10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2003

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 incorporation or organization)	(I.R.S. employer identification no.)

427 Turnpike Street, Canton, Massachusetts 02021

(Address of principal executive offices, including zip code)

(781) 821-5566

(Issuer’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 ¨

As of December 20, 2003, there were 1,631,031 shares of $0.01 par value per share, common stock, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

Form 10-QSB

Quarter Ended November 30, 2003

Table of Contents

			Page No.
Part I.	Financial Information:
	Item 1:	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets, November 30, 2003 and August 31, 2003	3
		Condensed Consolidated Statements of Operations, three months ended November 30, 2003 and 2002	4
		Condensed Consolidated Statement of Shareholders’ Equity, three months ended November 30, 2003	5
		Condensed Consolidated Statements of Cash Flows, three months ended November 30, 2003 and 2002	6
		Notes to Condensed Consolidated Financial Statements	7-11
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-19
	Item 3:	Controls and Procedures	20
Part II.	Other Information:
	Item 6:	Exhibits and Reports on Form 8-K	21
	Signature		21

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Part I. Financial Information

Item 1: Financial Statements

INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	Nov. 30, 2003			August 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	2,128,025		$	2,266,078
Accounts receivable, net		1,426,678			1,452,143
Inventories		908,696			764,674
Deferred income taxes		376,000			379,000
Other current assets		243,187			259,521
Total current assets		5,082,586			5,121,416
Property and equipment, net		771,141			698,837
Other assets:
Deferred income taxes		70,000			66,000
Other		8,062			8,062
Total other assets		78,062			74,062
	$	5,931,789		$	5,894,315
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	401,170		$	381,248
Accrued expenses		1,155,388			1,135,394
Current portion of long-term obligations		310,583			291,167
Total current liabilities		1,867,141			1,807,809
Long-term obligations, less current portion		223,075			201,086
Commitments
Shareholders’ equity:
Common stock, $0.01 par value:
Authorized 5,984,375 shares
Issued 1,666,031 and 1,653,731 shares		16,660			16,537
Capital in excess of par value		5,026,446			5,016,786
Accumulated deficit		(1,162,889	)		(1,109,259	)
Less treasury stock, at cost:
35,000 common shares		(38,644	)		(38,644	)
Total shareholders’ equity		3,841,573			3,885,420
	$	5,931,789		$	5,894,315

See notes to unaudited condensed consolidated financial statements.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended November 30,
	2003			2002
Net sales	$	2,699,631		$	2,744,518
Cost of sales		1,524,902			1,508,235
Gross profit		1,174,729			1,236,283
Operating expenses:
Research and development		256,362			285,683
Selling, general and administrative		970,687			926,424
Total operating expenses		1,227,049			1,212,107
Income (loss) from operations		(52,320	)		24,176
Interest expense		(6,073	)		(8,255	)
Other income		3,763			10,040
Income (loss) before income taxes		(54,630	)		25,961
Provision (benefit) for income taxes:
Current		—			11,000
Deferred		(1,000	)		2,000
Total provision (benefit) for income taxes		(1,000	)		13,000
Net income (loss)		($53,630	)	$	12,961
Net income (loss) per share:
Basic	($	0.03	)	$	0.01
Diluted	($	0.03	)	$	0.01
Shares used in computing net income (loss) per share:
Basic		1,625,095			1,608,731
Diluted		1,625,095			1,708,939

See notes to unaudited condensed consolidated financial statements.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF

SHAREHOLDERS’ EQUITY

(unaudited)

	Common Stock			Capital in Excess of Par Value		Accumulated Deficit			Treasury Stock				Total
	Shares	Amount							Shares	Cost
Balances, September 1, 2003	1,653,731	$	16,537	$	5,016,786	($	1,109,259	)	35,000	($	38,644	)	$	3,885,420
Stock issued upon exercise of stock options and warrants	12,300		123		9,660		—		—		—			9,783
Net loss	—		—		—		(53,630	)	—		—			(53,630	)
Balances, November 30, 2003	1,666,031	$	16,660	$	5,026,446	($	1,162,889	)	35,000	($	38,644	)	$	3,841,573

