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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, 2000
Commission File Number: 2-91218-B
International Electronics, Inc.
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(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___
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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: $11,452,278
As of November 6, 2000, 1,358,841 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 $2.44 per share, (the average of the closing bid and asked price on
November 6, 2000) the aggregate market value of the non-affiliate shares so held
was approximately $3,300,000.
As of November 6, 2000, 1,535,813 shares of the registrant's common stock
were outstanding.
Documents incorporated by reference: None
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PART I
Item 1. Business
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, and controls up to four separate outputs. 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 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 sells a version of its Door-Gard(TM) under the trade name
prox.pad(TM). The prox.pad(TM) incorporates the use of both keypad and proximity
technology. This product has been jointly developed by the Company and HID
Corporation. HID Corporation recently announced an agreement with ASSA ABLOY AB,
of Sweden, which, if completed, will result in the acquisition of HID
Corporation, subject to regulatory approval.
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.
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Approximate prices paid by installing dealers for the digital keypads are
$50 to $300 and for the Secured Series product line $150 to $400.
The Company also markets a line of industrial access control products sold
under the trade name PowerKey(TM).
Glassbreak Detector Products
A detector is the component in an alarm system that is activated by an
intrusion or entry into 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 $25 to $35 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 Limited ("Chloride"). In
May 2000 the Company signed a Mutual Distribution Agreement whereby the Company
would resell certain Chloride products in the United States and Chloride would
resell certain of the Company's products in Europe.
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 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. BI has not purchased voice verification
products from the Company since February 1999.
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 fifteen 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
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Lock. The Company's largest customer accounted for approximately 36% of net
sales for the fiscal year ended August 31, 2000.
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.
The Company provides sales support through national advertising, periodic
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 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. The office was closed as of August 31, 1999, and the Company
currently has no employees at its European subsidiary. The Company generally
sells into overseas markets through distribution in certain countries. The
Company also participates with some of its distributors in cooperative
advertising programs.
Overseas Components and Production
The Company is currently having some of its finished products manufactured
in Asia. 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:
Voice
Access Control Glassbreak Verification
and Keypad Detectors & Other Total
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1998 $ 8,066,417 $1,272,313 $312,873 $ 9,651,603
1999 8,464,419 898,157 62,993 9,425,569
2000 10,716,817 735,461 0 11,452,278
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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:
Domestic Foreign
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1998 88% 12%
1999 90 10
2000 92 8
Manufacturing and Raw Materials
The Company performs in-house manufacturing for its Access Control, Keypad,
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. 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, 2000, was
approximately $315,000. Its backlog as of August 31, 1999 was approximately
$293,000. The increase in 2000 from 1999 is primarily due to an increase in
access control and keypad orders. The Company believes that the backlog will be
shipped during fiscal 2001.
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 are 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.
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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.
Competition for the industrial forklift access control product line includes
I.D. Systems, 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., and Sentrol, Inc.
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 (Visionics and Viisage).
Working Capital
During fiscal 2000, the Company depended on its existing cash balances to
provide working capital. As of August 31, 2000, the Company had a demand bank
line of credit available for borrowings of up to $1,000,000 which could be used
for working capital purposes and an additional line of credit for $390,000 for
equipment purchases, expiring February 28, 2001. The Company expects its working
capital requirements for fiscal 2001 to be provided from its cash reserves and
its line of credit plus anticipated cash from operations. As of August 31, 2000,
there were no borrowings outstanding under the demand line of credit and
approximately $347,000 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 nine 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 $1,202,000, $731,000 and $537,000
during fiscal 2000, 1999 and 1998, respectively.
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Employees
As of November 1, 2000, the Company had 68 employees, of which 64 were
full-time employees. Of these 68 employees, 15 were engaged in sales and
marketing, 9 were involved in product development, 29 in manufacturing, 6 in
customer service and 9 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.
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 ranging from
approximately $11,250 up to $12,100 plus utilities, maintenance and certain real
estate taxes. The property used by the Company is in good condition.
Item 3. Legal Proceedings
None
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Item 4. Submission of Matters to a Vote
of Security Holders
The Company held a special meeting in lieu of an annual meeting of
stockholders on March 30, 2000. The following directors were elected and the
votes for, against or abstained are indicated next to their name.
