ITEM 1. BUSINESS - -----------------
IEC Electronics Corp. ("IEC", "We", "Our") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. We provide high quality electronics manufacturing services with state-of-the-art manufacturing capabilities and production capacity. Utilizing computer controlled manufacturing and test machinery and equipment, IEC provides manufacturing services employing surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection technologies. As an independent full-service EMS provider, we offer our customers a wide range of manufacturing and management services, on either a turnkey or consignment basis, including design, prototype, material procurement and control, manufacturing and test engineering support, statistical quality assurance, complete resource management and distribution. Our strategy is to cultivate strong manufacturing relationships with established and emerging original equipment manufacturers ("OEMs").
IEC Electronics Corp., a Delaware corporation, is the successor by merger in 1990 to IEC Electronics Corp., a New York corporation which was organized in 1966. In June 1992, we acquired an EMS provider in Edinburg, Texas which it renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November 1994, we acquired an EMS provider in Arab, Alabama, which we renamed IEC Arab, Alabama Inc. ("Alabama"). In August 1998, through an Irish subsidiary, IEC Electronics - Ireland Limited, ("Longford"), we acquired certain assets of an EMS provider located in Longford, Ireland. In February 2001, we acquired IEC Electronicos de Mexico, located in Reynosa, Mexico ("Mexico").
The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiaries.
In October 1998, we closed our Alabama facility. In October 2002, we sold the facility for $600,000. All significant intercompany transactions and accounts have been eliminated.
On June 18, 2002, we signed an Asset Purchase Agreement to sell substantially all of our Mexican assets to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out amounts were received. In addition, EPI was to pay to IEC commissions based on the net selling price of products shipped to certain former customers of IEC. No such commissions were received. Under the terms of a related agreement, IEC and Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. IEC recorded an after-tax loss on the sale of the business of approximately $3.1 million.
In June 2002, IEC's Board of Directors approved a restructuring and reduction of workforce plan at its Newark, NY facility. In connection with this restructuring, IEC recorded a $448,000 charge to earnings during fiscal 2002 relating primarily to severance. All related payments were made as of September 30, 2003.
On February 28, 2003, we sold our Edinburg, Texas facility for $875,000 and completed our restructuring initiative. As a result, we recorded a $184,000 restructuring benefit due to certain facility payments accrued in a prior fiscal year that will no longer be paid out.
We achieved world-class ISO:9001-2002 certification in fiscal 2003 at our Newark, New York plant. In fiscal 2002, IEC became an FDA registered contract manufacturer of medical devices. These certifications are international quality assurance standards that most OEMs consider crucial in qualifying their EMS providers.
Our New York facility is self-certified to previously recognized British Approvals Board for Telecommunications standards, allowing it to provide manufacturing and test services to manufacturers producing telecommunication equipment destined for shipment to the European Common Market.
During 1998, we opened a state-of-the-art 10,000 square foot Technology Center at our Newark, New York manufacturing facility. During 2000, the Technology Center added pilot build to its services, which also include prototype assembly, design engineering services, and our Advanced Materials Technology Laboratory.
Our executive offices are located at 105 Norton Street, Newark, New York 14513. The telephone number is (315) 331-7742, and our internet address is www.iec-electronics.com.
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Electronics Manufacturing Services: The Industry
The EMS industry specializes in providing the program management, technical and administrative support and manufacturing expertise required to take a product from the early design and prototype stages through volume production and distribution. It provides quality product, delivered on time and at the lowest cost, to the OEM. This full range of services gives the OEM an opportunity to avoid large capital investments in plant, equipment and staff and allows the OEM to concentrate instead on the areas of its greatest strengths: innovation, design and marketing. Utilizing EMS such as those provided by IEC gives the customer an opportunity to improve return on investment with greater flexibility in responding to market demands and exploiting new market opportunities.
Primarily as a response to rapid technological change and increased competition in the electronics industry, OEMs have recognized that by utilizing EMS providers they can improve their competitive position, realize an improved return on investment and concentrate on areas of their greatest expertise such as research, product design and development and marketing. In addition, EMS allows OEMs to bring new products to market rapidly and adjust more quickly to fluctuations in product demand; avoid additional investment in plant, equipment and personnel; reduce inventory and other overhead costs; and establish known unit costs over the life of a contract. Many OEMs now consider EMS providers an integral part of their business and manufacturing strategy. Accordingly, the EMS industry experienced significant growth through mid-2000. The downturn of the telecommunications industry, and economic conditions in the United States as a result of September 11, 2001 caused a slowdown in the EMS industry, but the current long term forecast is for growth to resume in late 2003, as OEMs have established long-term working arrangements with EMS providers such as IEC.
OEMs increasingly require EMS providers to provide complete turnkey manufacturing and material handling services, rather than working on a consignment basis in which the OEM supplies all materials and the EMS provider supplies labor. Turnkey contracts involve design, manufacturing and engineering support, the procurement of all materials, and sophisticated in-circuit and functional testing and distribution.
We continually evaluate emerging technology and maintain a technology road map to ensure relevant processes are available to our customers when commercial and design factors so indicate. The current generation of interconnection technologies include chip scale packaging and ball grid array (BGA) assembly techniques. We have placed millions of plastic BGA's since 1994 and added Ceramic BGA placement for networking customers to our service offerings in fiscal 2001. Future advances will be directed by our Technology Center which combines Prototype and Pilot Build Services with the capabilities of our Advanced Materials Technology Laboratory, and is supported by our Design Engineering Group.
We are well positioned to utilize our very experienced workforce with technical expertise. Our emphasis is on building the most challenging complete systems with current work for Excel Switching, ViaSat and Teradyne as examples. IEC has positioned itself as a leader of lead-free solder assembly technology through early development and technical publications. Lead-free is mandated by July 2006 for many electronic products sold in Europe.
IEC's Strategy
Our strategy is to cultivate strong manufacturing partnerships with established and emerging OEMs in the electronics industry. These long-term business partnerships involve the joint development of manufacturing and support strategies with OEM customers and promote customer satisfaction. In implementing this strategy, we offer our customers a full range of manufacturing solutions through flexibility in production, high quality and fast-turnaround manufacturing services and computer-aided testing.
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Assembly Process
We generally enter into formal agreements with our significant customers. These agreements generally provide for fixed prices for one year, absent any customer changes which impact cost of labor or material, and rolling forecasts of customer requirements. After establishing an OEM relationship, we offer our consultation services with respect to the manufacturability and testability of the product design. We often recommend design changes to reduce manufacturing costs and to improve the quality of the finished assemblies, and in some instances will produce original designs to the customer's specifications.
Upon receipt, a customer's order is entered into our computer system by customer service personnel and is reviewed by all departments. The Production Control Department generates a detailed manufacturing schedule. Bills of material and approved vendor lists are reviewed by the Engineering Department, which creates a detailed process to direct the flow of product through the plant. The Material Control Department utilizes a material requirement planning (MRP) program to generate the requisitions used by the Purchasing Department to procure all material and components from approved vendors in the quantities and at the time required by the production schedule.
We assign a program manager to each customer. The program manager maintains regular contact with the customer to assure timely and complete flow of information between the customer and us. Many products we manufacture are in the early stages of their product cycle and therefore undergo numerous engineering changes. In addition, production quantities and schedules of certain products must be varied to respond to changes in customers' marketing opportunities. We assess the impact of such changes on the production process and take the appropriate action, such as restructuring bills of material, expediting procurement of new components and adjusting its manufacturing and testing plans. We believe that our ability to provide flexible and rapid response to customer needs in high change environment is critical to our success.
Products and Services
We manufacture a wide range of assemblies which are incorporated into many different products. We provide electronic manufacturing services primarily for broadband telecommunications equipment; measuring devices; medical instrumentation; imaging equipment and diagnostic test equipment. During the fiscal year ended September 30, 2003 we provided electronics manufacturing services to approximately 20 different customers, including Motorola ("Motorola"), Teradyne Diagnostic Solutions UK ("Teradyne Diagnostic"), Teradyne Test Division ("Teradyne Test"), and General Electric Transportation ("GE"). We provide our services to multiple divisions and product lines of many of our customers and typically manufacture for a number of each customer's successive product generations. In most cases, we are the sole contract manufacturer for the customer site or division, providing all services, prototype through box build and functional test.
Materials Management
We generally procure material only to meet specific contract requirements. In addition, our agreements with our significant customers generally provide for cancellation charges equal to the costs which are incurred by us as a result of a customer's cancellation of contracted quantities. Our internal systems provide effective controls for all materials, whether purchased by us or provided by the customer, through all stages of the manufacturing process, from receiving to final shipment.
Availability of Components
Substantially all of our net sales are derived from turnkey manufacturing in which we provide both materials procurement and assembly services. We are well positioned with supplier relationships and material procurement expertise to acquire needed materials. However, availability of customer-consigned parts and unforeseen shortages of components on the world market are beyond our control and could adversely affect revenue levels and operating efficiencies.
Suppliers
We have a Master Distribution Program in place with Arrow Electronics. This alliance has the benefit of reducing lead time on program parts, reducing the quotation process timetable, providing competitive pricing, providing some protection during periods of component allocation, providing better payment terms, reducing overhead cost, providing access to in-house stores and providing access to global resources.
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Marketing and Sales
During 2003, we have successfully maintained and grown sales through increases in services to existing customers. We are successfully pursuing new business through the efforts of five newly contracted manufacturing representative firms and our long-term relationship with a strong New England representative firm headquartered in Boston. In addition to our sales and marketing staff, our executives are closely involved with marketing efforts. We conduct market research to identify industries and to target companies where the opportunity exists to provide electronic manufacturing services across a number of product lines and product generations.
Our sales effort is supported by advertising in trade media, sales literature, internet website, video presentations, participation in trade shows and direct mail promotions. Inquiries resulting from these advertising and public relations activities are assigned to the representative covering the customer's location. In addition, referrals by existing customers are an important source of new opportunities. Our objective is to sell complex, high-mix, full systems to regional customers who require both our technical expertise and our ability to execute in a dynamic engineering change environment. These customers can be found in many diverse industries including telecommunications, medical, transportation, defense, avionics and others.
Backlog
Our backlog as of September 30, 2003 and September 30, 2002 was approximately $6.7 million and $8.5 million, respectively. Backlog consists of contracts or purchase orders with delivery dates scheduled within the next 12 months. Substantially all of the current backlog is expected to be shipped within our current fiscal year. Variations in the magnitude and duration of contracts received by us and customer delivery requirements may result in substantial fluctuations in backlog from period to period.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. Management believes that our business is operated in compliance with applicable regulations promulgated by the Occupational Safety and Health Administration and the Environmental Protection Agency and corresponding state agencies which, respectively, pertain to health and safety in the work place and the use, discharge, and storage of chemicals employed in the manufacturing process. Current costs of compliance are not material to us. However, new or modified requirements, not presently anticipated, could be adopted creating additional expense for us.
Employees
IEC's employees numbered 182 at October 28, 2003, including 13 employees engaged in engineering, 153 in manufacturing and 16 in administrative and marketing functions. None of our employees are covered by a collective bargaining agreement. We have not experienced any work stoppages and believe that our employee relations are good. We have access to a large work force by virtue of our northeast location midway between Rochester and Syracuse, two upstate New York industrial cities.
Patents and Trademarks
We hold patents unrelated to electronics manufacturing services and also employ various registered trademarks. We do not believe that either patent or trademark protection is material to the operation of our business.
ITEM 2.
ITEM 2. PROPERTIES - -------------------
Our administrative and manufacturing facility is located in Newark, New York and contains an aggregate of approximately 300,000 square feet.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
Except as set forth below, there are no material legal proceedings pending to which IEC or any of its subsidiaries is a party or to which any of IEC's or subsidiaries' property is subject. To our knowledge, there are no material legal proceedings to which any director, officer or affiliate of IEC, or any beneficial owner of more than 5 percent (5%) of Common Stock, or any associate of any of the foregoing, is a party adverse to IEC or any of its subsidiaries.
An action was commenced in United States District Court for the Southern Division of Texas against IEC and several other corporate defendants, on August 12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for exposure to lead, lead dust, chemicals and other substances used in the manufacture of products by various defendants. The essence of the complaint relates to alleged "in utero" exposure to the circulatory system of the then unborn children, resulting in alleged tissue toxicity through the mothers, causing damage to the central nervous system, brain and other organs of the fetus. The complaint alleges theories of negligence, gross negligence, strict liability, breach of warranty and fraud/negligent misrepresentation, and claims unspecified damages for pain and suffering, a variety of special damages, punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has agreed to provide a defense of the claims with a reservation of rights, but has expressly excluded any coverage for the claim for punitive damages. IEC has denied liability and the case is still in the discovery phase. A trial is tentatively scheduled for March 2004.
