FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 2001 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-6508
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IEC ELECTRONICS CORP.
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Exact name of registrant as specified in its charter
Delaware 13-3458955
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State or other jurisdiction of IRS Employer ID No.
incorporation or organization
105 Norton Street, Newark, New York 14513
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Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 315-331-7742
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Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Page 1 of 60
The aggregate market value of shares of common stock held by non-affiliates of
the registrant was approximately $3,029,398 as of January 11, 2002, based upon
the closing price of the registrant's common stock on the Nasdaq National
Market on such date. Shares of common stock held by each executive officer and
director and by each person and entity who beneficially owns more than 5% of
the outstanding common stock have been excluded in that such person or entity
under certain circumstances may be deemed to be an affiliate. Such exclusion
should not be deemed a determination or admission by registrant that such
individuals or entities are, in fact, affiliates of registrant.
As of January 11, 2002, there were outstanding 7,691,503 shares of Common
Stock.
Documents incorporated by reference:
Portions of IEC Electronics Corp.'s Proxy Statement for the Annual Meeting
of Stockholders to be held on February 27, 2002 are incorporated into Part
III of this Form 10-K.
Page 2 of 60
TABLE OF CONTENTS
PART I
PAGE
Item 1: Business..................................................... 4
Item 2: Properties................................................... 11
Item 3: Legal Proceedings............................................ 11
Item 4: Submission of Matters to a Vote of Security Holders.......... 12
Executive Officers of Registrant............................. 12
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6: Selected Consolidated Financial Data......................... 14
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 7A: Quantitative and qualitative disclosures about market risk... 19
Item 8: Financial Statements and Supplementary Data.................. 19
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 19
PART III
Item 10: Directors and Executive Officers of the Registrant........... 20
Item 11: Executive Compensation....................................... 20
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 13: Certain Relationships and Related Transactions............... 20
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 21
Page 3 of 60
PART I
ITEM 1. BUSINESS
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IEC Electronics Corp. ("IEC") is an independent electronics manufacturing
services ("EMS") provider of complex printed circuit board assemblies and
electronic products and systems. The Company believes that it is a significant
provider of electronics manufacturing services based upon its state-of-the-art
manufacturing capabilities, volume of production and quality of its services.
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. The Company
believes that, based upon its volume of production, it is one of the larger
independent SMT electronics manufacturing services providers in the United
States. As a 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").
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, the Company acquired an EMS provider in Edinburg, Texas
which it renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November
1994, the Company acquired an EMS provider in Arab, Alabama, which it renamed
IEC Arab, Alabama Inc. ("Alabama"). In August 1998, the Company through its
newly created Irish subsidiary, IEC Electronics - Ireland Limited,("Longford"),
acquired certain assets of an EMS provider located in Longford, Ireland. In
February 2001, the Company acquired IEC Electronicos de Mexico, located in
Reynosa, Mexico.
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries, Texas and Alabama until January 26, 2000 when each of
Texas and Alabama merged into IEC; Longford from August 31, 1998, until
September 4, 2001, when it was merged into IEC; and IEC Electronicos de Mexico
from February 2001, (collectively, the "Company"). In December 1999, the Company
closed its underutilized Longford operations and transferred some of the
customers served there to its other operations in New York and Texas. All
significant intercompany transactions and accounts have been eliminated.
In October 1998, the Company closed its Alabama facility. The facility's
customers were transferred to the Company's other facilities, the equipment was
moved to the Company's other locations, and a certain portion of the real estate
was sold. On the remaining balance of real estate there is a building of
approximately 106,500 square feet. The Company entered into a one-year lease
agreement in August, 2001 which was later modified into a two-year lease in
December 2001 for 57,000 square feet of it, under which the tenant is obligated
to buy all of that real property before a revised date of August 15, 2003, if
the tenant is able to secure financing for this purchase. In November 2001 the
Company leased to a third party 1,000 square feet of the remaining 49,500 square
feet of the Alabama facility under a month-to-month lease.
In December, 1998, the Company entered into a Shelter Services Agreement
with a Texas Limited Partnership and its Mexican corporate subsidiary which
leased 50,000 square feet in a newly constructed industrial park in Reynosa,
Mexico. This Maquiladora facility thereafter commenced manufacturing printed
circuit board assemblies and wire harnesses, and began shipping in April 1999
as IEC Electronicos de Mexico.
Effective February 1, 2001, the Company terminated the Shelter Services
Agreement and exercised its option to acquire the Mexican subsidiary of the
Texas Limited Partnership for one U.S. dollar ($1.00). On March 28, 2001, the
subsidiary, now wholly owned by the Company, executed a new five-year lease
agreement with a five-year renewal option combining the original 50,000 square
feet with an additional 62,000 square feet at the Reynosa facility. Effective
May 1, 2001, the Mexican subsidiary, IEC Electronicos de Mexico, S. De R.L. De
C.V. occupied the entire 112,000 square foot facility.
Page 4 of 60
In April 2001, the Company's Board of Directors approved a restructuring
plan to consolidate its Texas and Mexico business operations, including reducing
its cost structure and improving working capital. This restructuring plan will
allow the Company to concentrate its investments, resources and management
attention on lower cost, high volume production at its Mexico operation.
The Company has achieved world-class ISO 9002 certification for the
Reynosa, Mexico plant and is ISO 9001 certified at the Newark, New York plant.
These certifications are international quality assurance standards that most
OEMs consider crucial in qualifying their EMS providers.
The Company's New York facility has received approval from the British
Approvals Board for Telecommunications allowing it to provide manufacturing and
test services to manufacturers producing telecommunication equipment destined
for shipment to the European Common Market.
During 1998, the Company opened a state-of-the-art 8,000 square foot
Technology Center at its Newark, New York manufacturing facility. During 2000,
the Technology Center added pilot build to its services, which also include
prototype assembly and the Advanced Materials Technology Laboratory. Design
Engineering services are also provided at the Newark, New York facility.
The Company's executive offices are located at 105 Norton Street, Newark,
New York 14513. The telephone number is (315) 331-7742, its internet address is
www.iec-electronics.com, and its e-mail addresses include
inq@iec-electronics.com and ir@iec-electronics.com.
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 has experienced significant growth 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. The manufacturing
partnership between OEMs and EMS providers involves an increased use of
"just-in-time" inventory management techniques which minimize the OEM's
investment in component inventories, personnel and related facilities, thereby
reducing costs.
In the industry there has been the increasing shift from PTH to SMT
interconnection technologies. PTH technology involves the attachment of
electronic components to printed circuit boards with leads or pins which are
inserted into pre-drilled holes in the boards. The pins are then soldered to the
electronic circuits. The drive for increasingly greater functional density has
resulted in the emergence of SMT, which eliminates the need for holes and allows
components to be placed on both sides of a printed circuit, contributing to size
reductions of up to 50%. SMT requires expensive, highly automated assembly
equipment and significantly more expertise than PTH technology. To achieve high
yields, EMS providers must have extensive knowledge and experience in solder
paste, solder reflow, thermal management, metal fatigue, adhesives, solvents,
flux chemistry, surface analysis, intermetallic bonding and testing. The shift
to SMT from PTH technology has increased the use of EMS providers by OEMs
seeking to avoid the significant capital investment required for development and
maintenance of SMT expertise.