873,089 shares for John Waldstein
6,387 shares against John Waldstein
0 shares abstain John Waldstein
872,455 shares for Heath Paley
7,021 shares against Heath Paley
0 shares abstain Heath Paley
873,189 shares for Diane Balcom
6,287 shares against Diane Balcom
0 shares abstain Diane Balcom
873,189 shares for Kenneth Moyes
6,287 shares against Kenneth Moyes
0 shares abstain Kenneth Moyes
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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 and net tangible assets of $2,000,000 or
alternatively net income of $500,000 for the last fiscal year or in two of the
three most recently completed fiscal years. In fiscal 2000 the Company met the
$2,000,000 net tangible asset standard.
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, or at all.
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.
Sales Prices
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High Low
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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
Fiscal Year 2000:
First Quarter 3.13 1.63
Second Quarter 3.72 1.75
Third Quarter 3.25 2.00
Fourth Quarter 3.00 2.00
As of November 6, 2000 there were approximately 450 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.
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Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
As of August 31, 2000, the Company had $2,456,956 in working capital as
compared to $1,938,435 at August 31, 1999. The ratio of current assets to
current liabilities as of August 31, 2000 was 2.4, as compared to 2.2 in 1999
and 2.1 in 1998. The debt to equity ratio was .7 at August 31, 2000, 1999 and
1998. The increases in working capital and current ratio in 2000 from 1999 are
primarily the result of the Company's operating income and the deferred income
tax asset for fiscal 2000. The increase in current ratio in 1999 from 1998 is
the result of the Company's operating income and the deferred income tax asset
for fiscal 1999.
Net capital expenditures were $291,221, $346,679 and $214,156 in fiscal
years ending August 31, 2000, 1999 and 1998, respectively. The Company
anticipates having up to $420,000 in total capital expenditures for the purchase
of equipment, regulatory testing and tooling costs during fiscal 2001.
As of August 31, 2000, the Company has available a demand line of credit of
up to $1,000,000 and a $390,000 equipment line of credit, expiring
February 28, 2001. See Notes 5 and 6 to the Consolidated Financial Statements.
As of August 31, 2000, the Company had no outstanding borrowings under the
demand line of credit and had approximately $347,000 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 were issues associated with the programming code in existing computer
systems as the year 2000 approached. Systems that failed to recognize the
rollover of the two-digit year value to 00 could generate erroneous data or
cause the system to fail. The Company considers its products to be year 2000
compliant. The Company's products do not perform any date calculations, nor do
they have any report generating software that would present a problem with the
year 2000. To date, the results of the Company's year 2000 readiness plan
indicate that the assessment, improvement and testing programs implemented
provided a smooth transition to the year 2000. The Company has not experienced
any significant year 2000 disruptions with any of its products, its internal
information systems, or its vendors and customers. Based on this experience to
date, the Company does not anticipate incurring any material expenses or
experiencing any material operational disruptions related to the year 2000
transition. The Company will continue to monitor its computer applications and
those of its customers and vendors throughout the year 2000 to ensure that any
latent year 2000 issues that may arise are addressed promptly.
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Results of Operations
Fiscal years ended August 31, 2000, 1999 and 1998
Net sales in 2000 increased 22% from 1999 while 1999 sales decreased 2%
from 1998. The increase in sales for 2000 is due to an increase in access
control, keypad, and OEM sales, partially offset by decreases in glassbreak and
vertical market product lines. 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 ratios of gross profit to sales were 45% in 2000 and 47% in both 1999
and 1998. The decrease in gross profit in 2000 from 1999 and 1998 is due to
product mix and additional manufacturing costs.
Research and development expenses were $1,201,859 in 2000, as compared to
$731,302 in 1999 and $537,426 in 1998. The increase in costs in 2000 from 1999,
as well as the increase from 1999 to 1998, is primarily due to an increase in
personnel and related expenses and an increase in the use of consultants.
As a percentage of net sales, selling, general and administrative expenses
were 33% in 2000, 36% in 1999, and 35% in 1998. The decrease in expenses as a
percentage of net sales in 2000 is primarily due to decreases in bad debt,
sales samples, amortization expense, and the closing of the Company's
European sales office, partially offset by increased depreciation expense and
renovation costs, combined with improved sales efficiencies. The increase in
expenses as a percentage of net sales in 1999 from 1998 is primarily due to an
increase in compensation, advertising, and promotion expense.
Other income increased approximately $44,000 in 2000 from 1999, due to an
increase in interest income. Other income in 1999 was comparable to 1998.
The 2000 current provision for income taxes represents state income tax
expense. The deferred tax benefit of $95,000 for the fiscal year ended August
31, 2000 primarily reflects 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 (29%) for 2000, (89)% for 1999, and 19% for 1998.
