U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended May 31, 2002
--------------------------------------------------------------
Commission File Number 0-16305
----------------------------------------------------------
International Electronics, Inc.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2654231
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
427 Turnpike Street, Canton, Massachusetts 02021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 821-5566
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
--- ---
1,600,981 common shares were outstanding at July 7, 2002.
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
Index
Part I. Financial Information: Page No.
--------
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, May 31, 2002
and August 31, 2001 2
Condensed Consolidated Statements of Operations, three and nine
months ended May 31, 2002 and 2001 3
Condensed Consolidated Statement of Shareholders' Equity,
nine months ended May 31, 2002 4
Condensed Consolidated Statements of Cash Flows, nine
months ended May 31, 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 6: Exhibits and Reports on Form 8-K 18
Signature 18
-1-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
May 31, 2002 August 31, 2001
------------ ---------------
ASSETS
Current assets:
Cash and equivalents $ 2,300,395 $ 1,549,954
Accounts receivable, net 901,632 1,211,884
Inventories 768,426 848,742
Deferred income taxes 337,000 330,000
Other current assets 274,164 239,486
----------- -----------
Total current assets 4,581,617 4,180,066
Property and equipment, net 877,030 476,359
Other assets:
Deferred income taxes 88,000 88,000
Other 25,461 36,711
----------- -----------
113,461 124,711
----------- -----------
$ 5,572,108 $ 4,781,136
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 197,225 $ 330,627
Accrued expenses 1,149,192 987,306
Income taxes 16,000 31,000
Current portion of long-term obligations 329,055 218,066
----------- -----------
Total current liabilities 1,691,472 1,566,999
Long-term obligations, less current portion 365,190 201,488
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 (1,344,594) (1,833,391)
Less treasury stock, at cost:
35,000 shares (38,644) (38,644)
----------- -----------
Total shareholders' equity 3,515,446 3,012,649
----------- -----------
$ 5,572,108 $ 4,781,136
=========== ===========
See notes to unaudited condensed consolidated financial statements.
-2-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended May 31, Nine months ended May 31,
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $3,058,901 $2,439,740 $8,919,452 $7,776,882
Cost of sales 1,626,140 1,404,531 4,793,428 4,340,763
---------- ---------- ---------- ----------
Gross profit 1,432,761 1,035,209 4,126,024 3,436,119
Operating expenses:
Research and development costs 267,048 243,160 777,435 781,012
Selling, general and
administrative expenses 964,800 827,449 2,818,000 2,695,905
---------- ---------- ---------- ----------
Total operating expenses 1,231,848 1,070,609 3,595,435 3,476,917
---------- ---------- ---------- ----------
Income (loss) from operations 200,913 (35,400) 530,589 (40,798)
Interest expense (8,376) (8,308) (19,244) (24,221)
Other income 8,258 15,164 25,452 64,694
---------- ---------- ---------- ----------
Income (loss) before income taxes 200,795 (28,544) 536,797 (325)
Provision (benefit) for income taxes:
Current 16,000 (4,000) 55,000 7,000
Deferred - 16,000 (7,000) -
---------- ---------- ---------- ----------
16,000 12,000 48,000 7,000
---------- ---------- ---------- ----------
Net income (loss) $ 184,795 $ (40,544) $ 488,797 $ (7,325)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.12 $ (0.03) $ 0.31 $ (0.00)
========== ========== ========== ==========
Diluted $ 0.10 $ (0.03) $ 0.28 $ (0.00)
========== ========== ========== ==========
Shares used in computing net income
(loss) per share:
Basic 1,570,647 1,539,980 1,568,360 1,538,811
========== ========== ========== ==========
Diluted 1,804,822 1,539,980 1,716,393 1,538,811
========== ========== ========== ==========
See notes to unaudited condensed consolidated financial statements.
-3-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(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 - - - 488,797 - - 488,797
--------- ------- ---------- ----------- ------ -------- ----------
Balances,
May 31, 2002 1,605,647 $16,056 $4,882,628 $(1,344,594) 35,000 $(38,644) $3,515,446
========= ======= ========== =========== ====== ======== ==========
See notes to unaudited condensed consolidated financial statements.