On August 13, 2003 an action was commenced by General Electric Company ("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc. The action alleges causes of action for breach of a manufacturing services contract which had an initial value of $4.4 million, breach of express warranty, breach of implied warranty and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a component that IEC used to assemble printed circuit boards for GE that GE contends failed to function properly requiring a product recall. GE claims damages "in excess of $15,000" plus interest and attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for lack of jurisdiction and the motion is pending. The position of IEC is that the contract with GE was substantially completed and that it has meritorious defenses and a cross claim against Vishay.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ During the fourth quarter of fiscal 2003, no matters were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
IEC's executive officers as of September 30, 2003, were as follows:
Name Age Position
W. Barry Gilbert 57 Chairman of the Board, Director and Acting Chief Executive Officer
Bill R. Anderson 58 Vice President and Chief Operating Officer
Brian H. Davis 49 Vice President, Chief Financial Officer and Controller
W. Barry Gilbert has served as acting Chief Executive Officer since June 2002. He has been a director of IEC since February 1993, and Chairman of the Board since February 2001. He is an adjunct faculty member at the William E. Simon Graduate School of Business Administration of the University of Rochester. From 1991-1999, Mr. Gilbert was President of the Thermal Management Group of Bowthorpe Plc. of Crawley, West Sussex, England. Prior to that, he was corporate Vice President and President, Analytical Products Division of Milton Roy Company, a manufacturer of analytical instrumentation.
Bill R. Anderson has served as Chief Operating Officer since June 2002. From September 2001 to June 2002, he was Vice President and General Manager, Newark Operations and from March 2001 to September 2001, he was Vice President, Supply Chain Management and Materials. He held the positions of Vice President of Materials and of Executive Vice President and General Manager at IEC from 1995-1998. In 1998, he left IEC and became Vice President of North American Operations for SMT Centre (SMTC), Toronto, Canada, an EMS provider. From there, he accepted the position of Vice President of Materials and Supply Chain Management at MCMS, Inc., also an EMS provider, a position he held until March 2001, when he rejoined IEC.
Brian H. Davis joined IEC in April 2003 as Vice President, Chief Financial Officer and Controller. Mr. Davis previously served as Vice President of Finance from 1996 - 2003 at Thermo Spectronic, a manufacturer of laboratory equipment located in Rochester, NY. Prior to that, Mr. Davis functioned in various Controller positions with Life Sciences International and Milton Roy Company.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------------------------
(a) Market Information.
IEC's Common Stock began trading on The Over the Counter Bulletin Board ("OTCBB") under the symbol IECE.OB on December 3, 2002. Prior to that, IEC's Common Stock was traded on the Nasdaq Stock Market.
The following table sets forth, for the period stated, the high and low closing sales prices for the Common Stock as reported on The Nasdaq Stock Market or the OTCBB, as applicable.
Closing Sales Price Period High Low October 1, 2001 - December 31, 2001 $ 0.850 $ 0.400 January 1, 2002 - March 31, 2002 $ 0.680 $ 0.360 April 1,2002 - June 30, 2002 $ 0.570 $ 0.110 July 1, 2002 - September 30, 2002 $ 0.160 $ 0.070 October 1, 2002 - December 31, 2002 $ 0.270 $ 0.060 January 1, 2003 - March 31, 2003 $ 0.570 $ 0.070 April 1, 2003 - June 30, 2003 $ 0.980 $ 0.390 July 1, 2003 - September 30, 2003 $ 1.530 $ 0.650
The closing price of IEC's Common Stock on the OTCBB on November 19, 2003, was $1.79 per share.
(b) Holders.
As of November 19, 2003, there were approximately 158 holders of record of IEC's Common Stock.
(c) Dividends.
IEC has never paid dividends on its Common Stock. It is the current policy of the Board of Directors of IEC to retain earnings for use in our business. Certain financial covenants set forth in IEC's current loan agreement prohibit IEC from paying cash dividends. We do not plan to pay cash dividends on our Common Stock in the foreseeable future.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information concerning IEC's equity compensation plans as of September 30, 2003.
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(1) All debt is recorded as current for reporting purposes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS --------------------------
MANAGEMENT'S DISCUSSION OF OPERATIONS
The information in this Management's Discussion & Analysis should be read in conjunction with the accompanying consolidated financial statements, the related Notes to Financial Statements and the Five-Year Summary of Financial Data. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement preceding Item 1 of this Form 10K.
Overview - --------
We had a successful year in fiscal 2003 as we completed our restructuring and returned to profitability. We were profitable during each quarter of 2003. Long term debt has been reduced by $2.6 million since our January 14, 2003 refinancing. We took a number of important steps in 2003, including a continued emphasis on business development. During the year, we were able to add five new manufacturer's representative organizations, several new customers and win new business from existing customers.
Analysis of Operations - ----------------------
Sales ----- (dollars in millions)
% % For Year Ended September 30, 2003 2002 Change 2001 Change ---- ---- ------ ---- ------
Net sales $48.2 $39.4 22.3% $114.8 (66)%
The increase in fiscal 2003 net sales compared to fiscal 2002 was primarily due to increased demand from our major customers.
The decrease in fiscal 2002 net sales compared to fiscal year 2001 was primarily due to the loss of 4 major customers and the significant downturn in the telecommunications and industrial sectors of the U.S. economy.
Gross Profit and Selling and Administrative Expenses - ---------------------------------------------------- (as a % of Net Sales)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Gross profit 10.2% 5.8% 2.6%
Selling and administrative expenses 6.1% 10.7% 6.1%
Gross profit as a percentage of sales was 10.2% in fiscal 2003 as compared to 5.8% in fiscal 2002. The increase of more than 4 percentage points was primarily attributable to our concerted efforts to reduce manufacturing overhead.
Gross profit as a percentage of sales was 5.8% in fiscal 2002 as compared to 2.6% in fiscal 2001. The increase of more than 3 percentage points was primarily attributable to the sale of fully reserved inventory to Acterna Corporation for $1.1 million as part of an out of court settlement. In addition, the 2001 amount was considerably lower due to the charge against inventory and receivables.
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Selling and administrative expenses as a percentage of sales decreased to 6.1% in fiscal 2003 compared to 10.7% in fiscal 2002. The decrease is primarily due to a decrease in the number of employees.
Selling and administrative expenses as a percentage of sales increased to 10.7% in fiscal 2002 compared to 6.1% in fiscal 2001 as certain costs remained fixed with a significantly lower sales volume.
Other Income and Expense - ------------------------ (dollars in millions)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Interest and financing expense $0.6 $0.9 $1.3
Other income $0.7 $0.2 $ -
Interest and financing expense decreased $0.3 million to $0.6 million in fiscal 2003 from $0.9 million in fiscal 2002. This is primarily due to debt reduction that was achieved due to favorable cash flow from operations. Interest and finance expense decreased $0.4 million to $0.9 million from $1.3 million in fiscal 2001. This was also due to debt reduction.
We had other income of $0.7 million in fiscal 2003. $0.6 million was related to negotiated forgiveness of accounts payable owed to various creditors and $0.1 million was related to the sale of our Alabama facility.
Other income of $0.2 million in fiscal 2002 is composed of interest income received from Acterna Corporation as part of an out of court settlement.
Income Taxes - ------------ (as a % of income (loss) before income taxes)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Effective tax rate (12.1)% -% (0.1)%
We recorded a $260,000 tax benefit during fiscal 2003. This is due to a $250,000 adjustment against valuation allowances that had been established against our net deferred tax assets and $10,000 from the utilization of a state net operating loss carryforward. We continue to maintain a large valuation allowance against our net deferred tax assets including the net operating loss carryforward.
In fiscal 2001, we recorded an income tax benefit from the receipt of a prior year state refund in the amount of $95,000.
Restructuring Charge (Benefit) - ----------------------------- (dollars in millions)
For Year Ended September 30, 2003 2002 2001 ---- ---- ---- ($0.1) $0.2 $ -
During Fiscal 2003, we recorded a benefit from restructuring of $63,000. This was due to certain severance payments accrued in 2002 that will no longer be paid out.
In June 2002, our Board of Directors approved a restructuring and reduction of workforce plan at our Newark, NY facility. In connection with this restructuring, we recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. Offsetting this charge was a $240,000 reduction in a reserve previously recorded for our Arab, Alabama facility that was no longer needed due to the sale of the facility in October 2002.
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Asset Impairment Writedown - --------------------------
In assessing and measuring the impairment of long-lived assets, we apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in our business strategy, we did not believe that their future cash flows supported the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment.
During August 1998, we initiated a plan to dispose of our Arab, Alabama facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000 for fiscal 2002. The facility was sold in October 2002 for $600,000.
During April 2001, we initiated a plan to dispose of our Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million for fiscal 2002 and was reflected in discontinued operations. The facility was sold on February 28, 2003 for $875,000.
Discontinued Operations - -----------------------
On June 18, 2002, we signed an Asset Purchase Agreement to sell substantially all of the assets of IEC-Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out amounts were received. Under the terms of a related agreement, IEC and IEC-Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. We recorded an after-tax loss on the sale of the business of approximately $3.1 million in fiscal 2002. The reserve balance at September 30, 2003 was $216,000. It is anticipated that all remaining charges against the accrual will be made by December 2003.
On February 28, 2003, We sold its Edinburg, Texas facility for $875,000 and completed its restructuring initiative. As a result, we recorded a $184,000 restructuring benefit due to certain facility payments accrued in a prior fiscal year that will no longer be paid out.
Significant Events - ------------------
A small number of customers are currently responsible for a significant portion of our net sales.
One of these customers has announced its intention to begin manufacturing most of the products it currently purchases from IEC at its own facility. We believe that we will be able to retain a piece of that business.
We have recently added several new customers and have received additional business from existing customers. Furthermore, we expect to add additional customers in the near future.
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Liquidity and Capital Resources - -------------------------------
As reflected in the Consolidated Statements of Cash Flows for Fiscal 2003, net cash provided by operations was $4.6 million. Of this, $4.1 million was used to reduce IEC's debt.
On January 14, 2003, we completed a new $7,300,000 financing agreement composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000 Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the IEC directors. The Facility, which has a 3 year maturity, bears interest at the rate of prime plus 2%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 secured by a first mortgage lien against our Edinburg, Texas real estate which was paid in full upon the sale of the facility in February 2003. The Term Loan is secured by a general security agreement, and indirectly by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The availability under the revolver was $2.2 million on September 30, 2003.
$0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively.
The financing agreements contain various affirmative and negative covenants including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). We are in compliance with these covenants. In connection with the financing, we entered into agreements with certain of our trade creditors providing for extended payment terms involving an aggregate of approximately $2.0 million of past due balances. In addition, certain trade creditors agreed to discounted payment terms. Such discounts amounted to $0.6 million and were recorded in the first half of fiscal 2003.
Application of Critical Accounting Policies - -------------------------------------------
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of long-lived assets, accounting for legal contingencies and accounting for income taxes.
We recognize revenue in accordance with Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements." Sales are recorded when products are shipped to customers. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded.
We evaluate our long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in IEC's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact IEC's financial position or its results of operations.
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Impact of Inflation - -------------------
The impact of inflation on our operations has been minimal due to the fact that we ares able to adjust its bids to reflect any inflationary increases in cost.
New Pronouncements - ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The adoption of SFAS No. 143 did not have a material effect on our financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". We adopted this standard as of October 1, 2002 with no material effect on our financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS No. 145). SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
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In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure". SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. IEC continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." ("FIN 46"). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Statement 150"). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
FACTORS AFFECTING FUTURE RESULTS
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL.
Our annual and quarterly results may vary significantly depending on various factors, including:
- adverse changes in general economic conditions - the level and timing of customer orders - the level of capacity utilization of our manufacturing facility and associated fixed costs - the composition of the costs of revenue between materials, labor and manufacturing overhead - price competition - our level of experience in manufacturing a particular product - the degree of automation used in our assembly process - the efficiencies achieved in managing inventories and fixed assets - fluctuations in materials costs and availability of materials - the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor.
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The volume and timing of orders placed by our customers vary due to variation in demand for our customers' products, our customers' inventory management, new product introductions and manufacturing strategy changes, and consolidations among our customers. In the past, changes in customer orders have had a significant effect on our results of operations due to corresponding changes in the level of overhead absorption. Any one or a combination of these factors could adversely affect our annual and quarterly results of operations in the future.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, A REDUCTION IN SALES TO ANY ONE OF OUR CUSTOMERS COULD CAUSE A SIGNIFICANT DECLINE IN OUR REVENUE.
A small number of customers are currently responsible for a significant portion of our net sales. During fiscal 2003, 2002, and 2001, our five largest customers accounted for 93%, 81% and 72% of consolidated net sales, respectively. During fiscal 2003, Motorola and Teradyne accounted for 55% and 32%, respectively, of consolidated net sales. The percentage of IEC's sales to its major customers may fluctuate from period to period.
We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced rapid technological change, short product life cycles, consolidation, and pricing and margin pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales. Any consolidation among our customers could further reduce the number of customers that generate a significant percentage of our revenues and exposes us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, would have a material adverse effect on our results of operations. We cannot assure you that present or future customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of manufacturing services ordered from us. If they do, it could have a material adverse effect on our results of operations. In addition, we generate significant account receivables in connection with providing manufacturing services to our customers. If one or more of our customers were to become insolvent or otherwise were unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE.
Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers' products become obsolete or fail to gain widespread commercial acceptance, our business could be materially adversely affected.
WE DEPEND ON THE ELECTRONICS INDUSTRY, WHICH CONTINUALLY PRODUCES TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS WOULD HARM OUR BUSINESS.
Factors affecting the electronics industry in general could seriously harm our customers and, as a result, us.
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These factors include:
- the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which result in short product life cycles; - the inability of our customers to develop and market their products, some of which are new and untested, the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance; and - recessionary periods in our customers' markets.
If any of these factors materialize or if we are unable to offer technologically advanced, cost effective, quick response manufacturing service to customers, demand for our services would decline and our business would suffer.
MOST OF OUR CUSTOMERS DO NOT COMMIT TO LONG-TERM PRODUCTION SCHEDULES, WHICH MAKES IT DIFFICULT FOR US TO SCHEDULE PRODUCTION AND ACHIEVE MAXIMUM EFFICIENCY OF OUR MANUFACTURING CAPACITY.
The volume and timing of sales to our customers may vary due to:
- variation in demand for our customers' products - our customers' attempts to manage their inventory - electronic design changes - changes in our customers' manufacturing strategy - acquisitions of or consolidations among customers - recessionary conditions in customers' industries
Due in part to these factors, most of our customers do not commit to firm production schedules for more than one quarter in advance. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, we have been required to increase staffing and other expenses in order to meet the anticipated demand of our customers. Anticipated orders from many of our customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in our customers' business needs, thereby adversely affecting our results of operations. On other occasions, our customers have required rapid increases in production, which have placed an excessive burden on our resources. Such customer order fluctuations and deferrals could have a material adverse effect on us in the future.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION.
Electronics manufacturing service providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons. The success of our customers' products in the market affects our business. Cancellations, reductions or delay by a significant customer or by a group of customers could negatively impact our operating results.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimate of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results. On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins.
WE COMPETE WITH NUMEROUS PROVIDERS OF ELECTRONIC MANUFACTURING SERVICES, INCLUDING OUR CURRENT OR POTENTIAL CUSTOMERS WHO MAY DECIDE TO MANUFACTURE ALL OF THEIR PRODUCTS INTERNALLY.
The electronic manufacturing services business is highly competitive. We compete against numerous domestic and foreign manufacturers with global operations as well as those who operate on a local or regional basis. Many of our competitors have international operations and some have substantially greater manufacturing, financial, research and development, and marketing resources than us. We also face potential competition from the manufacturing operations of our current and potential customers, who are continually evaluating the merits of manufacturing products internally versus the advantages of outsourcing.
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INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, research and development, sales and marketing resources than we do.
We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures as a result of their geographic location or the services they provide. As a result, competitors may have a competitive advantage. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin compression, or loss of market share.
IF WE DO NOT MANAGE OUR BUSINESS EFFECTIVELY, OUR PROFITABILITY COULD DECLINE.
Our ability to manage our business effectively will require us to continue to implement and improve our operational, financial and management information systems; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees. Our failure to effectively do so could have a material adverse effect on our results of operations.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR COMPONENTS THAT ARE CRITICAL TO OUR MANUFACTURING PROCESSES. A SHORTAGE OF THESE COMPONENTS OR AN INCREASE IN THEIR PRICE COULD INTERRUPT OUR OPERATIONS AND REDUCE OUR PROFITS.
Substantially all of our net revenue is derived from turnkey manufacturing in which we provide materials procurement. While many of our customer contracts permit quarterly or other periodic adjustments to pricing based on decreases and increases in component prices and other factors, we typically bear the risk of component price increases that occur between any such re-pricings or, if such re-pricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, certain component price increases could adversely affect our gross profit margins. Almost all of the products we manufacture require one or more components that are available from a limited number of suppliers. Some of these components are allocated from time to time in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times industry wide shortages of electronic components have occurred. Such circumstances have produced insignificant levels of short-term interruption of our operations, but could have a material adverse effect on our results of operations in the future.
OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK
Most of our contract manufacturing services are provided on a turnkey basis, where we purchase some or all of the materials required for designing, product assembling and manufacturing. These services involve greater resource investment and inventory risk management than consignment services, where the customer provides materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results.
In our turnkey operations, we must order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. Customers' cancellation or reduction of orders can result in expenses to us. While our customer agreements typically include provisions which require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our supplies.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are highly complex and may, at times, contain design or manufacturing errors or failures. Despite our quality control and quality assurance efforts, defects may occur. Defects in the products we manufacture, whether caused by a design, manufacturing or component failure or error, may result in delayed shipments to customers or reduced or cancelled customer orders and may affect our business reputation. In addition, these defects may result in liability claims against us. Even if customers or component suppliers are responsible for the defects, they may be unwilling or unable to assume responsibility for any costs or payments. Page 19 of 79
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to:
- hire, retain and expand our qualified engineering and technical personnel; - maintain technological leadership; - develop and market manufacturing services that meet changing customer needs; and - successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations provide the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment, which could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers' changing technological needs and requirements could have an adverse effect on our business.
WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH ANY OF OUR KEY PERSONNEL, THE LOSS OF WHICH COULD HURT OUR OPERATIONS.
Our continued success depends largely on the efforts and skills of our key managerial and technical employees. The loss of the services of certain of these key employees or an inability to attract or retain qualified employees could have a material adverse effect on us. We do not have employment agreements or non-competition agreements with our key employees.
COMPLIANCE OR THE FAILURE TO COMPLY WITH CURRENT AND FUTURE ENVIRONMENTAL REGULATIONS COULD CAUSE US SIGNIFICANT EXPENSE.
We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. If we fail to comply with any present and future regulations, we could be subject to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations.
THE AGREEMENTS GOVERNING OUR EXISTING DEBT CONTAIN VARIOUS COVENANTS THAT IMPACT UPON THE OPERATION OF OUR BUSINESS.
The agreements and instruments governing our existing debt and our secured credit facility contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios and minimum earnings before interest, taxes, depreciation and amortization (EBITDA) and restrict our ability to:
- incur debt; - incur or maintain liens; - make acquisitions of businesses or entities; - make investments, including loans, guarantees and advances; - engage in mergers, consolidations or certain sales of assets; - engage in transactions with affiliates; and - pay dividends or engage in stock redemptions.
Our secured credit facilities are secured by a general security agreement covering receivables, inventory, equipment, intangibles, investment property and deposit accounts and indirectly by a first mortgage on our Newark plant.
Our ability to comply with covenants contained in our existing debt and our secured credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our failure to comply with our debt-related covenants could result in an acceleration of our indebtedness and cross-defaults under our other indebtedness, which may have a material adverse effect on our financial condition. We are currently in compliance with all of our covenants.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL.
Our common stock is traded on the Over-the-Counter Bulletin Board The market price of our common stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including future announcements concerning us or our key customers or competitors, government regulations, litigation, changes in earnings estimates by analysts, fluctuations in quarterly operating results, or general conditions in the EMS industry.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of IEC due to adverse changes in financial rates. We are exposed to market risk in the area of interest rates. One exposure is directly related to its Term Loan and Revolving Credit borrowings under the Credit Agreement, due to their variable interest rate pricing. Management believes that interest rate fluctuations will not have a material impact on IEC's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The information required by this item is incorporated herein by reference to pages 25 through 42 of this Form 10-K and is indexed under Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
There have been no disagreements on accounting and financial disclosure matters.
ITEM 9A CONTROLS AND PROCEDURES - --------------------------------
An evaluation was performed under the supervision and with the participation of the Company's management, including our acting Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K as required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our acting Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by the Annual Report on 10-K to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC rules and forms.
In connection with the evaluation described above, our management, including our acting Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2003, and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The information required by this item is presented under the caption entitled "Election of Directors - Nominees for Election as Directors" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto. The information regarding Executive Officers of the Registrant is found in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
The information required by this item is presented under the caption entitled "Executive Officer Compensation" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto, except, however, the sections entitled "Performance Graph" and "Report of the Compensation Committee of the Board of Directors" are not incorporated in this report by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ---------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
The information required by this item is presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
The information required by this item is presented under the caption "Executive Officer Compensation - Certain Transactions" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------------------------------------------------
The information required by this item is presented under the caption "Audit Committee Report" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
(a) The following documents are filed as part of this report and as response to Item 8: Page (1) and (2) Financial Statements and Supplementary Schedule Report of Independent Public Accountants...................... 27 Consolidated Balance Sheets as of September 30, 2003 and 2002.................................. 28 Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 .................... 29 Consolidated Statements of Comprehensive Income (Loss) and Shareholders' Equity for the years ended September 30, 2003, 2002 and 2001................................................ 30 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001...................... 31 Notes to Consolidated Financial Statements.................... 32 Selected Quarterly Financial Data (unaudited)................ 42
All other schedules are either inapplicable or the information is included in the financial statements and, therefore, have been omitted.
(3) Exhibits
Exhibit No. Title Page
3.1 Amended and Restated Certificate of Incorporation of DFT Holdings Corp. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.2 Amended Bylaws of IEC Electronics Corp. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings Corp. (Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings Corp. - New York. (Incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.5 Certificate of Ownership and Merger merging IEC Electronics Corp. into DFT Holdings Corp. - Delaware. (Incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-1, Registration No. 33-56498)
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3.6 Certificate of Merger of IEC Acquisition Corp. into IEC Electronics Corp. (Incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.7 Certificate of Amendment of Certificate of Incorporation of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on Feb. 26, 1998 (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 27, 1998) 3.8 Certificate of Designations of the Series A Preferred Stock of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on June 3, 1998. (Incorporated by reference to Exhibit 3.8 of the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 4.1 Specimen of Certificate for Common Stock. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics Corp. and ChaseMellon Shareholder Services. LLC., as Rights Agents (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 2, 1998) 10.1* Form of Indemnity Agreement. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1993) 10.2* IEC Electronics Corp. 1993 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 10.3* Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.4* Form of Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.5* Form of Non-Employee Director Stock Option Agreement (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.6* IEC Electronics Corp. 2001 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.7 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.8* IEC Electronics Corp. Savings and Security Plan effective June 1, 1997 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). 10.9* Amendment to IEC Electronics Corp. Savings and Security Plan effective June 1, 1998. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998). 10.10* Amendment to IEC Electronics Corp. Savings and Security Plan effective April 1, 2002 (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.11 Loan and Security Agreement dated as of December 28, 1999, among IEC ELECTRONICS CORP. and IEC ELECTRONICS-EDINBURG, TEXAS INC. (collectively, "Debtor") and HSBC BANK USA as agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital"), as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999). 10.12 Amendment No. 1 dated as of March 30, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 amount IEC ELECTRONICS CORP. ("IEC) and IEC ELECTRONICS-EDINBURG, TEXAS INC. ("IEC-Edinburg") (collectively, "Debtor") and HSBC BANK USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.13 Amendment No. 2 dated as of December 1, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC ELECTRONICS CORP. ("IEC") and IEC ELECTRONICS-EDINBURG, TEXAS INC.("IEC-Edinburg")(collectively, "Debtor") and HSBC BANK USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders. (Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000). 10.14 Amendment No. 3 dated as of April 24, 2001 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital"). (Incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001).
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10.15 Amendment No. 4 dated as of December 21, 2001 ("Amendment") to Loan and Security Agreement originally dated as of December 28, 1999 and originally among IEC Electronics Corp. ("IEC" or "Debtor") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") as Lenders.(Incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.16 Amendment No. 5 dated as of February 15, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 20, 2002). 10.17 Amendment No. 6 dated as of February 28, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 6, 2002). 10.18 Amendment No. 7 dated as of March 15, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 21, 2002). 10.19 Amendment No. 8 dated as of April 8, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 9, 2002). 10.20 Amendment Number 9 dated as of June 20, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital"); Letter Modifications to Amendment Number 9 dated August 9, 2002, August 23, 2002, September 17, 2002 and September 24, 2002 (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.21 Amendment Number 10 dated as of October 1, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.22 Amendment Number 11 dated as of November 13, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.23 Amendment Number 12 dated as of January 1, 2003 to Loan and 53 Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002).
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10.24* Employment Agreement made as of August 11, 2000 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000.) 10.25* First Amendment dated as of October 23, 2001 and effective as of August 21, 2001 to Employment Agreement between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.26* Severance Agreement dated June 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.27* Supplemental Severance Agreement dated December 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.28 Loan Agreement between IEC Electronics Corp., and Keltic 43 Financial Partners, LLP, dated January 14, 2003. 10.29 Loan and Security Agreement between IEC Electronics Corp. and Suntrust Bank dated January 13, 2003. 64 10.30 Supplier agreement between IEC Electronics Corp. and Arrow CMS Distribution Group of Arrow Electronics, Inc. dated December 27, 2002 69 10.31 Amendment Number 1 to Term Note between IEC Electronics Corp. and SunTrust Bank dated September 26, 2003 73 21.1 Subsidiaries of IEC Electronics Corp. 74 23.1 Consent of Rotenberg & Co., LLP 75 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 76 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 77 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 78 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 79
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and Exchange Commission on July 21, 2003. It announced earnings for the quarter ended June 27, 2003 and a press release relating to the earnings was attached thereto.