Page 5 of 60
The Company continually evaluates emerging technology and maintains a
technology road map to ensure relevant processes are available to its 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. The Company has placed millions of plastic BGA's
since 1994 and this year added Ceramic BGA placement for networking customers
to its service offerings. Future advances will be directed by the Company's
Technology Center which combines Prototype and Pilot Build Services with the
capabilities of the Advanced Materials Technology Laboratory, and is supported
by the Design Engineering Group.
The Company's Strategy
The Company's 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, the Company offers its customers a full range of manufacturing
solutions through flexibility in production, high quality and fast-turnaround
manufacturing services and computer-aided testing.
As part of its strategy, the Company recognizes the need to offer advanced
manufacturing technologies to its customers and, as a consequence, has been
actively involved with SMT since the early 1980's. During fiscal 2001, the
Company invested approximately $4.0 million in capital equipment. The vast
majority of this amount was invested to upgrade equipment and process automation
projects. The Company believes that it operates one of the larger SMT facilities
in the United States. IEC believes that the high cost of SMT assembly equipment
and the increased technical capability necessary to achieve an efficient, high
yield SMT operation are significant competitive factors in the market for
electronic assembly. The Company also believes that OEMs will increasingly
contract for manufacturing on a turnkey basis as they seek to reduce their
capital and inventory costs, as manufacturing technologies become more complex
and as product life cycles shorten. Generally, turnkey contracts result in
stable, close and long-term working relationships with customers. Since major
OEMs require that EMS providers demonstrate the ability to offer SMT assembly
services and to manage and support large turnkey contracts, there are
significant barriers to entry in the EMS industry.
Assembly Process
The Company generally enters into formal agreements with its 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,
the Company offers its consultation services with respect to the
manufacturability and testability of the product design. IEC often recommends
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 the Company's 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.
All incoming material is inspected to ensure compliance with customer
specifications and delivered to the production floor on a "just-in-time" basis.
Material and product movement are carefully and continuously computer-monitored
throughout the assembly process to meet customer requirements. The placement and
insertion of components on circuit board assemblies are accomplished by
high-speed, vision and computer-controlled PTH or SMT machines. Any manual
operations are performed prior to passage of the assemblies through various
soldering processes. Statistical process control ("SPC") is used to provide
consistent results in all steps of the manufacturing process.
The manufactured assembly then moves into the test phase. IEC's
computer-aided testing ensures delivery of high quality products on a consistent
basis. Computer-driven in-circuit tests verify that all components have been
properly placed or inserted and that the electrical circuits are complete.
Functional tests determine if the board or system assembly is performing to
customer specifications.
Page 6 of 60
IEC assigns 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 the Company. Many products manufactured
by the Company 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. The Company assesses the impact of such changes on the
production process and takes the appropriate action, such as restructuring bills
of material, expediting procurement of new components and adjusting its
manufacturing and testing plans. IEC believes that its ability to provide
flexible and rapid response to customer needs is critical to its success.
Products and Services
The Company manufactures a wide range of assemblies which are incorporated
into hundreds of different products. The Company provides electronic
manufacturing services primarily for telecommunications equipment; measuring
devices; medical instrumentation; imaging equipment; office equipment; micro,
mini and mainframe computers; and computer peripheral equipment. During the
fiscal year ended September 30, 2001 the Company provided electronics
manufacturing services to approximately 55 different customers, including JDS
Uniphase, ("JDSU"), GenRad, Inc. ("GenRad"), Symbol Technologies, Inc.
("Symbol"), Tellabs, Inc. ("Tellabs"), and Lucent Technologies, Inc.("Lucent").
The Company provides its services to multiple divisions and product lines of
many of its customers and typically manufactures for a number of each customer's
successive product generations.
Materials Management
In fiscal 2001, 2000, and 1999, turnkey contracts, under which the Company
provided materials in addition to a value-added labor component, represented
96 percent, 97 percent and 95 percent of sales, respectively. Materials and the
associated material handling expense often represent a very substantial portion
of the total manufacturing cost of turnkey products. The Company generally
procures material only to meet specific contract requirements. In addition, the
Company's agreements with its significant customers generally provide for
cancellation charges equal to the costs which are incurred by the Company as a
result of a customer's cancellation of contracted quantities. The Company's
internal systems provide effective controls for all materials, whether purchased
by the Company or provided by the customer, through all stages of the
manufacturing process, from receiving to final shipment.
Suppliers
Materials and components used in EMS, whether supplied by the OEM or by the
Company, are available generally from a number of suppliers at negotiated prices
which are firm for the life of the purchase order. However, at various times in
the electronics industry there have been industry-wide short- ages of components
which have temporarily delayed the Company's manufacture and shipment of
products. The Company's business is not dependent upon any one supplier.
In 1997, Master Distribution Programs were put in place with Arrow
Electronics and Pioneer-Standard Electronics. These alliances have 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 and providing access to global resources.
Marketing and Sales
The Company markets its services through a direct sales force of 4
individuals, 14 program managers and 5 independent manufacturers'
representatives, who currently employ approximately 36 sales people. In addition
to the sales and marketing staff, the Company's executives are closely involved
with marketing efforts. The Company conducts extensive 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.
The Company's sales effort is supported by advertising in numerous 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 manufacturers'
representative covering the customer's location. IEC's direct sales force
coordinates all such activity and monitors the performance of the manufacturers'
representatives. In addition, referrals by existing customers are an important
source of new opportunities. The Company's objective is to further diversify the
customers and industries which it serves.
Page 7 of 60
Backlog
The Company's backlog as of September 30, 2001 and September 30, 2000 was
approximately $21 million and $162 million, respectively. At December 31, 2001,
the backlog was $31 million, and the book-to-bill ratio (newly signed
purchase orders/sales) for the first quarter 2002 improved to 1.67. 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 the Company's current fiscal year. Variations in the magnitude
and duration of contracts received by the Company and customer delivery
requirements may result in substantial fluctuations in backlog from period to
period. Because customers may cancel or reschedule deliveries, backlog is not a
meaningful indicator of future financial results.
Governmental Regulation
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's 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 workplace and the use, discharge, and storage of chemicals employed in
the manufacturing process. Current costs of compliance are not material to the
Company. However, new or modified requirements, not presently anticipated, could
be adopted creating additional expense for the Company.
Employees
The Company's employees numbered approximately 700 at November 6, 2001,
including 116 employees (of which 48 are in Mexico) engaged in engineering, 442
(of which 211 are in Mexico) in manufacturing and 142 (of which 48 are in
Mexico) in administrative and marketing functions. None of the Company's U.S.
employees are covered by a collective bargaining agreement. The Mexican
employees are represented by a labor union. The Company has not experienced any
work stoppages and believes that its employee relations are good. The Company
has access to a large work force by virtue of its northeast location midway
between Rochester and Syracuse, two upstate New York industrial cities, and by
virtue of its Mexican location in Reynosa, 15 miles from the Texas border.
Patents and Trademarks
The Company holds patents unrelated to electronics manufacturing services
and also employs various registered trademarks. The Company does not believe
that either patent or trademark protection is material to the operation of its
business.
Safe Harbor for Forward-looking Statements under Securities Litigation
Reform Act of 1995: Certain risk factors
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
The words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the Reform Act). The Company wishes to
ensure that such statements are accompanied by meaningful cautionary statements,
so as to maximize to the fullest extent possible the protections of the Safe
Harbor established in the Reform Act. Accordingly, such statements are qualified
in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward looking statements.