See notes to unaudited condensed consolidated financial statements.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended November 30,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		($53,630	)	$	12,961
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		70,015			82,833
Deferred income taxes		(1,000	)		2,000
Changes in operating assets and liabilities:
Accounts receivable		25,465			(228,042	)
Inventories		(144,022	)		22,338
Other current assets		16,334			19,893
Accounts payable and accrued expenses		39,916			118,207
Net cash provided by (used in) operating activities		(46,922	)		30,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of property and equipment		(142,319	)		(39,504	)
Net cash used in investing activities		(142,319	)		(39,504	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants		9,783			—
Additions to debt obligations		122,468			70,414
Payment of debt obligations		(81,063	)		(86,638	)
Net cash provided by (used in) financing activities		51,188			(16,224	)
CASH AND CASH EQUIVALENTS:
Net decrease during period		(138,053	)		(25,538	)
Balances, beginning of period		2,266,078			2,916,461
Balances, end of period	$	2,128,025		$	2,890,923
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	6,073		$	8,255
Income taxes paid	$	1,225		$	39,225

See notes to unaudited condensed consolidated financial statements.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. (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 November 30, 2003 and the results of operations for the three months ended November 30, 2003 and 2002.

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 condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in IEI’s Annual Report on Form 10-KSB for the year ended August 31, 2003.

(b) Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123 provides that companies may account for stock-based compensation either under the fair value-based method of accounting under SFAS No. 123 or use the intrinsic value-based method provided by Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees.” IEI uses the intrinsic value-based method of APB No. 25 to account for all of its employee stock-based compensation plans and uses the fair value method of SFAS No. 123 to account for all non-employee stock-based compensation. SFAS No. 123, as amended by SFAS No. 148, requires companies using the intrinsic value method under APB No. 25 to make pro forma disclosure in the notes to the financial statements using the measurement provisions of SFAS No. 123.

IEI has computed the pro forma disclosures required under SFAS No. 123 for stock options granted to employees using the Black-Scholes option pricing model with an assumed risk-free interest rate of 3%, volatility of 100% in fiscal 2004 and 120% for fiscal 2003 and an expected life of 5 years, with the assumption that no dividends will be paid. Under APB No. 25, IEI has recognized no stock-based compensation expense for the three months ended November 30, 2003 and 2002. Had compensation expense for IEI’s stock option plans been determined consistent with SFAS No. 123, the pro forma net income (loss) and pro forma net income (loss) per share would have been as follows:

	Three months ended November 30,
	2003		2002
Net income (loss):
As reported	($53,630	)	$	12,961
Less employee stock-based compensation under fair value method	(12,985	)		(11,584	)
Pro forma	($66,615	)	$	1,377
Net income (loss) per share:
Basic as reported	($0.03	)	$	0.01
Basic pro forma	(0.04	)		0.00
Diluted as reported	(0.03	)		0.01
Diluted pro forma	(0.04	)		0.00

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because IEI’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of IEI’s options.

(c) Recent Accounting Pronouncement

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on IEI’s financial position or results of operations.

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

2. 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.

3. 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.

4. Significant Estimates and Assumptions

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 materially from those estimates.

5. 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).

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

The following table sets forth the computation of the shares used in calculating basic and diluted net income (loss) per share:

	Three months ended November 30,
	2003	2002
Shares used in computation:
Weighted-average shares outstanding for basic net income (loss) per share	1,625,095	1,608,731
Effect of dilutive option and warrant shares	—	100,208
Total shares for diluted net income (loss) per share	1,625,095	1,708,939

The calculations for diluted net income (loss) per share do not include aggregate stock options and warrants of 376,040 as of November 30, 2003 and 1,000 as of November 30, 2002, as their effects would have been anti-dilutive.

6. Inventories

Inventories consist of the following:

	Nov. 30, 2003		Aug. 31, 2003
Raw materials	$	478,283	$	478,241
Work in progress		226,570		107,903
Finished goods		203,843		178,530
	$	908,696	$	764,674

7. Accrued Warranty Expenses

The following table sets forth activity in IEI’s warranty accrual, included in accrued expenses, for the three months ended November 30, 2003:

Balance at beginning of period		Charges to costs and expenses		Deductions			Balance end of period
$	385,833	$	54,479	($	54,479	)	$	385,833

8. Commitments

Leases – IEI leases an administrative and production facility under an operating lease expiring in April 2006 at an annual rate of $145,000 through April 2004 and $160,000 thereafter. IEI is also responsible for certain real estate taxes, utilities and

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INTERNATIONAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

(unaudited)

maintenance costs related to the leased property. Such contingent rental obligations are recognized as incurred.

