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, 1998 ------------------------------------- Commission File Number 2-91218-B ------------------------------------ International Electronics, Inc. ------------------------------- (Exact name of small business issuer as specified in its charter) Massachusetts 04-2654231 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 427 Turnpike Street, Canton, Massachusetts 02021 ------------------------------------------ ----- (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 ----- ----- 1,493,301 common shares were outstanding at July 7, 1998. INTERNATIONAL ELECTRONICS, INC. --------------------------------- Index ----- Part I. Financial Statements (unaudited) -------------------------------- Condensed Consolidated Balance Sheets, May 31, 1998 and August 31, 1997 2 Condensed Consolidated Statements of Operations, three and nine months ended May 31, 1998 and 1997 3 Condensed Consolidated Statement of Shareholders' Equity, nine months ended May 31, 1998 4 Condensed Consolidated Statements of Cash Flows, nine months ended May 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2: Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations 10-14 --------------------------------------------- Part II. Other Information: Item 4: Submission of Matters to a Vote of Security Holders 15 --------------------------------------------------- Item 6: Exhibits and Reports on Form 8-K 15 --------------------------------------------------- Signature 15 --------- -1- INTERNATIONAL ELECTRONICS, INC. --------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ---------------------------------------- (unaudited) May 31, 1998 August 31, 1997 ------------- ---------------- ASSETS - -------------------------------------- Current assets: Cash and equivalents $ 557,175 $ 160,075 Accounts receivable, net 992,816 1,035,596 Inventories 1,041,930 1,078,561 Other current assets 166,191 133,274 ----------- ----------- Total current assets 2,758,112 2,407,506 Equipment, furniture and improvements, net 410,024 357,289 Other assets: Goodwill and other intangibles, net 170,052 235,029 Other 17,405 26,349 ----------- ----------- 187,457 261,378 ----------- ----------- $ 3,355,593 $ 3,026,173 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------- Current liabilities: Accounts payable $ 411,028 $ 684,431 Accrued expenses 1,010,176 847,210 Income taxes 100,000 39,000 Current portion of long-term obligations 63,126 36,212 ----------- ----------- Total current liabilities 1,584,330 1,606,853 Long-term obligations 99,200 68,369 Commitments Shareholders' equity: Common stock, $.01 par value: Authorized 5,984,375 shares Issued 1,528,301 shares 15,283 15,283 Capital in excess of par value 4,785,679 4,784,267 Accumulated deficit (3,090,255) (3,409,955) Less treasury stock, at cost: 35,000 shares (38,644) (38,644) ----------- ----------- Total shareholders' equity 1,672,063 1,350,951 ----------- ----------- $ 3,355,593 $ 3,026,173 =========== =========== See notes to unaudited condensed consolidated financial statements. -2- INTERNATIONAL ELECTRONICS, INC. --------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------- (unaudited) Three months ended Nine months ended ---------------------------- ---------------------------- May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997 ------------- ------------- ------------- ------------- Net sales $2,437,287 $2,334,115 $7,030,239 $6,818,952 Cost of sales 1,287,497 1,392,871 3,793,812 4,086,951 ---------- ---------- ---------- ---------- Gross profit 1,149,790 941,244 3,236,427 2,732,001 Research and development costs 158,106 132,548 386,866 383,429 Selling, general and administrative expenses 868,001 794,191 2,430,298 2,351,211 ---------- ---------- ---------- ---------- Income (loss) from operations 123,683 14,505 419,263 (2,639) Interest expense (4,650) (3,617) (11,108) (27,683) Other income (expense), net 10,965 9,375 11,545 20,489 ---------- ---------- ---------- ---------- Income (loss) before extraordinary gain and taxes 129,998 20,263 419,700 (9,833) Extraordinary gain, net of income tax expense of $1,000 - - - 10,446 ---------- ---------- ---------- ---------- Income before taxes 129,998 20,263 419,700 613 Provision for taxes 28,000 10,000 100,000 32,000 ---------- ---------- ---------- ---------- Net income (loss) $ 101,998 $ 10,263 $ 319,700 $ (31,387) ========== ========== ========== ========== Net income (loss) per share: Basic $.07 $.01 $.21 $(.02) Diluted $.06 $.01 $.20 $(.02) ========== ========== ========== ========== Shares used in computing net income (loss) per share: Basic 1,493,301 1,492,551 1,493,301 1,492,524 Diluted 1,586,750 1,642,894 1,582,728 1,492,524 ========== ========== ========== ========== See notes to unaudited condensed consolidated financial statements. -3- INTERNATIONAL ELECTRONICS, INC. --------------------------------- 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, 1997 1,528,301 $15,283 $4,784,267 $(3,409,955) 35,000 $(38,644) $1,350,951 Issuance of stock warrants - - 1,412 - - - 1,412 Net income - - - 319,700 - - 319,700 --------- ------- ---------- ------------ ------ -------------- ---------- Balances, May 31, 1998 1,528,301 $15,283 $4,785,679 $(3,090,255) 35,000 $(38,644) $1,672,063 ========= ======= ========== =========== ====== ============== ========== See notes to unaudited condensed consolidated financial statements. -4- INTERNATIONAL ELECTRONICS, INC. --------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ---------------------------------------------------- (unaudited) Nine months ended ---------------------------- May 31, 1998 May 31, 1997 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 