Stockholders should be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to such analysts any material non-public information or other
confidential information. Accordingly, stockholders should not assume
that the Company agrees with any statement or report issued by any analyst
regardless of the content of such statement or report. Accordingly, to the
extent that reports issued by a securities analyst contain any projections,
forecasts, or opinions, such reports are not the responsibility of the
Company.
Page 8 of 60
The risks included here are not exhaustive. Furthermore, reference is also
made to other sections of this report which include additional factors which
could adversely impact the Company's business and financial performance.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all of such risk factors, nor can it assess the
impact of all such risk factors on the Company's business or the extent to
which any factor, or a combination of factors may cause actual results to
differ materially from those contained in any forward-looking statements.
Accordingly, forward-looking statements should not be relied upon as a
prediction of actual results.
General Economic Conditions
The Company is exposed to general economic conditions which could have a
material adverse impact on its business, operating results and financial
condition. As a result of recent unfavorable economic conditions and reduced
capital spending, sales have declined in fiscal 2001 compared to fiscal 2000.
In particular, sales to OEMs in the telecommunications, workstation and server
equipment manufacturing industry worldwide were impacted during fiscal 2001. If
the economic conditions in the United States worsen either as the result of a
protracted recession or in consequence of the after effects of the events of
September 11, 2001, the Company may experience a material adverse impact on its
business, operating results and financial condition.
Financing Arrangements
The Company has significant debt service obligations and has sustained
operating losses for four consecutive fiscal years. As reported in Note 1 to the
Consolidated Financial Statements, the Company's credit agreement expires on
February 15, 2002. As a result of certain charges to inventory and receivables
recorded on January 11, 2002, included in the accompanying financial statements
as of September 30, 2001, to reflect contingencies involved in pending
litigation, the Company is in violation of the amended agreement. It is
currently in discussions with other lending institutions with respect to a new
credit agreement. If it is unable to obtain a new credit agreement by February
15, 2002, or to obtain a further extension on its current credit agreement, the
Company will be unable to service its current debt obligations and its business,
operating results and financial condition would be materially adversely
impacted.
The degree to which the Company may be leveraged in the future could
materially and adversely affect its ability to obtain financing for working
capital, acquisitions or other purposes and could make it more vulnerable to
industry downturns and competitive pressures. The Company's ability to meet its
debt service obligations will be dependent upon its future performance, which
will be subject to financial, business and other factors affecting its
operations, many of which are beyond its control.
The Company will require substantial amounts of cash to fund scheduled
payments of principal and interest on its outstanding indebtedness, as well as
future capital expenditures and any increased working capital requirements. If
it is unable to meet its cash requirements out of cash flow from operations,
there can be no assurance that it will be able to obtain alternative financing,
that any such financing would be on favorable terms, or that it will be
permitted to do so under the terms of its existing financing arrangements, or
its financing arrangements in effect in the future. In the absence of such
financing, the Company's ability to respond to changing business and economic
conditions, to make future acquisitions, to experience adverse operating results
or to fund required capital expenditures or increased working capital
requirements may be adversely affected.
Customer Concentration; Dependence On the Electronics Industry
A small number of customers are currently responsible for a significant
portion of the Company's net sales. During fiscal 2001, 2000, and 1999, the
Company's five largest customers accounted for 57%, 75% and 60% of consolidated
net sales, respectively. During fiscal 2001, JDS Uniphase, GenRad and Symbol,
accounted for 13%, 12% and 11%, respectively, of consolidated net sales. No
revenues from JDS Uniphase are anticipated during fiscal 2002. The Company is
dependent upon continued revenues from its other large customers. The
percentage of the Company's sales to its major customers may fluctuate from
period to period. Significant reductions in sales to any of these customers
could have a material adverse effect on the Company's results of operations. The
Company has no firm long-term volume purchase commitments from its customers,
and over the past few years has experienced reduced lead-times in customer
orders. In addition, customer contracts can be canceled and volume levels can be
changed or delayed. The timely replacement of canceled, delayed or reduced
contracts with new business cannot be assured. These risks are increased because
a majority of the Company's sales are to customers in the electronics industry,
which is subject to rapid technological change and product obsolescence. The
factors affecting the electronics industry, in general, or any of the Company's
major customers in particular, could have a material adverse effect on the
Company's results of operations.
Page 9 of 60
Revenue Fluctuations
The Company's revenues have fluctuated over the past five fiscal years. Net
sales were $260.7 million in fiscal 1997, $248.2 million in fiscal 1998, $157.5
million in fiscal 1999, $204.2 million in fiscal 2000, and $160.6 million in
fiscal 2001. Although the Company continues to broaden its portfolio of
customers there can be no assurance that its revenues will increase. There can
also be no assurance that the Company will successfully manage the integration
of any business it may acquire in the future. As the Company manages its
geographically dispersed operations and expands its operation in Mexico, it may
experience certain inefficiencies. In addition, the Company's results of
operations could be adversely affected if either of its facilities does not
achieve growth sufficient to offset increased expenditures associated with
geographic expansion. Should the Company increase its expenditures in
anticipation of a future level of sales which does not materialize, its
profitability would be adversely affected. On occasion, customers may require
rapid increases in production which can place an excessive burden on the
Company's resources.
Potential Fluctuations in Operating Results
The Company's margins and operating results are affected by a number of
factors, including product mix, additional costs associated with new projects,
price erosion within the electronics industry, capacity utilization, price
competition, the degree of automation that can be used in the assembly process,
the efficiencies that can be achieved by the Company in managing inventories and
fixed assets, the timing of orders from major customers, fluctuations in demand
for customer products, the timing of expenditures in anticipation of increased
sales, customer product delivery requirements, and increased costs and shortages
of components or labor. The Company's turnkey manufacturing, which typically
results in higher net sales and gross profits but lower gross profit margins
than consignment assembly and testing services, represents a substantial
percentage of net sales. All of these factors can cause fluctuations in the
Company's operating results over time. Because of these factors, there can be no
assurance that the Company's margins or results of operations will not fluctuate
or decrease in the future.
Competition
The electronics assembly and manufacturing industry is comprised of a large
number of domestic and offshore companies, several of which have achieved
substantial market share. The Company also faces competition from current and
prospective customers which evaluate its capacities against the merits of
manufacturing products internally. The Company competes with different companies
depending on the type of service or geographic area. Certain of the Company's
competitors have broader geographic breadth. They also may have greater
manufacturing, financial, research and development, and marketing resources than
the Company. The Company believes that the primary basis of competition in its
targeted markets is manufacturing technology, quality, responsiveness, the
provision of value-added services, and price. To be competitive, the Company
must provide technologically advanced manufacturing services, high product
quality levels, flexible delivery schedules, and reliable delivery of finished
products on a timely and price-competitive basis. The Company currently may be
at a competitive disadvantage as to price when compared to manufacturers with
lower cost structures, particularly with respect to manufacturers with
facilities established where labor costs are lower.
Availability of Components
Substantially all of the Company's net sales are derived from turnkey
manufacturing in which the Company provides both materials procurement and
assembly services. In turnkey manufacturing, the Company potentially bears the
risk of component price increases, which could adversely affect the Company's
gross profit margins. At various times there have been shortages of components
in the electronics industry. If significant shortages of components should
occur, the Company may be forced to delay manufacturing and shipments, which
could have a material adverse effect on the Company's results of operations.
Availability of customer-consigned parts and unforeseen shortages of
components on the world market are beyond the Company's control and could
adversely affect revenue levels and operating efficiencies.