Employment Arrangements – IEI has a continuous, three-year employment agreement with its president and chief executive officer providing minimum annual aggregate compensation of approximately $175,000. This employment agreement contains certain termination provisions. In addition, IEI has employment arrangements with certain other key management that require salary and benefit continuation for up to one year (representing an aggregate of approximately $441,000 in salaries as of November 30, 2003) in the event of termination of such employment as a result of an acquisition, merger or sale of assets of IEI.

9. Long-term Obligations

Long-term obligations are summarized as follows:

	Nov. 30, 2003			Aug. 31, 2003
Equipment line of credit, 4.0%-5.0% (Note 10)	$	533,658		$	492,253
Less current portion		(310,583	)		(291,167	)
	$	223,075		$	201,086

The aggregate principal payments on long-term obligations as of November 30, 2003, are: $310,583 (2004), $155,191 (2005) and $67,884 (2006).

10. Bank Arrangements

As of November 30, 2003, IEI has available through February 28, 2004 an equipment line of credit that provides for remaining borrowings of up to $277,000 and a demand bank 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 (5.0% at November 30, 2003), and all of IEI’s assets are collateralized under these arrangements. The credit agreements contain certain restrictive covenants including covenants limiting the payment of certain dividends, a minimum debt-to-tangible-net-worth ratio, minimum current ratio, bi-annual net income and minimum annual net income of $10,000. As of November 30, 2003, no borrowings have been made under the demand line of credit and IEI has an aggregate of $533,658 outstanding as equipment debt which is payable in monthly installments through November 2006.

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Item 2: 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, 2003 describes the significant accounting policies used in the preparation of our consolidated financial statements. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. Estimates are used for, but not limited to, the accounting for allowance for doubtful accounts and sales returns, inventory reserves, warranty reserves and contingencies. Actual results could materially 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 and sales returns is based on our assessment of the collectibility of specific customer accounts, the aging of our accounts receivable and trends in product returns. While we believe that our allowance for doubtful accounts and sales returns is adequate and that the judgment applied is appropriate, if there is a deterioration of a major customer’s credit worthiness, actual defaults are higher than our previous experience, or actual future returns do not reflect historical trends, our estimates of the recoverability of the amounts due us and our sales would be adversely affected.

Inventory purchases and commitments are based upon future demand forecasts for our products and our current level of inventory. 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 as a result, our gross profit margin would be adversely affected.

We accrue for warranty costs based on the historical rate of claims and costs to provide warranty services as the sale is recognized. While we believe the accrual for warranty costs is adequate to address known warranty issues, if we experience an increase in warranty claims that are higher than our historical experience or our costs to provide warranty services increase, we may be required to increase our warranty accrual and as a result, our gross profit margin would be adversely affected.

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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 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 recognized or adjusted.

Results of Operations

Three months ended November 30, 2003 and 2002

Net Sales. Net sales in the first quarter of fiscal 2004 ending November 30, 2003 decreased 2% compared to the first quarter of fiscal 2003. The decrease in net sales is primarily the result of a reduction in demand for our digital keypad products.

Cost of Sales/Gross Profit. Our cost of sales consists primarily of purchased materials, manufacturing salaries and related personnel expenses, facility overhead and amounts paid to third-party manufacturers. The ratios of gross profit to net sales were 44% for the three months ended November 30, 2003, compared to 45% for the three months ended November 30, 2002. The decrease in the gross profit ratio is primarily due to changes in product mix. Our gross profit as a percentage of net sales in a particular quarter is highly variable due to many factors such as sales volume. Gross profit may also be adversely affected by increases in manufacturing costs, excess and obsolete inventory, warranty costs, increased price competition, geographic mix, and changes in sales channels or product mix.

Research and Development Expenses. Research and development expenses consist primarily of salaries and related personnel expenses, consulting fees and prototype costs. Research and development expenses were $256,362 and $285,683 for the three months ended November 30, 2003 and 2002, respectively. The decrease in costs is primarily due to a reduction in consulting expenses. 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 Expenses. Selling, general and administrative expenses consist primarily of salaries and related personnel expenses, commissions, travel and entertainment expenses, trade shows, advertising, telephone, bad debts and professional fees. As a percentage of net sales, selling, general and administrative expenses were 36% and 34% for the three months ended November 30, 2003 and 2002, respectively. The increase in expenses as a percentage of net sales is primarily due to the hiring of additional senior management and additional consulting, trade show and advertising expenses, partially offset by a reduction in bad debt expense. We expect future selling, general and administrative expenses to increase in absolute dollars from its current level as we introduce new products to the market and expand our sales organization.

