U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended February 28, 2002
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Commission File Number 0-16305
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International Electronics, Inc.
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(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2654231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
427 Turnpike Street, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(781) 821-5566
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(Issuer's telephone number, including area code)
Not applicable
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(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO _____
---
1,570,647 common shares were outstanding at March 29, 2002.
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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Index
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Part I. Financial Information: Page No.
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Item 1: Financial Statements (unaudited)
--------------------------------
Condensed Consolidated Balance Sheets, February 28, 2002
and August 31, 2001 2
Condensed Consolidated Statements of Income, three and six
months ended February 28, 2002 and 2001 3
Condensed Consolidated Statement of Shareholders' Equity,
six months ended February 28, 2002 4
Condensed Consolidated Statements of Cash Flows, six
months ended February 28, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 10-17
---------------------------------------------
Part II. Other Information:
Item 4: Submission of Matters to a Vote of Security Holders 18
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Item 6: Exhibits and Reports on Form 8-K 18
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Signature 19
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(unaudited)
Feb. 28, 2002 August 31, 2001
------------- ---------------
ASSETS
- ------
Current assets:
Cash and equivalents $1,789,168 $1,549,954
Accounts receivable, net 1,457,482 1,211,884
Inventories 767,017 848,742
Deferred income taxes 337,000 330,000
Other current assets 274,949 239,486
---------- ----------
Total current assets 4,625,616 4,180,066
Property and equipment, net 892,851 476,359
Other assets:
Deferred income taxes 88,000 88,000
Other 29,211 36,711
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117,211 124,711
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$5,635,678 $4,781,136
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 529,830 $ 330,627
Accrued expenses 1,199,866 987,306
Income taxes 29,000 31,000
Current portion of long-term obligations 273,162 218,066
-------------- -------------
Total current liabilities 2,031,858 1,566,999
Long-term obligations, less current portion 273,169 201,488
Commitments
Shareholders' equity:
Common stock, $0.01 par value;
authorized 5,984,375 shares;
issued 1,605,647 and 1,589,313
shares, respectively 16,056 15,893
Capital in excess of par value 4,882,628 4,868,791
Accumulated deficit (1,529,389) (1,833,391)
Less treasury stock, at cost:
35,000 shares (38,644) (38,644)
-------------- -------------
Total shareholders' equity 3,330,651 3,012,649
-------------- -------------
$5,635,678 $4,781,136
============== =============
See notes to unaudited condensed consolidated financial statements.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(unaudited)
Three months ended Six months ended
-------------------------------------- -----------------------------------
Feb. 28, 2002 Feb. 28, 2001 Feb. 28, 2002 Feb. 28, 2001
---------------- ---------------- ---------------- ---------------
Net sales $3,214,792 $2,597,690 $5,860,551 $5,337,142
Cost of sales 1,739,373 1,464,439 3,167,288 2,936,232
-------------- -------------- -------------- --------------
Gross profit 1,475,419 1,133,251 2,693,263 2,400,910
Operating expenses:
Research and development costs 250,314 249,759 510,387 537,852
Selling, general and
administrative expenses 961,512 873,795 1,853,200 1,868,457
-------------- -------------- -------------- --------------
Total operating expenses 1,211,826 1,123,554 2,363,587 2,406,309
-------------- -------------- -------------- --------------
Income (loss) from operations 263,593 9,697 329,676 (5,399)
Interest expense (4,981) (7,476) (10,868) (15,913)
Other income 7,341 20,094 17,194 49,531
-------------- -------------- -------------- --------------
Income before income taxes 265,953 22,315 336,002 28,219
Provision (benefit) for income taxes:
Current 29,000 2,300 39,000 11,000
Deferred (6,000) (27,000) (7,000) (16,000)
-------------- --------------- -------------- --------------
23,000 (24,700) 32,000 (5,000)
-------------- --------------- -------------- --------------
Net income $ 242,953 $ 47,015 $ 304,002 $ 33,219
============== ============== ============== ==============
Net income per share:
Basic $ 0.15 $ 0.03 $ $0.19 $ 0.02
============== ============== ============== ==============
Diluted $ 0.15 $ 0.03 $ $0.18 $ 0.02
============== ============== ============== ==============
Shares used in computing
net income per share:
Basic 1,569,817 1,539,980 1,567,198 1,538,217
============== ============== ============== ==============
Diluted 1,674,982 1,662,544 1,672,159 1,672,146