Risks Associated with Mexican Operations
The Company intends to continue to expand its manufacturing operations in
Mexico, which will result in a significant portion of its net sales being
subject to the normal risks associated with foreign operations. Such risks
include unexpected difficulties in staffing and managing a foreign subsidiary
and political and regulatory uncertainties. There can be no assurance that such
factors will not have an adverse impact on the Company's ability to increase and
maintain its revenues from its Mexican manufacturing operations.
Page 10 of 60
Market Price of Common Stock
The fluctuations in the Company's operating results as well as general
market conditions have affected the price of the Company's Common Stock. On
January 11, 2002, the closing price of the Company's Common Stock on The Nasdaq
Stock Market ("Nasdaq") was $0.68 per share. The Company's Common Stock is
currently listed on The Nasdaq National Market ("NNM") tier of Nasdaq.
Nasdaq rules provide, among other things, that a company must maintain a
minimum bid price of $1 per share in order to remain listed on NNM. Companies
whose securities fall below the minimum bid price for 30 consecutive business
days are given a 90-day grace period to regain compliance. A company may
demonstrate compliance by meeting the standard for a minimum of ten consecutive
business days. If a company fails to regain compliance within the applicable
timeframe, it is subject to delisting. On September 27, 2001, Nasdaq announced
there would be an across-the-board moratorium on the minimum price requirements
until January 2, 2002. Under this temporary relief, companies were not to be
cited for bid price deficiencies, and no deficiencies accrued during this
period. The minimum bid price rule was reinstated effective January 3, 2002. It
is not certain what impact that will have on the continued listing of the
Company's Common Stock on NNM. There can be no assurance that the bid price of
the Company's Common Stock will be at or above $1.00 for the requisite period of
time. If the Company is unable to regain compliance, the Company anticipates
that its Common Stock will be transferred to The Nasdaq SmallCap Market tier of
Nasdaq.
Environment Compliance
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. Any failure by the Company to comply with present or
future regulations could subject it to future liabilities or the suspension of
production which could have a material adverse effect on the Company's business.
In addition, such regulations could restrict the Company's ability to expand its
facilities or could require the Company to acquire costly equipment or to incur
other expenses to comply with environmental regulations.
Dependence on Key Personnel and Skilled Employees
The Company's continued success depends to a large extent upon the efforts
and abilities of key managerial and technical employees. The loss of services of
certain key personnel could have a material adverse effect on the Company. The
Company's business also depends upon its ability to continue to attract and
retain senior managers and skilled employees. Failure to do so could adversely
affect the Company's operations.
ITEM 2. PROPERTIES
- -------------------
The Company's administrative and principal manufacturing facility is
located in Newark, New York and contains an aggregate of approximately 300,000
square feet. The IEC Edinburg, Texas facility consists of approximately 87,000
square feet. The facility is primarily empty, houses a materials stockroom, and
is currently being marketed for sale. The Reynosa, Mexico facility consists of
approximately 112,000 square feet and is leased from a third party under an
agreement expiring in 2006, with a 5-year renewal option. The Company's Arab,
Alabama facility consists of approximately 106,500 square feet, of which 57,000
square feet is leased to a third party under an agreement expiring in August,
2003 and 1,000 square feet is leased to a third party under a month-to-month
agreement.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Except as set forth below, there are no material legal proceedings pending
to which the Company or any of its subsidiaries is a party or to which any of
the Company's or subsidiaries' property is subject. To the Company's knowledge,
there are no material legal proceedings to which any director, officer or
affiliate of the Company, 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
the Company or any of its subsidiaries.
On November 16, 2001, the Company commenced an action in New York State
Supreme Court against Acterna Corporation. The complaint asserts claims for
unpaid invoices and breach of contract for which the Company seeks approximately
$7.0 million. The defendant's answer was served on January 8, 2002 and consists
of a general denial and various affirmative defenses. The Company is in the
process of moving for summary judgment and will prosecute the action vigorously,
as management believes its case to be meritorious and regards the answer as a
delaying tactic.
On October 4, 2001, the Company commenced an action against ID Systems, Inc.
seeking approximately $177,000 for unpaid invoices and breach of contract. An
answer was served on December 14, 2001, denying the Company's claims and
asserting counterclaims totaling $950,000. The Company believes its case to be
meritorious and will vigorously prosecute the action.
Page 11 of 60
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the fourth quarter of fiscal 2001, no matters were submitted to a
vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers as of September 30, 2001, were as follows:
Name Age Position
Thomas W. Lovelock 58 President,Chief Executive Officer and
Director
Richard L. Weiss 57 Vice President,
Chief Financial Officer and Treasurer
Bill R. Anderson 56 Vice President and General Manager
Newark Operations
William A. Nabors 60 Vice President and General Manager
Texas/Mexico Operations
Randall C. Lainhart 42 Vice President, New Business Development
Stephen H. Hotchkiss 51 Director of Marketing
Kevin J. Monacelli 47 Controller
Thomas W. Lovelock has served as IEC's President and Chief Executive
Officer and as a Director since August 21, 2000. He was previously employed as
President and Chief Executive Officer of Group Technologies, an EMS provider and
subsidiary of Sypris Solutions in Tampa, Florida. Mr. Lovelock has also held the
positions of President and Chief Executive Officer (1992-1997) at Bell
Technologies,Inc., Vice President of Operations in the Communications
Manufacturing Division of E-Systems, and various management positions at Analog
Devices and Motorola.
Richard L. Weiss, a certified public accountant, became Vice President,
Chief Financial Officer and Treasurer of the Company on October 1, 1999, having
joined the Company as Director of Finance in August 1999. Prior thereto, he had
been Vice President, Finance of Microwave Data Systems, a division of California
Microwave, Inc.(1990 - 1998). From 1974 - 1990, Mr. Weiss was employed by the RF
Communications Group of Harris Corp. as a Manager of Finance and Operations and
in various other managerial positions.
Bill R. Anderson has served as Vice President and General Manager, Newark
Operations since September 2001. Prior thereto, he was Vice President, Supply
Chain Management and Materials (March 2001 to September 2001) and continues to
remain responsible for those areas corporate wide. 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 the Company 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 the Company.
William A. Nabors became Vice President and General Manager of Texas and
Mexico Operations in September 2001. Prior thereto, he held the positions of
Vice President, Manufacturing Operations (October 2000-September 2001) and Vice
President and General Manager of Newark Operations (June 2000-October 2000).
Previously, Mr. Nabors was Vice President and General Manager (during 1998) of
Austin High Volume Mfg. at XeTel Corporation. He also was Vice President of
Manufacturing Operations at Tanisys Technology (June 1, 1995-October 1, 1997),
and held key management positions at Compaq Computer.
Randall C. Lainhart joined the Company in June 2001 as Vice President, New
Business Development. Prior thereto, he was Vice President, Sales and Marketing
for Matco Electronics, Inc., Binghamton, New York, (1994-2001), Director, New
Business Development for SCI Systems, Inc. (1989-1994) and Director, New
Business Development for Ferranti International, Lancaster, Pennsylvania,
(1986-1989). At Ferranti International, he was also Director, Quality Assurance
(1984-1986).
Stephen H. Hotchkiss has served as Director of Marketing since June 2001.
He previously served as Vice President of New Business Development (October
2000-June 2001) and Vice President, Sales and Marketing (November 1997-October
2000). Prior thereto, he had been Director of Sales of Marketing (November
1996-November 1997), Sales Manager (March 1996-November 1996), and Sales
Representative (1977-1996).
