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, 1999 -------------------------------------------------------- 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 March 30, 1999. INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ Index ----- Part I. Financial Statements (unaudited) -------------------------------- Condensed Consolidated Balance Sheets, February 28, 1999 and August 31, 1998 2 Condensed Consolidated Statements of Operations, three and six months ended February 28, 1999 and 1998 3 Condensed Consolidated Statement of Shareholders' Equity, six months ended February 28, 1999 4 Condensed Consolidated Statements of Cash Flows, six months ended February 28, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2: Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations 10-15 --------------------------------------------- Part II. Other Information: Item 4: Submission of Matters to a Vote of Security ------------------------------------------- Holders 16 ------- Item 6: Exhibits and Reports on Form 8-K 16 -------------------------------- Signature 16 --------- 1 INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (unaudited) Feb. 28, 1999 August 31, 1998 ------------- --------------- ASSETS - ------ Current assets: Cash and equivalents $1,178,566 $ 895,876 Accounts receivable, net 971,095 986,403 Inventories 1,026,454 746,570 Other current assets 164,403 153,816 ---------- ---------- Total current assets 3,340,518 2,782,665 Equipment, furniture and improvements, net 392,706 368,965 Other assets: Goodwill and other intangibles, net 105,191 148,432 Other 11,950 11,950 ---------- ---------- 117,141 160,382 ---------- ---------- $3,850,365 $3,312,012 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 466,474 $ 138,894 Accrued expenses 1,034,611 1,089,267 Income taxes 86,921 44,000 Current portion of long-term obligations 86,057 64,030 ---------- ---------- Total current liabilities 1,674,063 1,336,191 Long-term obligations 106,595 82,859 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 4,797,090 4,796,149 Accumulated deficit (2,704,022) (2,879,826) Less treasury stock, at cost: 35,000 shares (38,644) (38,644) ---------- ---------- Total shareholders' equity 2,069,707 1,892,962 ---------- ---------- $3,850,365 $ 3,312,012 ========== ========== See notes to unaudited condensed consolidated financial statements. 2 INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (unaudited) Three months ended Six months ended --------------------------------- ----------------------------- Feb. 28, 1999 Feb. 28, 1998 Feb. 28, 1999 Feb. 28, 1998 ------------- ------------- ------------- ------------- Net sales $2,403,159 $2,232,020 $4,534,272 $4,592,952 Cost of sales 1,301,546 1,208,964 2,399,849 2,506,315 ---------- ---------- ---------- ---------- Gross profit 1,101,613 1,023,056 2,134,423 2,086,637 Research and development costs 181,485 126,037 325,607 228,760 Selling, general and administrative expenses 813,890 756,596 1,611,090 1,562,297 ---------- ---------- ---------- ---------- Income from operations 106,238 140,423 197,726 295,580 Interest expense (3,292) (3,322) (7,381) (6,458) Other income (expense) 13,830 (463) 29,459 580 ---------- ---------- ---------- ---------- Income before taxes 116,776 136,638 219,804 289,702 Provision for taxes 20,000 28,000 44,000 72,000 ---------- ---------- ---------- ---------- Net income $ 96,776 $ 108,638 $ 175,804 $ 217,702 ========== ========== ========== ========== Net income per share: Basic $.06 $.07 $.12 $.15 Diluted $.06 $.07 $.11 $.14 ========== ========== ========== ========== Shares used in computing net income per share: Basic 1,493,301 1,493,301 1,493,301 1,493,301 Diluted 1,583,585 1,569,802 1,570,914 1,580,718 ========== ========== ========== ========== 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, 1998 1,528,301 $15,283 $4,796,149 ($2,879,826) 35,000 ($38,644) $1,892,962 Issuance of stock warrants - - 941 - - - 941 Net income - - - 175,804 - - 175,804 --------- ------- ---------- --------- ------ -------- ---------- Balances, February 28, 1999 1,528,301 $15,283 $4,797,090 ($2,704,022) 35,000 ($38,644) $2,069,707 ========= ======= ========== ========== ====== ======== ========== See notes to unaudited condensed consolidated financial statements. 4 INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (unaudited) Six months ended ---------------------------------------- Feb. 28, 1999 Feb. 28, 1998 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 175,804 $ 217,702 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 139,762 94,577 Stock warrants issued for professional services 941 942 Changes in operating assets and liabilities: Accounts receivable 15,308 48,674 Inventories (279,884) 97,053 Other current assets (10,587) (19,359) Income taxes 42,921 33,000 Accounts payable and accrued expenses 272,924 (106,364) ---------- ------------ Net cash provided by operating activities 357,189 366,225 CASH FLOWS FROM INVESTING ACTIVITIES AND OTHER: Net purchase of equipment, furniture and improvements (120,262) (121,118) Other assets 0 9,911 ---------- ------------ Net cash used in investing activities and other (120,262) (111,207) CASH FLOWS FROM FINANCING ACTIVITIES: Additions of notes payable and debt obligations 77,342 62,672 Reduction of notes payable and debt obligations (31,579) (15,744) ---------- ------------ Net cash provided by financing activities 45,763 46,928 ---------- ------------ CASH AND EQUIVALENTS: Net increase during period 282,690 301,946 Balances, beginning of period 895,876 160,075 ---------- ------------ Balances, end of period $1,178,566 $ 462,021 ========== ============ 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 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 February 28, 1999 and the results of operations for the three and six 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, 1998. B. 