(ii) A current report on Form 8-K was filed with the Securities and Exchange Commission on October 29, 2003. It announced financial results for the fiscal quarter and the year ended September 30, 2003 and a press release relating to the financial results was attached thereto.
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 21, 2003.
IEC Electronics Corp.
By:/s/ W. Barry Gilbert ------------------------- W. Barry Gilbert Acting Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/W. Barry Gilbert Acting Chief Executive Officer and - ---------------------- Chairman of the Board (W. Barry Gilbert) November 21, 2003
/s/Brian H. Davis Vice President, - ----------------- Chief Financial Officer (Brian H. Davis) and Controller November 21, 2003
/s/David J. Beaubien Director November 21, 2003 - -------------------- (David J. Beaubien)
/s/Robert P. B. Kidd Director November 21, 2003 - ------------------- (Robert P. B. Kidd)
/s/Eben S. Moulton Director November 21, 2003 - ------------------ (Eben S. Moulton)
/s/Justin L. Vigdor Director November 21, 2003 - ------------------- (Justin L. Vigdor)
/s/James C. Rowe Director November 21, 2003 - ------------------ (James C. Rowe)
/s/Dermott O'Flanagan Director November 21, 2003 - --------------------- (Dermott O'Flanagan)
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors IEC Electronics Corp. Newark, New York
We have audited the accompanying consolidated balance sheets of IEC Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, comprehensive income and shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IEC Electronics Corp. and subsidiaries as of September 30, 2003 and 2002 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The financial statements for the year ended September 30, 2001 were audited by other auditors who have ceased operations whose report dated November 16, 2001 (except with respect to the matter discussed in Notes 1 and 5, as to which the date was January 11, 2002), on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern.
/s/ Rotenberg & Co., LLP - ------------------------ Rotenberg & Co., LLP
Rochester, New York October 21, 2003
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IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, 2002 AND 2001
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - -----------------------------------------------------------
Business - --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. The Company is a significant provider of high quality electronics manufacturing services with state-of-the-art manufacturing capabilities and production capacity. Utilizing computer controlled manufacturing and test machinery and equipment, the Company provides manufacturing services employing surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection technologies. As an independent full-service EMS provider, the Company offers its customers a wide range of manufacturing and management services, on either a turnkey or consignment basis, including design, prototype, material procurement and control, manufacturing and test engineering support, statistical quality assurance, complete resource management and distribution. The Company's strategy is to cultivate strong manufacturing relationships with established and emerging original equipment manufacturers ("OEMs").
Consolidation - -------------
The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico"), (collectively, "IEC"). Operations in Texas and Mexico were closed in July 2002. All significant intercompany transactions and accounts have been eliminated.
Revenue Recognition - -------------------
The Company recognizes revenue upon shipment of product for both turnkey and consignment contracts.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The Company's cash and cash equivalents are held and managed by institutions which follow the Company's investment policy. The fair value of the Company's financial instruments approximates carrying amounts due to the relatively short maturities and variable interest rates of the instruments, which approximate current market interest rates.
Long-Lived Assets - -----------------
The Company evaluates its long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." IEC evaluates the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
Previously, the Company applied the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement required that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
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During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in the Company's business strategy, the Company did not believe that their future cash flows supported the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment.
During fiscal year 2002, the company wrote down the value of its Arab, Alabama facility to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million in fiscal 2002.
Fair Value of Financial Instruments - -----------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.
Current Assets and Liabilities - The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of those instruments.
Debt - The fair value of the Company's debt is estimated based upon the quoted market prices for the same or similar issues which approximates its carrying amount.
Costs in Excess of Net Assets Acquired - --------------------------------------
Costs in excess of net assets acquired of $14.1 million were being amortized on a straight-line basis over 40 years. Amortization of $324,000 was charged against operations for the year ended September 30, 2001.
The remaining net goodwill in the amount of $9.6 million, related to the Newark operations was written off in fiscal 2001.
Earnings Per Share - ------------------
Net income (loss) per common share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per common share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per common share is calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive stock options, warrants and convertible securities.
Foreign Currency Translation - ----------------------------
The assets and liabilities of the Company's foreign subsidiary are translated based on the current exchange rate at the end of the period for the balance sheet and weighted-average rate for the period for the statement of operations. Translation adjustments are recorded as a separate component of equity. Transaction gains or losses are included in operations.
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Comprehensive Income - --------------------
Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the statements of comprehensive income (loss) and shareholders' equity.
Use of Estimates - ----------------
The preparation of 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, the 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.
New Pronouncements - ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The adoption of SFAS No. 143 did not have a material effect on the financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". The Company adopted this standard as of October 1, 2002 with no material effect on its financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical corrections (SFAS No. 145). The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
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In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148 (SFAS 148), "Accounting for Stock Based Compensation - Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. The Company continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." (FIN 46). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
Reclassifications - -----------------
Certain prior year amounts have been reclassified to conform with the current year presentation.
2. INVENTORIES - -------------------
Inventories are stated at the lower of cost (first-in, first-out) or market. The major classifications of inventories are as follows at period end (in thousands):
2003 2002 ------- -------
Raw Materials $ 1,128 $ 2,175 Work-in-process 498 1,214 Finished goods 7 23 -------- -------- $ 1,633 $ 3,412 ======== ========
3. PROPERTY, PLANT, AND EQUIPMENT - ---------------------------------
Property, plant, and equipment are stated at cost and are depreciated over various estimated useful lives using the straight-line method.
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Maintenance and repairs are charged to expense as incurred; renewals and improvements are capitalized. At the time of retirement or other disposition of property, plant, and equipment, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income.
Depreciation and amortization was $1.5 million, $1.8 million, and $4.0 million for the years ended September 30, 2003, 2002 and 2001, respectively.
The principal depreciation and amortization lives used are as follows:
Estimated Description Useful Lives - ---------------------------- ------------
Land improvements 10 years Buildings and improvements 5 to 40 years Machinery and equipment 3 to 5 years Furniture and fixtures 3 to 7 years
4. ASSET HELD FOR SALE - ----------------------
Included in asset held for sale in 2002 was land and land improvements with a net book value of approximately $114,000 and buildings and improvements with a net book value of approximately $383,000.
5. DISCONTINUED OPERATIONS - ------------------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell substantially all of the assets of Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No such Earn-out amounts were received. In addition, EPI was to pay to the Company commissions based on the net selling price of products shipped to certain former customers. No such commissions were received. Under the terms of a related agreement, the Company and Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. The Company recorded an after-tax loss on the sale of the business of approximately $3.1 million.
Net sales of IEC-Mexico were $0, $10.8 million, and $45.9 million for the years ended September 30, 2003, 2002 and 2001, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations.
Assets and liabilities of IEC-Mexico to be disposed of consisted of the following at September 30:
6. RESTRUCTURING - ----------------
In June 2002, the Company's Board of Directors approved a restructuring and reduction of workforce plan at its Newark, NY facility. In connection with this restructuring, the Company recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. All remaining charges against the accrual were made by September 30, 2003.
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In August 1998, the Company announced its plan to close its underutilized Alabama facility. Due to the pending sale of the facility, a benefit of approximately $240,000 was recorded in fiscal 2002 resulting from the reversal of a previously established restructuring reserve which related to building maintenance costs. The Company recorded charges against the accrual of $85,000 in fiscal 2001.
7. LONG-TERM DEBT: - ------------------
Long-term debt consists of the following at September 30 (in thousands):
2003 2002 ------- -------
Senior debt facility $ - $ 1,976 Term loans 1,592 2,420 Vendor term notes 1,075 - Less - Current portion (1,277) (3,128) -------- ------- $ 1,390 $ 1,268 ======== =======
As of September 30, 2001, the Company was not in compliance with certain financial covenants under its secured asset-based credit agreement. As of December 21, 2001, the Company's banks waived the non-compliance, amended certain covenants to allow the Company more flexibility and changed the expiration date of the credit agreement. As a result of the January 1, 2003 amendment, the expiration date of the credit agreement was January 17, 2003.
As last amended, the credit agreement provided for a revolving credit facility component of $1.0 million. The interest rate on the revolving credit facility was increased at the time of the various amendments and on September 30, 2002 was prime rate plus 3.50%.
The second component of the credit facility consisted of a $10 million three-year term loan with monthly principal installments based on a five-year amortization which began in April 2000. The interest rate on the term loan facility was increased at the time of the various amendments and at September 30, 2002 was prime rate plus 4.00%.
At September 30, 2002, $3.6 million was outstanding, consisting of $1.1 million and $2.5 million relating to the revolving credit facility and term loan, respectively, with an additional $403,000 available under the revolving credit facility.
On January 14, 2003, IEC completed a new $7,300,000 financing composed of a $5,000,000 Senior Secured Facility with Keltic Financial Partners LLP ("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust") and a $100,000 infusion by certain of the IEC directors. The Keltic Facility, which has a 3 year maturity, bears interest at the rate of prime plus 6%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 which was paid in full upon the sale of the facility in February 2003. The SunTrust Term Loan is secured by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The prime rate at September 30, 2003 was 4.0%.
$0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively.
The Keltic and Suntrust loan agreements contain various affirmative and negative covenants including, among other, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). In connection with the financing the Company entered into agreement with certain of its trade creditors providing for extended payment terms on past due balances.
Aggregate debt maturities over the next five years and thereafter are as follows (in thousands):
2004 $1,277 2005 918 2006 391 2007 67 2008 14 ----------- Total $2,667
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8. INCOME TAXES: - ----------------
The provision for (benefit from) income taxes in fiscal 2003, 2002 and 2001 is summarized as follows (in thousands):
2003 2002 2001 ---- ---- ---- Current Federal $ - $ - $ - State/Other (10) - 21
Deferred Federal (188) - - State/Other (62) - - ------ ----- ----- (Benefit from) provision for income taxes, net $ (260) - 21
The components of the deferred tax asset (liability) at September 30 are as follows (in thousands):
2003 2002 2001 ---- ---- ---- Net operating loss and AMT credit carryovers $15,614 $ 14,858 $ 8,167 Asset impairment loss 1,688 1,688 - Accelerated depreciation (1,397) (1,067) (1,255) New York State investment tax credits 3,237 3,237 3,435 Compensated absences 91 119 293 Inventories 90 985 3,609 Receivables 26 151 323 Restructuring reserve 48 470 711 Other 489 666 41 ------ ------ ------ 19,886 21,107 16,354 Valuation allowance (19,636) (21,107) (16,354) ------- ------- ------- $ 250 $ - $ - ====== ======= =======
The Company has a net operating loss carryforward of $45.2 million (expiring in years through 2023). The Company has available approximately $4.9 million in New York State investment tax credits (expiring in years through 2017). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at September 30, 2003 to be realized as a result of the reversal of existing taxable temporary differences.
The differences between the effective tax rates and the statutory federal income tax rates for fiscal years 2003, 2002 and 2001 are summarized as follows:
2003 2002 2001 ---- ---- ---- Federal Tax (Benefit) at statutory rates 34.0% (34.0)% (34.0)% Goodwill adjustments - - 1.5 Provision for state taxes, net of Federal Benefit 5.0 - - Life Insurance - - (8.5) Other 0.1 1.8 0.2 Utilization of NOL Carryforwards (39.0) - - Valuation Allowance (12.1) 33.9 39.2 ------- ------ ------- (12.1)% -% -%
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9. SHAREHOLDERS' EQUITY: - ------------------------
Stock-Based Compensation Plans
In December 2001, the Board of Directors authorized the 2001 Stock Option and Incentive Plan, reserving 1,500,000 shares of common stock for issuance to directors, officers, consultants or independent contractors providing services to the Company and key employees. This plan superceded a similar plan that was adopted in 1993. The option price for incentive options must be at least 100 percent of the fair market value at date of grant, or if the holder owns more than 10 percent of total common stock outstanding at the date of grant, then not less than 110 percent of the fair market value at the date of grant. The Plan was approved by shareholders in February 2002. In conjunction with the approval of this plan, no further grants will be made under the 1993 SOP and the 1993 SOP was terminated. Stock options issued under the 2001 plan terminate five years from date of grant.
Generally, incentive stock options granted during the period between July 1995 through September 2003 vest in increments of 25 percent. Nonqualified stock options granted during fiscal years 1999 to 2003 vest in increments of 33 1/3 percent.
