form 10-KSB for
the year ended August 31, 1995.
(10)(j) Amendment to original lease of March 28, 1995, Canton,
Massachusetts between 427 Turnpike Realty Trust and the
Registrant dated April 1, 1998 is incorporated by reference to
Exhibit 10(k) on Form 10-KSB for the year ended August 31,
1998 .
(10)(k) Second amendment dated May 1, 1998 to the Employment, Non-
Disclosure and Non-Compete Agreement originally dated June 20,
1994 for John Waldstein is incorporated by reference to
Exhibit 10(l) on Form 10-KSB for the year ended August 31,
1998.
(10)(l) Third amendment dated July 15, 1999 to the Employment, Non-
Disclosure and Non-Compete agreement originally dated June 20,
1994 for John Waldstein.
26
<PAGE>
(10)(m) Second amendment to original lease of March 28, 1995, Canton,
Massachusetts between 427 Turnpike Realty Trust and the
Registrant dated January 28, 1999.
(10)(n) Third amendment to original lease of March 28, 1995, Canton,
Massachusetts between 427 Turnpike Realty Trust and the
Registrant dated September 27, 1999.
(22) Subsidiaries of the Registrant.
(27) Financial data schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL ELECTRONICS, INC.
Date: November 29, 1999 By: /s/ John Waldstein
-----------------------------
John Waldstein, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John Waldstein November 29, 1999
- -------------------------------- President and Chief
John Waldstein Executive Officer,
Treasurer and Chief
Financial and Accounting
Officer, and Chairman of
the Board
/s/ Heath Paley Director November 29, 1999
- ---------------------------------
Heath Paley
/s/Kenneth Moyes Director November 29, 1999
- --------------------------------
Kenneth Moyes
/s/ Diane Balcom Director November 29, 1999
- --------------------------------
Diane Balcom
</TABLE>
28
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1999, 1998 AND
1997:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7-16
FINANCIAL STATEMENT SCHEDULE FURNISHED PURSUANT TO THE
REQUIREMENTS OF FORM 10-KSB:
Schedule II - Valuation and Qualifying Accounts F-18
</TABLE>
All other schedules are omitted because they are inapplicable, not required
under the instructions, or because the information is reflected in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
International Electronics, Inc.
Canton, Massachusetts
We have audited the accompanying consolidated balance sheets of International
Electronics, Inc. and subsidiaries (the "Company") as of August 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended August 31, 1999.
Our audits also included the financial statement schedule listed in the Table of
Contents. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of August 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
November 5, 1999
Boston, Massachusetts
F-2
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $1,327,032 $ 895,876
Accounts receivable, net of allowance for
doubtful accounts and returns of $201,000
and $176,000 in 1999 and 1998, respectively 724,332 986,403
Inventories 1,033,097 746,570
Deferred income taxes 260,000 -
Other current assets 182,171 153,816
-------- -------
Total current assets 3,526,632 2,782,665
---------- ---------
EQUIPMENT AND FURNITURE, net of
accumulated depreciation and amortization 494,463 368,965
-------- --------
OTHER ASSETS:
Deferred income taxes 69,000 -
Goodwill and other intangibles, net of
accumulated amortization of $1,178,000
and $1,093,000 in 1999 and 1998, respectively 63,108 148,432
Other 11,950 11,950
------- -------
Total other assets 144,058 160,382
-------- -------
$4,165,153 $3,312,012
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 378,034 $ 138,894
Accrued expenses 1,040,705 1,089,267
Income taxes payable 62,000 44,000
Current portion of long-term obligations 107,458 64,030
-------- ------
Total current liabilities 1,588,197 1,336,191
---------- ---------
LONG-TERM OBLIGATIONS, Less
current portion 117,668 82,859
-------- ------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value - authorized,
5,984,375 shares; issued, 1,533,301 and
1,528,301 shares in 1999 and 1998, respectively 15,333 15,283
Capital in excess of par value 4,806,955 4,796,149
Accumulated deficit (2,324,356) (2,879,826)
Less treasury stock, at cost - 35,000 shares (38,644) (38,644)
--------- ---------
Total shareholders' equity 2,459,288 1,892,962
--------- ---------
$4,165,153 $3,312,012
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
NET SALES $ 9,425,569 $ 9,651,603 $ 9,173,580
COST OF SALES 5,028,089 5,152,016 5,439,461
----------- ----------- -----------
GROSS PROFIT 4,397,480 4,499,587 3,734,119
----------- ----------- -----------
OPERATING EXPENSES:
Research and development costs 731,302 537,426 520,629
Selling, general and administrative expenses 3,394,207 3,332,544 3,106,376
----------- ----------- -----------
Total operating expenses 4,125,509 3,869,970 3,627,005
----------- ----------- -----------
INCOME FROM OPERATIONS 271,971 629,617 107,114
INTEREST EXPENSE (15,680) (16,411) (30,826)
OTHER INCOME 37,379 37,923 21,410
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN 293,670 651,129 97,698
----------- ----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 67,200 121,000 38,000
Deferred (329,000)
----------- ----------- -----------
(261,800) 121,000 38,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY GAIN 555,470 530,129 59,698
EXTRAORDINARY GAIN ON PREPAYMENT OF
LONG-TERM OBLIGATIONS, net of
income tax expense of $1,000 10,446
----------- ----------- -----------
NET INCOME $ 555,470 $ 530,129 $ 70,144
=========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.37 $ 0.36 $ 0.05
=========== =========== ===========
Diluted $ 0.35 $ 0.34 $ 0.04
=========== =========== ===========
SHARES USED IN COMPUTING NET INCOME
PER SHARE:
Basic 1,493,479 1,493,301 1,493,046
=========== =========== ===========
Diluted 1,574,279 1,577,203 1,598,799
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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>
BALANCE, SEPTEMBER 1, 1996 1,527,051 $ 15,271 $4,779,413 $(3,480,099) 35,000 $(38,644) $1,275,941
Stock issued upon exercise of stock options 1,250 12 1,328 - - - 1,340
Issuance of stock warrants - - 3,526 - - - 3,526
Net income - - - 70,144 - - 70,144
--------- -------- --------- ----------- ------ -------- ---------