The Company's effective tax rate in 2000 and 1999 differs from the federal
statutory rate because of the deferred tax asset recorded during the fiscal
years and utilization of federal net operating loss carryforwards. Differences
between the effective tax rate and the federal statutory rate for fiscal 1998 is
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.
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New Accounting Pronouncement
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. The Company believes the implementation of this statement will not
have a material effect on its consolidated financial statements.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This bulletin established guidelines for revenue recognition. SAB
101 will be effective in fiscal year 2001. The Company believes the
implementation of this bulletin will not have a material effect 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.
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, 2000, 1999 and 1998 the Company had net income of
approximately $355,000, $555,000 and $530,000, 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
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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 annual growth rates
recently experienced by the Company are not necessarily indicative of future
annual 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 a quarter. In addition, competitive pressure
on pricing in a given quarter could adversely affect the Company's operating
results, or such price pressure over an extended period could adversely affect
the Company's long-term profitability.
The Company establishes its expenditure levels for sales and marketing and
other expenses based, in large part, on its expected future results. As a
result, if sales fall below expectations, there would likely be a material
adverse effect on operating results because only a small portion of the
Company's expenses vary with its sales in the short-term.
Concentration of Customers. The Company has a substantial number of
customers but sells a large majority of 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 36% of the Company's
total net sales for the fiscal year ended August 31, 2000. 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
14
<PAGE>
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.
Offshore Production. The Company is currently having some of its finished
products manufactured 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 for 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, or at all. 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, 2000, the Company's
foreign sales represented approximately 8% of net sales. There may be a
reduction in the Company's foreign sales from the 2000 level in the event of
significant changes in foreign exchange rates or political and economic
instability in foreign countries.
Year 2000 Compliance. There were issues associated with the programming
code in existing computer systems as the year 2000 approached. Systems that
failed to recognize the rollover of the two-digit year value to 00 could
generate erroneous data or cause the system to fail. The Company considers its
products to be year 2000 compliant. The Company's products do not perform any
date calculations, nor do they have any report generating software that would
present a problem with the year 2000. To date, the results of the Company's
year 2000 readiness plan indicate that the assessment, improvement and testing
programs implemented provided a smooth transition to the year 2000. The Company
has not experienced any significant year 2000 disruptions with any of its
products, its internal information systems, or its vendors and customers. Based
on this experience to date, the Company does not anticipate incurring any
material expenses or experiencing any material operational disruptions related
to the year 2000 transition. The Company will continue to monitor its computer
applications and those of its
15
<PAGE>
customers and vendors throughout the year 2000 to ensure that any latent year
2000 issues that may arise are addressed promptly.
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 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
16
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
First Elected
Name Age Director Position
---- --- -------- --------
John Waldstein 47 1982 President, Chief Executive Officer,
Treasurer and Chairman of the Board
James C. Brierley, Jr. 49 - Vice President of Sales and
Marketing
Christopher Hentschel 56 - Vice President of Engineering
Heath Paley 52 1990 Director
Diane Balcom 58 1989 Director
Kenneth Moyes 44 1998 Director
The term of office of each director expires as follows:
John Waldstein Third Annual Meeting following March 30, 2000 meeting
Heath Paley First Annual Meeting following March 30, 2000 meeting
Diane Balcom Second Annual Meeting following March 30, 2000 meeting
Kenneth Moyes Second Annual Meeting following March 30, 2000 meeting
The Company anticipates that an annual meeting of shareholders will be held
in April 2001.
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."
17
<PAGE>
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 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.
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.
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 2000.
18
<PAGE>
Item 10. Executive Compensation
The following table sets forth information concerning the compensation for
each of the last three fiscal years ended August 31, 2000, of the Company's
President and Chief Executive Officer, and two other executive officers of the
Company who received at least $100,000 of compensation during any of these years
(the "Named Executive Officers"):
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 2000 $145,217 $50,000 12,500 $16,234
President, 1999 141,014 7,000 29,500 16,233
Chief Executive Officer 1998 137,947 27,000 15,000 16,892
James Brierley, Jr. 2000 120,065 9,500 5,000 -
Vice President of 1999 99,959 16,000 - -
Sales and Marketing 1998 89,250 25,100 10,000 -
Christopher Hentschel 2000 105,196 6,000 5,000 -
Vice President of 1999 96,972 8,000 3,333 -
Engineering 1998 86,317 7,500 7,000 -
</TABLE>
(1) Represents the cost of a split dollar whole life insurance policy with a
face value of $1,005,000 as of August 31, 2000 and a long-term disability
policy. The Company is a beneficiary of the life insurance policy to the
extent of all premiums paid upon the death of John Waldstein. Mr. Waldstein
may purchase the life insurance policy upon termination of his employment
for the then current cash surrender value.