Changes in the status of options under the SOP at September 30, are summarized as follows:
Weighted Shares Average Under Exercise Available September 30, Option Price for Grant Exercisable ------------- ---------- -------- ---------- -----------
2000 872,375 5.78 436,625 490,917 Options granted 493,450 1.33 Options exercised - - Options forfeited (303,125) 7.68 ---------- 2001 1,062,700 3.17 246,300 414,226 Options authorized 1,500,000 Options terminated (246,300) Options granted 338,250 0.07 Options exercised - - Options forfeited (530,100) 2.68 ---------- 2002 870,850 2.27 1,171,250 362,283 Options granted 643,200 0.61 Options exercised (34,500) 0.17 Options forfeited (168,750) 4.26 ---------- 2003 1,310,800 242,916 649,908
The following table summarizes information about stock options outstanding as of September 30, 2003:
Options Outstanding Options Exercisable -------------------------------------- --------------------------
Number Weighted Number Outstanding Average Weighted Exercisable Weighted Range of at Remaining Average at Average Exercise September 30, Contractual Exercise September 30, Exercise Prices 2003 Life Price 2003 Price - -------------- ---------------- ---------- --------- ---------------- ---------
$ 0.070 - $ 0.090 431,500 3.947 $ 0.076 326,083 $ 0.074 $ 0.200 - $ 0.210 70,000 5.602 $ 0.206 20,000 $ 0.203 $ 0.400 85,700 6.526 $ 0.400 - $ - $ 0.520 - $ 0.730 37,000 5.420 $ 0.619 9,875 $ 0.540 $ 0.950 335,000 5.390 $ 0.950 - $ - $ 1.313 - $ 1.500 137,000 3.314 $ 1.418 112,000 $ 1.442 $ 1.625 - $ 1.875 65,500 3.969 $ 1.646 34,750 $ 1.655 $ 2.500 - $ 3.875 40,100 2.416 $ 3.637 38,200 $ 3.656 $ 6.25 86,000 0.082 $ 6.250 86,000 $ 6.250 $ 9.75 23,000 0.625 $ 9.750 23,000 $ 9.750 ------------- ------------ 1,310,800 649,908 ============= ============
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The weighted average fair value of options granted during fiscal 2003, 2002 and 2001 was $0.14, $0.05 and $0.97, respectively. The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.30 percent, 4.40 percent and 5.19 percent, for fiscal 2003, 2002 and 2001, respectively; volatility of 76.55 percent, 57.68 percent and 78.76 percent for fiscal 2003, 2002 and 2001, respectively; and expected option life of 6.5 years, 5.0 years and 6.7 years for fiscal 2003, 2002 and 2001, respectively. The dividend yield was 0 percent. Forfeitures are recognized as they occur.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company recognized compensation cost based upon the fair value at the date of grant for awards under its plans consistent with the methodology prescribed by SFAS No. 123, net income (loss) and net income (loss) per common and common equivalent share would have been as follows for years ended September 30 (in thousands, except per share data):
Because the SFAS No. 123 method of accounting had not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
Treasury Stock
The treasury balance is 573 shares with a book value of $11,000.
10. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS: - ---------------------------------------------------
Financial instruments which potentially subject the Company to concentrations of a significant credit risk consist primarily of cash, cash equivalents, and trade accounts receivable. The Company has concentrations of credit risk due to sales to its major customers.
The Company's revenues are derived primarily from sales to customers in the industrial and telecommunications industries and are concentrated among specific companies. For the fiscal year ended September 30, 2003, two customers accounted for 55 percent and 32 percent of the Company's net sales. For the fiscal year ended September 30, 2002, two customers accounted for 44 percent and 23 percent of the Company's net sales. For the fiscal year ended September 30, 2001, four customers accounted for 18 percent, 17 percent, 15 percent and 14 percent of the Company's net sales.
At September 30, 2003, amounts due from two customers represented 34 percent and 32 percent of trade accounts receivable. At September 30, 2002, amounts due from three customers represented 34 percent, 26 percent and 20 percent of trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial positions and generally does not require collateral.
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11. COMMITMENTS AND CONTINGENCIES: - ----------------------------------
Lease Commitments
Effective March 28, 2001, the Company exercised a five-year lease agreement with a five-year renewal option at the Reynosa facility. In June 2002, in conjunction with the sale of IEC-Mexico, IEC and IEC-Mexico were released of all their lease obligations related to the Mexican facility.
Rental expense for the Mexico facility was $0, $54,000, and $465,000 for fiscal 2003, 2002 and 2001, respectively. These amounts are included in discontinued operations.
As of September 30, 2003, the Company was obligated under non-cancelable operating leases, primarily for manufacturing and office equipment. These leases generally contain rental options and provisions for payment of the lease for executory costs (taxes, maintenance and insurance). Rental expenses on equipment were $187,000, $352,000, and $178,000 for fiscal 2003, 2002 and 2001, respectively.
Litigation - ----------
An action was commenced in United States District Court for the Southern Division of Texas against IEC and several other corporate defendants, on August 12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for exposure to lead, lead dust, chemicals and other substances used in the manufacture of products by various defendants. The essence of the complaint relates to alleged "in utero" exposure to the circulatory system of the then unborn children, resulting in alleged tissue toxicity through the mothers, causing damage to the central nervous system, brain and other organs of the fetus. The complaint alleges theories of negligence, gross negligence, strict liability, breach of warranty and fraud/negligent misrepresentation, and claims unspecified damages for pain and suffering, a variety of special damages, punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has agreed to provide a defense of the claims with a reservation of rights, but has expressly excluded any coverage for the claim for punitive damages. The Company has denied liability and the case is still in the discovery phase. A trial is tentatively scheduled for March 2004.
On August 13, 2003 an action was commenced by General Electric Company ("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc. The action alleges causes of action for breach of a manufacturing services contract which had an initial value of $4.4 million, breach of express warranty, breach of implied warranty and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a component that IEC used to assemble printed circuit boards for GE that GE contends failed to function properly requiring a product recall. GE claims damages "in excess of $15,000" plus interest and attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for lack of jurisdiction and the motion is pending. The position of the Company is that the contract with GE was substantially completed and that it has meritorious defenses and a cross claim against Vishay.
12. RETIREMENT PLAN: - --------------------
The Company has a retirement savings plan, established pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive benefit of its eligible employees and beneficiaries. Eligible employees may elect to contribute a portion of their compensation each year to the plan. Effective June 1, 1998, The Board of Directors approved a change in the employer match from 33 percent of the amount contributed by participant to 100 percent of the first 3 percent of employee contributions, and 50 percent of the next 3 percent of employee contributions. The match is discretionary and was suspended indefinitely as of October 1, 2001. There was no matching contribution made for fiscal 2002 or 2003. The matching Company contribution was approximately $608,000 for the year ended September 30, 2001. The plan also allows the Company to make an annual discretionary contribution determined by the Board of Directors. There were no discretionary contributions for fiscal 2003, 2002, or 2001.
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13. SUBSEQUENT EVENTS: - ----------------------
There have been no material subsequent events.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- ----------
(in thousands, except per share data) YEAR ENDED SEPTEMBER 30,2003: Net sales $ 9,601 $15,469 $14,030 $ 9,101 Gross profit 989 1,246 1,808 886 Net income from continuing operations 443 542 853 575 Net income from discontinued IEC-Mexico operations - 184 - - Net income 443 726 853 575
Earnings per share from: Continuing operations Basic 0.06 0.07 0.11 0.07 Diluted 0.06 0.07 0.10 0.07 Discontinued IEC-Mexico operations Basic - 0.02 - - Diluted - 0.02 - - ------ ------ ------ ------ Net income Basic $ 0.06 $ 0.09 $ 0.11 $ 0.07 ====== ====== ====== ======
Diluted $ 0.06 $ 0.09 $ 0.10 $ 0.07 ====== ====== ====== ======
YEAR ENDED SEPTEMBER 30,2002: Net sales $11,209 $13,478 $ 6,038 $ 8,640 Gross profit (loss) 379 (269) 416 1,771 Net (loss) income from continuing operations (1,073) (2,394) (1,697) 1,393(1) Net (loss) income from discontinued IEC-Mexico operations (1,089) (1,436) (5,171) 488(2) Net (loss) income (2,162) (3,830) (6,868) 1,881
Basic and diluted EPS Continuing operations (0.14) (0.31) (0.22) 0.18 Discontinued IEC-Mexico operations (0.14) (0.19) (0.67) 0.06 ------ ------ ------ ------ Net (loss) income $ (0.28) $ (0.50) $ (0.89) $ 0.24 ====== ====== ====== ======
(1) Included in this amount for the fourth quarter is the $1.1 million received from Acterna Corporation as discussed in Management's Discussion and Analysis in Item 7.
(2) Included in this amount for the fourth quarter is the $1.3 million reversal of the estimate to dispose of IEC-Mexico offset by the $1.0 million write down of the Texas facility as discussed in Management's Discussion and Analysis in Item 7.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS --------------------------
MANAGEMENT'S DISCUSSION OF OPERATIONS
The information in this Management's Discussion & Analysis should be read in conjunction with the accompanying consolidated financial statements, the related Notes to Financial Statements and the Five-Year Summary of Financial Data. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement preceding Item 1 of this Form 10K.
Overview - --------
We had a successful year in fiscal 2003 as we completed our restructuring and returned to profitability. We were profitable during each quarter of 2003. Long term debt has been reduced by $2.6 million since our January 14, 2003 refinancing. We took a number of important steps in 2003, including a continued emphasis on business development. During the year, we were able to add five new manufacturer's representative organizations, several new customers and win new business from existing customers.
Analysis of Operations - ----------------------
Sales ----- (dollars in millions)
% % For Year Ended September 30, 2003 2002 Change 2001 Change ---- ---- ------ ---- ------
Net sales $48.2 $39.4 22.3% $114.8 (66)%
The increase in fiscal 2003 net sales compared to fiscal 2002 was primarily due to increased demand from our major customers.
The decrease in fiscal 2002 net sales compared to fiscal year 2001 was primarily due to the loss of 4 major customers and the significant downturn in the telecommunications and industrial sectors of the U.S. economy.
Gross Profit and Selling and Administrative Expenses - ---------------------------------------------------- (as a % of Net Sales)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Gross profit 10.2% 5.8% 2.6%
Selling and administrative expenses 6.1% 10.7% 6.1%
Gross profit as a percentage of sales was 10.2% in fiscal 2003 as compared to 5.8% in fiscal 2002. The increase of more than 4 percentage points was primarily attributable to our concerted efforts to reduce manufacturing overhead.
Gross profit as a percentage of sales was 5.8% in fiscal 2002 as compared to 2.6% in fiscal 2001. The increase of more than 3 percentage points was primarily attributable to the sale of fully reserved inventory to Acterna Corporation for $1.1 million as part of an out of court settlement. In addition, the 2001 amount was considerably lower due to the charge against inventory and receivables.
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Selling and administrative expenses as a percentage of sales decreased to 6.1% in fiscal 2003 compared to 10.7% in fiscal 2002. The decrease is primarily due to a decrease in the number of employees.
Selling and administrative expenses as a percentage of sales increased to 10.7% in fiscal 2002 compared to 6.1% in fiscal 2001 as certain costs remained fixed with a significantly lower sales volume.
Other Income and Expense - ------------------------ (dollars in millions)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Interest and financing expense $0.6 $0.9 $1.3
Other income $0.7 $0.2 $ -
Interest and financing expense decreased $0.3 million to $0.6 million in fiscal 2003 from $0.9 million in fiscal 2002. This is primarily due to debt reduction that was achieved due to favorable cash flow from operations. Interest and finance expense decreased $0.4 million to $0.9 million from $1.3 million in fiscal 2001. This was also due to debt reduction.
We had other income of $0.7 million in fiscal 2003. $0.6 million was related to negotiated forgiveness of accounts payable owed to various creditors and $0.1 million was related to the sale of our Alabama facility.
Other income of $0.2 million in fiscal 2002 is composed of interest income received from Acterna Corporation as part of an out of court settlement.
Income Taxes - ------------ (as a % of income (loss) before income taxes)
For Year Ended September 30, 2003 2002 2001 ---- ---- ----
Effective tax rate (12.1)% -% (0.1)%
We recorded a $260,000 tax benefit during fiscal 2003. This is due to a $250,000 adjustment against valuation allowances that had been established against our net deferred tax assets and $10,000 from the utilization of a state net operating loss carryforward. We continue to maintain a large valuation allowance against our net deferred tax assets including the net operating loss carryforward.
In fiscal 2001, we recorded an income tax benefit from the receipt of a prior year state refund in the amount of $95,000.
Restructuring Charge (Benefit) - ----------------------------- (dollars in millions)
For Year Ended September 30, 2003 2002 2001 ---- ---- ---- ($0.1) $0.2 $ -
During Fiscal 2003, we recorded a benefit from restructuring of $63,000. This was due to certain severance payments accrued in 2002 that will no longer be paid out.
In June 2002, our Board of Directors approved a restructuring and reduction of workforce plan at our Newark, NY facility. In connection with this restructuring, we recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. Offsetting this charge was a $240,000 reduction in a reserve previously recorded for our Arab, Alabama facility that was no longer needed due to the sale of the facility in October 2002.
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Asset Impairment Writedown - --------------------------
In assessing and measuring the impairment of long-lived assets, we apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in our business strategy, we did not believe that their future cash flows supported the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment.
During August 1998, we initiated a plan to dispose of our Arab, Alabama facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000 for fiscal 2002. The facility was sold in October 2002 for $600,000.
During April 2001, we initiated a plan to dispose of our Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million for fiscal 2002 and was reflected in discontinued operations. The facility was sold on February 28, 2003 for $875,000.