BALANCE, AUGUST 31, 1997 1,528,301 15,283 4,784,267 (3,409,955) 35,000 (38,644) 1,350,951
Issuance of stock warrants - - 11,882 - - - 11,882
Net income - - - 530,129 - - 530,129
--------- -------- --------- ----------- ------ -------- ---------
BALANCE, AUGUST 31, 1998 1,528,301 15,283 4,796,149 (2,879,826) 35,000 (38,644) 1,892,962
Issuance of stock warrants - - 6,356 - - - 6,356
Stock issued upon exercise of stock warrants 5,000 50 4,450 - - - 4,500
Net income - - - 555,470 - - 555,470
--------- -------- --------- ----------- ------ -------- ---------
BALANCE, AUGUST 31, 1999 1,533,301 $ 15,333 $4,806,955 $(2,324,356) 35,000 $(38,644 $2,459,288
========= ======== ========== =========== ====== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 555,470 $ 530,129 $ 70,144
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 306,505 289,077 285,512
Stock options and warrants issued for professional services 6,356 11,882 1,626
Deferred income taxes (329,000) - -
Changes in operating assets and liabilities:
Accounts receivable 262,071 49,193 (103,341)
Inventories (286,527) 331,991 (250,113)
Other current assets (28,355) (20,542) 8,544
Accounts payable and accrued expenses 190,578 (303,480) 236,371
Income taxes payable 18,000 5,000 (1,000)
--------- --------- ---------
Net cash provided by operating activities 695,098 893,250 247,743
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER:
Net purchase of equipment and furniture (346,679) (214,156) (208,891)
Other assets - 14,399 (12,050)
--------- --------- ---------
Net cash used in investing activities and other (346,679) (199,757) (220,941)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt obligations 157,390 111,066 24,353
Issuance of common stock 4,500 - 3,240
Payments of debt obligations (79,153) (68,758) (451,065)
--------- --------- ---------
Net cash provided by (used in) financing activities 82,737 42,308 (423,472)
--------- --------- ---------
CASH AND CASH EQUIVALENTS-Increase (decrease) during the year 431,156 735,801 (396,670)
BALANCES, BEGINNING OF YEAR 895,876 160,075 556,745
---------- -------- ---------
BALANCES, END OF YEAR $1,327,032 $ 895,876 $ 160,075
========== ========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION-Interest paid $ 15,680 $ 16,411 $ 30,826
========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS-
Equipment acquired under capitalized leases $ - $ - $ 42,326
========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Description of the Business - International Electronics, Inc. and
subsidiaries (the "Company") designs, manufactures, markets and sells
electronic products for the security industry and other commercial
applications.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of International Electronics, Inc. and its
majority owned subsidiary, Ecco Industries, Inc. ("Ecco"), and its wholly
owned subsidiary, International Electronics Europe Limited. All material
intercompany transactions, balances and profits have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
instruments purchased with a remaining maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments - The fair value of the Company's
assets and liabilities which constitute financial instruments approximate
their recorded value.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk are cash and accounts
receivable. The majority of the Company's cash is maintained with a
commercial bank. Concentration of credit risk with respect to accounts
receivable is limited to certain customers to whom the Company makes
substantial sales (see Note 11).
Inventories - Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis. Allowances are made for
slow-moving, obsolete, unsalable or unusable items.
Equipment and Furniture - Equipment and furniture are stated at cost.
Expenditures for maintenance and repairs are charged to expense as
incurred, whereas major betterments are capitalized as additions to
equipment and furniture. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the applicable
assets, including capital leases.
Estimated
Lives
Machinery and equipment 3-5 years
Office furniture and equipment 3-7 years
Goodwill and Other Intangibles - Goodwill and other intangibles are
amortized over five- to ten-year periods.
Long-Lived Assets - The Company accounts for long-lived assets under
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No.
121 requires that long-lived assets, certain identifiable intangibles, and
goodwill to be held and used by an entity be reviewed for impairment
whenever circumstances indicate that the carrying amount of an asset may
not be recoverable.
F-7
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Revenue Recognition - Revenue from product sales is recognized upon
shipment. An allowance for estimated future returns is recorded at the
time revenue is recognized based on the Company's historical experience.
Estimated product warranty costs are also provided for at the time of
sale.
Research and Development Costs - All research and development costs
are charged to operations as incurred.
Net Income Per Share - The Company calculates net income per share under
the requirements of SFAS No. 128, "Earnings per Share." Basic net income
per share is computed by dividing net income by weighted-average common
shares outstanding during the year. 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>
1999 1998 1997
<S> <C> <C> <C>
Net income $ 555,470 $ 530,129 $ 70,144
========= ========= ========
Shares used in computation:
Weighted-average shares outstanding for
basic net income per share 1,493,479 1,493,301 1,493,046
Effect of dilutive option and warrant shares 80,800 83,902 105,753
--------- --------- ---------
Total shares for diluted net income per share 1,574,279 1,577,203 1,598,799
========= ========= =========
Basic net income per share:
Income before extraordinary gain $ .37 $ .36 $ .04
Extraordinary gain - - .01
--------- --------- ---------
Net income $ .37 $ .36 $ .05
========= ========= =========
Diluted net income per share:
Income before extraordinary gain $ .35 $ .34 $ .03
Extraordinary gain - - .01
--------- --------- ---------
Net income $ .35 $ .34 $ .04
========= ========= =========
</TABLE>
The calculations for diluted net income per share do not include aggregate
out-of-money options and warrants of 77,037, 156,304 and 107,371 for the
years ended August 31, 1999, 1998 and 1997, respectively.