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. C. 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. 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 financial statements, and the reported amounts of revenues 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 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 the Company's common stock (under the treasury stock method). The following table sets forth the computation of basic and diluted net income per share: Three months ended Six months ended -------------------------------- --------------------------- Feb. 28, 1999 Feb. 28, 1998 Feb. 28, 1999 Feb. 28, 1998 ------------- ------------- -------------- ------------- Net income $ 96,776 $ 108,638 $ 175,804 $ 217,702 =========== =========== ========== ========== Shares used in computation: Weighted average shares outstanding for basic income per share 1,493,301 1,493,301 1,493,301 1,493,301 Effect of dilutive option and warrant shares 90,284 76,501 77,613 87,417 ---------- --------- -------- -------- Total shares for diluted income per share 1,583,585 1,569,802 1,570,914 1,580,718 =========== =========== ========== ========== Net income per share: Basic $.06 $.07 $.12 $.15 Diluted $.06 $.07 $.11 $.14 =========== =========== ========== ========== The calculations for diluted net income per share did not include an aggregate out of the money options and warrants of 109,037 and 118,871 for the three months ended February 28, 1999 and 1998, respectively. 7 INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (continued) (unaudited) F. Long-term Obligations: ---------------------- Long-term obligations are summarized as follows: Feb. 28, 1999 Aug. 31, 1998 ------------- ------------- Equipment line of credit, 7.75-8.5% (Note G) $ 148,570 $ 90,160 7-18% capitalized lease obligations, due through April 2001 (Note H) 28,046 38,134 8% equipment loan, collateralized by equipment, final payment due Nov., 2001 16,036 18,595 --------- -------- 192,652 146,889 Less current portion (86,057) (64,030) --------- -------- $ 106,595 $ 82,859 ========= ======== The aggregate principal payments on long-term obligations as of February 28, 1999, excluding capital leases are $69,092 (2000), $63,685 (2001) and $31,829 (2002). G. Bank Arrangements: ------------------ As of February 28, 1999, the Company has available up to $1,000,000 for a bank working capital demand line of credit and a $148,000 equipment line of credit until April 29, 1999. 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 of the Company's assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of dividends and a required minimum current ratio and debt to tangible net worth ratio. As of February 28, 1999, no borrowings have been made under the working capital line of credit and the Company has $148,570 in borrowings under the equipment line of credit at interest rates ranging from 7.75%-8.5% which is payable in monthly installments through February 2002. -8- INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES ------------------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (continued) (unaudited) H. 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 February 28, 1999 are as follows: 2000 $19,157 2001 9,473 2002 2,417 ------- Total minimum lease payments 31,047 Less interest (3,001) ------- Net minimum lease payments 28,046 Less current portion (16,965) ------- Long-term portion $11,081 ======= -9- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- Liquidity and Capital Resources As of February 28, 1999, the Company had working capital of $1,666,455 compared to $1,446,474 at August 31, 1998. The ratio of current assets to current liabilities was 2.0 at February 28, 1999 and 2.1 at August 31, 1998. The debt to equity ratio was .9 at February 28, 1999 and .7 at August 31, 1998. The increase in working capital is primarily the result of the Company's operating cash flow, offset in part by the purchase of fixed assets for fiscal 1999. The decrease in current ratio and increase in debt to equity ratio is primarily the result of an increase in accounts payable and accrued expenses. Net capital expenditures were $120,262 and $121,118 for the six months ended February 28, 1999 and 1998, 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. 