Discontinued Operations - -----------------------
On June 18, 2002, we signed an Asset Purchase Agreement to sell substantially all of the assets of IEC-Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out amounts were received. Under the terms of a related agreement, IEC and IEC-Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. We recorded an after-tax loss on the sale of the business of approximately $3.1 million in fiscal 2002. The reserve balance at September 30, 2003 was $216,000. It is anticipated that all remaining charges against the accrual will be made by December 2003.
On February 28, 2003, We sold its Edinburg, Texas facility for $875,000 and completed its restructuring initiative. As a result, we recorded a $184,000 restructuring benefit due to certain facility payments accrued in a prior fiscal year that will no longer be paid out.
Significant Events - ------------------
A small number of customers are currently responsible for a significant portion of our net sales.
One of these customers has announced its intention to begin manufacturing most of the products it currently purchases from IEC at its own facility. We believe that we will be able to retain a piece of that business.
We have recently added several new customers and have received additional business from existing customers. Furthermore, we expect to add additional customers in the near future.
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Liquidity and Capital Resources - -------------------------------
As reflected in the Consolidated Statements of Cash Flows for Fiscal 2003, net cash provided by operations was $4.6 million. Of this, $4.1 million was used to reduce IEC's debt.
On January 14, 2003, we completed a new $7,300,000 financing agreement composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000 Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the IEC directors. The Facility, which has a 3 year maturity, bears interest at the rate of prime plus 2%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 secured by a first mortgage lien against our Edinburg, Texas real estate which was paid in full upon the sale of the facility in February 2003. The Term Loan is secured by a general security agreement, and indirectly by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The availability under the revolver was $2.2 million on September 30, 2003.
$0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively.
The financing agreements contain various affirmative and negative covenants including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). We are in compliance with these covenants. In connection with the financing, we entered into agreements with certain of our trade creditors providing for extended payment terms involving an aggregate of approximately $2.0 million of past due balances. In addition, certain trade creditors agreed to discounted payment terms. Such discounts amounted to $0.6 million and were recorded in the first half of fiscal 2003.
Application of Critical Accounting Policies - -------------------------------------------
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of long-lived assets, accounting for legal contingencies and accounting for income taxes.
We recognize revenue in accordance with Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements." Sales are recorded when products are shipped to customers. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded.
We evaluate our long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in IEC's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact IEC's financial position or its results of operations.
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Impact of Inflation - -------------------
The impact of inflation on our operations has been minimal due to the fact that we ares able to adjust its bids to reflect any inflationary increases in cost.
New Pronouncements - ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The adoption of SFAS No. 143 did not have a material effect on our financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". We adopted this standard as of October 1, 2002 with no material effect on our financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS No. 145). SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
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In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure". SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. IEC continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." ("FIN 46"). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Statement 150"). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows.
FACTORS AFFECTING FUTURE RESULTS
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL.
Our annual and quarterly results may vary significantly depending on various factors, including:
- adverse changes in general economic conditions - the level and timing of customer orders - the level of capacity utilization of our manufacturing facility and associated fixed costs - the composition of the costs of revenue between materials, labor and manufacturing overhead - price competition - our level of experience in manufacturing a particular product - the degree of automation used in our assembly process - the efficiencies achieved in managing inventories and fixed assets - fluctuations in materials costs and availability of materials - the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor.
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The volume and timing of orders placed by our customers vary due to variation in demand for our customers' products, our customers' inventory management, new product introductions and manufacturing strategy changes, and consolidations among our customers. In the past, changes in customer orders have had a significant effect on our results of operations due to corresponding changes in the level of overhead absorption. Any one or a combination of these factors could adversely affect our annual and quarterly results of operations in the future.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, A REDUCTION IN SALES TO ANY ONE OF OUR CUSTOMERS COULD CAUSE A SIGNIFICANT DECLINE IN OUR REVENUE.
A small number of customers are currently responsible for a significant portion of our net sales. During fiscal 2003, 2002, and 2001, our five largest customers accounted for 93%, 81% and 72% of consolidated net sales, respectively. During fiscal 2003, Motorola and Teradyne accounted for 55% and 32%, respectively, of consolidated net sales. The percentage of IEC's sales to its major customers may fluctuate from period to period.
We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced rapid technological change, short product life cycles, consolidation, and pricing and margin pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales. Any consolidation among our customers could further reduce the number of customers that generate a significant percentage of our revenues and exposes us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, would have a material adverse effect on our results of operations. We cannot assure you that present or future customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of manufacturing services ordered from us. If they do, it could have a material adverse effect on our results of operations. In addition, we generate significant account receivables in connection with providing manufacturing services to our customers. If one or more of our customers were to become insolvent or otherwise were unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE.
Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers' products become obsolete or fail to gain widespread commercial acceptance, our business could be materially adversely affected.
WE DEPEND ON THE ELECTRONICS INDUSTRY, WHICH CONTINUALLY PRODUCES TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS WOULD HARM OUR BUSINESS.
Factors affecting the electronics industry in general could seriously harm our customers and, as a result, us.
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These factors include:
- the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which result in short product life cycles; - the inability of our customers to develop and market their products, some of which are new and untested, the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance; and - recessionary periods in our customers' markets.
If any of these factors materialize or if we are unable to offer technologically advanced, cost effective, quick response manufacturing service to customers, demand for our services would decline and our business would suffer.
MOST OF OUR CUSTOMERS DO NOT COMMIT TO LONG-TERM PRODUCTION SCHEDULES, WHICH MAKES IT DIFFICULT FOR US TO SCHEDULE PRODUCTION AND ACHIEVE MAXIMUM EFFICIENCY OF OUR MANUFACTURING CAPACITY.
The volume and timing of sales to our customers may vary due to:
- variation in demand for our customers' products - our customers' attempts to manage their inventory - electronic design changes - changes in our customers' manufacturing strategy - acquisitions of or consolidations among customers - recessionary conditions in customers' industries
Due in part to these factors, most of our customers do not commit to firm production schedules for more than one quarter in advance. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, we have been required to increase staffing and other expenses in order to meet the anticipated demand of our customers. Anticipated orders from many of our customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in our customers' business needs, thereby adversely affecting our results of operations. On other occasions, our customers have required rapid increases in production, which have placed an excessive burden on our resources. Such customer order fluctuations and deferrals could have a material adverse effect on us in the future.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION.
Electronics manufacturing service providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons. The success of our customers' products in the market affects our business. Cancellations, reductions or delay by a significant customer or by a group of customers could negatively impact our operating results.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimate of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results. On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins.
WE COMPETE WITH NUMEROUS PROVIDERS OF ELECTRONIC MANUFACTURING SERVICES, INCLUDING OUR CURRENT OR POTENTIAL CUSTOMERS WHO MAY DECIDE TO MANUFACTURE ALL OF THEIR PRODUCTS INTERNALLY.
The electronic manufacturing services business is highly competitive. We compete against numerous domestic and foreign manufacturers with global operations as well as those who operate on a local or regional basis. Many of our competitors have international operations and some have substantially greater manufacturing, financial, research and development, and marketing resources than us. We also face potential competition from the manufacturing operations of our current and potential customers, who are continually evaluating the merits of manufacturing products internally versus the advantages of outsourcing.
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INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, research and development, sales and marketing resources than we do.
We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures as a result of their geographic location or the services they provide. As a result, competitors may have a competitive advantage. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin compression, or loss of market share.
IF WE DO NOT MANAGE OUR BUSINESS EFFECTIVELY, OUR PROFITABILITY COULD DECLINE.
Our ability to manage our business effectively will require us to continue to implement and improve our operational, financial and management information systems; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees. Our failure to effectively do so could have a material adverse effect on our results of operations.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR COMPONENTS THAT ARE CRITICAL TO OUR MANUFACTURING PROCESSES. A SHORTAGE OF THESE COMPONENTS OR AN INCREASE IN THEIR PRICE COULD INTERRUPT OUR OPERATIONS AND REDUCE OUR PROFITS.
Substantially all of our net revenue is derived from turnkey manufacturing in which we provide materials procurement. While many of our customer contracts permit quarterly or other periodic adjustments to pricing based on decreases and increases in component prices and other factors, we typically bear the risk of component price increases that occur between any such re-pricings or, if such re-pricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, certain component price increases could adversely affect our gross profit margins. Almost all of the products we manufacture require one or more components that are available from a limited number of suppliers. Some of these components are allocated from time to time in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times industry wide shortages of electronic components have occurred. Such circumstances have produced insignificant levels of short-term interruption of our operations, but could have a material adverse effect on our results of operations in the future.
OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK
Most of our contract manufacturing services are provided on a turnkey basis, where we purchase some or all of the materials required for designing, product assembling and manufacturing. These services involve greater resource investment and inventory risk management than consignment services, where the customer provides materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results.
In our turnkey operations, we must order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. Customers' cancellation or reduction of orders can result in expenses to us. While our customer agreements typically include provisions which require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our supplies.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are highly complex and may, at times, contain design or manufacturing errors or failures. Despite our quality control and quality assurance efforts, defects may occur. Defects in the products we manufacture, whether caused by a design, manufacturing or component failure or error, may result in delayed shipments to customers or reduced or cancelled customer orders and may affect our business reputation. In addition, these defects may result in liability claims against us. Even if customers or component suppliers are responsible for the defects, they may be unwilling or unable to assume responsibility for any costs or payments. Page 19 of 79
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to:
- hire, retain and expand our qualified engineering and technical personnel; - maintain technological leadership; - develop and market manufacturing services that meet changing customer needs; and - successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations provide the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment, which could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers' changing technological needs and requirements could have an adverse effect on our business.
WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH ANY OF OUR KEY PERSONNEL, THE LOSS OF WHICH COULD HURT OUR OPERATIONS.
Our continued success depends largely on the efforts and skills of our key managerial and technical employees. The loss of the services of certain of these key employees or an inability to attract or retain qualified employees could have a material adverse effect on us. We do not have employment agreements or non-competition agreements with our key employees.
COMPLIANCE OR THE FAILURE TO COMPLY WITH CURRENT AND FUTURE ENVIRONMENTAL REGULATIONS COULD CAUSE US SIGNIFICANT EXPENSE.
We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. If we fail to comply with any present and future regulations, we could be subject to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations.
THE AGREEMENTS GOVERNING OUR EXISTING DEBT CONTAIN VARIOUS COVENANTS THAT IMPACT UPON THE OPERATION OF OUR BUSINESS.
The agreements and instruments governing our existing debt and our secured credit facility contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios and minimum earnings before interest, taxes, depreciation and amortization (EBITDA) and restrict our ability to:
- incur debt; - incur or maintain liens; - make acquisitions of businesses or entities; - make investments, including loans, guarantees and advances; - engage in mergers, consolidations or certain sales of assets; - engage in transactions with affiliates; and - pay dividends or engage in stock redemptions.
Our secured credit facilities are secured by a general security agreement covering receivables, inventory, equipment, intangibles, investment property and deposit accounts and indirectly by a first mortgage on our Newark plant.
Our ability to comply with covenants contained in our existing debt and our secured credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our failure to comply with our debt-related covenants could result in an acceleration of our indebtedness and cross-defaults under our other indebtedness, which may have a material adverse effect on our financial condition. We are currently in compliance with all of our covenants.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL.
Our common stock is traded on the Over-the-Counter Bulletin Board The market price of our common stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including future announcements concerning us or our key customers or competitors, government regulations, litigation, changes in earnings estimates by analysts, fluctuations in quarterly operating results, or general conditions in the EMS industry.
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ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of IEC due to adverse changes in financial rates. We are exposed to market risk in the area of interest rates. One exposure is directly related to its Term Loan and Revolving Credit borrowings under the Credit Agreement, due to their variable interest rate pricing. Management believes that interest rate fluctuations will not have a material impact on IEC's results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The information required by this item is incorporated herein by reference to pages 25 through 42 of this Form 10-K and is indexed under Item 14(a)(1) and (2).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
There have been no disagreements on accounting and financial disclosure matters.
ITEM 9A
ITEM 9A CONTROLS AND PROCEDURES - --------------------------------
An evaluation was performed under the supervision and with the participation of the Company's management, including our acting Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K as required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our acting Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by the Annual Report on 10-K to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC rules and forms.
In connection with the evaluation described above, our management, including our acting Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2003, and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The information required by this item is presented under the caption entitled "Election of Directors - Nominees for Election as Directors" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto. The information regarding Executive Officers of the Registrant is found in Part I of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
The information required by this item is presented under the caption entitled "Executive Officer Compensation" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto, except, however, the sections entitled "Performance Graph" and "Report of the Compensation Committee of the Board of Directors" are not incorporated in this report by reference.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ---------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
The information required by this item is presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
The information required by this item is presented under the caption "Executive Officer Compensation - Certain Transactions" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------------------------------------------------
The information required by this item is presented under the caption "Audit Committee Report" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
(a) The following documents are filed as part of this report and as response to Item 8: Page (1) and (2) Financial Statements and Supplementary Schedule Report of Independent Public Accountants...................... 27 Consolidated Balance Sheets as of September 30, 2003 and 2002.................................. 28 Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 .................... 29 Consolidated Statements of Comprehensive Income (Loss) and Shareholders' Equity for the years ended September 30, 2003, 2002 and 2001................................................ 30 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001...................... 31 Notes to Consolidated Financial Statements.................... 32 Selected Quarterly Financial Data (unaudited)................ 42
All other schedules are either inapplicable or the information is included in the financial statements and, therefore, have been omitted.