(2) Does not include perquisites, which do not exceed 10% of annual salary.
(3) Amount represents commissions and/or bonus earned during the applicable
year.
The Company's Board of Directors, commencing in fiscal 1993, established an
annual bonus plan for officers and certain key employees. The available funds
for the plan shall be up to five percent of income before taxes. The final
amount and subsequent distribution to employees and officers shall be determined
by the Company's Compensation Committee.
19
<PAGE>
Options Granted During Fiscal 2000
The following table sets forth certain information with respect to the
grant of stock options in fiscal 2000 to any of the Named Executive Officers:
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------------- Value of Assumed
Number of Percent of Annual Rates of
Shares Total Options Stock Price
Underlying Granted To Exercise Appreciation for
Options Employees Price Expiration Option Term (2)
Name Granted (1) In Year Per Share Date 5%($) 10%($)
---- ------- ------- --------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
John Waldstein 12,500 26% $1.77 Sept. 16, 2009 $13,914 $35,262
Christopher Hentschel 5,000 10% 2.54 Nov. 11, 2009 7,987 20,241
James Brierley, Jr. 5,000 10% 2.54 Nov. 11, 2009 7,987 20,241
</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 $147,000, subject to adjustment for inflation.
The salary and bonus 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, 2000, John Waldstein's
base salary to the conclusion of his contract period is approximately $441,000,
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 severance of one year's compensation and benefits.
For each additional six months that he works thereafter, he shall be paid
severance of an additional six months compensation and benefits provided any
such severance payments shall not exceed three years of compensation.
20
<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, 2000, the annual salaries of such
management personnel represent an aggregate of $398,000.
Year End Option Table
The following table sets forth the number and value of unexercised options held
as of August 31, 2000 by the Named Executive Officers:
Aggregated Option Exercises In Last Fiscal
Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options at
Acquired on Value Options at End of Fiscal 2000 End of Fiscal 2000 (1)
Name Exercise Realized (3) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Waldstein (2) 11,667 $10,296 114,375 44,625 $138,990 $42,712
James Brierley, Jr. - - 25,000 5,000 25,888 5,438
Christopher Hentschel - - 21,667 6,000 23,581 5,799
</TABLE>
(1) Difference between the fair market value of the underlying common stock on
November 6, 2000 and the exercise price.
(2) Includes warrants to purchase an aggregate of 35,000 shares of common
stock. See Note 9 to the Consolidated Financial Statements.
(3) Difference between fair market value of the underlying common stock on the
date of exercise and the exercise price, multiplied by the number of shares
issued upon exercise.
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, 2000,
directors' fees were paid in the amounts of $2,500 to Ms. Balcom, $3,500 to Mr.
Moyes, and $4,000 to Mr. Paley. In March 2000, 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
$2.81. These options are fully vested after one year, provided the Directors
continue to provide service to the Company.
21
<PAGE>
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 6, 2000, (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 245,131/(2)/ 14.8%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
James Brierley, Jr. 33,826/(5)/ 2.2%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
Heath Paley 44,350/(3)/ 2.8%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
Kenneth Moyes 23,680/(6)/ 1.5%
526 Boston Post Road
Wayland, Massachusetts
Diane Balcom 20,060/(4)/ 1.3%
1709 Boulevard of the Allies, Suite 100
Pittsburgh, Pennsylvania
Christopher Hentschel 24,550/(7)/ 1.6%
c/o International Electronics, Inc.
427 Turnpike Street
Canton, Massachusetts
All directors and executive officers
as a group (6 persons) 391,597/(8)/ 22.4%
5% Shareholders:
Warren Paley 217,267 14.1%
3 Mill Street
New Baltimore, New York
Steven Tannenbaum 126,927/(9)/ 8.3%
125 Country Club Road
Newton, Massachusetts
</TABLE>
22
<PAGE>
(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, 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 6, 2000.
(2) Includes vested options and warrants to purchase an aggregate 121,125 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 27,333 shares of the
Company's common stock granted at prices ranging from $.75 - $2.81 per
share.
(4) Includes vested options and warrants to purchase an aggregate 11,000 shares
of the Company's common stock granted to Diane Balcom and Balcom &
Associates at prices ranging from $.72 - $2.81 per share.