============== ============== ============== ==============
See notes to unaudited condensed consolidated financial statements.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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(unaudited)
Common Stock Capital in Treasury Stock
------------ excess of Accumulated --------------
Shares Amount par value Deficit Shares Cost Total
------ ------ --------- ------- ------ ---- -----
Balances,
September 1, 2001 1,589,313 $15,893 $4,868,791 ($1,833,391) 35,000 ($38,644) $3,012,649
Stock issued upon
exercise of stock
options 14,001 140 10,361 - - - 10,501
Stock issued upon
exercise of stock
warrants 2,333 23 3,476 - - - 3,499
Net income - - - 304,002 - - 304,002
--------- ------- ---------- ------------ ------ --------- ----------
Balances,
February 28, 2002 1,605,647 $16,056 $4,882,628 ($1,529,389) 35,000 ($38,644) $3,330,651
========= ======= ========== ============ ====== ========= ==========
See notes to unaudited condensed consolidated financial statements.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(unaudited)
Six months ended
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Feb. 28, 2002 Feb. 28, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 304,002 $ 33,219
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 170,229 154,577
Deferred income taxes (7,000) (16,000)
Changes in operating assets and liabilities:
Accounts receivable (245,598) (426,484)
Inventories 81,725 (351,493)
Other current assets (35,463) 21,412
Income taxes (2,000) 11,000
Accounts payable and accrued
expenses 411,763 396,221
---------- ----------
Net cash provided by (used in)
operating activities 677,658 (177,548)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of property and equipment (579,221) (199,702)
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Net cash used in investing activities (579,221) (199,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 14,000 4,176
Proceeds from long-term obligations 248,659 42,268
Payments of long-term obligations (121,882) (92,468)
---------- ----------
Net cash provided by (used in) financing activities 140,777 (46,024)
CASH AND EQUIVALENTS:
Net increase (decrease) during period 239,214 (423,274)
Balances, beginning of period 1,549,954 1,642,359
---------- ----------
Balances, end of period $1,789,168 $1,219,085
========== ==========
See notes to unaudited condensed consolidated financial statements.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
A. Financial Statements:
---------------------
In the opinion of International Electronics, Inc. ("IEI"), the unaudited
condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial position as of February 28, 2002 and the results of
operations for the three and six months ended February 28, 2002 and 2001.
Certain disclosures normally included have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, although IEI believes the disclosures are adequate to make
the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in IEI's Annual Report on Form 10-KSB for the
year ended August 31, 2001.
B. Principles of Consolidation:
----------------------------
The accompanying condensed consolidated financial statements include the
accounts of IEI, its majority owned subsidiary, Ecco Industries, Inc. and
its wholly owned subsidiary, International Electronics Europe Limited.
All material intercompany transactions, balances and profits have been
eliminated.
C. Income Taxes:
-------------
IEI provides for income taxes at the end of each interim period based on
the estimated effective tax rate for the full fiscal year. Cumulative
adjustments to the tax provision are recorded in the interim period in
which a change in the estimated annual effective rate is determined.
D. Significant Estimates and Assumptions:
--------------------------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts
of sales and expenses during the reporting period. Actual results could
differ from those estimates.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
E. Net Income per Share:
---------------------
Basic net income per share is computed by dividing net income by the
weighted-average common shares outstanding during the periods. Diluted
net income per share is computed by dividing net income by the weighted
average number of common and dilutive option and warrant shares
outstanding based on the average market price of IEI'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:
Three months ended Six months ended
--------------------------------- --------------------------------
Feb. 28, 2002 Feb. 28, 2001 Feb. 28, 2002 Feb. 28, 2001
------------- ------------- ------------- -------------
Shares used in computation:
Weighted-average
shares outstanding for
basic net income per share 1,569,817 1,539,980 1,567,198 1,538,217
Effect of dilutive option
and warrant shares 105,165 122,564 104,961 133,929
------------ ------------ ------------ ------------
Total shares for diluted net
income per share 1,674,982 1,662,544 1,672,159 1,672,146
============ ============ ============ ============
The calculations for diluted net income per share do not include an aggregate
out of the money options and warrants of 95,000 and 60,500 for the three months
ended February 28, 2002 and 2001, respectively.