319,700 ($31,387) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 212,618 203,508 Stock warrants issued for professional services 1,412 - Changes in operating assets and liabilities: Accounts receivable 42,780 (19,954) Inventories 36,631 (266,120) Other current assets (32,917) 3,884 Income taxes 61,000 (8,000) Accounts payable and accrued expenses (110,437) 538,258 --------- --------- Net cash provided by operating activities 530,787 420,189 CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER: Net purchase of equipment, furniture and improvements (200,376) (130,593) Other assets 8,944 (25,363) --------- --------- Net cash used in investing activities and other (191,432) (155,956) CASH FLOWS FROM FINANCING ACTIVITIES: Additions of notes payable and debt obligations 89,214 - Issuance of common stock - 4,045 Reduction of notes payable and debt obligations (31,469) (437,854) --------- --------- Net cash provided by (used in) financing activities 57,745 (433,809) --------- --------- CASH AND EQUIVALENTS: Net increase (decrease) during period 397,100 (169,576) Balances, beginning of period 160,075 556,745 --------- --------- Balances, end of period $ 557,175 $ 387,169 ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS: Equipment acquired under capitalized leases $ - $ 42,326 See notes to unaudited condensed consolidated financial statements. -5- INTERNATIONAL ELECTRONICS, INC. --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------- (unaudited) A. Financial Statements: --------------------- In the opinion of the Company, the unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of May 31, 1998 and the results of operations for the three and nine months then ended. Certain disclosures normally included have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the year ended August 31, 1997. B. Income Taxes: ------------- The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. C. Net Income (Loss) per Share: ---------------------------- In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 replaced the previously reported primary and fully diluted income (loss) per share with basic and diluted income (loss) per share. Unlike primary income (loss) per share, basic income (loss) per share excludes any dilutive effects of options and warrants. Diluted income (loss) per share is very similar to the previously reported fully diluted income (loss) per share. All income (loss) per share amounts for all periods have been presented, and, where necessary, restated to conform to SFAS No. 128 requirements. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average common shares outstanding during the periods. Diluted 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 the Company's common stock (under the treasury stock method). -6- INTERNATIONAL ELECTRONICS, INC. --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------- (continued) (unaudited) The following table sets forth the computation of basic and diluted income (loss) per share: Three months ended Nine months ended ----------------------------- --------------------------- May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997 ---------------- ------------ ------------ ------------- Net income (loss) $ 101,998 $ 10,263 $ 319,700 $(31,387) ========== ========== ========== ========= Shares used in computation: Weighted average shares outstanding for basic income (loss) per share 1,493,301 1,492,551 1,493,301 1,492,524 Effect of dilutive option and warrant shares 93,449 150,343 89,427 - ---------- ---------- ---------- --------- Total shares for diluted income (loss) per share 1,586,750 1,642,894 1,582,728 1,492,524 ========== ========== ========== ========= Basic income (loss) per share: Income (loss) before extraordinary gain $ .07 $ .01 $ .21 $(.03) Extraordinary gain - - - .01 ---------- ---------- ---------- --------- Net income (loss) $ .07 $ .01 $ .21 $(.02) ========== ========== ========== ========= Diluted income (loss) per share: Income (loss) before extraordinary gain $ .06 $ .01 $ .20 $(.03) Extraordinary gain - - - .01 ---------- ---------- ---------- --------- Net income (loss) $ .06 $ .01 $ .20 $(.02) ========== ========== ========== ========= The calculations for diluted income (loss) per share did not include an aggregate out of the money options and warrants of 98,037, 118,871 and 97,537 for the three months ended November 30, 1997, February 28, 1998 and May 31, 1998, respectively. D. Principles of Consolidation: ---------------------------- The accompanying condensed consolidated financial statements include the accounts of the Company, its majority owned subsidiary, Ecco Industries, Inc. and its wholly owned subsidiary, International Electronics Europe Limited. All material intercompany transactions, balances and profits have been eliminated. -7- INTERNATIONAL ELECTRONICS, INC. --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------- (continued) (unaudited) E. Long-term Obligations: ---------------------- Long-term obligations are summarized as follows: May 31, 1998 Aug. 31, 1997 ------------- -------------- Equipment line of credit, 8.5% (Note F) $ 99,627 $ 24,352 7-18% capitalized lease obligations, due through April 2001 (Note G) 42,863 60,627 8 - 13% equipment loans, collateralized by equipment, final payment due Nov., 2001 19,836 5,602 Other - 14,000 -------- -------- 162,326 104,581 Less current portion (63,126) (36,212) -------- -------- $ 99,200 $ 68,369 ======== ======== Federal Deposit Insurance Corporation (FDIC) Agreement - In February, 1997 ------------------------------------------------------ the Company repaid approximately $358,000 representing the balance due the FDIC for the outstanding