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 second quarter of fiscal 1999 increased 8% as compared to the second quarter of fiscal 1998. The increase in sales for the second quarter primarily reflects an increase in access control and keypad sales, offset in part by a reduction in glassbreak detector sales. Net sales for the first six months of fiscal 1999 decreased 1% as compared to the first six months of fiscal 1998. The ratio of gross profit to sales for the three months ended February 28, 1999 and 1998 were both 46%. The ratio of gross profit to sales for the six months ended February 28, 1999 and 1998 were 47% and 45%, respectively. The increase in gross profit percentage is primarily the result of decreases in warranty expense, lower product costs and product mix. Research and development expenses were $181,485 and $325,607 for the second quarter and six months ended February 28, 1999, respectively, compared to $126,037 and $228,760 for the comparable periods of fiscal 1998. The increases in this discretionary expense are primarily due to the hiring of additional personnel and outside consultants. The Company anticipates that future research and development costs will be comparable as a percentage of net sales to the amounts incurred during this fiscal quarter. As a percentage of net sales, selling, general and administrative expenses were 34% for both the three months ended February 28, 1999 and 1998 and were 36% and 34% for the six months ended February 28, 1999 and 1998, respectively. The increase in expenses as a percentage of net sales for the first six months of fiscal 1999 as compared to the first six months of fiscal 1998 is primarily due to an increase in promotion expense, and sales personnel and associated costs. -10- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (continued) The provision for income taxes represents foreign, federal alternative minimum taxes and state income tax expense. The Company's effective income tax rate for the six months ended February 28, 1999 of 20% 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 There are issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company considers its products to be Year 2000 compliant. The Company's products do not perform any date calculations requiring the year digits, nor do they have any report generating software that would present a problem with the Year 2000. The Company is in the process of developing a definitive timetable, including a contingency plan, to address the Year 2000 problem regarding both its internal systems and external relationships. The Company's internal systems include the manufacturing and inventory control system, internal reporting and the Company's existing manufacturing equipment. The Company has been in contact with its software vendors to plan the installation of upgrades to these systems. The Company's testing and implementation of its business and manufacturing systems is in the early stages and, at this point, the Company cannot accurately quantify the impact of its most likely worst case Year 2000 scenario. The Company relies on commercially distributed software and has determined that upgrades, conforming to the Year 2000 date function, exist. Based upon this information, the Company does not anticipate that it will incur significant operating expenses or be required to invest heavily in computer system improvements or new manufacturing equipment to be Year 2000 compliant. However, significant uncertainty exists concerning the potential costs and effects associated with Year 2000 compliance. During the year the Company plans to survey its largest customers, and is in the process of surveying its vendors, to determine their state of readiness regarding this issue and to estimate the impact, if any, on the Company's financial position or results of operations if any of its vendors' or customers' systems should fail due to their non-compliance with Year 2000 requirements. Based upon the results of this survey, the Company will then plan its best course of action to prevent any negative impact on its financial position and results of operations. The Company believes that the greatest potential risk is the failure of its external business partners to achieve Year 2000 compliance in a timely manner. Any Year 2000 compliance problem of either the Company or its users, customers, vendors or advertisers could have a material, adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may be affected by the failure of any global infrastructure including national banking systems, communications and governmental activities. The Company is in the process of developing a contingency plan to address the most critical operational issues regarding the Year 2000. The Company plans to communicate with its external business partners to determine their Year 2000 contingency plans and to coordinate, to the extent possible, with such plan. However, there may be no practical alternative source of action available to the Company. -11- Management's Discussion and Analysis of ---------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (continued) New Accounting Pronouncement Statement of Financial Accounting Standards (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 No. 