F-8
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee Stock-Based Compensation - The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion No. 25, as
permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
to account for all of its employee and director stock-based compensation
plans.
Nonemployee Stock-Based Compensation - The Company complies with the
provisions of SFAS No. 123 relating to the accounting for awards of
stock-based compensation to nonemployees. Accordingly, stock-based
compensation awarded to nonemployees is accounted for using the "fair
value" method.
Recent Accounting Pronouncements - The Company reports comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income for the three years ended August 31, 1999 does not
differ from the reported net income.
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires companies to report
selected information about operating segments, products and services,
geographic areas and major customers. Operating segments are determined
based on the way the chief operating decision-maker organizes the business
for making operating decisions and assessing performance. The Company has
determined that it conducts its operations in one business segment.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 was not required to
be implemented until fiscal year 2000. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133
- an amendment of FASB Statement No. 133." SFAS No. 137 delayed the
original implementation date of SFAS No. 133 by one year. This will
require that the Company implement this statement in fiscal year 2001.
Since its requirements are complex and its scope far reaching, the
Company has not completed its evaluation of the impact of this
standard on its consolidated financial statements.
2. INVENTORIES
Inventories at August 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials and subassemblies $ 691,812 $ 455,740
Work in process 130,632 79,935
Finished goods 210,653 210,895
---------- ----------
$1,033,097 $ 746,570
========== ==========
</TABLE>
F-9
<PAGE>
3. EQUIPMENT AND FURNITURE
Equipment and furniture at August 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Machinery and equipment $ 984,335 $ 902,769
Office furniture and equipment 883,164 632,393
----------- -----------
1,867,499 1,535,162
Less accumulated depreciation and amortization (1,373,036) (1,166,197)
----------- -----------
$ 494,463 $ 368,965
=========== ===========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at August 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Payroll and related amounts $ 294,310 $ 235,629
Warranty 503,833 651,077
Professional fees 187,842 152,301
Other 54,720 50,260
----------- -----------
$ 1,040,705 $ 1,089,267
=========== ===========
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations at August 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Capitalized lease obligations, 7%-18%, due through
April 2001 (Note 7) $ 17,188 $ 38,134
Equipment line of credit, 7.75%-8.5% (Note 6) 194,562 90,160
Collateralized 8% equipment loans, final payments
through November 2001 13,376 18,595
--------- ---------
225,126 146,889
Less current portion (107,458) (64,030)
--------- ---------
$ 117,668 $ 82,859
========= =========
</TABLE>
The aggregate principal payments on long-term obligations as of August 31,
1999, excluding capital leases, are $95,998 in 2000, $73,032 in 2001, and
$38,908 in 2002.
Capital lease and equipment loans at August 31, 1999 are collateralized by
the related equipment with a carrying value of approximately $186,384.
F-10
<PAGE>
6. BANK ARRANGEMENTS
As of August 31, 1999, the Company had a bank demand line of credit that
provided for borrowings up to $1,000,000 and an available $170,000
equipment line of credit. 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, a
required minimum debt to tangible net worth ratio and net income. As of
August 31, 1999, no borrowings have been made under the demand line of
credit, and the Company has $194,562 in borrowings as equipment debt which
is payable in monthly installments through July 2002.
7. COMMITMENTS
Leases - The Company leases an administrative and production facility
under an operating lease which expires in April 2002. The Company is
responsible for certain real estate taxes, utilities and maintenance
costs. Total rental expense for operating leases for the years ended
August 31, 1999, 1998 and 1997 amounted to $171,014, $138,322 and
$137,033, respectively.
The Company leases certain equipment under capital leases, and,
accordingly, the present value of the net minimum payments has been
reflected in equipment and furniture and capitalized lease obligations.
Future minimum lease payments under noncancelable lease terms in excess of
one year at August 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
2000 $ 12,761 $128,761
2001 6,042 138,267
2002 -- 96,786
-------- --------
Total minimum lease payments 18,803 $363,814
========
Less interest (1,615)
--------
Net minimum lease payments 17,188
Less current portion (11,460)
--------
Long-term portion $ 5,728
========
</TABLE>
Employment Arrangements - The Company has a continuous three year
employment agreement with its President and Chief Executive Officer
providing minimum annual aggregate compensation of $142,000.
The Company also has employment arrangements with certain key management
that require salary and benefit continuation for one year (representing an
aggregate of $367,000 in salaries as of August 31, 1999) in the event of a
termination of such employment as a result of an acquisition, merger or
sale of assets of the Company (an "Acquisition").
F-11
<PAGE>
8. INCOME TAXES
The provision (benefit) for income taxes is composed of the following for
the years ended August 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 1,000 $ 15,000 $ 2,000
State 58,700 95,000 36,000
Foreign 7,500 11,000 -
--------- -------- -------
67,200 121,000 38,000
--------- -------- -------
Deferred:
Federal (257,000) - -
State (72,000) - -
--------- -------- -------
(329,000) - -
--------- -------- -------
$(261,800) $121,000 $38,000
========= ======== =======
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate due to the following for the years ended August 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
State income taxes, net of federal benefit 13.2 9.6 23.6
Amortization of goodwill 9.9 4.5 30.1
Federal alternative minimum and foreign taxes 1.9 2.6 2.0
Utilization of federal net operating loss carryforwards
and tax credits (30.6) (39.4) (66.9)
Deferred tax benefit (112.0) - -
Other (5.5) 7.3 16.1
------- ------- ------
Effective tax rate (89.1)% 18.6 % 38.9 %
======= ======= ======
</TABLE>
As of August 31, 1999, the Company has net operating loss carryforwards
for financial reporting and income tax purposes of approximately
$1,362,000, expiring in varying amounts from 2004 to 2008 (primarily 2004
to 2006). Aggregate investment and research and development credit
carryforwards of $46,000 at August 31, 1999 expire in varying amounts
through the year 2005.