note originally payable in full on December 31, 1997. The Company recognized an extraordinary gain of $10,446 on this transaction representing a prepayment discount from the FDIC (Note F). The aggregate principal payments on long-term obligations as of May 31, 1998, excluding capital leases are $42,984 (1999), $43,401 (2000), $29,897 (2001), and $3,181 (2002). F. Bank Arrangements: ------------------ The Company has available up to $1,000,000 for a working capital demand line of credit. The Company also had approximately $225,000 available for equipment financing as of May 31, 1998. Available borrowings under the working capital line are based on a percentage of eligible accounts receivable and inventory. Both lines of credit are at the bank's prime rate of interest and all the Company's assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of dividends and required minimum current ratio and debt to tangible net worth ratio. As of May 31, 1998, no borrowings have been made under the working capital line of credit and the Company has $99,627 in borrowings under the equipment line of credit at an interest rate of 8.5% which is payable in monthly installments through February 2001. -8- INTERNATIONAL ELECTRONICS, INC. --------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------- (continued) (unaudited) G. Capital Lease Commitments: -------------------------- The Company leases certain equipment under capital leases and, accordingly, the present value of the net minimum payments has been reflected in equipment, furniture and improvements and capitalized lease obligations. Future minimum capital lease payments under lease terms in excess of one year at May 31, 1998 are as follows: 1999 $ 24,486 2000 15,959 2001 8,361 2002 604 -------- Total minimum lease payments 49,410 Less interest (6,547) -------- Net minimum lease payments 42,863 Less current portion (20,142) -------- Long-term portion $ 22,721 ======== -9- Management's Discussion and Analysis of --------------------------------------------- Financial Condition and Results of Operations --------------------------------------------- Liquidity and Capital Resources - ------------------------------- As of May 31, 1998, the Company had working capital of $1,173,782 compared to $800,653 at August 31, 1997. The ratio of current assets to current liabilities was 1.7 at May 31, 1998 as compared to 1.5 at August 31, 1997. The debt to equity ratio was 1.0 at May 31, 1998 and 1.2 at August 31, 1997. The increase in working capital and current ratio and the decrease in the debt to equity are the result of the Company's net income for the first nine months of fiscal 1998. Capital expenditures were $155,388 and $172,919 for the nine months ended May 31, 1998 and 1997, respectively. The Company has no current commitments for any material capital expenditures, but the Company anticipates up to $400,000 in capital expenditures for the purchase of office and manufacturing equipment, regulatory testing and tooling costs over the next twelve months. As of May 31, 1998, the Company had available bank lines of credit for working capital financing of up to $1,000,000 and $225,248 for equipment purchases. See Notes E and F to Unaudited Condensed Consolidated Financial Statements. 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 additional external funding will be obtainable, if such a need should arise. Results of Operations - --------------------- Net sales for the third quarter of fiscal 1998 increased 4% as compared to the third quarter of fiscal 1997. Net sales for the first nine months of fiscal 1998 increased 3% as compared to the comparable periods of fiscal 1997. The increases in sales for the third quarter and first nine months of fiscal 1998 primarily reflect increases in access control and keypad sales, offset in part by a reduction in glassbreak detector sales. The ratios of gross profit to sales for the three months ended May 31, 1998 and 1997 were 47% and 40%, respectively. The ratios of gross profit to sales for the nine months ended May 31, 1998 and 1997 were 46% and 40%, respectively. The increases in gross profits are primarily the results of decreases in warranty costs, a reduction in product costs resulting from favorable pricing terms from vendors and an increase in the price of the Company's products to its customers effective January 1998. The Company expects a reduction in its current gross profit percentage in the future and believes that such percentage will be comparable to its past historical levels. Research and development expenses were $158,106 and $386,866 for the third quarter and nine months ended May 31, 1998, respectively, compared to $132,548 and $383,429 for the comparable periods of fiscal 1997. The increase in costs for the third quarter of 1998 as compared to the prior year period is primarily due to project costs associated with customization of the Company's voice verification product. As a percentage of net sales, selling, general and administrative expenses were 36% and 34% for the three months ended May 31, 1998 and 1997, respectively and were 35% and 34% for the nine months ended May 31, 1998 and 1997, respectively. The increase in expenses as a percentage of net sales is primarily the result of increased personnel and related expenses. -10- The gain on extinguishment of debt for the nine months ended May 31, 1997 of $10,446 represents a prepayment discount from the FDIC. The provision for income taxes for the third quarter and first nine months of fiscal 1998 represents foreign, federal alternative minimum taxes and state tax expense. The Company's effective income tax rate for the nine months ended May 31, 1998 of 24% was less than the combined federal and state statutory income tax rates, primarily as a result of the utilization of available net operating loss carryforwards. YEAR 2000 COMPLIANCE The Company is in the process of reviewing its computer systems to identify those areas that could be affected by the "Year 2000" issue and is analyzing its computer systems to determine what kind of implementation plan is necessary to address the issue. The Company presently believes, with modifications to its existing software, the Year 2000 problem will not pose significant operational problems and is not anticipated to be material to its financial position or results of operations in any given year. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" will be effective for fiscal years beginning after December 15, 1997. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for periods beginning after December 15, 1997. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" is effective for all quarters of fiscal years beginning after June 15, 1999. The Company has not determined the effects, if any, that SFAS Nos. 130, 131, and 133 will have on its consolidated financial statements and disclosures. 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 factors that may affect the Company's stock price which are detailed below. MAINTAIN LISTING ON NASDAQ. In March 1992, the NASD established higher standards for a company's stock to maintain its listing on NASDAQ. The revised standards include maintaining a minimum bid price of $1.00 per share for ten consecutive trading days and shareholders' equity with a minimum balance of $1,000,000. Although the Company has maintained its NASDAQ listing, the Company has, at times, been unable to maintain the $1.00 minimum bid price criteria. Effective February 23, 1998, the NASD adopted new more stringent standards for a company to maintain its stock listing on NASDAQ. One of the newly adopted standards includes maintaining minimum net tangible shareholders' equity of $2,000,000. As of May 31, 1998, the Company had net tangible shareholders' equity of approximately $1,502,000. The Company does not presently meet the standard and, unless the Company increases its net tangible shareholders' equity to $2,000,000, the Company's common stock will no longer be listed on NASDAQ. The Company has requested an exception to the $2,000,000 minimum net tangible shareholders' equity requirement to allow the Company time to comply with such requirement. The Company has received a temporary exception to the net tangible shareholders' equity requirement until the NASD holds an oral hearing on July 30, 1998. Any delisting action will not occur until the NASD makes a written determination. The Company cannot evaluate the prospects of receiving an exception from the NASD. 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. -11- 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. 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. 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. The Company experienced a loss of approximately ($231,000) for the year ended August 31, 1995. For the years ended August 31, 1996, and 1997, and for the nine months ended May 31, 1998, the Company had net income of approximately $162,000, $70,000 and $320,000, respectively. There can be no assurance that the Company will continue profitable operations. Continued operations after the expenditure of the Company's existing cash reserves may require additional working capital to be generated by profitable operations or use of the bank lines of credit and/or additional financing. There can be no assurance that profits will continue or that additional external funding will be obtainable, if such a need should arise. DEPENDENCE ON KEY EMPLOYEES. The business of the Company is dependent upon the efforts of John Waldstein and certain other key management and technical employees. The loss or prolonged disability of such personnel could have a significant adverse effect on the business of the Company. The Company presently maintains a key man life insurance policy of $1,000,000 on John Waldstein, President and Treasurer. LIMITED DESIGN ENGINEERING STAFF. The Company is engaged in an industry which, as a result of extensive research and development, introduces new products on a regular basis. Current competitors or new market entrants may develop new products with features that could adversely affect the competitive position of the Company's products. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products or that the Company will be able to respond effectively to technological changes or product announcements by competitors. Any failure or delay in these goals could have a material adverse effect on the Company. FLUCTUATIONS IN SALES AND OPERATING RESULTS. The quarterly growth rates recently experienced by the Company are not necessarily indicative of future quarterly growth rates. Operating results may also fluctuate due to factors such as the timing of new product announcements and introductions by the Company, its major customers and its competitors, market acceptance of new or enhanced versions of the Company's products, changes in the product mix of sales, changes in the relative proportions of sales among distribution channels or among customers within each distribution channel, changes in manufacturing costs, competitive pricing pressures, the gain or -12- loss of significant customers, increased research and development expenses associated with new product introductions and general economic conditions. A limited number of customers have accounted for a significant portion of sales in any particular quarter. In addition, the