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 risks and uncertainties as factors which may impact on its operating results that are detailed below. All of these factors are difficult for the Company to forecast, and these or other factors can materially adversely affect the Company's business and operating results for one quarter or a series of quarters. Limited Financial Resources and Losses from Operations. The Company has limited financial resources. It is therefore subject to all the risks generally associated with a small business having limited financial resources. For the years ended August 31, 1996, 1997 and 1998, and the six months ended February 28, 1999, the Company had net income of approximately $162,000, $70,000, $530,000 and $176,000, 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. -12- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (continued) Fluctuations in Sales and Operating Results. The quarterly growth rates recently experienced by the Company are not necessarily indicative of future quarterly growth rates. Operating results may also fluctuate due to factors such as the timing of new product announcements and introductions by the Company, its major customers and its competitors, market acceptance of new or enhanced versions of the Company's products, changes in the product mix of sales, changes in the relative proportions of sales among distribution channels or among customers within each distribution channel, changes in manufacturing costs, competitive pricing pressures, the gain or loss of significant customers, increased research and development expenses associated with new product introductions and general economic conditions. A limited number of customers have accounted for a significant portion of sales in any particular quarter. In addition, the Company typically operates with a relatively small backlog. As a result, quarterly sales and operating results generally depend on the volume, timing of, and ability to fulfill orders received within the quarter which are difficult to forecast. In this regard, the Company may recognize a substantial portion of its sales in a given quarter from sales booked and shipped in the last weeks of that quarter. A delay in customer orders, resulting in a shift of product shipment from one quarter to another, could have a significant effect on the Company's operating results. In addition, competitive pressure on pricing in a given quarter could adversely affect the Company's operating results, or such price pressure over an extended period could adversely affect the Company's long-term profitability. The Company establishes its expenditure levels for sales and marketing and other expenses based, in large part, on its expected future results. As a result, if sales fall below 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, 1998. 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. -13- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (continued) 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. Foreign Sales. During the year ended August 31, 1998, the Company's foreign sales represented approximately 12% 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. Year 2000 Compliance. There are issues associated with the programming code in existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is in the process of developing a definitive timetable, including a contingency plan, to address the Year 2000 problem regarding both its internal systems and external relationships. The Company believes that the greatest potential risk is the failure of its external business partners to achieve Year 2000 compliance in a timely manner. Any Year 2000 compliance problem of either the Company or its users, customers, vendors or advertisers could have a material, adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may be affected by the failure of any global infrastructure including national banking systems, communications and governmental activities. The Company is in the process of developing a contingency plan to address the most critical operational issues regarding the Year 2000. The Company plans to communicate with its external business partners to determine their Year 2000 contingency plans and to coordinate, to the extent possible, with such plan. However, there may be no practical alternative source of action available to the Company. 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. -14- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (continued) Maintain Listing on NASDAQ. In February, 1998, the NASD changed its standards for a company's stock to maintain its listing on NASDAQ. The revised standards include maintaining a minimum bid price of $1.00 per share for ten consecutive trading days and tangible shareholders' equity with a minimum balance of $2,000,000 or alternatively net income of $500,000 for the last fiscal year. The Company met the test of $500,000 of net income during fiscal 1998. However, there can be no assurance that the Company will continue to meet the new standards as implemented and maintain its listing in NASDAQ. If the Company is unable to maintain its listing on NASDAQ, holders of the Company's common stock may have additional difficulty selling their shares at a favorable price. 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. -15- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- (Continued) Part II. Other Information: - ---------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On April 7, 1999, 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, Diane Balcom and Kenneth Moyes In addition, the shareholders approved a 1999 stock option plan providing for the issuance of up to 175,000 shares of common stock. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) There were no reports on Form 8-K filed for the three months ended February 28, 1999. 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: 4/13/99 /s/ John Waldstein ------- ------------------------------- John Waldstein, President, Treasurer & Chief Financial and Accounting Officer and duly authorized to sign. 16