-4-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended May 31,
----------------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 488,797 $ (7,325)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 272,130 234,908
Deferred income taxes (7,000) -
Changes in operating assets and liabilities:
Accounts receivable 310,252 196,142
Inventories 80,316 (245,844)
Other current assets (34,678) 21,327
Income taxes (15,000) (8,000)
Accounts payable and accrued expenses 28,484 (175,230)
---------- ----------
Net cash provided by operating activities 1,123,301 15,978
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of property and equipment (661,551) (224,340)
---------- ----------
Net cash used in investing activities (661,551) (224,340)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 14,000 4,176
Proceeds from long-term obligations 478,728 188,640
Payments of long-term obligations (204,037) (142,771)
---------- ----------
Net cash provided by financing activities 288,691 50,045
CASH AND EQUIVALENTS:
Net increase (decrease) during period 750,441 (158,317)
Balances, beginning of period 1,549,954 1,642,359
---------- ----------
Balances, end of period $2,300,395 $1,484,042
========== ==========
See notes to unaudited condensed consolidated financial statements.
-5-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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 May 31, 2002 and the results of
operations for the three and nine months ended May 31, 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.
-6-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(unaudited)
E. Net Income (Loss) Per Share:
----------------------------
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted-average common shares outstanding during the
periods. Diluted net income (loss) per share is computed by dividing net
income (loss) 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 (loss)
per share:
Three months ended May 31, Nine months ended May 31,
-------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Shares used in computation:
Weighted-average
shares outstanding for basic
net income (loss) per share 1,570,647 1,539,980 1,568,360 1,538,811
Effect of dilutive option
and warrant shares 234,175 - 148,033 -
--------- --------- --------- ---------
Total shares for diluted net
income (loss) per share 1,804,822 1,539,980 1,716,393 1,538,811
========= ========= ========= =========
The calculations for diluted net loss per share do not include an aggregate of
options and warrants of 445,326 as of May 31, 2001 as such options and warrants
were anti-dilutive.
-7-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
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. The implementation of
SFAS No's. 141 and 142 did not have any impact on IEI's 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. Inventories:
------------
Inventories consist of the following:
May 31, 2002 Aug. 31, 2001
------------ -------------
Raw materials and subassemblies $478,871 $578,839
Work-in-process 109,733 123,479
Finished goods 179,822 146,424
-------- --------
$768,426 $848,742
======== ========
H. 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 nine
months ended May 31, 2002 and 2001 amounted to approximately $152,000 and
$121,000, respectively.
-8-
INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(unaudited)
Employment Arrangements - 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. In
addition, IEI has employment arrangements with certain other key
management that require salary and benefit continuation for one year
(representing an aggregate of $427,000 in salaries as of August 31, 2001)
in the event of a termination of such employment as a result of an
acquisition, merger or sale of assets of IEI.
I. Long-term Obligations:
----------------------
Long-term obligations are summarized as follows:
May 31, 2002 Aug. 31, 2001
------------ -------------
Equipment line of credit, 4.75%-6.75% (Note J) $ 694,245 $ 417,948
Collateralized 8% equipment loan - 1,606
--------- ---------
694,245 419,554
Less current portion (329,055) (218,066)
--------- ---------
$ 365,190 $ 201,488
========= =========
The future principal payments on long-term obligations are $329,055
(2003), $236,034 (2004) and $129,156 (2005).
J. Bank Arrangements:
------------------
As of May 31, 2002, IEI has an available $150,000 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 May 31, 2002, no borrowings have been made under
the demand line of credit, and IEI has an aggregate of $694,245
outstanding as equipment debt, which is payable in monthly installments
through May 2005 (Note I).