(5) Includes vested options to purchase an aggregate 26,250 shares of the
Company's common stock granted at prices ranging from $1.35-$2.54 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 6,000 shares of the
Company's common stock at prices ranging from $1.17 - $2.81 per share.
(7) Includes vested options to purchase an aggregate 22,917 shares of the
Company's common stock at prices ranging from $.75 to $2.54 per share.
(8) Includes vested options and warrants to purchase an aggregate 214,625 shares
of the Company's common stock granted at prices ranging from $.72 -$2.81 per
share.
(9) With respect to 52,150 shares, Mr. Tannenbaum holds such shares jointly with
his wife and has shared voting and investment power. With respect to 74,777
shares, Mr. Tannenbaum has sole voting and investment power.
23
<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, 2000 and 1999
Consolidated Statements of Income for the Years Ended August 31,
2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
August 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended August 31,
2000, 1999 and 1998
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.
24
<PAGE>
(10)(a) A American Automatic Alarm Company Supplies Contract and
Non-Competition Agreement is incorporated by reference to
Exhibit (10)(w) 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) 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)(f) 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)(g) 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)(h) 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)(i) 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)(j) Third amendment dated July 15, 1999 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-KSB for the year ended August 31,
1999.
(10)(k) Second amendment to original lease of March 28, 1995,
Canton, Massachusetts between 427 Turnpike Realty Trust and
the Registrant dated January 28, 1999 is incorporated by
reference to 10(m) on Form 10-KSB for the year ended August
31, 1999.
25
<PAGE>
(10)(l) Third amendment to original lease of March 28, 1995, Canton,
Massachusetts between 427 Turnpike Realty Trust and the
Registrant dated September 27, 1999 is incorporated by
reference to 10(n) on Form-10-KSB for the year ended August
31, 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.
26
<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.
<TABLE>
<S> <C>
INTERNATIONAL ELECTRONICS, INC.
Date: November 29, 2000 By: /s/ John Waldstein
-----------------------------------------------------
John Waldstein, President and Chief Executive Officer
</TABLE>
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 President and Chief November 29, 2000
-------------------------------- Executive Officer,
John Waldstein Treasurer and Chief
Financial and Accounting
Officer, and Chairman of
the Board
/s/ Heath Paley Director November 29, 2000
--------------------------------
Heath Paley
/s/ Kenneth Moyes Director November 29, 2000
--------------------------------
Kenneth Moyes
/s/ Diane Balcom Director November 29, 2000
--------------------------------
Diane Balcom
</TABLE>
27
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31,
2000, 1999 AND 1998:
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-7-17
FINANCIAL STATEMENT SCHEDULE FURNISHED PURSUANT TO THE
REQUIREMENTS OF FORM 10-KSB:
Schedule II - Valuation and Qualifying Accounts F-19
</TABLE>
All other schedules are omitted because they are inapplicable, or not required
under the instructions.
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, 2000 and
1999, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended August 31, 2000.
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 auditing standards generally accepted
in the United States of America. 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, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 10, 2000
Boston, Massachusetts
F-2
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,642,359 $ 1,327,032
Accounts receivable, net of allowances for
doubtful accounts and returns of $171,000
and $201,000 in 2000 and 1999, respectively 1,135,128 724,332
Inventories 831,993 1,033,097
Deferred income taxes 348,000 260,000
Other current assets 250,097 182,171
----------- -----------
Total current assets 4,207,577 3,526,632
----------- -----------
EQUIPMENT AND FURNITURE, net of
accumulated depreciation and amortization 505,101 494,463
----------- -----------
OTHER ASSETS:
Deferred income taxes 76,000 69,000
Goodwill and other intangibles, net of
accumulated amortization of
$1,178,000 in 1999 - 63,108
Other 11,950 11,950
----------- -----------
Total other assets 87,950 144,058
----------- -----------
$ 4,800,628 $ 4,165,153
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 444,884 $ 378,034
Accrued expenses 1,118,401 1,040,705
Income taxes payable 15,000 62,000
Current portion of long-term obligations 172,336 107,458
----------- -----------
Total current liabilities 1,750,621 1,588,197
----------- -----------
LONG-TERM OBLIGATIONS, less
current portion 188,543 117,668