Net operating loss carryforwards are limited in the event of certain
circumstances, including significant changes in ownership interests. Upon
completion of the Company's 1987 public offering and 1990 acquisition of
Ecco, the maximum net operating loss carryforward that may be used in any
year for losses incurred prior to the aforementioned events is
approximately $212,000. However, use of the Company's net operating loss
carryforwards, incurred since the completion of the 1987 offering and 1990
acquisition, approximating $727,000, will not be limited in any year.
F-12
<PAGE>
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts for income tax purposes. Valuation
allowances have been recorded to offset net deferred tax assets due to the
uncertainty of realizing the benefit of some assets.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities at August 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $463,000 $ 550,000
Tax credits 46,000 78,000
Accounts receivable reserves 80,000 70,000
Inventories and related reserves 289,000 359,000
Other 71,000 (17,000)
Depreciation 39,000 31,000
Valuation allowance (659,000) (1,071,000)
-------- ----------
$329,000 $ -
======== ==========
</TABLE>
9. CAPITAL TRANSACTIONS
Stock Options - Since 1988, the Company has approved and reserved shares
of common stock for nonqualified stock option plans for the benefit of
certain employees, nonemployee directors, and key advisors. The option
plans are administered by a committee appointed by the Board of Directors
(the "Committee"), which determines the terms of options including the
exercise price, expiration date (no longer than 10 years), number of
shares and vesting provisions. All options vest at the rate of 25% per
year with the exception of options issued to certain officers, nonemployee
directors and key advisors with vesting provisions established by the
Committee. All of the options vest 100% and are fully exercisable in the
event of an Acquisition of the Company. At August 31, 1999, 155,593 shares
remain available for future grants.
A summary of activity of the stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Exercise
Shares Price Per Share
<S> <C> <C>
Outstanding, September 1, 1996 314,034 $ 1.30
Granted (weighted-average fair value of $0.94) 38,000 2.12
Canceled (30,300) 1.65
-------
Outstanding, August 31, 1997 321,734 1.37
Granted (weighted-average fair value of $1.01) 61,500 1.50
Canceled/expired (61,467) 1.27
-------
Outstanding, August 31, 1998 321,767 1.41
Granted (weighted-average fair value of $0.84) 75,333 1.34
Canceled/expired (40,670) 1.56
-------
Outstanding, August 31, 1999 356,430 $ 1.38
======= ======
</TABLE>
F-13
<PAGE>
9. CAPITAL TRANSACTIONS (CONTINUED)
Stock Options (Continued) - The following table summarizes information
concerning outstanding and exercisable options as of August 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------------
Weighted-
Average
Remaining
Contractual Weighted- Weighted-
Range of Number Life Average Number Average
Exercise Price(s) Outstanding (Years) Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$.72-$1.00 71,200 2.70 $ .81 71,200 $ .81
$1.01-$2.00 232,526 7.32 1.39 118,103 1.38
$2.01-$2.12 52,333 4.41 2.09 44,583 2.08
$6.48 371 0.79 6.48 371 6.48
------- -------
356,430 5.96 $1.38 234,257 $1.35
======= ==== ====== ======= ======
</TABLE>
Stock Warrants - In September 1996, the Company granted warrants to two
officers to purchase an aggregate 19,000 shares of common stock at an
exercise price of $2.12 per share, exercisable for a ten-year period. Each
of the warrants was assigned a value of $.10 per share which was paid by
the officers.
In August 1997, the Company granted warrants to a financial consultant to
purchase 3,500 shares of common stock at an exercise price of $1.69,
exercisable for a ten-year period. The Company valued these warrants and
recorded compensation expense of $1,725 and $1,882 for the years ended
August 31, 1999 and 1998, respectively.
In June 1998, the Company granted warrants to a financial consultant to
purchase 6,667 shares of common stock at an exercise price of $1.67,
exercisable for a ten-year period. Pursuant to SFAS No. 123, the Company
valued these warrants and recorded compensation expense of $10,000 for the
year ended August 31, 1998.
The Company has granted rights to certain warrant holders with respect to
the registration of such shares underlying the warrants with the
Securities and Exchange Commission.
F-14
<PAGE>
9. CAPITAL TRANSACTIONS (CONTINUED)
Stock Warrants (Continued) - The following is a summary of transactions
relating to the Company's outstanding common stock warrants:
<TABLE>
<CAPTION>
Consultants Officers Debt Total
<S> <C> <C> <C> <C>
Outstanding, September 1, 1996 51,238 25,000 2,512 78,750
Expired (3,571) - - (3,571)
Granted (weighted-average
fair value of $2.05) 3,500 19,000 - 22,500
------ ------ ----- ------
Outstanding, August 31, 1997 51,167 44,000 2,512 97,679
Expired (6,667) (9,000) - (15,667)
Granted (weighted-average
fair value of $1.13) 6,667 - - 6,667
------ ------ ----- ------
Outstanding, August 31, 1998 51,167 35,000 2,512 88,679
Exercised (5,000) - - (5,000)
------ ------ ----- ------
Outstanding, August 31, 1999
(weighted-average exercise
price of $1.24) 46,167 35,000 2,512 83,679
====== ====== ===== ======
Exercisable 46,167 30,000 2,512 78,679
====== ====== ===== ======
Exercise price(s) $.72-$2.07 $.74-$2.07 $ .99 $.72-$2.12
========== ========== ===== ==========
</TABLE>
Employee Stock-Based Compensation - With respect to employee and
directors' stock-based compensation, the Company has adopted the
disclosure-only requirements of SFAS No. 123. Accordingly, no
compensation cost has been recognized in the accompanying consolidated
financial statements for employee and directors' stock-based compensation
awarded under employee stock option plans. If compensation cost had been
determined for awards granted commencing September 1, 1995 under the
Company's employee and directors' stock option plans based on the fair
value of the awards at the date of grant in accordance with the
provisions of SFAS No. 123, the Company's net income and net income per
share for the years ended August 31, 1999, 1998 and 1997 would have
decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income-as reported $555,470 $530,129 $70,144
Net income-pro forma 483,730 484,380 39,634
Net income per share-diluted-as reported 0.35 0.34 0.04
Net income per share-diluted-pro forma 0.31 0.31 0.02
</TABLE>
The pro forma disclosures presented are not necessarily representative of
the effects on reported net income for future years.