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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
F. Recent Accounting Pronouncements:
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for using the purchase method of accounting and
prohibits the use of the pooling-of-interests method. SFAS No. 142
eliminates the amortization of goodwill and certain other intangibles and
instead subjects these assets to periodic impairment assessments. SFAS
No. 142 is effective immediately for all goodwill and certain other
intangible assets acquired after June 30, 2001. IEI does not expect that
the implementation of SFAS No's. 141 and 142 will have any impact on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". SFAS No. 144 specifies accounting for
long-lived assets to be disposed of by sale and broadens the presentation
of discontinued operations to include more disposal transactions than
were included under the previous standards. IEI is required to implement
SFAS No. 144 on September 1, 2002, and it has not determined the impact,
if any, that this statement will have on its consolidated financial
position or results of operations.
G. Commitments:
-----------
Leases - IEI leases an administrative and production facility under an
operating lease, which expires in 2004 at an annual rate of approximately
$145,000. IEI is responsible for certain real estate taxes, utilities and
maintenance costs. Total rental expense for operating leases for the six
months ended February 28, 2002 and 2001 amounted to approximately $85,000
and $78,000, respectively.
Employment Agreement - IEI has a continuous three-year employment
agreement with its President and Chief Executive Officer providing
minimum annual aggregate compensation of approximately $167,000. This
employment agreement contains certain termination benefits including the
payment of three years compensation upon a termination without cause.
-8-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(continued)
(unaudited)
H. Long-term Obligations:
----------------------
Long-term obligations are summarized as follows:
Feb. 28, 2002 Aug. 31, 2001
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Equipment line of credit, 4.75%-6.5% (Note I) $546,331 $417,948
Collateralized 8% equipment loan - 1,606
----------- -----------
546,331 419,554
Less current portion (273,162) (218,066)
----------- -----------
$273,169 $201,488
=========== ===========
The future principal payments on long-term obligations are $273,162
(2003), $176,566 (2004) and $96,603 (2005).
I. Bank Arrangements:
------------------
As of February 28, 2002, IEI has an available $380,000 equipment line of
credit expiring February 28, 2003 and a bank demand line of credit that
provides for borrowings of up to $1,000,000. Both lines of credit are at
the bank's prime rate of interest, and all of IEI's assets are
collateralized under these arrangements. The credit agreements contain
certain restrictive covenants including covenants limiting the payment of
dividends, a minimum debt to tangible net worth ratio, and bi-annual or
annual net income. As of February 28, 2002, no borrowings have been made
under the demand line of credit, and IEI has an aggregate of $546,331
outstanding as equipment debt, which is payable in monthly installments
through February 2005 (Note H).
-9-
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and notes to those statements. The
following discussion contains forward-looking information that involves risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of a number of
factors, including the matters discussed in "Risk Factors" and elsewhere in this
report.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Note 1 to the consolidated financial statements in our Annual Report on
Form 10-KSB for the year ended August 31, 2001 describes the significant
accounting policies used in the preparation of our consolidated financial
statements. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts and sales returns, inventory reserves, warranty
reserves, contingencies and taxes. Actual results could differ from these
estimates. The following critical accounting policies are impacted significantly
by judgments, assumptions and estimates used in the preparation of the
consolidated financial statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of our accounts
receivable. If there is a deterioration of a major customer's credit
worthiness or actual defaults are higher than our historical experience,
our estimates of the recoverability of the amounts due us could be
adversely affected.
A reserve for sales returns is established based on trends in product
returns. If the actual future returns do not reflect these trends, our
sales could be affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there is a sudden and significant decrease in demand for our products or
there is a higher risk of inventory obsolescence because of rapidly
changing technology and requirements, we may be required to increase our
inventory reserve and our gross profit margin could be adversely affected.