Kevin J. Monacelli joined IEC on May 31, 2000 as Director of Corporate
Finance and was appointed Company Controller on November 30, 2000. He previously
worked for 22 years in finance at Alling and Cory/xpedx, serving as its
Controller the last 17 years. Prior to that, Mr. Monacelli was employed at
Deloitte and Touche in Rochester, NY.
Page 12 of 60
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
- --------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
(a) Market Information.
The Company's Common Stock is traded on The Nasdaq Stock Market
under the symbol IECE.
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.
Closing Sales Price
Period High Low
October 1, 1999 - December 31, 1999 $ 3.063 $ 1.000
January 1, 2000 - March 31, 2000 $ 3.781 $ 2.000
April 1, 2000 - June 30, 2000 $ 2.969 $ 1.500
July 1, 2000 - September 30, 2000 $ 2.875 $ 1.500
October 1, 2000 - December 31, 2000 $ 2.063 $ 0.531
January 1, 2001 - March 31, 2001 $ 2.000 $ 0.656
April 1, 2001 - June 30, 2001 $ 1.440 $ 1.063
July 1, 2001 - September 30, 2001 $ 1.200 $ 0.520
The closing price of the Company's Common Stock on The Nasdaq Stock
Market on January 11, 2002, was $0.68 per share.
(b) Holders.
As of January 11, 2002, there were approximately 134 holders of
record of the Company's Common Stock.
(c) Dividends.
The Company did not pay any dividends on its Common Stock during the
fiscal years ended September 30, 2001 and 2000. It is the current policy of the
Board of Directors of the Company to retain earnings for use in the business of
the Company. Certain financial covenants set forth in the Company's current loan
agreement prohibit the Company from paying cash dividends. The Company does not
plan to pay cash dividends on its Common Stock in the foreseeable future.
Page 13 of 60
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Years Ended September 30,
2001 2000 1999 1998(1) 1997
------------------------------------------------
Income Statement Data
- ---------------------
Net Sales $ 160,638 $204,158 $157,488 $248,159 $260,686
------------------------------------------------
Gross (Loss) Profit $ (3,544) $ 3,726 $ (5,766) $13,640 $ 28,094
------------------------------------------------
Operating (Loss) Income $ (27,280) $ (7,864) $(22,051) $(7,554)$ 12,321
------------------------------------------------
Net (Loss) Income $ (29,272) $ (8,031) $(20,565) $(6,160)$ 6,958
------------------------------------------------
Net (Loss) Income per Common
and common equivalent share:
Basic $ (3.83) $(1.06) $ (2.72) $ (0.82)$ 0.93
Diluted $ (3.83) $(1.06) $ (2.72) $ (0.82)$ 0.91
------------------------------------------------
Common and Common
equivalent shares
Basic 7,651 7,590 7,563 7,542 7,442
Diluted 7,651 7,590 7,563 7,542 7,617
-----------------------------------------------
Balance Sheet Data
- ------------------
Working Capital $ 1,163 $30,860 $ 33,424 $31,764 $ 34,622
-----------------------------------------------
Total Assets $ 38,126 $89,561 $ 93,919 $98,665 $152,070
-----------------------------------------------
Long-term debt, less current
maturities $ - $15,266 $ 16,547 $ 7,138 $ 6,988
-----------------------------------------------
Shareholders' equity $ 11,809 $41,008 $ 48,845 $69,568 $ 75,461
-----------------------------------------------
(1) The results of operations and financial position as of and for the year
ended September 30, 1998, include the operations of IEC Electronics - Ireland
Limited, as of the acquisition date, August 31, 1998, through September 4, 2001.
Page 14 of 60
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 in Item 1 of this Form 10K.
Overview
- --------
IEC had a challenging year in fiscal 2001 as it continued its transition
from heavy reliance on customers in the personal computer industry to
establishing a more diverse portfolio of customers, but focusing on
telecommunications and industrial customers. During 2001, the telecommunications
segment contracted dramatically and the Company suffered significant order
reductions from its customers. The Company took a number of important steps in
2001, including a continued emphasis on business development from new and
existing customers and establishing and completing a restructuring plan to
consolidate its Texas and Mexico business operations, while significantly
reducing its overhead structure to match lower revenues.
Analysis of Operations
- ----------------------
Sales
-----
(dollars in millions)
% %
For Year Ended September 30, 2001 2000 Change 1999 Change
---- ---- ------ ---- ------
Net Sales $160.6 $204.2 (21.4)% $157.5 29.7%
The 21.4% decrease in fiscal 2001 net sales compared to fiscal year 2000
was primarily due to the loss of one major customer and the significant downturn
in the telecommunications and industrial sectors of the U.S. economy. Subsequent
to September 30, 2001, the book-to-bill ratio has improved and is currently at
1.67. The 29.7% increase in fiscal 2000 net sales compared to fiscal year 1999
was mainly attributable to the corporate strategy to broaden its customer base
while maintaining the current level of production with its larger customers. The
Company's percentage of turnkey sales has remained steady. Such sales
represented 96%,97% and 95% of net sales in fiscal 2001, 2000 and 1999,
respectively.
Gross (Loss) Profit and Selling and Administrative Expenses
----------------------------------------------------
(as a % of Net Sales)
For Year Ended September 30, 2001 2000 1999
---- ---- ----
Gross (Loss) Profit (2.2%) 1.8% (3.7%)
Selling and Administrative Expenses 6.1% 6.2% 7.8%
Gross profit as a percentage of sales was (2.2%) in fiscal 2001 as compared
to 1.8% in fiscal 2000. This decrease was a result of a combination of factors.
The Company experienced lower overhead absorption due to underutilized capacity
from lower sales volume, change of customer mix, and greater customer product
complexity with requests for design changes which caused manufacturing
production interruptions, restarts and increased set-up expenses, creating
excess production downtime. A significant factor was a charge against inventory
and receivables recorded on January 11, 2002, included in the accompanying
financial statements as of September 30, 2001, to reflect litigation
contingencies. Were it not for that charge, the fiscal 2001 gross profit
percentage would have been 1.1%. During fiscal 2001, the Company has
significantly reduced its overhead structure in an effort to match lower
revenues. On an annualized basis, $14 million was removed. As a result, the
breakeven level of business was almost half of the level in effect in fiscal
2000.
Gross profit as a percentage of sales increased more than 5 percentage
points in fiscal 2000 compared to fiscal 1999. This increase was primarily due
to an increase in demand from the Company's two largest customers who provide
higher margin percentages. This increase was also due to improved fixed
manufacturing overhead absorption being mitigated by increased material and
direct labor costs.
Page 15 of 60
Selling and administrative expenses as a percentage of sales decreased
slightly to 6.1% compared to 6.2% in fiscal 2000. This minimal change during a
year when revenue decreased 21% was primarily a result of concentrated efforts
to better match overhead expenses with the revenue stream. In fiscal year 2000,
SG&A expenses as a percentage of sales decreased from fiscal 1999's 7.8%
primarily due to an increase in the sales base. Selling and administrative
expenditures decreased in fiscal 2001 to $9.8 million from $12.6 million in
fiscal 2000, as a result of decreases in commissions expense related to
decreased net sales, and other cost-cutting measures.