Interest Expense. Interest expense consists of interest incurred on equipment financing. Interest expense was $6,073 and $8,255 for the three months ended November

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30, 2003 and 2002, respectively. The decrease is the result of lower interest rates on equipment borrowings, partially offset by an increase in outstanding debt.

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 $3,763 and $10,040 for the three months ended November 30, 2003 and 2002, respectively. The decrease is the result of a reduction in interest rates and invested balances.

Income Taxes. For the three months ended November 30, 2003, IEI has recorded a $1,000 deferred tax benefit and no current provision for income taxes due to our net loss. For the three months ended November 30, 2002, our effective income tax rate was 50%. The difference between the effective tax rate and the federal statutory rate for the three months ended November 30, 2002 is primarily the result of non-deductible permanent differences, partially offset by the utilization of net operating loss carryforwards.

Liquidity and Capital Resources

As of November 30, 2003, IEI had $3,215,445 in working capital as compared to $3,313,607 at August 31, 2003. The ratio of current assets to current liabilities as of November 30, 2003 was 2.7, as compared to 2.8 at August 31, 2003. The debt to equity ratio was 0.5 at both November 30, 2003 and August 31, 2003. The decrease in working capital and current ratio is primarily due to an increase in current liabilities and our net loss for the three months ended November 30, 2003.

Net cash flows used in operating activities was $46,922 for the three months ended November 30, 2003, as compared with net cash flows provided by operating activities of $30,190 for the comparable period of the prior year. The decrease is primarily the result of the net loss and increase in inventory balances.

Net capital expenditures were $142,319 and $39,504 for the three months ended November 30, 2003 and 2002, respectively. The increase in expenditures is primarily due to additional purchases of manufacturing equipment. IEI anticipates having up to $325,000 in total capital expenditures in fiscal 2004 primarily for the purchase of facility improvements and production and engineering equipment. We expect that a portion of our fiscal 2004 capital expenditures will be financed from our available equipment line of credit and the remainder from cash flow from operations.

As of November 30, 2003, IEI has available through February 28, 2004 a $277,000 equipment line of credit and a bank demand line of credit of up to $1,000,000. See Notes 9 and 10 to the Unaudited Condensed Consolidated Financial Statements. As of November 30, 2003, IEI had no outstanding borrowings under the demand line of credit and had approximately $534,000 in borrowings outstanding under equipment lines of credit. The current bank lines of credit expire on February 29, 2004 and there is no assurance that these agreements will be extended.

Net cash flows provided by financing activities was $51,188 for the three months ended November 30, 2003, as compared to with net cash flows used in financing

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activities of $16,224 for the comparable period of the prior year. The increase is the result of additional long-term borrowings for equipment financing and proceeds from the exercise of stock options and warrants.

The following table summarizes our future contractual cash obligations as of November 30, 2003:

	2004		2005		2006		Total
Long-term obligations	$	310,583	$	155,191	$	67,884	$	533,658
Employment agreement		174,908		174,908		174,908		524,724
Operating lease obligations		154,254		160,735		107,157		422,146
	$	639,745	$	490,834	$	349,949	$	1,480,528

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, 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.

Recent Accounting Pronouncement

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on IEI’s financial position or results of operations.

Risk Factors

Information provided by IEI in writing and orally, from time to time may contain certain “forward-looking” information as this term is defined by: (1) the Private Securities Litigation Reform Act of 1995 (the “Act”) and (2) in releases made by the Securities and Exchange Commission. These risk factors are being described 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 which are detailed below. All of these factors are difficult for IEI to

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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 large majority of its products to a small number of large customers. This concentration of customers may cause net sales and operating results to fluctuate from quarter to quarter based on major customers’ requirements and the timing of their orders and shipments. For both the three months ended November 30, 2003 and fiscal year ended August 31, 2003, net sales to our largest customer accounted for approximately 38% of our total net sales, respectively. IEI’s industry has 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 effected if any present or future major customer were to choose to reduce its level of orders, were to experience financial, operational or other difficulties that resulted in such a reduction in orders to IEI or were to delay paying or fail to pay IEI’s receivables from such customer.

Reliance on Distribution Partners. We have historically sold the majority of our products through distribution. We believe that our future success is dependent upon retaining successful relationships with a variety of distribution partners. We have no long-term agreements with these partners and certain distribution partners also manufacture and sell products that compete with some of our products. We cannot be certain that we will be able to retain our current distribution partners or that these partners will devote adequate resources to selling our products. If we are unable to maintain our distribution partners or the partners do not devote adequate resources to the sale of our products, our operating results could be materially and adversely effected.