We accrue for warranty costs based on the historical rate of claims and
costs to provide warranty services. If we experience an increase in
warranty claims that are higher than our historical experience or our costs
to provide warranty services increase, our gross profit margin could be
adversely affected.
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. An estimated loss contingency is accrued
-10-
when it is probable that a liability has been incurred or an asset has been
impaired and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether such
accruals should be adjusted.
Results of Operations
Net Sales. Net sales for the second quarter of fiscal 2002 increased 24% as
compared to the second quarter of fiscal 2001. Net sales for the first six
months of fiscal 2002 increased 10% as compared to the first six months of
fiscal 2001. These increases are primarily the result of increased demand for
our keypad and access control products. For the six months ended February 28,
2002 and 2001, one and two customers each contributed more than 10% of our net
sales, representing an aggregate of 35% and 45% of total net sales,
respectively.
Cost of Sales. Our cost of sales consists primarily of purchased materials,
manufacturing salaries and related personnel expenses, facility overhead and
amounts paid to third-party manufacturers.
Gross Profit. The ratios of gross profit to sales were 46% for both the second
quarter and six months ended February 28, 2002, compared to 44% and 45% for the
comparable periods of fiscal 2001. These increases are primarily the result of
improved manufacturing efficiencies due to increased sales volume, a favorable
product mix and a reduction in material costs, partially offset by start-up
costs incurred in the implementation of the recently purchased production
equipment. We expect future gross profit as a percentage of net sales to remain
consistent at its current level.
Research and Development. Research and development expenses consist primarily of
salaries and related personnel expenses, consulting fees and prototype costs
related to the design, development, testing and enhancement of our products.
Research and development expenses were $250,314 and $510,387 for the second
quarter and six months ended February 28, 2002, respectively, compared to
$249,759 and $537,852 for the comparable periods of fiscal 2001. The decrease in
these discretionary costs for the first half of fiscal 2002 compared to the
first half of fiscal 2001 primarily relates to a reduction in consulting fees
and, to a lesser extent, a decrease in prototype costs. We believe that research
and development is critical to our strategic product development objectives and
we intend to continue to enhance our products. Accordingly, we expect future
research and development expenses to increase in absolute dollars from its
current level.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and related personnel expenses,
commissions, travel and entertainment expenses, trade shows, advertising, bad
debts and professional fees. As a percentage of net sales, selling, general and
administrative expenses were 30% and 32% for the second quarter and six months
ended February 28, 2002, respectively, as compared to 34% and 35% for the
comparable periods of fiscal 2001. These decreases in costs as a percentage of
net sales are primarily due to an increase in sales volume. The
-11-
increases in expenses for the second quarter of fiscal 2002 compared to the
second quarter of fiscal 2001 primarily relate to increased commissions and
incentive compensation and, to a lesser extent, additional advertising and
professional fees expense. We expect future selling, general and administrative
expenses to increase in absolute dollars from its current level as we introduce
new products to the market and expand our sales organization.
Interest Expense. Interest expense consists of interest incurred on equipment
financing. Interest expense was $4,981 and $10,868 for the three and six months
ended February 28, 2002, respectively, compared to $7,476 and $15,913 for the
comparable periods of fiscal 2001. These decreases are the result of lower
interest rates on equipment borrowings, partially offset by an increase in
borrowings.
Other Income. Other income primarily consists of interest earned on our cash
balances and, to a lesser extent, sundry other non-operating items. Other income
was $7,341 and $17,194 for the three and six months ended February 28, 2002,
respectively, as compared to $20,094 and $49,531 for the comparable periods of
fiscal 2001. These decreases are the result of a reduction in interest rates
earned on our excess cash balances.
Income Taxes. Our effective income tax rate, which includes current and deferred
taxes, is 10% for the first half of fiscal 2002. The difference between the
effective tax rate and the federal statutory rate is primarily the result of
utilization of available federal net operating loss carryforwards and a
corresponding reduction in the valuation allowance.