Other Income and Expense
------------------------
(dollars in millions)
For Year Ended September 30, 2001 2000 1999
---- ---- ----
Interest Expense $2.0 $2.1 $1.1
Other Income $ - $2.0 $ -
Interest expense decreased $131,000 to $2.0 million in fiscal 2001 from
$2.1 million in fiscal 2000 due to lower interest rates throughout the year.
Interest expense increased $1.0 million in fiscal 2000 from $1.1 million in
fiscal 1999, due to higher borrowing levels and higher interest rates throughout
the year. Other income of $2.0 million in fiscal 2000 is composed of life
insurance proceeds due to the death of the former Chief Executive Officer in
December, 1999.
Income Taxes
------------
(as a % of loss before income taxes)
For Year Ended September 30, 2001 2000 1999
---- ---- ----
Effective Tax Rate -% -% (11.1%)
In fiscal 2001, the Company recorded an income tax expense relating to
foreign operations in the amount of $116,000, and an income tax benefit from the
receipt of a prior year state refund in the amount of $95,000. The Company has
recorded no benefit from U.S. income tax for fiscal years 2001 and 2000 as a
result of net losses from fiscal 1998 through 2001, and accordingly, has a full
valuation allowance against its net deferred tax asset including the net
operating loss carry-forward.
Restructuring Charge
- --------------------
(dollars in millions)
For Year Ended September 30, 2001 2000 1999
---- ---- ----
Restructuring Charge $ 1.4 $(1.0) $4.0
In April 2001, the Company's Board of Directors approved a restructuring
plan to consolidate its Texas and Mexico business operations including reducing
its cost structure and improving working capital. As part of the
business-restructuring plan, the Company recorded a charge to earnings of $1.4
million in the third quarter of fiscal 2001. The charge related to facility
consolidations ($1.0 million) and headcount reductions ($400,000). This
restructuring plan will allow the Company to concentrate its investments,
resources and management attention on lower cost, high volume production at its
Mexico operations. As of September 30, 2001, a reserve balance of approximately
$651,000 still remained. It is anticipated that all remaining charges against
the accrual will be made during fiscal 2002. There have been no significant
reallocations or re-estimates of this restructuring charge to date.
In September 1999, the Company announced its plan to close its
underutilized Irish operation (Longford) and transfer some of the customers
served there to its other operations in New York and Texas. Accordingly, a
restructuring charge of approximately $4.0 million was recorded in the fourth
quarter of fiscal 1999. The components of the charge are as follows: the
write-down of assets to be disposed of to their fair market value ($1.1
million), the write-down of goodwill ($670,000), severance and employee benefits
($619,000), accrual of the remaining lease payments and related building
maintenance costs ($895,000) and repayment of a grant provided by the Irish
Development Agency ($681,000). In February 2000 a third party purchased from the
Company certain assets of Longford and assumed the lease of the Longford
facility. This resulted in a benefit of $1.0 million from the reversal of a
previously established restructuring reserve which included $800,000 relating to
the lease and $200,000 recovered from a guarantee which had been executed by the
company from whom the assets in Ireland had been purchased. The Company recorded
charges against the accrual of approximately $54,000, $2.2 million and $700,000
during fiscal 2001, 2000 and 1999, respectively. There is no remaining balance
at September 30, 2001.
Page 16 of 60
In October 1998, the Company closed its underutilized Alabama facility and
transferred the facility's customers to the Company's other operations in New
York and Texas. Accordingly, a restructuring charge of $4.7 million was recorded
in the fourth quarter of fiscal 1998. The components of the charge are as
follows: the write-down of assets to be disposed of to their fair market value
($2.2 million), the write-down of goodwill ($1.3 million), and severance and
employee benefits ($1.2 million). The Company recorded charges against the
accrual of $85,000, $200,000, and $1.6 million in fiscal 2001, 2000, and 1999,
respectively. As of September 30, 2001, a reserve balance of approximately
$1,440,000 still remained. Of this balance, $1.2 million relates to the
write-down of assets and is included in property, plant and equipment on the
Consolidated Balance Sheet. There have been no significant reallocations or
re-estimates of the restructuring charges to date.
Asset Impairment Writedown
- --------------------------
In assessing and measuring the impairment of long-lived assets, the Company
applies 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 indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the long-lived asset or identifiable
intangible being tested for impairment was acquired in a purchase business
combination, the goodwill that arose in that transaction is included in the
asset grouping in determining whether an impairment has occurred. If some but
not all of the assets acquired in that transaction are being tested, goodwill is
allocated to the assets being tested for impairment based on the relative fair
values of the long-lived assets and identifiable intangibles acquired at the
acquisition date. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Additionally, where an impairment
loss is recognized for long-lived assets and identifiable intangibles where
goodwill has been allocated to the asset grouping, as described immediately
above, the carrying amount of the allocated goodwill is impaired (eliminated)
before reducing the carrying amounts of impaired long-lived assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
With respect to the carrying amounts of goodwill remaining after the testing for
impairment of long-lived assets and identifiable intangibles, including
enterprise level goodwill not subject to impairment testing under SFAS No. 121,
the Company assesses such carrying value for impairment whenever events or
changes in circumstances indicate that the carrying amount of such goodwill may
not be recoverable. The Company assesses the recoverability of this goodwill by
determining whether the amortization of goodwill over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
business. The amount of goodwill impairment, if any, is measured based on
projected discounted operating cash flows compared to the carrying value of such
goodwill.
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 does not believe that their future cash flows
support 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 the fourth quarter of 1999, certain fixed assets were no longer in
use and identified as impaired. The equipment was marketed for sale, and as
such, the carrying value of these assets was written down to the estimated
recoverable sales value, net of commissions, obtained from appraisals and used
equipment quotations. The effect of this impairment recognition totalled
approximately $400,000 and was included with depreciation expense for the year
ended September 30, 1999. In fiscal 2000, $160,000 of these assets were
returned to active use due to volume increases.
Page 17 of 60
Liquidity and Capital Resources
- -------------------------------
As reflected in the Consolidated Statement of Cash Flows for 2001, of the
$11.2 million of cash provided by operating activities, $4.0 million was used to
fund investing activities, and $7.2 million was used to pay down bank debt.
Capital additions were $4.0 million in 2001 and $1.8 million in 2000. These
expenditures were primarily used to upgrade the manufacturing capabilities of
the Company.
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 from January 31, 2003 to February 15,
2002. Under the terms of the amendment, the revolving credit facility component
of the agreement, based on eligibility criteria for receivables and inventory,
was reduced from $25 million to $5 million. Amounts borrowed are limited to 85%
of qualified accounts receivable, 20% of raw materials and 30% of finished goods
inventory, but in no event is the inventory borrowing base greater than $2
million. The second component consists of a $10 million three-year term loan
with monthly principal installments based on a five-year amortization which
began in April 2000. At September 30, 2001, $13.4 million was outstanding,
consisting of $6.5 million and $6.9 million relating to the revolving credit
facility and term loan, respectively, with an additional $2.1 million available
under the revolving credit facility. As a result of certain changes to inventory
and receivables to reflect contingencies involved in pending litigation, the
Company is currently in violation of the amended agreement. Subject to
resolution related to the Company's violation of the amended agreement, the
availability under the revolver at December 21, 2001, under the most recent
amendment was $1.6 million.
Interest on this revolving credit facility is determined at the Company's
option on a LIBOR or prime rate basis, plus a margin. A facility fee is paid on
the unused portion of the facility.