F-15
<PAGE>
9. CAPITAL TRANSACTIONS (CONTINUED)
Employee Stock-Based Compensation (Continued) - The fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with an assumed risk-free interest rate of 5.5% in
1999 and 1998, and 6% in 1997, an expected life of five years, an expected
volatility of 80% in 1999 and 1998, and 42% in 1997 and assumes no
dividends will be paid.
<TABLE>
<CAPTION>
Common Stock Reserved Shares
<S> <C>
Stock warrants 83,679
Stock options 512,023
-------
595,702
=======
</TABLE>
10. BENEFIT PLAN
The Company sponsors a savings plan for its employees which has been
qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deductions within statutory and plan limits. Contributions from the
Company are made at the discretion of the Board of Directors. The Company
has made no contributions to the 401(k) plan to date.
11. VENDORS, CUSTOMER AND INTERNATIONAL SALES
The Company is dependent upon sole source suppliers for a number of key
components of its 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 at favorable terms. Any extended
interruption in the supply of any such components or any significant price
increase could have a material adverse effect on the Company's operating
results in any given period.
Sales to one customer accounted for 40% of net sales in 1999 and 36% of
net sales in both 1998 and 1997. The accounts receivable from this
customer amounted to approximately $189,000 and $207,000 at August 31,
1999 and 1998, respectively.
The Company sources a significant amount of components and maintains
certain molds for its products in Asia. The Company believes that such
sourcing reduces its cost of sales through lower parts, labor and tooling
costs. There can be no guarantee that the Asian political or economic
environment will remain sufficiently stable to allow reliable and
consistent delivery of product. Any extended interruption in the supply or
significant increase in the price of any such components could have a
material adverse effect on the Company's operating results in any given
period. International sales, primarily to Canada, Europe and Asia, were
approximately $977,000 in 1999, $1,196,000 in 1998 and $1,435,000 in 1997.
12. OTHER INCOME
Other income consists of the following for the years ended August 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest $60,343 $26,248 $ 7,592
Commissions - 3,357 13,818
Other income (expense) (22,964) 8,318 -
------- ------- -------
$37,379 $37,923 $21,410
======= ======= =======
</TABLE>
* * * * * *
F-16
<PAGE>
FINANCIAL STATEMENT SCHEDULE
FURNISHED PURSUANT TO THE
REQUIREMENTS OF FORM 10-KSB
F-17
<PAGE>
SCHEDULE II
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End of
Description of Year Expenses Accounts (A) Year
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and returns:
August 31, 1999 $ 176,000 $31,000 $ - $ (6,000) $201,000
August 31, 1998 185,000 35,000 - (44,000) 176,000
August 31, 1997 131,000 74,000 - (20,000) 185,000
</TABLE>
(A) Net write-offs of bad debts (net of recoveries) and returns.
F-18
<PAGE>
EXHIBIT 10.L
THIRD AMENDMENT TO EMPLOYMENT,
NON-DISCLOSURE AND NON-COMPETE AGREEMENT
----------------------------------------
This Amendment (which may hereinafter be referred to as the "Third
Amendment") is an amendment to the amended Employment, Non-Disclosure and Non-
Compete Agreement dated June 20, 1994 (hereinafter 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 the
"Company") and John Waldstein of 97 Meadowbrook Road, Needham, Massachusetts
02492 (hereinafter referred to as the "Employee"). The 1994 Agreement was
amended by a 1994 Amendment dated December 7, 1994 (hereinafter referred to as
the "1994 Amendment"), as well as by a Second Amendment dated May 1, 1998
(hereinafter referred to as the "Second Amendment"). This Third Amendment is
dated as of July 15, 1999.
For good and valuable consideration, including the promises hereinafter
made, the parties hereto hereby agree that the 1994 Agreement, as amended by the
1994 Amendment and the Second Amendment, is hereby further amended as follows:
A. Changes to Paragraph 6. Paragraph 6 of the Second Amendment is hereby
----------------------
deleted and the following is substituted in its place:
6. Term/Termination. The Employee's employment may be terminated by the
----------------
Company at any time for cause, for voluntary resignation, or upon death or
permanent disability of the Employee, all as defined in this Paragraph 6.
Unless the Employee is terminated pursuant to the causes set forth in
Paragraph 6(a), 6(b), 6(c) or 6(d), the term of the Employee's employment
shall be for a continuing period of three years following each day of
employment. In further clarification of this provision, it is intended
that the employment term of the Employee, at all times following the
effective date of this Third Amendment, will be a continuing three year
period unless the Employee's employment is terminated pursuant to Paragraph
6(a), 6(b), 6(c) or 6(d).
a. "Termination for Cause" shall mean the termination of employment
of the Employee because of the Employee's dishonesty, theft, gross
misconduct, disclosure of trade secrets or aid of a competitor.
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 for any 100 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
<PAGE>
physician selected by the Company, and such determination shall be
conclusive and binding upon the Company and Employee.
f. If the Company's principal office changes so that it would be
inconvenient for the Employee to perform his duties at the Company's
principal office without changing his primary residence, and if the
Employee refuses to perform his services at the Company's new
principal office, such refusal shall not be a grounds for termination
for cause.