Liquidity and Capital Resources
As of February 28, 2002, IEI had working capital of $2,593,758 compared to
$2,613,067 at August 31, 2001. The ratio of current assets to current
liabilities was 2.3 at February 28, 2002 and 2.7 at August 31, 2001. The debt to
equity ratio was 0.7 at February 28, 2002 and 0.6 at August 31, 2001. The
decrease in current ratio and increase in debt to equity ratio are primarily due
to an increase in accounts payable and accrued expenses, partially offset by
operating income for the first half of fiscal 2002.
Net cash flows from operating activities were $677,658 for the six months ended
February 28, 2002 compared to net cash flows used in operating activities of
($177,548) for the six months ended February 28, 2001. The cash flows from
operating activities in the first half of fiscal 2002 compared to the comparable
period of the prior year primarily reflect significantly higher net income and
decreases in inventories and accounts receivable.
Net capital expenditures were $579,221 and $199,702 for the six months ended
February 28, 2002 and 2001, respectively. The increase in expenditures is
primarily due to the purchase of additional manufacturing equipment and related
facility improvements. IEI has no current commitments for any material capital
expenditures, but we anticipate up to $250,000 in additional capital
expenditures for the purchase of office and manufacturing equipment, regulatory
testing and tooling costs over the next twelve months.
As of February 28, 2002, IEI has available a $380,000 equipment line of credit
expiring February 28, 2003 and a bank demand line of credit available of up to
$1,000,000. See Notes H and I to the unaudited condensed consolidated financial
statements. As of
-12-
February 28, 2002, IEI had no outstanding borrowings under the demand line of
credit and had approximately $546,000 in outstanding borrowings as equipment
debt.
Net cash flows provided by financing activities were $140,777 for the six months
ended February 28, 2002 compared to net cash flows used in financing activities
of ($46,024) for the six months ended February 28, 2001. The net cash flows
provided by financing activities in the first half of fiscal 2002 primarily
resulted from additions to long-term debt obligations for equipment financing,
partially offset by payments on long-term obligations. The net cash flows used
in financing activities in the first half of fiscal 2001 primarily resulted from
the payment of long-term obligations, partially offset by new borrowings for
equipment purchases.
The following table summarizes our future contractual cash obligations as of
February 28, 2002:
2003 2004 2005 Total
---- ---- ---- -----
Long-term obligations $ 273,162 $ 176,566 $ 96,603 $ 546,331
Employment agreement 167,056 167,056 167,057 501,169
Operating lease obligations 145,180 145,180 24,197 314,557
---------- ---------- ---------- ----------
$ 585,398 $ 488,802 $ 287,857 $1,362,057
========== ========== ========== ==========
Management believes that its current cash position, together with internally
generated funds at present sales levels and its available bank financing, will
provide adequate liquidity to satisfy its cash requirements for the next twelve
months. Depending upon whether or not sufficient sales and working capital is
generated from profitable operations, IEI 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. If
we are unable to obtain required financing, we may be required to reduce the
scope of our planned product development, which could harm our business,
financial condition and operating results.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
all business combinations initiated after June 30, 2001, be accounted for using
the purchase method of accounting and prohibits the use of the
pooling-of-interests method. SFAS No. 142 eliminates the amortization of
goodwill and certain other intangibles and instead subjects these assets to
periodic impairment assessments. SFAS No. 142 is effective immediately for all
goodwill and certain other intangible assets acquired after June 30, 2001. IEI
does not expect that the implementation of SFAS No's. 141 and 142 will have any
impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Bulletin Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a
-13-
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 specifies accounting for long-lived
assets to be disposed of by sale and broadens the presentation of discontinued
operations to include more disposal transactions than were included under the
previous standards. IEI is required to implement SFAS No. 144 on September 1,
2002, and it has not determined the impact, if any, that this statement will
have on its consolidated financial position or results of operations.
Risk Factors
Information provided by IEI 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. IEI cautions
investors that any forward-looking statements made by IEI involve risks and
uncertainties, which could cause actual results to differ materially from those
projected.
IEI has identified certain risks and uncertainties as factors, which may impact
on its operating results that are detailed below. All of these factors are
difficult for IEI to forecast, and these or other factors can materially
adversely affect IEI's business and operating results for one quarter or a
series of quarters.