(3) Exhibits
Exhibit No. Title Page
3.1 Amended and Restated Certificate of Incorporation of DFT Holdings Corp. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.2 Amended Bylaws of IEC Electronics Corp. (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings Corp. (Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings Corp. - New York. (Incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.5 Certificate of Ownership and Merger merging IEC Electronics Corp. into DFT Holdings Corp. - Delaware. (Incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-1, Registration No. 33-56498)
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3.6 Certificate of Merger of IEC Acquisition Corp. into IEC Electronics Corp. (Incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.7 Certificate of Amendment of Certificate of Incorporation of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on Feb. 26, 1998 (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 27, 1998) 3.8 Certificate of Designations of the Series A Preferred Stock of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on June 3, 1998. (Incorporated by reference to Exhibit 3.8 of the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 4.1 Specimen of Certificate for Common Stock. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics Corp. and ChaseMellon Shareholder Services. LLC., as Rights Agents (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 2, 1998) 10.1* Form of Indemnity Agreement. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1993) 10.2* IEC Electronics Corp. 1993 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 10.3* Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.4* Form of Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.5* Form of Non-Employee Director Stock Option Agreement (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.6* IEC Electronics Corp. 2001 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.7 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.8* IEC Electronics Corp. Savings and Security Plan effective June 1, 1997 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). 10.9* Amendment to IEC Electronics Corp. Savings and Security Plan effective June 1, 1998. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998). 10.10* Amendment to IEC Electronics Corp. Savings and Security Plan effective April 1, 2002 (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.11 Loan and Security Agreement dated as of December 28, 1999, among IEC ELECTRONICS CORP. and IEC ELECTRONICS-EDINBURG, TEXAS INC. (collectively, "Debtor") and HSBC BANK USA as agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital"), as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999). 10.12 Amendment No. 1 dated as of March 30, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 amount IEC ELECTRONICS CORP. ("IEC) and IEC ELECTRONICS-EDINBURG, TEXAS INC. ("IEC-Edinburg") (collectively, "Debtor") and HSBC BANK USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.13 Amendment No. 2 dated as of December 1, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC ELECTRONICS CORP. ("IEC") and IEC ELECTRONICS-EDINBURG, TEXAS INC.("IEC-Edinburg")(collectively, "Debtor") and HSBC BANK USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders. (Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000). 10.14 Amendment No. 3 dated as of April 24, 2001 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital"). (Incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001).
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10.15 Amendment No. 4 dated as of December 21, 2001 ("Amendment") to Loan and Security Agreement originally dated as of December 28, 1999 and originally among IEC Electronics Corp. ("IEC" or "Debtor") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") as Lenders.(Incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.16 Amendment No. 5 dated as of February 15, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 20, 2002). 10.17 Amendment No. 6 dated as of February 28, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 6, 2002). 10.18 Amendment No. 7 dated as of March 15, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 21, 2002). 10.19 Amendment No. 8 dated as of April 8, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 9, 2002). 10.20 Amendment Number 9 dated as of June 20, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital"); Letter Modifications to Amendment Number 9 dated August 9, 2002, August 23, 2002, September 17, 2002 and September 24, 2002 (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.21 Amendment Number 10 dated as of October 1, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.22 Amendment Number 11 dated as of November 13, 2002 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.23 Amendment Number 12 dated as of January 1, 2003 to Loan and 53 Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics- Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002).
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10.24* Employment Agreement made as of August 11, 2000 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000.) 10.25* First Amendment dated as of October 23, 2001 and effective as of August 21, 2001 to Employment Agreement between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.26* Severance Agreement dated June 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.27* Supplemental Severance Agreement dated December 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.28 Loan Agreement between IEC Electronics Corp., and Keltic 43 Financial Partners, LLP, dated January 14, 2003. 10.29 Loan and Security Agreement between IEC Electronics Corp. and Suntrust Bank dated January 13, 2003. 64 10.30 Supplier agreement between IEC Electronics Corp. and Arrow CMS Distribution Group of Arrow Electronics, Inc. dated December 27, 2002 69 10.31 Amendment Number 1 to Term Note between IEC Electronics Corp. and SunTrust Bank dated September 26, 2003 73 21.1 Subsidiaries of IEC Electronics Corp. 74 23.1 Consent of Rotenberg & Co., LLP 75 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 76 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 77 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 78 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 79
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and Exchange Commission on July 21, 2003. It announced earnings for the quarter ended June 27, 2003 and a press release relating to the earnings was attached thereto.
(ii) A current report on Form 8-K was filed with the Securities and Exchange Commission on October 29, 2003. It announced financial results for the fiscal quarter and the year ended September 30, 2003 and a press release relating to the financial results was attached thereto.
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SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 21, 2003.
IEC Electronics Corp.
By:/s/ W. Barry Gilbert ------------------------- W. Barry Gilbert Acting Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/W. Barry Gilbert Acting Chief Executive Officer and - ---------------------- Chairman of the Board (W. Barry Gilbert) November 21, 2003
/s/Brian H. Davis Vice President, - ----------------- Chief Financial Officer (Brian H. Davis) and Controller November 21, 2003
/s/David J. Beaubien Director November 21, 2003 - -------------------- (David J. Beaubien)
/s/Robert P. B. Kidd Director November 21, 2003 - ------------------- (Robert P. B. Kidd)
/s/Eben S. Moulton Director November 21, 2003 - ------------------ (Eben S. Moulton)
/s/Justin L. Vigdor Director November 21, 2003 - ------------------- (Justin L. Vigdor)
/s/James C. Rowe Director November 21, 2003 - ------------------ (James C. Rowe)
/s/Dermott O'Flanagan Director November 21, 2003 - --------------------- (Dermott O'Flanagan)
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors IEC Electronics Corp. Newark, New York
We have audited the accompanying consolidated balance sheets of IEC Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, comprehensive income and shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IEC Electronics Corp. and subsidiaries as of September 30, 2003 and 2002 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The financial statements for the year ended September 30, 2001 were audited by other auditors who have ceased operations whose report dated November 16, 2001 (except with respect to the matter discussed in Notes 1 and 5, as to which the date was January 11, 2002), on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern.
/s/ Rotenberg & Co., LLP - ------------------------ Rotenberg & Co., LLP
Rochester, New York October 21, 2003
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IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, 2002 AND 2001
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - -----------------------------------------------------------
Business - --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. The Company is a significant provider of high quality electronics manufacturing services with state-of-the-art manufacturing capabilities and production capacity. Utilizing computer controlled manufacturing and test machinery and equipment, the Company provides manufacturing services employing surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection technologies. As an independent full-service EMS provider, the Company offers its customers a wide range of manufacturing and management services, on either a turnkey or consignment basis, including design, prototype, material procurement and control, manufacturing and test engineering support, statistical quality assurance, complete resource management and distribution. The Company's strategy is to cultivate strong manufacturing relationships with established and emerging original equipment manufacturers ("OEMs").
Consolidation - -------------
The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico"), (collectively, "IEC"). Operations in Texas and Mexico were closed in July 2002. All significant intercompany transactions and accounts have been eliminated.
Revenue Recognition - -------------------
The Company recognizes revenue upon shipment of product for both turnkey and consignment contracts.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The Company's cash and cash equivalents are held and managed by institutions which follow the Company's investment policy. The fair value of the Company's financial instruments approximates carrying amounts due to the relatively short maturities and variable interest rates of the instruments, which approximate current market interest rates.
Long-Lived Assets - -----------------
The Company evaluates its long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." IEC evaluates the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values.
Previously, the Company applied the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement required that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
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During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in the Company's business strategy, the Company did not believe that their future cash flows supported the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment.
During fiscal year 2002, the company wrote down the value of its Arab, Alabama facility to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million in fiscal 2002.
Fair Value of Financial Instruments - -----------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.
Current Assets and Liabilities - The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of those instruments.
Debt - The fair value of the Company's debt is estimated based upon the quoted market prices for the same or similar issues which approximates its carrying amount.
Costs in Excess of Net Assets Acquired - --------------------------------------
Costs in excess of net assets acquired of $14.1 million were being amortized on a straight-line basis over 40 years. Amortization of $324,000 was charged against operations for the year ended September 30, 2001.
The remaining net goodwill in the amount of $9.6 million, related to the Newark operations was written off in fiscal 2001.
Earnings Per Share - ------------------
Net income (loss) per common share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per common share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per common share is calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive stock options, warrants and convertible securities.
Foreign Currency Translation - ----------------------------
The assets and liabilities of the Company's foreign subsidiary are translated based on the current exchange rate at the end of the period for the balance sheet and weighted-average rate for the period for the statement of operations. Translation adjustments are recorded as a separate component of equity. Transaction gains or losses are included in operations.
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Comprehensive Income - --------------------
Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the statements of comprehensive income (loss) and shareholders' equity.
Use of Estimates - ----------------
The preparation of 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, the 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.
New Pronouncements - ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. The adoption of SFAS No. 143 did not have a material effect on the financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business". The Company adopted this standard as of October 1, 2002 with no material effect on its financial position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical corrections (SFAS No. 145). The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
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In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148 (SFAS 148), "Accounting for Stock Based Compensation - Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. The Company continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." (FIN 46). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows.
Reclassifications - -----------------
Certain prior year amounts have been reclassified to conform with the current year presentation.
2. INVENTORIES - -------------------
Inventories are stated at the lower of cost (first-in, first-out) or market. The major classifications of inventories are as follows at period end (in thousands):
2003 2002 ------- -------
Raw Materials $ 1,128 $ 2,175 Work-in-process 498 1,214 Finished goods 7 23 -------- -------- $ 1,633 $ 3,412 ======== ========
3. PROPERTY, PLANT, AND EQUIPMENT - ---------------------------------
Property, plant, and equipment are stated at cost and are depreciated over various estimated useful lives using the straight-line method.
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Maintenance and repairs are charged to expense as incurred; renewals and improvements are capitalized. At the time of retirement or other disposition of property, plant, and equipment, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income.
Depreciation and amortization was $1.5 million, $1.8 million, and $4.0 million for the years ended September 30, 2003, 2002 and 2001, respectively.
The principal depreciation and amortization lives used are as follows:
Estimated Description Useful Lives - ---------------------------- ------------
Land improvements 10 years Buildings and improvements 5 to 40 years Machinery and equipment 3 to 5 years Furniture and fixtures 3 to 7 years
4. ASSET HELD FOR SALE - ----------------------
Included in asset held for sale in 2002 was land and land improvements with a net book value of approximately $114,000 and buildings and improvements with a net book value of approximately $383,000.
5. DISCONTINUED OPERATIONS - ------------------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell substantially all of the assets of Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No such Earn-out amounts were received. In addition, EPI was to pay to the Company commissions based on the net selling price of products shipped to certain former customers. No such commissions were received. Under the terms of a related agreement, the Company and Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. The Company recorded an after-tax loss on the sale of the business of approximately $3.1 million.
Net sales of IEC-Mexico were $0, $10.8 million, and $45.9 million for the years ended September 30, 2003, 2002 and 2001, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations.
Assets and liabilities of IEC-Mexico to be disposed of consisted of the following at September 30:
6. RESTRUCTURING - ----------------
In June 2002, the Company's Board of Directors approved a restructuring and reduction of workforce plan at its Newark, NY facility. In connection with this restructuring, the Company recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. All remaining charges against the accrual were made by September 30, 2003.
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In August 1998, the Company announced its plan to close its underutilized Alabama facility. Due to the pending sale of the facility, a benefit of approximately $240,000 was recorded in fiscal 2002 resulting from the reversal of a previously established restructuring reserve which related to building maintenance costs. The Company recorded charges against the accrual of $85,000 in fiscal 2001.
7. LONG-TERM DEBT: - ------------------
Long-term debt consists of the following at September 30 (in thousands):
2003 2002 ------- -------
Senior debt facility $ - $ 1,976 Term loans 1,592 2,420 Vendor term notes 1,075 - Less - Current portion (1,277) (3,128) -------- ------- $ 1,390 $ 1,268 ======== =======
As of September 30, 2001, the Company was not in compliance with certain financial covenants under its secured asset-based credit agreement. As of December 21, 2001, the Company's banks waived the non-compliance, amended certain covenants to allow the Company more flexibility and changed the expiration date of the credit agreement. As a result of the January 1, 2003 amendment, the expiration date of the credit agreement was January 17, 2003.
As last amended, the credit agreement provided for a revolving credit facility component of $1.0 million. The interest rate on the revolving credit facility was increased at the time of the various amendments and on September 30, 2002 was prime rate plus 3.50%.