General Economic Conditions. Our 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 we experience a worsening in the global economic slowdown, we may experience adverse impacts on our 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 three months ended November 30, 2003, IEI had a net loss of approximately $(54,000), and for the years ended August 31, 2003 and 2002 had net income of approximately $23,000 and $701,000, respectively. There can be no assurance that IEI will return to profitable operations. 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. The current bank lines of credit expire on February 29, 2004 and there is no assurance that these agreements will be extended. There can be no assurance that profits will return or that additional external funding will be obtainable, if such a need should arise.

Dependence on Key Employees. The business of IEI is dependent upon the efforts of John Waldstein and certain other key management and technical employees.

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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, President, Chief Executive Officer, Chief Financial Officer and Treasurer.

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. Operating results may 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 a quarter. 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. IEI competes with a number of large multinational companies including: Assa Abloy, Bosch, General Electric, Honeywell International, Ingersoll Rand, Kaba, Nortek and Tyco, some of whom have recently expanded their position in the marketplace by acquiring companies that design competing products. We

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also compete against a number of smaller companies. Some of our competitors sell significant amounts of other products to our current and prospective customers.

Our competitors’ broad product portfolios, coupled with already existing relationships, may cause our customers to buy our competitors’ products or harm our ability to attract new customers. Increased competition could adversely affect IEI’s sales and operating results. There can be no assurance that IEI will be able to continue to compete successfully with its existing competitors or with new competitors.

Investments and Acquisitions. Although we have no current agreements to do so, we intend to consider investing in or acquiring products, technologies or businesses. In the event of future investments or acquisitions, we could:

• issue stock that would dilute our current shareholders’ percentage ownership, incur debt or assume liabilities;

• incur significant impairment charges related to the write-off of goodwill and purchased intangible assets;

• incur significant amortization expenses related to purchased intangible assets; or

• incur large and immediate write-offs for in-process research and development and stock-based compensation.

Our integration of any acquired products, technologies or businesses may also involve numerous risks including:

• problems and unanticipated costs associated with combining the purchased products, technologies, or businesses;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

• risks associated with entering markets in which we have limited or no prior experience, and;

• potential loss of key employees, particularly those of the acquired organizations.

We may be unable to successfully integrate any products, technologies, businesses or personnel that we might acquire in the future.

Lack of Patent Protection. Although IEI has obtained some patent, trademark, trade secret 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 IEI.

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Offshore Production. IEI is currently having some of its finished products manufactured in Asia. IEI presently maintains certain manufacturing molds in Asia and has a significant amount of components for some products manufactured in Asia. There can be no assurance that the Asian political or economic environment will remain sufficiently stable or that other factors will allow for reliable and consistent delivery of product.

Dependence on Single Source of Supply. 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. For the three months ended November 30, 2003 and the year ended August 31, 2003, IEI’s foreign sales represented approximately 11% and 10% of net sales, respectively. There may be a 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 SmallCap Listing on NASDAQ. There can be no assurance that IEI will continue to meet the SmallCap standards to maintain its listing on NASDAQ. If IEI is unable to maintain its SmallCap listing on NASDAQ, holders of IEI’s common stock may have difficulty selling their shares at a favorable price, or at all, and it may be more difficult for IEI to obtain additional financing.

Volatility of Stock Price. IEI’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 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.

Insiders have Substantial Control. Our executive officers, directors and entities affiliated with them beneficially own, in the aggregate, a significant portion of our outstanding common stock. Although there are no current agreements among the parties, these shareholders, if acting together, would be able to influence significantly all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

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Item 3: Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive and chief financial officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive and chief financial officer has concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive and chief financial officer by others within those entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms.

(b) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting (as defined in Rules 240.13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 6: Exhibits and Reports on Form 8-K

(a) There were no reports on Form 8-K filed for the three months ended November 30, 2003.

(b) Exhibits

10(a)	November 26, 2003 Amendment to Demand Loan and Security Agreement Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant.
31.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 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: 01/12/04	/S/    JOHN WALDSTEIN
	John Waldstein, President and Chief Executive Officer, Treasurer, Chief Financial and Accounting Officer and Chairman of the Board

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International Electronics, Inc. and Subsidiaries

Exhibits to Form 10-QSB

Quarter Ended November 30, 2003

10(a)	November 26, 2003 Amendment to Demand Loan and Security Agreement Accounts Receivable and Inventory dated February 28, 1997 between Eastern Bank and the Registrant.
31.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of International Electronics, Inc. Chief Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.(A)

Exhibit 10(a)

Eastern Bank

November 3, 2003

International Electronics, Inc.