B. Changes to Paragraph 5. Paragraph 5 of the 1994 Agreement, as amended by
----------------------
the 1994 Amendment, is hereby modified by adding the following clauses:
i. The Company grants to John Waldstein options to purchase 25,000
shares of IEI common stock at the average of the bid and asked prices
for the 10 trading days of the Company prior to April 14, 1999, with
such options to vest in equal annual amounts over the four years
following April 14, 1999.
j. 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 1998 to January of the year in which the calculation
is performed.
k. If (i) the Employee is involuntarily terminated for any reason
other than pursuant to the causes set forth in Paragraph 6(a), 6(c) or
6(d), including a change of status as defined in Paragraph 21(d), or
(ii) if there is an election of a slate of directors not approved by
Employee, an amount equal to the total compensation due to the
Employee over time under the 1994 Agreement, as amended, shall be
calculated, and such total compensation as calculated shall be paid in
a single payment to the Employee no later than 10 days following his
termination. Without limiting the generality of the foregoing, not
later than 10 days following such a termination, the Company shall pay
to the Employee an amount equal to the Employee's current annual total
compensation multiplied by three and adjusted for cost of living under
Paragraph 5(j) using the most recent annual adjustment calculation as
the basis for adjustment over the three years. Total compensation as
used herein and in Paragraph 21(c) shall include all salary, bonus,
and other benefits to which the Employee is entitled.
l. If the Employee is terminated for disability, as herein defined,
any unvested options which would have vested within one year of such
termination, shall be vested and then currently exercisable.
m. The Company, through its Board of Directors or Compensation
Committee, may bonus or otherwise provide additional incentives to the
Employee.
n. The Company shall pay to the Employee an amount sufficient to
enable the Employee to receive the accelerated compensation payments
called for under Paragraph 5, net of any excise tax required to be
paid by the Employee under Internal Revenue Code, Section 280G on
accelerated compensation payments to the Employee.
C. Changes to Paragraph 10.1. Paragraph 10.1 of the 1994 Agreement, as
-------------------------
amended, is hereby deleted and the following is substituted in its place:
2
<PAGE>
10.1 Non-Competition. So long as the Employee is employed as an Employee
---------------
or as a Consultant by the Company, and for a period of one year following
the termination of the Employee's employment with the Company for any
reason, so long as during said one year period the Company pays to the
Employee the payments to which the Employee is entitled, the Employee,
during said one year period, shall not engage, directly or indirectly, in
any business activity or own, directly or indirectly, any interest in any
business which competes with the business of the Company as conducted or as
planned to be conducted by the Company during the Employee's employment at
any place within the United States or the world where the Company then
conducts business, whether for his own account or as an employee, partner,
officer or director of, or consultant or independent contractor to, or
holder of more than five percent (5%) of the equity interest in, any other
person, firm, partnership or corporation. If at any time the foregoing
provisions shall be deemed to be invalid or unenforceable or are prohibited
by the laws of the state or place where they are to be enforced, by reason
of being vague or unreasonable as to duration or place of performance, this
section shall be considered divisible and shall become and be immediately
amended to include only such time and such area as shall be determined to
be reasonable and enforceable by the court or other body having
jurisdiction over this Agreement. The Company and the Employee expressly
agree that this section, as so amended, shall be valid and binding as
though any valid or unenforceable provision had not been included herein.
D. Adoption of New Paragraph 21. The 1994 Agreement, as amended, is hereby
----------------------------
further amended by adding the following Paragraph 21:
21. Acquisition Matters. If an Acquisition Event, as hereinafter defined,
-------------------
occurs, the following provisions shall apply to the Employee:
a. If an Acquisition Event occurs, the Employee's base salary shall
increase to annualized compensation of $175,000 per year, commencing
on the Acquisition Event. Such amount shall be increased each January
1 commencing on January 1 following the Acquisition Event in
accordance with the formula described in Paragraph 5(j) of the Third
Amendment.
b. On the occurrence of any Acquisition Event, all of the Employee's
then unvested stock options and warrants shall be vested and then
currently exercisable.
c. If an Acquisition Event occurs, for the first six months that the
Employee works after the Acquisition Event, the Company shall pay to
the Employee a severance payment of one year of total compensation,
and for each six months after the first six months that the Employee
works after the Acquisition Event, the Company shall pay to the
Employee a severance payment of six months of total compensation at
such time as the Employee voluntarily resigns his employment or is
terminated by death or disability, provided however, that the
Employee's severance payment shall not exceed three years of total
compensation. The severance payments provided herein shall be paid
within ten (10) days of such voluntary resignation.
d. If an Acquisition Event occurs, the Company shall not change the
status of the Employee. A change of status shall
3
<PAGE>
mean the occurrence of any of the following events without the express
written approval of the Employee: (i) any diminution or change in any
manner adverse to the Employee of (x) his positions, duties,
responsibilities, or status with the Company; (y) his reporting
responsibilities, titles, offices or the manner in which he is held
out to the public or the industry; or (z) his salary, bonus or other
benefits, or (ii) the Company requiring him to be based at any office
or location more than thirty miles from the Company's current main
office in Massachusetts or the Company requiring the Employee to
travel on Company business to a greater extent than the Employee
traveled prior to the Acquisition Event.
e. An "Acquisition Event" is defined as any event in which the
Company merges or consolidates with another party or sells all or
substantially all of its assets to an unaffiliated third party or an
event in which more than 50% of the outstanding common stock of the
Company is acquired by a third party or the third party and its
affiliates. An Acquisition Event will also be the election of a slate
of Directors not approved by the Employee.