Concentration of Customers. IEI has a substantial number of customers but sells
a 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 IEI's two largest customers
accounted for approximately 46% of IEI's total net sales for the fiscal year
ended August 31, 2001. IEI's industry has recently experienced significant
consolidation, which may further increase IEI's concentration among its major
customers. There can be no assurance that IEI's major customers will place
additional orders, or that IEI will obtain orders of similar magnitude from
other customers. IEI's operating results could be materially and adversely
affected upon the loss of any significant customer or if any present or future
significant 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 IEI or were to delay paying or fail to pay IEI's
receivables from such customer.
General Economic Conditions. IEI's business is subject to the effects of general
economic conditions in the United States and globally. If the economic
conditions in the United States and globally do not improve, or if there is a
worsening in the global economic slowdown, IEI could experience adverse impacts
on its business, operating results and financial condition.
Limited Financial Resources. IEI has limited financial resources. It is
therefore subject to all the risks generally associated with a small business
having limited financial resources. For the six months ended February 28, 2002
and the years ended August 31, 2001, 2000 and 1999, IEI had net income of
approximately $304,000, $136,000,
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$355,000, and $555,000, respectively. There can be no assurance that IEI will
remain profitable. Continued operations after the expenditure of IEI'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. If
we are unable to obtain required financing, we may be required to reduce the
scope of our planned product development, which could harm our business,
financial condition and operating results.
Dependence on Key Employees. The business of IEI is dependent upon the efforts
of John Waldstein, President and Chief Executive and Financial Officer, and
certain other key management and technical employees. The loss or prolonged
disability of such personnel could have a significant adverse effect on the
business of IEI. IEI presently maintains a key man life insurance policy of
$1,000,000 on John Waldstein.
Lack of New Product Development. IEI is engaged in an industry, which, as a
result of extensive research and development, introduces new products on a
regular basis. Current competitors or new market entrants may develop new
products with features that could adversely affect the competitive position of
IEI's products. There can be no assurance that IEI will be successful in
selecting, developing, manufacturing and marketing new products or enhancing its
existing products or that IEI will be able to respond effectively to
technological changes or product announcements by competitors. Any failure or
delay in these goals could have a material adverse effect on IEI.
Fluctuations in Sales and Operating Results. The annual growth rates experienced
by IEI 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 IEI, its major customers and its competitors,
market acceptance of new or enhanced versions of IEI'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, IEI 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, IEI 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 IEI's
operating results. In addition, competitive pressure on pricing in a given
quarter could adversely affect IEI's operating results, or such price pressure
over an extended period could adversely affect IEI's long-term profitability.
IEI 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 IEI's expenses vary with
its sales in the short-term.
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Competition. Other companies in the industry offer products in competition with
those of IEI. Many of the companies with which IEI competes are substantially
larger, have greater resources and market a larger line of products. IEI expects
competition to increase significantly in the future from existing competitors
and new companies that may enter IEI's existing or future markets. Increased
competition could adversely affect IEI's sales and profitability. There can be
no assurance that IEI will be able to continue to compete successfully with its
existing competitors or with new competitors.
Investments or Acquisitions. Although we have no current agreements to do so, we
intend to consider investing in or acquiring products, technologies or
businesses. In the event of future investments or acquisitions, we could:
. issue stock that would dilute our current shareholders' percentage
ownership; incur debt or assume liabilities;
. incur significant impairment charges related to the write-off of
goodwill and purchased intangible assets;
. incur significant amortization expenses related to purchased
intangible assets; or
. incur large and immediate write-offs for in-process research and
development and stock-based compensation.
Our integration of any acquired products, technologies or businesses may
also involve numerous risks including:
. problems and unanticipated costs associated with combining the
purchased products, technologies or businesses;
. diversion of management's attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have limited or no
prior experience; and
. potential loss of key employees, particularly those of the acquired
organizations.
We may be unable to successfully integrate any products, technologies,
businesses or personnel that we might acquire in the future.
Lack of Patent Protection. Although IEI has obtained some patent and copyright
protection for certain of its products and software, management believes that
competitors may be able to market products similar to those sold by IEI.