427 Turnpike Street

Canton, Massachusetts 02021

Attn: John Waldstein, President and Treasurer

Gentlemen:

Reference is made to our Demand Loan and Security Agreement Accounts Receivable and Inventory dated February 28, 1997, together with all amendments and additions thereto (hereinafter called the “Agreement”). Notwithstanding the provisions of the Agreement, it is agreed, effective immediately, that the Agreement shall be amended as follows:

1. Sections 14(a) and 14(b) of the Agreement are hereby stricken in their entirety and the following new Sections 14(a) and 14(b) substituted therefore:

“(a) (Debt to Worth) permit the aggregate amount of its indebtedness to be more than one (1) time the amount of its tangible net worth on the last day of any fiscal year beginning with the fiscal year ending August 31, 2004;

(b) (Current Ratio) permit its ratio of current assets to current liabilities to be less than 2 to 1 on the last day of any fiscal year of Borrower,”

2. Section 14(f) of the Agreement is hereby stricken in its entirety and the following new Section 14(f) substituted therefor;

“(f) (Dividends) pay any dividends on or make any distribution on account of (except, if Borrower is a Subchapter S corporation, consistent with paragraph (c) above) any class of Borrower’s capital stock in cash or in property (other than additional shares of such stock), or redeem, purchase or otherwise acquire, directly or indirectly, any of such stock; notwithstanding the foregoing, if Borrower has a net income in excess of One Hundred Thousand ($100,000.00) Dollars, determined as of the last day of any fiscal year, determined in accordance with generally accepted accounting principles, the Borrower may, in the next succeeding fiscal year, declare dividends, redeem, purchase or otherwise acquire Borrower’s capital stock, provided (i) the aggregate of any such dividends and/or redemptions does not exceed the sum of Five Hundred Thousand ($500,000.00) Dollars in any fiscal year; (ii) the aggregate of any such dividends and/or

redemptions does not exceed three (3) times the amount of Borrower’s net after tax income for the prior fiscal year; and (iii) immediately after giving effect to any such dividends and/or redemptions, the Borrower is in compliance with the financial covenants set forth in Sections 14(a) and 14(b) above.

The foregoing notwithstanding, during the fiscal year ending August 31, 2004, Borrower may declare and pay dividends to its shareholders in an amount not exceeding five ($.05) cents per share per quarter.”

3. Section 14(m) of the Agreement is hereby stricken in its entirety and the following new Section 14(m) substituted therefore:

“(m) (Minimum Net Earnings) (i) permit the net tax after earnings of Borrower for any year ending on or after August 31, 2004 to be less than Ten Thousand ($10,000.00) Dollars; and (ii) permit the net after tax earnings of Borrower for each six (6) month period ending on or after August 31, 2003, and on the last day of February in each year thereafter, to be less than One ($1.00) Dollar.”

Kindly note that the alterations contained herein do not in any way alter, release or change any other sections contained in the Agreement.

Please acknowledge your agreement to the foregoing by signing the enclosed copy of this letter and returning the same to the undersigned.

Very truly yours,
EASTERN BANK
By:	/s/    Alan Roberts
	Alan Roberts, Vice President

ACCEPTED:
INTERNATIONAL ELECTRONICS, INC.
By:	/s/    John Waldstein
	John Waldstein, President and Treasurer

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, John Waldstein, President, Chief Executive Officer, Chief Financial Officer and Treasurer of International Electronics, Inc. (the “Registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-QSB for the quarter ended November 30, 2003 of International Electronics, Inc. (“Quarterly Report”);

2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the Registrant and I have:

(i) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

(ii) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];

(iii) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures, and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and

(iv) Disclosed in this Quarterly Report any change in the Registrant’s internal control over financial reporting, that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors:

(i) All significant deficiencies in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting.

/s/    JOHN WALDSTEIN        

John Waldstein

President, Chief Executive Officer,

Chief Financial Officer and Treasurer

Dated: January 12, 2004

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-QSB of International Electronics, Inc. (the “Company”) for the three months ended November 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John Waldstein, President, Chief Executive Officer, Chief Financial Officer and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JOHN WALDSTEIN        

John Waldstein

President, Chief Executive Officer,

Chief Financial Officer and Treasurer

Dated: January 12, 2004