D. Adoption of New Paragraph 22. The 1994 Agreement, as amended, is hereby
----------------------------
further amended by adopting the following Paragraph 22:
22. Enforcement Matters. The following provisions shall apply to the
-------------------
parties to the 1994 Agreement, as amended:
a. In the event of any controversy, claim or dispute between the
parties hereto arising out of or relating to the 1994 Agreement, as
amended, or the Employee's employment by the Company, such
controversy, claim or dispute shall be settled in accordance with the
rules of arbitration of the American Arbitration Association under the
rules then pertaining in Boston, Massachusetts, and shall be conducted
under the Expedited Procedures thereof . The arbitrator shall be a
person with significant experience in businesses similar to the
business conducted by the Company. The parties agree that such
arbitration shall be binding and conclusive upon them. At the request
of either party, arbitration proceedings will be conducted in secrecy,
and in such case, all documents, testimony and records shall be
received, heard and maintained by the arbitrators in confidence and
available for inspection only by the parties or any court in which an
award is finally entered. Judgment upon any award so rendered may be
entered in any court of competent jurisdiction.
b. In the event of litigation or arbitration relating to the 1994
Agreement, as amended, the Employee, if the prevailing party, shall be
paid its reasonable expenses and reasonable attorney's fees by the
other party.
c. In the event of litigation or arbitration relating to the payment
of the obligations by the Company under the 1994 Agreement, as
amended, the Employee, if the prevailing party, shall be paid treble
damages by the other party.
4
<PAGE>
d. In the event of litigation or arbitration relating to the 1994
Agreement, as amended, the Employee, if the prevailing party, shall be
paid interest by the other party on any amounts due at the rate of 12%
per annum, calculated on a daily basis.
e. Any litigation or arbitration relating to the 1994 Agreement, as
amended shall be decided in the federal or state courts of
Massachusetts as to litigation, or in Boston, Massachusetts as to
arbitration.
Other than as provided in this Third Amendment, all of the terms and
conditions of the 1994 Agreement, as amended by the 1994 Amendment and by the
Second Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
a party duly authorized thereunto and the Employee has hereunto set his hand and
seal, all as of the date set forth above.
International Electronics, Inc.
/s/ John Waldstein
- ------------------------------
John Waldstein, Employee By: /s/ Kenneth Moyes
----------------------------
Kenneth Moyes, Director
5
<PAGE>
EXHIBIT (10)(M)
January, 1999
427 TURNPIKE STREET
-------------------
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
AMENDMENT NO. 2
---------------
Reference is made to the Lease dated March 28, 1995 (the "Lease" by and between
427 Turnpike Street Realty Trust (hereinafter called the "Landlord", which
expression shall include its heirs, executors, successors and assigns where the
context so admits) of one part, and International Electronics, Inc., a
Massachusetts corporation (hereinafter called the "Tenant", which expression
shall include its successors and assigns or executors and administrators where
the context so admits) of the otherwise defined herein shall have the same
meaning herein as therein and Amendment No. 1 of said Lease.
For good and valuable consideration, the receipt and legal sufficiency which is
hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease as
follows:
Section 1 (A), 3 (B), 5 (C), 4 (C), 10 (N), and 10 (O) are hereby amended to
read as follows:
1. (A) SUBJECTS REFERRED TO;
---------------------
LEASE TERM
OR TERM: From February 1, 1999 through April 30, 2001.
FIXED RENT: Fixed Rent shall be payable as follows: $6.00 per rentable square
foot, triple net, for the first fourteen (14) calendar months of
the Lease Amendment Term and $6.50 per rentable square foot,
triple net, for the remaining thirteen (13) calendar months of
the Lease Amendment Term. Fixed Rent shall be calculated on the
aggregate square footage of the Existing Premises of 20,740
square feet.
RENTABLE FLOOR AREA OF TENANT'S SPACE: 20,740 Square Feet.
OCCUPANCY: The Tenant shall occupy it's former space of 15,540 Square Feet
and in addition 5,200 Square feet of space formerly occupied by
Alma Foods.
2. (B) LANDLORD'S REQUIRED WORK
------------------------
Landlord's only work at the demised premises shall consist of the
installation of carpet in the office space areas only in the space formerly
occupied by Alma Foods; the painting of all walls in the office space area
only in the space formerly occupied by Alma Foods; the repairing of the
bathroom damage in the office space area only in the space formerly
<PAGE>
occupied by Alma Foods; and the re-keying of the front and back doors of
the former Alma Foods space.
3. (D) TENANT'S REQUIRED WORK
----------------------
Install a doorway or doorways between the Tenant's current Bay and the
warehouse space formerly occupied by Alma Foods or other modifications with
Landlord's consent. The aforementioned work is at the sole cost of the
Tenant. Such space shall be restored to it's original condition, unless
Tenant provides for significant improvements.
4. (C) The Factor: The factor shall be 51.2%.
----------
10. (N) OPTION TO EXTEND
----------------
Provided that Tenant is not then in default hereunder, Tenant shall have
the option to extend the term of this lease for an additional period of two
(2) years from the end of the Amendment 2 term (i.e. April 30, 2001), and
further, provided, however, that Tenant delivers written notice to Landlord
of tenant's exercise of its option to extend on or before September 30,
2000 (time being of the essence).
Such extended term shall be on the same terms, conditions, and covenants of
this lease, and amendments except that the Fixed Rent for the extended term
shall be at a rate of $7.00 per square foot.
10. (O) SUBLETTING AND ASSIGNMENT
-------------------------
Tenant shall not sublet nor assign this lease, either voluntarily or by
operation of law, (other than with a Person who is a Subsidiary Company or
Affiliate of Tenant) without the prior written consent of Landlord, such
consent shall not be unreasonably withheld. Landlord may withhold approval
of any Subtenant if Tenant is in default under the Lease. Landlord hereby
ratifies the existing occupancy arrangements between Tenant and Subtenants
and any future extensions of the occupancy arrangements between Tenant and
Subtenant within the lease term.
If the Landlord consents to such sublease or assignment Tenant shall remain
liable for the payment and performance of the terms and covenants of this
Lease. Tenant agrees to disclose the terms of any sublease arrangement to
Landlord prior to signing said sublease.