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Offshore Production. IEI is currently having some of its finished products
manufactured in Taiwan and Thailand. IEI presently maintains certain
manufacturing molds in Taiwan and Thailand and has a significant amount of
components for some products manufactured in South Korea, Taiwan and China.
There can be no assurance that the political or economic environment in
these countries will remain sufficiently stable to allow reliable and consistent
delivery of product.
Dependence on Single Source of Supply. IEI is dependent upon sole source
suppliers for a number of key components and parts used in IEI's products. There
can be no assurance that these suppliers will be able to meet IEI's future
requirements for such components or that the components will be available to IEI
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 IEI's operating results in any given period.
Foreign Sales. During the year ended August 31, 2001, IEI's foreign sales
represented approximately 10% of total net sales. There may be a reduction in
IEI's foreign sales from the 2001 level in the event of significant changes in
foreign exchange rates or political and economic instability in foreign
countries.
Limited Market for Common Stock. There is a limited market for IEI's common
stock and there can be no assurance that even this limited market will be
sustained. Holders of IEI's common stock may have difficulty selling their
shares or may have difficulty selling them at a favorable price.
Maintain Listing on NASDAQ. There can be no assurance that IEI will continue to
meet the NASDAQ SmallCap standards to maintain its listing on NASDAQ. If IEI is
unable to maintain its listing on NASDAQ, holders of IEI's common stock may have
difficulty selling their shares or may have difficulty selling them at a
favorable price.
Volatility of Stock Price. IEI's stock price is subject to significant
volatility. If sales or earnings in any quarter fail to meet the investment
community's expectations, announcements of new products by IEI or its
competitors and other events or factors could have an immediate impact on IEI's
stock price. The stock price may also be affected by broader market trends
unrelated to IEI's performance.
Change in Control. Our executive officers, directors and entities affiliated
with them beneficially own, in the aggregate, a significant portion of our
outstanding common stock. Although there are no current agreements among the
parties, these shareholders, if acting together, would be able to influence
significantly all matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or other business combination
transactions.
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Part II. Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On March 26, 2002, International Electronics held its
Special Meeting in Lieu of the Annual Meeting of
Shareholders. Of the 1,570,647 shares outstanding as of
February 8, 2002, the record date, 1,115,971 shares (71%)
were present or represented by proxy at the meeting.
The table below presents the results of the election to
International Electronics' board of directors:
Votes for Against Abstentions
--------- ------- -----------
Diane Balcom 1,094,723 21,248 0
Kenneth Moyes 1,094,729 21,242 0
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(10) (a) Demand Loan and Security Agreement Accounts
Receivable and Inventory dated as of February 28,
1997 between Eastern Bank and the Registrant.
(10) (b) Demand Loan and Security Letter Agreement
dated as of December 27, 2000 between Eastern Bank
and the Registrant.
(10) (c) Demand Loan and Security Letter Agreement
dated May 20, 1999 between Eastern Bank and the
Registrant.
(10) (d) Line of Credit Agreement for the Acquisition
of Equipment dated as of December 11, 2001 between
Eastern Bank and the Registrant.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed for the three
months ended February 28, 2002.
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SIGNATURE
---------
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign and is the Chief Financial and Accounting Officer.
International Electronics, Inc.
Date: 4/09/02 /s/ John Waldstein
------- ------------------------------------
John Waldstein, President, Chief Executive Officer,
Treasurer and Chief Financial and
Accounting Officer and duly
authorized to sign.
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International Electronics, Inc.
Exhibits to Form 10-QSB
Quarter Ended February 28, 2002
(10) (a) Demand Loan and Security Agreement Accounts Receivable and
Inventory dated as of February 28, 1997 between Eastern Bank and
the Registrant.
(10) (b) Demand Loan and Security Letter Agreement dated as of December 27,
2000 between Eastern Bank and the Registrant.
(10) (c) Demand Loan and Security Letter Agreement dated May 20, 1999
between Eastern Bank and the Registrant.
(10) (d) Line of Credit Agreement for the Acquisition of Equipment dated as
of December 11, 2001 between Eastern Bank and the Registrant.
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