The credit facility contains specific affirmative and negative covenants,
including, among others, the maintenance of certain financial covenants, as well
as limitations on amounts available under the lines of credit relating to the
borrowing base, capital expenditures, lease payments and additional debt. The
more restrictive of the covenants require the Company to maintain a minimum
tangible net worth, maximum debt-to-tangible net worth ratio, and a minimum
earnings before interest and taxes (EBIT). As a result of certain charges to
inventory and receivables to reflect contingencies involved in pending
litigation recorded on January 11, 2002, included in the accompanying financial
statements as of September 30, 2001, the Company is in violation of the amended
agreement. The Company is currently in discussions with other lending
institutions with respect to a new credit agreement. While the Company believes
it will be successful, there can be no assurance that it will meet the February
15, 2002, expiration date of the current agreement.
Since the Company's loan agreement currently expires on February 15, 2002,
it has classified the entire term loan and revolver as current debt. The
Company's liquidity is dependent on the ability to generate positive cash flow.
Provided the Company obtains a new credit agreement by February 15, 2002, or
obtains an extension of its existing credit agreement and providing it meets
with substantial success in its pending litigation and meets its performance
targets, management believes the Company will generate sufficient cash flows in
2002 to meet the obligations.
Impact of Inflation
- -------------------
The impact of inflation on the Company's operations for the last three
years has been minimal due to the fact that it is able to adjust its bids to
reflect any inflationary increases in cost.
New Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141") "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years
beginning after December 15, 2001; however, as the Company wrote-off all
goodwill during fiscal 2001, adoption of this pronouncement will have no impact
on the Company.
Page 18 of 60
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 will adopt this standard on October 1, 2002.
Upon adoption of 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. Management does not expect the adoption of SFAS No. 143 to
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" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". FAS 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". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on October 1, 2002.
Management is currently determining what effect, if any, FAS No. 144 will have
on its financial position and results of operations.
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 the Company due to adverse changes in financial
rates. The Company is exposed to market risk in the area of interest rates.
This exposure is directly related to its Term Loan and Revolving Credit bor-
rowings under the Credit Agreement, due to their variable interest rate pricing.
Management believes that interest rate fluctuations will not have a material
impact on the Company'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 44 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.
Page 19 of 60
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 Annual Meeting
of Stockholders to be held February 27, 2002 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 Annual Meeting of Stockholders to be
held February 27, 2002 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------
MANAGEMENT
----------
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 Annual
Meeting of Stockholders to be held February 27, 2002 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 Annual Meeting of
Stockholders to be held February 27, 2002 and is incorporated in this report
by reference thereto.
Page 20 of 60
PART IV
ITEM 14. 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...................... 25
Consolidated Balance Sheets as of
September 30, 2001 and 2000.................................. 26
Consolidated Statements of Operations for the years
ended September 30, 2001, 2000 and 1999 .................... 28
Consolidated Statements of Comprehensive Income (Loss) and
Shareholders' Equity for the years ended September 30, 2001,
2000 and 1999................................................ 29
Consolidated Statements of Cash Flows for the years
ended September 30, 2001, 2000 and 1999...................... 30
Notes to Consolidated Financial Statements.................... 31
Schedule I Valuation and Qualifying Accounts................. 44
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 of the Company's Annual Report on Form
10-K for the year ended September 30, 2000.)
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)
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 ende 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.
3.9 Certificate of Ownership and Merger merging IEC
Electronics-Edinburg, Texas Inc. into IEC Electronics Corp. filed
with the Secretary of State of the State of Delaware on January
26, 2000. (Incorporated by reference to Exhibit 3.13of the
Company's Annual Report on Form 10-K for the year ended September
30, 2000)
3.10 Articles of Merger of IEC Electronics-Edinburg, Texas Inc. into
IEC Electronics Corp. filed with the Secretary of State of the
State of Texas on January 26, 2000. (Incorporated by reference to
Exhibit 3.14 of the Company's Annual Report on Form 10-K for the
year ended September 30, 2000.
Page 21 of 60
3.11 Certificate of Ownership and Merger merging IEC Arab, Alabama,
Inc. into IEC Electronics Corp. filed with the Secretary of State
of the State of Delaware on January 26, 2000. (Incorporated by
reference to Exhibit 3.15 of the Company's Annual Report on Form
10-K for the year ended September 30, 2000)
3.12 Articles of Merger of IEC Arab, Alabama Inc. into IEC Electronics
Corp. filed with the Secretary of State of the State of Alabama
on January 26, 2000. (Incorporated by reference to Exhibit 3.16
of the Company's Annual Report on Form 10-K for the year ended
September 30, 2000)
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* IEC Electronics Corp. 1989 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-56498)
10.2* Form of Amended and Restated Incentive Stock Option Agreement.
(Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1,
Registration No. 33-56498)
10.3* Form of Non-Qualified Stock Option Agreement. (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1, Registration No. 33-56498)
10.4* 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)
10.5* 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)
10.6* 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)
10.7* 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)
10.8* 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)
10.9* Form of Change-in-Control Agreement between IEC Electronics Corp.
and each of its Vice Presidents, dated as of May 1, 1998.
(Incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended September 30,
1998.)
10.10* 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).
10.11* 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).
Page 22 of 60
10.12* IEC Electronics Corp. Director Compensation Plan (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended September 30, 1998).
10.13 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).
10.14 Amendment No. 1 dated as of March 30, 2000 to Loan and Security
Agreement originally dated as of December 28, 1999 amont 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)
10.15 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).
10.16 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"). 45
10.17* Retirement and Deferred Compensation Agreement dated September 30,
1999 between Russell E. Stingel and IEC Electronics Corp.(incor-
porated by reference to Exhibit 10.25 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000)
10.18* 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.)
10.19* 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. 49
10.20* Employment Agreement made as of November 1, 2000, effective as of
June 5, 2000, between IEC Electronics Corp. and William Nabors.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K for the year ended September 30,
2000.)
10.21* First Amendment dated as of August 24, 2001 to Employment
Agreement dated as of November 1, 2000 and effective as of June
5, 2000 between IEC Electronics Corp. and William Nabors. 50
10.22* Employment Agreement between IEC Electronics Corp. and Bill R.
Anderson dated as of March 29, 2001 (incorporated by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 30, 2001).
10.23 Lease Agreement dated as of March 21, 2001 between Matamoros
Industrial Partners, L.P. and IEC Electronicos de Mexico, S. de
R.L. de C.V.(incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 30, 2001).
10.24* 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).
10.25* Change-in-Control Agreement dated as of June 6, 2001 between IEC
Electronics Corp. and Randall C. Lainhart. 51
10.26 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. 55
11.1 Statement relating to computation of per share earnings. See Note
1 to the Notes to the Company's Consolidated Financial Statements
contained herein.
21.1 Subsidiaries of IEC Electronics Corp. 59
23.1 Consent of Arthur Andersen LLP 60
(b) Reports on Form 8-K:
None
*Management contract or compensatory plan or arrangement
Page 23 of 60
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: January 14, 2002.
IEC Electronics Corp.