Company typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume, timing of, and ability to fulfill orders received within the quarter which are difficult to forecast. In this regard, the Company may recognize a substantial portion of its sales in a given quarter from sales booked and shipped in the last weeks of that quarter. A delay in customer orders, resulting in a shift of product shipment from one quarter to another, could have a significant effect on the Company's operating results. In addition, competitive pressure on pricing in a given quarter could adversely affect the Company's operating results, or such price pressure over an extended period could adversely affect the Company's long-term profitability. The Company establishes its expenditure levels for sales and marketing and other expenses based, in large part, on its expected future results. As a result, if sales fall below expectations, there would likely be a material adverse effect on operating results because only a small portion of the Company's expenses vary with its sales in the short-term. CONCENTRATION OF CUSTOMERS. Although the Company has a substantial number of customers, a significant portion of the Company's sales are to a small number of large customers. This concentration of customers may cause net sales and operating results to fluctuate from quarter to quarter based on major customers' requirements and the timing of their orders and shipments. Sales to the Company's largest customer accounted for approximately 36% of the Company's total net sales for the fiscal year ended August 31, 1997. The Company's agreements with its customers generally do not include minimum purchase requirements. There can be no assurance that the Company's major customers will place additional orders, or that the Company will obtain orders of similar magnitude from other customers. The Company's operating results could be materially and adversely affected if any present or future major customer were to choose to reduce its level of orders, were to experience financial, operational or other difficulties that resulted in such a reduction in orders to the Company or were to delay paying or fail to pay the Company's receivables from such customer. In fiscal 1995, the Company lost a major domestic distributor who filed for bankruptcy with accounts receivable due the Company of approximately $80,000. COMPETITION. Other companies in the industry offer products in competition with those of the Company. Many of the companies with which the Company competes are substantially larger, have greater resources and market a larger line of products. The Company expects competition to increase significantly in the future from existing competitors and new companies that may enter the Company's existing or future markets. Increased competition could adversely affect the Company's sales and profitability. There can be no assurance that the Company will be able to continue to compete successfully with its existing competitors or with new competitors. LACK OF PATENT PROTECTION. Although the Company has obtained some patent and copyright protection for certain of its products and software, management believes that competitors may be able to market certain products similar to those sold by the Company. PRODUCTION IN ASIA. The Company presently maintains certain manufacturing molds in Asia and has a significant amount of components for some products manufactured in Asia. There can be no assurance that the Asian political or economic environment will remain sufficiently stable to allow reliable and consistent delivery of product. DEPENDENCE ON SINGLE SOURCE OF SUPPLY. The Company is dependent upon sole source suppliers for a number of key components and parts used in the Company's products. There can be no assurance that these suppliers will be able to meet the Company's future requirements for such components or that the components will be available to the Company at favorable prices. Any extended interruption in the supply or significant increase in price of any such components could have a material adverse effect on the Company's operating results in any given period. -13- FOREIGN SALES. During the year ended August 31, 1997, the Company's foreign sales represented approximately 16% of net sales. There may be a reduction in the Company's foreign sales in the event of significant changes in foreign exchange rates or political and economic instability in foreign countries. -14- Part II. Other Information - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On June 26, 1998, the Company held its Special Meeting in Lieu of the Annual Meeting of Shareholders. At the meeting, shareholders elected the following Board of Directors for the ensuing year: John Waldstein, Heath Paley and Diane Balcom The meeting was adjourned for the proposals relating to the authorization of preferred stock and amendments to the Company's Articles of Organization until July 14, 1998. On July 14, 1998, those proposals were defeated because the Company did not receive a two-thirds vote in favor of such proposals. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Second Amendment to Employment, Non-Disclosure and Non- Compete Agreement for John Waldstein dated May 1,1998. (b) There were no reports on Form 8-K filed for the three months ended May 31, 1998. SIGNATURE --------- Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, who is duly authorized to sign and is Chief Financial and Accounting Officer. International Electronics, Inc. Date: 7/14/98 /s/ John Waldstein ------- ------------------- John Waldstein, President, Treasurer & Chief Financial and Accounting Officer and duly authorized to sign. -15-