The second component of the credit facility consisted of a $10 million three-year term loan with monthly principal installments based on a five-year amortization which began in April 2000. The interest rate on the term loan facility was increased at the time of the various amendments and at September 30, 2002 was prime rate plus 4.00%.
At September 30, 2002, $3.6 million was outstanding, consisting of $1.1 million and $2.5 million relating to the revolving credit facility and term loan, respectively, with an additional $403,000 available under the revolving credit facility.
On January 14, 2003, IEC completed a new $7,300,000 financing composed of a $5,000,000 Senior Secured Facility with Keltic Financial Partners LLP ("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust") and a $100,000 infusion by certain of the IEC directors. The Keltic Facility, which has a 3 year maturity, bears interest at the rate of prime plus 6%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 which was paid in full upon the sale of the facility in February 2003. The SunTrust Term Loan is secured by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The prime rate at September 30, 2003 was 4.0%.
$0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively.
The Keltic and Suntrust loan agreements contain various affirmative and negative covenants including, among other, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). In connection with the financing the Company entered into agreement with certain of its trade creditors providing for extended payment terms on past due balances.
Aggregate debt maturities over the next five years and thereafter are as follows (in thousands):
2004 $1,277 2005 918 2006 391 2007 67 2008 14 ----------- Total $2,667
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8. INCOME TAXES: - ----------------
The provision for (benefit from) income taxes in fiscal 2003, 2002 and 2001 is summarized as follows (in thousands):
2003 2002 2001 ---- ---- ---- Current Federal $ - $ - $ - State/Other (10) - 21
Deferred Federal (188) - - State/Other (62) - - ------ ----- ----- (Benefit from) provision for income taxes, net $ (260) - 21
The components of the deferred tax asset (liability) at September 30 are as follows (in thousands):
2003 2002 2001 ---- ---- ---- Net operating loss and AMT credit carryovers $15,614 $ 14,858 $ 8,167 Asset impairment loss 1,688 1,688 - Accelerated depreciation (1,397) (1,067) (1,255) New York State investment tax credits 3,237 3,237 3,435 Compensated absences 91 119 293 Inventories 90 985 3,609 Receivables 26 151 323 Restructuring reserve 48 470 711 Other 489 666 41 ------ ------ ------ 19,886 21,107 16,354 Valuation allowance (19,636) (21,107) (16,354) ------- ------- ------- $ 250 $ - $ - ====== ======= =======
The Company has a net operating loss carryforward of $45.2 million (expiring in years through 2023). The Company has available approximately $4.9 million in New York State investment tax credits (expiring in years through 2017). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at September 30, 2003 to be realized as a result of the reversal of existing taxable temporary differences.
The differences between the effective tax rates and the statutory federal income tax rates for fiscal years 2003, 2002 and 2001 are summarized as follows:
2003 2002 2001 ---- ---- ---- Federal Tax (Benefit) at statutory rates 34.0% (34.0)% (34.0)% Goodwill adjustments - - 1.5 Provision for state taxes, net of Federal Benefit 5.0 - - Life Insurance - - (8.5) Other 0.1 1.8 0.2 Utilization of NOL Carryforwards (39.0) - - Valuation Allowance (12.1) 33.9 39.2 ------- ------ ------- (12.1)% -% -%
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9. SHAREHOLDERS' EQUITY: - ------------------------
Stock-Based Compensation Plans
In December 2001, the Board of Directors authorized the 2001 Stock Option and Incentive Plan, reserving 1,500,000 shares of common stock for issuance to directors, officers, consultants or independent contractors providing services to the Company and key employees. This plan superceded a similar plan that was adopted in 1993. The option price for incentive options must be at least 100 percent of the fair market value at date of grant, or if the holder owns more than 10 percent of total common stock outstanding at the date of grant, then not less than 110 percent of the fair market value at the date of grant. The Plan was approved by shareholders in February 2002. In conjunction with the approval of this plan, no further grants will be made under the 1993 SOP and the 1993 SOP was terminated. Stock options issued under the 2001 plan terminate five years from date of grant.
Generally, incentive stock options granted during the period between July 1995 through September 2003 vest in increments of 25 percent. Nonqualified stock options granted during fiscal years 1999 to 2003 vest in increments of 33 1/3 percent.
Changes in the status of options under the SOP at September 30, are summarized as follows:
Weighted Shares Average Under Exercise Available September 30, Option Price for Grant Exercisable ------------- ---------- -------- ---------- -----------
2000 872,375 5.78 436,625 490,917 Options granted 493,450 1.33 Options exercised - - Options forfeited (303,125) 7.68 ---------- 2001 1,062,700 3.17 246,300 414,226 Options authorized 1,500,000 Options terminated (246,300) Options granted 338,250 0.07 Options exercised - - Options forfeited (530,100) 2.68 ---------- 2002 870,850 2.27 1,171,250 362,283 Options granted 643,200 0.61 Options exercised (34,500) 0.17 Options forfeited (168,750) 4.26 ---------- 2003 1,310,800 242,916 649,908
The following table summarizes information about stock options outstanding as of September 30, 2003:
Options Outstanding Options Exercisable -------------------------------------- --------------------------
Number Weighted Number Outstanding Average Weighted Exercisable Weighted Range of at Remaining Average at Average Exercise September 30, Contractual Exercise September 30, Exercise Prices 2003 Life Price 2003 Price - -------------- ---------------- ---------- --------- ---------------- ---------
$ 0.070 - $ 0.090 431,500 3.947 $ 0.076 326,083 $ 0.074 $ 0.200 - $ 0.210 70,000 5.602 $ 0.206 20,000 $ 0.203 $ 0.400 85,700 6.526 $ 0.400 - $ - $ 0.520 - $ 0.730 37,000 5.420 $ 0.619 9,875 $ 0.540 $ 0.950 335,000 5.390 $ 0.950 - $ - $ 1.313 - $ 1.500 137,000 3.314 $ 1.418 112,000 $ 1.442 $ 1.625 - $ 1.875 65,500 3.969 $ 1.646 34,750 $ 1.655 $ 2.500 - $ 3.875 40,100 2.416 $ 3.637 38,200 $ 3.656 $ 6.25 86,000 0.082 $ 6.250 86,000 $ 6.250 $ 9.75 23,000 0.625 $ 9.750 23,000 $ 9.750 ------------- ------------ 1,310,800 649,908 ============= ============
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The weighted average fair value of options granted during fiscal 2003, 2002 and 2001 was $0.14, $0.05 and $0.97, respectively. The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.30 percent, 4.40 percent and 5.19 percent, for fiscal 2003, 2002 and 2001, respectively; volatility of 76.55 percent, 57.68 percent and 78.76 percent for fiscal 2003, 2002 and 2001, respectively; and expected option life of 6.5 years, 5.0 years and 6.7 years for fiscal 2003, 2002 and 2001, respectively. The dividend yield was 0 percent. Forfeitures are recognized as they occur.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company recognized compensation cost based upon the fair value at the date of grant for awards under its plans consistent with the methodology prescribed by SFAS No. 123, net income (loss) and net income (loss) per common and common equivalent share would have been as follows for years ended September 30 (in thousands, except per share data):
Because the SFAS No. 123 method of accounting had not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
Treasury Stock
The treasury balance is 573 shares with a book value of $11,000.
10. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS: - ---------------------------------------------------
Financial instruments which potentially subject the Company to concentrations of a significant credit risk consist primarily of cash, cash equivalents, and trade accounts receivable. The Company has concentrations of credit risk due to sales to its major customers.
The Company's revenues are derived primarily from sales to customers in the industrial and telecommunications industries and are concentrated among specific companies. For the fiscal year ended September 30, 2003, two customers accounted for 55 percent and 32 percent of the Company's net sales. For the fiscal year ended September 30, 2002, two customers accounted for 44 percent and 23 percent of the Company's net sales. For the fiscal year ended September 30, 2001, four customers accounted for 18 percent, 17 percent, 15 percent and 14 percent of the Company's net sales.
At September 30, 2003, amounts due from two customers represented 34 percent and 32 percent of trade accounts receivable. At September 30, 2002, amounts due from three customers represented 34 percent, 26 percent and 20 percent of trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial positions and generally does not require collateral.
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11. COMMITMENTS AND CONTINGENCIES: - ----------------------------------
Lease Commitments
Effective March 28, 2001, the Company exercised a five-year lease agreement with a five-year renewal option at the Reynosa facility. In June 2002, in conjunction with the sale of IEC-Mexico, IEC and IEC-Mexico were released of all their lease obligations related to the Mexican facility.
Rental expense for the Mexico facility was $0, $54,000, and $465,000 for fiscal 2003, 2002 and 2001, respectively. These amounts are included in discontinued operations.
As of September 30, 2003, the Company was obligated under non-cancelable operating leases, primarily for manufacturing and office equipment. These leases generally contain rental options and provisions for payment of the lease for executory costs (taxes, maintenance and insurance). Rental expenses on equipment were $187,000, $352,000, and $178,000 for fiscal 2003, 2002 and 2001, respectively.
Litigation - ----------
An action was commenced in United States District Court for the Southern Division of Texas against IEC and several other corporate defendants, on August 12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for exposure to lead, lead dust, chemicals and other substances used in the manufacture of products by various defendants. The essence of the complaint relates to alleged "in utero" exposure to the circulatory system of the then unborn children, resulting in alleged tissue toxicity through the mothers, causing damage to the central nervous system, brain and other organs of the fetus. The complaint alleges theories of negligence, gross negligence, strict liability, breach of warranty and fraud/negligent misrepresentation, and claims unspecified damages for pain and suffering, a variety of special damages, punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has agreed to provide a defense of the claims with a reservation of rights, but has expressly excluded any coverage for the claim for punitive damages. The Company has denied liability and the case is still in the discovery phase. A trial is tentatively scheduled for March 2004.
On August 13, 2003 an action was commenced by General Electric Company ("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc. The action alleges causes of action for breach of a manufacturing services contract which had an initial value of $4.4 million, breach of express warranty, breach of implied warranty and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a component that IEC used to assemble printed circuit boards for GE that GE contends failed to function properly requiring a product recall. GE claims damages "in excess of $15,000" plus interest and attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for lack of jurisdiction and the motion is pending. The position of the Company is that the contract with GE was substantially completed and that it has meritorious defenses and a cross claim against Vishay.
12. RETIREMENT PLAN: - --------------------
The Company has a retirement savings plan, established pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive benefit of its eligible employees and beneficiaries. Eligible employees may elect to contribute a portion of their compensation each year to the plan. Effective June 1, 1998, The Board of Directors approved a change in the employer match from 33 percent of the amount contributed by participant to 100 percent of the first 3 percent of employee contributions, and 50 percent of the next 3 percent of employee contributions. The match is discretionary and was suspended indefinitely as of October 1, 2001. There was no matching contribution made for fiscal 2002 or 2003. The matching Company contribution was approximately $608,000 for the year ended September 30, 2001. The plan also allows the Company to make an annual discretionary contribution determined by the Board of Directors. There were no discretionary contributions for fiscal 2003, 2002, or 2001.
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13. SUBSEQUENT EVENTS: - ----------------------
There have been no material subsequent events.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- ----------
(in thousands, except per share data) YEAR ENDED SEPTEMBER 30,2003: Net sales $ 9,601 $15,469 $14,030 $ 9,101 Gross profit 989 1,246 1,808 886 Net income from continuing operations 443 542 853 575 Net income from discontinued IEC-Mexico operations - 184 - - Net income 443 726 853 575
Earnings per share from: Continuing operations Basic 0.06 0.07 0.11 0.07 Diluted 0.06 0.07 0.10 0.07 Discontinued IEC-Mexico operations Basic - 0.02 - - Diluted - 0.02 - - ------ ------ ------ ------ Net income Basic $ 0.06 $ 0.09 $ 0.11 $ 0.07 ====== ====== ====== ======
Diluted $ 0.06 $ 0.09 $ 0.10 $ 0.07 ====== ====== ====== ======
YEAR ENDED SEPTEMBER 30,2002: Net sales $11,209 $13,478 $ 6,038 $ 8,640 Gross profit (loss) 379 (269) 416 1,771 Net (loss) income from continuing operations (1,073) (2,394) (1,697) 1,393(1) Net (loss) income from discontinued IEC-Mexico operations (1,089) (1,436) (5,171) 488(2) Net (loss) income (2,162) (3,830) (6,868) 1,881
Basic and diluted EPS Continuing operations (0.14) (0.31) (0.22) 0.18 Discontinued IEC-Mexico operations (0.14) (0.19) (0.67) 0.06 ------ ------ ------ ------ Net (loss) income $ (0.28) $ (0.50) $ (0.89) $ 0.24 ====== ====== ====== ======
(1) Included in this amount for the fourth quarter is the $1.1 million received from Acterna Corporation as discussed in Management's Discussion and Analysis in Item 7.
(2) Included in this amount for the fourth quarter is the $1.3 million reversal of the estimate to dispose of IEC-Mexico offset by the $1.0 million write down of the Texas facility as discussed in Management's Discussion and Analysis in Item 7.
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