-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 product 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
when it is probable that
-10-
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 third quarter of fiscal 2002 increased 25% as
compared to the third quarter of fiscal 2001. Net sales for the first nine
months of fiscal 2002 increased 15% as compared to the first nine months of
fiscal 2001. These increases are primarily the result of increased demand for
our keypad, access control and OEM products. For the nine months ended May 31,
2002 and 2001, one and two customers each contributed more than 10% of our net
sales, representing an aggregate of 34% and 44% 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 47% and 46% for the third
quarter and nine months ended May 31, 2002, respectively, compared to 42% and
44% 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 year to date 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 $267,048 and $777,435 for the third
quarter and nine months ended May 31, 2002, respectively, compared to $243,160
and $781,012 for the comparable periods of fiscal 2001. The increase in these
discretionary costs for the third quarter of fiscal 2002 compared to the third
quarter of fiscal 2001 primarily relates to an increase in salaries expense. 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 remain
consistent in absolute dollars at 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 32% for both the third quarter and nine months
ended May 31, 2002, 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 increases in expenses, in absolute
dollars, for the third quarter of fiscal 2002 compared to the third quarter of
fiscal 2001 primarily relate to increased advertising and professional fees
expense and, to a lesser extent, additional salaries and commissions expense. We
expect future selling,
-11-
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 $8,376 and $19,244 for the three and nine months
ended May 31, 2002, respectively, compared to $8,308 and $24,221 for the
comparable periods of fiscal 2001. The decrease for the nine months ended May
31, 2002 to the comparable period of 2001 is 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 $8,258 and $25,452 for the three and nine months ended May 31, 2002,
respectively, as compared to $15,164 and $64,694 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 9% for the first nine months 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 May 31, 2002, IEI had working capital of $2,890,145 compared to $2,613,067
at August 31, 2001. The ratio of current assets to current liabilities was 2.7
at both May 31, 2002 and August 31, 2001. The debt to equity ratio was 0.6 at
both May 31, 2002 and August 31, 2001. The increase in working capital is
primarily the result of IEI's operating income.
Net cash flows provided by operating activities were $1,123,301 for the nine
months ended May 31, 2002 compared to $15,978 for the nine months ended May 31,
2001. The increase primarily reflects higher net income and accrued expenses and
decreases in inventories and accounts receivable.
Net capital expenditures were $661,551 and $224,340 for the nine months ended
May 31, 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 May 31, 2002, IEI has an available $150,000 equipment line of credit
expiring February 28, 2003 and a bank demand line of credit available of up to
$1,000,000. See Notes I and J to the unaudited condensed consolidated financial
statements. As of May 31, 2002, IEI had no outstanding borrowings under the
demand line of credit and had approximately $694,000 in outstanding borrowings
as equipment debt.
-12-
Net cash flows provided by financing activities were $288,691 for the nine
months ended May 31, 2002 compared to $50,045 for the nine months ended May 31,
2001. The increase is primarily the result of additions to long-term debt
obligations for equipment financing, partially offset by payments on long-term
obligations.
The following table summarizes our future contractual cash obligations as of May
31, 2002:
2003 2004 2005 Total
-------- -------- -------- ----------
Long-term obligations $329,055 $236,034 $129,156 $ 694,245
Employment agreement 167,056 167,056 167,057 501,169
Operating lease obligations 145,180 133,082 - 278,262
-------- -------- -------- ----------
$641,291 $536,172 $296,213 $1,473,676
======== ======== ======== ==========
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. The
implementation of SFAS No's. 141 and 142 did not have any impact on IEI's
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.
-13-
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 nine months ended May 31, 2002 and
the years ended August 31, 2001, 2000 and 1999, IEI had net income of
approximately $489,000, $136,000, $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
-14-
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, Chief Executive Officer and Chief 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.
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
-15-
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:
o issue stock that would dilute our current shareholders' percentage
ownership; incur debt or assume liabilities;
o incur significant impairment charges related to the write-off of
goodwill and purchased intangible assets;
o incur significant amortization expenses related to purchased
intangible assets; or
o 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:
o problems and unanticipated costs associated with combining the
purchased products, technologies or businesses;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers
and customers;
o risks associated with entering markets in which we have limited or
no prior experience; and
o 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.
Offshore Production. IEI is currently having some of its finished products
manufactured in Taiwan and Thailand. IEI also 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.
-16-
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 and nine months ended May
31, 2002, IEI's foreign sales represented approximately 10% and 9% of total net
sales, respectively. There may be a further reduction in IEI's foreign sales
from the current 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.
-17-
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended May 31, 2002.
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: 7/09/02 /s/ John Waldstein
-------- ------------------------------------
John Waldstein, President, Chief
Executive Officer, Treasurer and
Chief Financial and Accounting
Officer and duly authorized to sign.
-18-