<PAGE>
IV. 4 (C) The Landlord shall be exclusively responsible to maintain all fire
protection systems for the demised premises in accordance with all
applicable Federal, State and local statutes, regulations and ordinances.
All other terms and conditions remain the same. Executed as a sealed instrument
this 28 day of January, 1999.
LANDLORD: 427 Turnpike Street Realty Trust
--------------------------------
BY: /s/ Shawn Rand
--------------------------------
Shawn Rand, Agent
TENANT: International Electronics, Inc.
--------------------------------
BY: /s/ John Waldstein
--------------------------------
John Waldstein
By its President
<PAGE>
EXHIBIT (10)(N)
September, 1999
427 TURNPIKE STREET
-------------------
INTERNATIONAL ELECTRONICS, INC.
-------------------------------
AMENDMENT NO. 3
---------------
Reference is made to the Lease dated March 28, 1995 (the "Lease" by and between
427 Turnpike Street Realty Trust (hereinafter called the "Landlord", which
expression shall include its heirs, executors, successors and assigns where the
context so admits) of one part, and International Electronics, Inc., a
Massachusetts corporation (hereinafter called the "Tenant", which expression
shall include its successors and assigns or executors and administrators where
the context so admits) of the otherwise defined herein shall have the same
meaning herein as therein and Amendment No. 1 of said Lease and Amendment No. 2
of said Lease.
For good and valuable consideration, the receipt and legal sufficiency which is
hereby acknowledged, Lessor and Lessee hereby agree to amend to read as follows:
Sections 1(A), 5(C), 10(N) and 10(O) are hereby amended to read as follows:
1. (A) SUBJECTS REFERRED TO;
--------------------
LEASE TERM
OR TERM: From February 1, 1999 through April 30, 2002.
FIXED RENT: Fixed Rent shall be payable as follows: $6.00 per rentable square
foot, triple net, for the first fourteen (14) calendar months of
the Lease Amendment 3 Term, $6.50 per rentable square foot, triple
net, for the next thirteen (13) calendar months and $7.00 per
rentable square foot, triple net, for the final twelve (12)
calendar months of the Lease Amendment Term. Fixed Rent shall be
calculated on the aggregate square footage of the existing Premises
of 20,740 square feet.
RENTABLE FLOOR AREA OF TENANT'S SPACE: 20,740 Square Feet.
OCCUPANCY: The Tenant shall occupy it's former space of 15,540 Square Feet and
in addition 5,200 Square feet of space formerly occupied by Alma
Foods.
5. (C) The Factor: The factor shall be 51.2%
----------
10. (N) OPTION TO EXTEND
----------------
Provided that Tenant is not then in default hereunder, Tenant shall have the
option to
<PAGE>
extend the term of this lease for an additional period of two (2) years from
the end of the Amendment 3 term (i.e. April 30, 2002), and further,
provided, however, that Tenant delivers written notice to Landlord of
tenant's exercise of its option to extend on or before September 30, 2001
(time being of the essence). Such extended term shall be on the same terms,
conditions, and covenants of this lease, and amendments except that the
Fixed Rent for the extended term shall be at a rate of $7.00 per square
foot.
10. (O) SUBLETTING AND ASSIGNMENT
-------------------------
Tenant shall not sublet nor assign this lease, either voluntarily or by
operation of law, (other than with a Person who is a Subsidiary Company or
Affiliate of Tenant) without the prior written consent of Landlord, such
consent shall not be unreasonably withheld. Landlord may withhold approval
of any Subtenant if Tenant is in default under the Lease. Landlord hereby
ratifies the existing occupancy arrangements between Tenant and Subtenants
and any future extensions of the occupancy arrangements between Tenant and
Subtenant within the lease term.
If the Landlord consents to such sublease or assignment Tenant shall remain
liable for the payment and performance of the terms and covenants of this
Lease. Tenant agrees to disclose the terms of any sublease arrangement to
Landlord prior to signing said sublease.
All other terms and conditions remain the same. Executed as a sealed instrument
this 27th day of September, 1999.
----
LANDLORD: 427 Turnpike Street Realty Trust
--------------------------------
BY: /s/ Shawn Rand
--------------------------------
Shawn Rand, Agent
TENANT: International Electronics, Inc.
--------------------------------
BY: /s/ John Waldstein
--------------------------------
John Waldstein
By its President
<PAGE>
EXHIBIT 22
Subsidiaries of the Registrant
The Company has a 99.3% owned subsidiary, Ecco Industries, Inc., a Delaware
Corporation and a wholly owned subsidiary, International Electronics Europe
Limited, a United Kingdom Corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL CONDITION AT AUGUST 31, 1999 AND
THE RESULTS OF INCOME FOR THE YEAR ENDED AUGUST 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 1,327,032
<SECURITIES> 0
<RECEIVABLES> 925,332
<ALLOWANCES> 201,000
<INVENTORY> 1,033,097
<CURRENT-ASSETS> 3,526,632
<PP&E> 1,867,499
<DEPRECIATION> (1,373,036)
<TOTAL-ASSETS> 4,165,153
<CURRENT-LIABILITIES> 1,588,197
<BONDS> 117,668
0
0
<COMMON> 15,333
<OTHER-SE> 2,443,955
<TOTAL-LIABILITY-AND-EQUITY> 4,165,153
<SALES> 9,425,569
<TOTAL-REVENUES> 9,462,948
<CGS> 5,028,089
<TOTAL-COSTS> 5,028,089
<OTHER-EXPENSES> 731,302
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,680
<INCOME-PRETAX> 293,670
<INCOME-TAX> (261,800)
<INCOME-CONTINUING> 555,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,470
<EPS-BASIC> .37
<EPS-DILUTED> .35
</TABLE>