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value - authorized,
5,984,375 shares; issued, 1,570,813 and
1,533,301 shares in 2000 and 1999, respectively 15,708 15,333
Capital in excess of par value 4,853,991 4,806,955
Accumulated deficit (1,969,591) (2,324,356)
Less treasury stock, at cost - 35,000 shares (38,644) (38,644)
----------- -----------
Total shareholders' equity 2,861,464 2,459,288
----------- -----------
$ 4,800,628 $ 4,165,153
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
NET SALES $ 11,452,278 $9,425,569 $9,651,603
COST OF SALES 6,295,556 5,028,089 5,152,016
------------ ---------- ----------
GROSS PROFIT 5,156,722 4,397,480 4,499,587
------------ ---------- ----------
OPERATING EXPENSES:
Research and development costs 1,201,859 731,302 537,426
Selling, general and administrative expenses 3,732,147 3,394,207 3,332,544
------------ ---------- ----------
Total operating expenses 4,934,006 4,125,509 3,869,970
------------ ---------- ----------
INCOME FROM OPERATIONS 222,716 271,971 629,617
INTEREST EXPENSE (29,706) (15,680) (16,411)
OTHER INCOME 81,755 37,379 37,923
------------ ---------- ----------
PRE-TAX INCOME 274,765 293,670 651,129
------------ ---------- ----------
PROVISION (BENEFIT) FOR TAXES:
Current 15,000 67,200 121,000
Deferred (95,000) (329,000) -
------------ ---------- ----------
(80,000) (261,800) 121,000
------------ ---------- ----------
NET INCOME $ 354,765 $ 555,470 $ 530,129
============ ========== ==========
NET INCOME PER SHARE:
Basic $ 0.23 $ 0.37 $ 0.36
============ ========== ==========
Diluted $ 0.21 $ 0.35 $ 0.34
============ ========== ==========
SHARES USED IN COMPUTING NET INCOME
PER SHARE:
Basic 1,524,964 1,493,479 1,493,301
============ ========== ==========
Diluted 1,688,549 1,574,279 1,577,203
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital In
Common Stock Excess of Accumulated Treasury Stock
Shares Amount Par Value Deficit Shares Cost Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1997 1,528,301 $ 15,283 $4,784,267 $(3,409,955) 35,000 $(38,644) $1,350,951
Issuance of stock warrants - - 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
Issuance of stock options - - 7,074 - - - 7,074
Stock issued upon exercise of stock options
and warrants 37,512 375 39,962 - - - 40,337
Net income - - - 354,765 - - 354,765
--------- ---------- ---------- ------------ ------ --------- -----------
BALANCE, AUGUST 31, 2000 1,570,813 $ 15,708 $4,853,991 $(1,969,591) 35,000 $(38,644) $2,861,464
========= ========== ========== ============ ====== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 354,765 $ 555,470 $ 530,129
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 343,691 306,505 289,077
Stock options and warrants issued for professional services 7,074 6,356 11,882
Deferred income taxes (95,000) (329,000) -
Changes in operating assets and liabilities:
Accounts receivable (410,796) 262,071 49,193
Inventories 201,104 (286,527) 331,991
Other current assets (67,926) (28,355) (20,542)
Accounts payable and accrued expenses 144,546 190,578 (303,480)
Income taxes payable (47,000) 18,000 5,000
---------- ---------- ----------
Net cash provided by operating activities 430,458 695,098 893,250
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of equipment and furniture (291,221) (346,679) (214,156)
Other assets - - 14,399
---------- ---------- ----------
Net cash used in investing activities (291,221) (346,679) (199,757)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to debt obligations 280,727 157,390 111,066
Issuance of common stock 40,337 4,500 -
Payments of debt obligations (144,974) (79,153) (68,758)
---------- ---------- ----------
Net cash provided by financing activities 176,090 82,737 42,308
---------- ---------- ----------
CASH AND CASH EQUIVALENTS - Increase during the year 315,327 431,156 735,801
BALANCES, BEGINNING OF YEAR 1,327,032 895,876 160,075
---------- ---------- ----------
BALANCES, END OF YEAR $1,642,359 $1,327,032 $ 895,876
========== ========== ==========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 29,984 $ 15,680 $ 16,411
========== ========== ==========
- Income taxes paid $ 2,500 $ 52,868 $ 118,136
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
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
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 - 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 the weighted-average
number of shares used in calculating basic and diluted net income per
share:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Weighted-average shares outstanding for
basic net income per share 1,524,964 1,493,479 1,493,301
Effect of dilutive option and warrant shares 163,585 80,800 83,902
--------- --------- ---------
Total shares for diluted net income per share 1,688,549 1,574,279 1,577,203
========= ========= =========
</TABLE>
The calculations for diluted net income per share do not include
aggregate out-of-money options and warrants of 36,000, 77,037 and
156,304 for the years ended August 31, 2000, 1999 and 1998,
respectively.
Employee Stock-Based Compensation - The Company uses the intrinsic value-
based method of Accounting Principles Board Opinion No. 25, as permitted
under Statement of Financial Accounting Standards ("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.
F-8
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income - The Company reports comprehensive income in accordance
with SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income for
the three years ended August 31, 2000 does not differ from the reported net
income.
Disclosures about Segments of an Enterprise - 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.
Recent Accounting Pronouncements - During 1998, the Financial Accounting
Standards Board ("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. The Company believes the implementation of
this statement will not have a material effect on its consolidated financial
statements.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This bulletin established guidelines for revenue recognition.
SAB 101 will be effective in fiscal year 2001. The Company believes the
implementation of this bulletin will not have a material impact on its
consolidated financial statements.
2. INVENTORIES
Inventories at August 31 consist of the following:
<TABLE>
<S> <C> <C>
2000 1999
Raw materials and subassemblies $ 555,136 $ 691,812
Work in process 116,054 130,632
Finished goods 160,803 210,653
--------- -----------
$ 831,993 $ 1,033,097
========= ===========
</TABLE>
F-9
<PAGE>
3. EQUIPMENT AND FURNITURE
Equipment and furniture at August 31 consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Machinery and equipment $ 1,172,431 $ 984,335
Office furniture and equipment 986,289 883,164
---------------- -----------------
2,158,720 1,867,499
Less accumulated depreciation and amortization (1,653,619) (1,373,036)
---------------- -----------------
$ 505,101 $ 494,463
================ =================
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at August 31 consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Payroll and related amounts $ 407,154 $ 294,310
Warranty 395,124 503,833
Professional fees 157,039 187,842
Other 159,084 54,720
---------------- -----------------
$ 1,118,401 $ 1,040,705
================ =================
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations at August 31 consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Capitalized lease obligations, 11.6%, due through
April 2001 (Note 7) $ 5,728 $ 17,188
Equipment line of credit, 8.25% - 9.0% (Note 6) 347,424 194,562
Collateralized 8% equipment loans, final payments
through November 2001 7,727 13,376
---------------- -----------------
360,879 225,126
Less current portion (172,336) (107,458)
---------------- -----------------
$ 188,543 $ 117,668
================ =================
</TABLE>
The future principal payments on long-term obligations as of August 31,
2000, excluding capital leases, are $166,608 in 2001, $132,484 in 2002, and
$56,059 in 2003.
Capital lease and equipment loans at August 31, 2000 are collateralized by
the related equipment with a carrying value of approximately $322,667.
F-10
<PAGE>
6. BANK ARRANGEMENTS
As of August 31, 2000, the Company has a bank demand line of credit that
provided for borrowings up to $1,000,000 and an available $390,000 equipment
line of credit, expiring February 28, 2001. 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, 2000, no borrowings have been made under the demand
line of credit, and the Company has $347,424 as equipment debt which is
payable in monthly installments through May 2003.
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, 2000, 1999 and
1998 amounted to $197,637, $171,014 and $138,322, 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, 2000 are as follows:
Capital Operating
Leases Leases
2001 $6,042 $138,267
2002 - 96,786
--------- -----------
Total minimum lease payments 6,042 $235,053
===========
Less interest (314)
---------
Net minimum lease payments - current portion $5,728
=========
Employment Arrangements - The Company has a continuous three year employment
agreement with its President and Chief Executive Officer providing minimum
annual aggregate compensation of $147,000.
The Company also has employment arrangements with certain key management that
require salary and benefit continuation for one year (representing an
aggregate of $398,000 in salaries as of August 31, 2000) 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>
2000 1999 1998
<S> <C> <C> <C>
Current:
Federal $ - $ 1,000 $ 15,000
State 15,000 58,700 95,000
Foreign - 7,500 11,000
-------- --------- ---------
15,000 67,200 121,000
-------- --------- ---------
Deferred:
Federal (103,000) (257,000) -
State 8,000 (72,000) -
-------- --------- ---------
(95,000) (329,000) -
-------- --------- ---------
$(80,000) $(261,800) $ 121,000
======== ========= =========
</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>
2000 1999 1998
<S> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
State income taxes, net of federal benefit 3.8 (1.0) 9.6
Amortization of goodwill 7.8 9.9 4.5
Other permanent items 4.1 4.7 2.6
Recognition of previously reserved tax assets (109.6) (140.2) (39.4)
Other 30.8 3.5 7.3
------ ------ -----
Effective tax rate (29.1)% (89.1)% 18.6 %
====== ====== =====
</TABLE>
As of August 31, 2000, the Company has net operating loss carryforwards for
financial reporting and income tax purposes of approximately $1,024,000,
expiring in varying amounts from 2004 to 2010 (primarily 2004 to 2008). Included
in this amount is approximately $341,000 of net operating loss carryforwards
which are limited to use against income of Ecco. Aggregate investment and
research and development credit carryforwards of $9,700 at August 31, 2000
expire in varying amounts through the year 2005. Net operating loss
carryforwards may be limited in the event of certain circumstances, including
significant changes in ownership interests.
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. During the year ended
August 31, 2000, the Company reduced its valuation allowance by $301,000
because of sustained levels of profitability and utilization of the Company's
net operating loss carryforwards.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities at August 31:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 348,000 $ 463,000
Tax credits 10,000 46,000
Accounts receivable reserves 68,000 80,000
Inventories and related reserves 228,000 289,000
Other 67,000 71,000
Depreciation 61,000 39,000
Valuation allowance (358,000) (659,000)
--------- ---------
$ 424,000 $ 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, 2000, 115,342 shares remain available for future
grants.
F-13
<PAGE>
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, 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
Granted (weighted-average fair value of $1.66) 48,500 2.48
Exercised (20,000) 1.22
Canceled/expired (8,621) 1.42
-------
Outstanding, August 31, 2000 376,309 $ 1.53
======= ======
</TABLE>
F-14
<PAGE>
9. CAPITAL TRANSACTIONS (CONTINUED)
Stock Options (Continued) - The following table summarizes information
concerning outstanding and exercisable options as of August 31, 2000:
<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 57,200 2.23 $ .79 57,200 $ .79
1.01 - 2.00 231,442 6.74 1.41 148,193 1.38
2.01 - 2.81 87,667 5.96 2.35 54,792 2.18
----------- ----------------
376,309 5.87 $ 1.53 260,185 $ 1.42
=============== ============= ================ ================ ================
</TABLE>
Stock Warrants - 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-15
<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, 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 46,167 35,000 2,512 83,679
Exercised (15,000) - (2,512) (17,512)
Expired (3,333) - - (3,333)
------------ ------------ ----------- ------------
Outstanding, August 31, 2000
(weighted-average exercise
price of $1.35) 27,834 35,000 - 62,834
============ ============ =========== ============
Exercisable 27,834 32,500 - 60,334
============ ============ =========== ============
Exercise prices $.72 - $2.07 $.74 - $2.12 $ - $.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, 2000, 1999 and 1998 would have decreased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION> 2000 1999 1998
<S> <C> <C> <C>
Net income - as reported $354,765 $555,470 $530,129
Net income - pro forma 322,366 483,730 484,380
Net income per share - diluted - as reported 0.21 0.35 0.34
Net income per share - diluted - pro forma 0.19 0.31 0.31
</TABLE>
The pro forma disclosures presented are not necessarily representative of the
effects on reported net income for future years.
F-16
<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% , an expected
life of five years, an expected volatility of 80% and assumes no dividends
will be paid.
<TABLE>
<CAPTION>
Common Stock Reserved Shares
<S> <C>
Stock warrants 62,834
Stock options 491,651
--------
554,485
========
</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 36% of net sales in 2000, 40% in 1999,
and 36% in 1998. The accounts receivable from this customer amounted to
approximately $181,000 and $189,000 at August 31, 2000 and 1999,
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 $918,000 in 2000,
$977,000 in 1999 and $1,196,000 in 1998.
12. OTHER INCOME
Other income consists of the following for the years ended August 31:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest $ 77,530 $ 60,343 $26,248
Commissions - - 3,357
Other income (expense) 4,225 (22,964) 8,318
-------- -------- -------
$ 81,755 $ 37,379 $37,923
======== ======== =======
</TABLE>
* * * * * *
F-17
<PAGE>
FINANCIAL STATEMENT SCHEDULE
FURNISHED PURSUANT TO THE
REQUIREMENTS OF FORM 10-KSB
<PAGE>
SCHEDULE 11
INTERNATIONAL ELECTRONICS, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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, 2000 $201,000 $ 2,000 $ - $(32,000) $171,000
August 31, 1999 176,000 31,000 - (6,000) 201,000
August 31, 1998 185,000 35,000 - (44,000) 176,000
</TABLE>
(A) Net write-offs of bad debts (net of recoveries) and returns.
F-19