By:/s/Thomas W. Lovelock
-----------------------
Thomas W. Lovelock
President and Chief Executive Officer
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 Chairman of the Board
- ----------------------
(W. Barry Gilbert ) January 14, 2002
/s/Thomas W. Lovelock President, Chief Executive Officer
- ---------------------- and Director January 14, 2002
(Thomas W. Lovelock)
/s/Richard Weiss Vice President, Chief Financial
- ----------------- Officer and Treasurer
(Richard Weiss) (Principal Financial
and Accounting Officer) January 14, 2002
/s/David J. Beaubien Director January 14, 2002
- --------------------
(David J. Beaubien)
/s/Russell E. Stingel Director January 14, 2002
- ---------------------
(Russell E. Stingel)
/s/Robert P. B. Kidd Director January 14, 2002
- -------------------
(Robert P. B. Kidd)
/s/Eben S. Moulton Director January 14, 2002
- ------------------
(Eben S. Moulton)
/s/Justin L. Vigdor Director January 14, 2002
- -------------------
(Justin L. Vigdor)
/s/James C. Rowe Director January 14, 2002
- ------------------
(James C. Rowe)
/s/Dermott O'Flanagan Director January 14, 2002
- ------------------
(Dermott O'Flanagan)
Page 24 of 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IEC Electronics Corp.:
We have audited the accompanying consolidated balance sheets of IEC Electronics
Corp. (a Delaware corporation) and subsidiaries as of September 30, 2001 and
2000, and the related consolidated statements of operations, comprehensive
income (loss) and shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 2001. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IEC Electronics Corp. and
subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and its debt is due on February 15, 2002, which raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Rochester, New York,
November 16, 2001
(except with respect to the matter discussed in
Notes 1 and 5, as to which the date is January 11, 2002)
Page 25 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
(in thousands)
ASSETS
2001 2000
----------------------
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $950 in 2001 and $614 in 2000 $ 14,926 $ 27,915
Inventories 12,032 36,157
Other current assets 522 75
----------------------
Total current assets 27,480 64,147
----------------------
PROPERTY, PLANT, AND EQUIPMENT, net 10,637 15,225
----------------------
OTHER ASSETS:
Costs in excess of net assets acquired, net - 9,889
Other assets 9 300
----------------------
9 10,189
-----------------------
$ 38,126 $ 89,561
======================
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets
Page 26 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
(in thousands, except share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
-------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 13,382 $ 2,105
Accounts payable 7,398 25,295
Accrued payroll and related expenses 2,014 2,572
Accrued insurance 848 1,583
Other accrued expenses 2,675 1,732
-------------------------
Total current liabilities 26,317 33,287
-------------------------
LONG-TERM DEBT - 15,266
-------------------------
COMMITMENTS & CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per
share, authorized - 500,000 shares;
issued and outstanding - none - -
Common stock, par value $.01 per
share, authorized - 50,000,000
shares; issued and outstanding -
7,692,076 and 7,626,565 shares,
respectively 77 76
Additional paid-in capital 38,418 38,332
Retained (deficit) earnings (26,661) 2,611
Accumulated other comprehensive loss -
Cumulative translation adjustment (14) -
Treasury stock, at cost - 573 shares (11) (11)
-------------------------
Total shareholders' equity 11,809 41,008
--------------------------
$ 38,126 $ 89,561
=========================
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets
Page 27 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(in thousands, except per share and share data)
2001 2000 1999
--------------------------------
Net sales $ 160,638 $204,158 $157,488
Cost of sales 164,182 200,432 163,254
-------------------------------
Gross (loss) profit (3,544) 3,726 (5,766)
Selling and administrative expenses 9,743 12,634 12,320
Restructuring charge (benefit) 1,400 (1,044) 3,965
Asset impairment writedown 12,593 - -
-------------------------------
Total operating expenses 23,736 11,590 16,285
-------------------------------
Operating loss (27,280) (7,864) (22,051)
Interest expense 2,003 2,134 1,124
Other income, net 32 1,962 19
-------------------------------
Loss before income taxes (29,251) (8,036) (23,156)
Provision for (benefit from) income taxes 21 (5) (2,591)
-------------------------------
Net loss $ (29,272) $ (8,031) $(20,565)
===============================
Net loss per common and
common equivalent share:
Basic and diluted $ (3.83) $ (1.06) $ (2.72)
===============================
Weighted average number of common
and common equivalent shares outstanding:
Basic and diluted 7,650,673 7,590,046 7,562,727
==============================
The accompanying notes to consolidated financial statements are
an integral part of these statements.
Page 28 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS) AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(in thousands)
Accumulated
Other
Comprehensive Additional Retained Comprehensive Total
Income Common Paid-In Earnings Income Treasury Shareholders'
(Loss) Stock Capital (Deficit) (Loss) Stock Equity
----------------------------------------------------------------------------------------------
BALANCE, September 30, 1998 $ 76 $38,563 $31,207 $ 133 $ (411) $69,568
Shares issued under Directors
Stock Plan - 3 - - - 3
Net loss $ (20,565) - - (20,565) - - (20,565)
Other comprehensive loss,
currency translation
adjustments (161) - - - (161) - (161)
------------------------------------------------------------------------------------------------------
Comprehensive loss $(20,726)
=========
BALANCE, September 30, 1999 76 38,566 10,642 (28) (411) 48,845
Executive Signing Bonus (181) 200 19
Shares issued in lieu of cash
to suppliers and others - (78) - - 200 122
Shares issued under Directors - 25 - - - 25
Stock Plan
Net loss $ (8,031) - - (8,031) - - (8,031)
Other comprehensive income,
currency translation
adjustments 28 - - - 28 - 28
------------------------------------------------------------------------------------------------------
Comprehensive loss $ (8,003)
=========
BALANCE, September 30, 2000 76 38,332 2,611 - (11) 41,008
Shares issued under Directors
Stock Plan 1 86 87
Net loss $(29,272) (29,272) (29,272)
Other comprehensive loss,
currency translation
adjustments (14) (14) (14)
------------------------------------------------------------------------------------------------------
Comprehensive loss $(29,286)
=========
BALANCE, September 30, 2001 $ 77 $38,418 $(26,661) $ (14) $ (11) $ 11,809
====================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 29 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(in thousands)
2001 2000 1999
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(29,272)$(8,031) $(20,565)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 5,267 7,546 15,145
Deferred income taxes - - 322
Loss (gain) on sale of fixed assets 231 18 (33)
Amortization of costs in excess of net assets
acquired 324 353 400
Common stock issued under Directors Stock Plan 87 25 3
Asset impairment writedown (recovery) 12,593 (365) 2,137
Changes in operating assets and liabilities:
(Increase)Decrease
Accounts receivable 12,989 (4,180) (930)
Inventories 24,125 (5,429) (10,687)
Income taxes receivable - 2,966 (1,009)
Other current assets (447) 441 (85)
Other assets 291 (284) 252
Increase (Decrease)
Accounts payable (14,631) (909) 8,474
Accrued payroll and related expenses (558) (1,295) 17
Accrued insurance (735) 775 (555)
Other accrued expenses 983 823 610
--------------------------
Net cash provided by (used in)
operating activities 11,247 (7,546) (6,504)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,961) (1,824) (2,434)
Proceeds from sale of equipment 23 1,294 310
Utilization of restructuring provision for
building/equipment (40) (116) -
--------------------------
Net cash used in investing activities (3,978) (646) (2,124)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in drafts payable (3,266) 4,385 -
Net (repayments) borrowings under revolving credit
facilities (1,884) 824 10,600
Principal payments on long-term debt (2,105) (1,052) (158)
--------------------------
Net cash (used in) provided by
financing activities (7,255) 4,157 10,442
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14 (4,035) 1,814
Effect of exchange rate changes (14) 28 (85)
CASH AND CASH EQUIVALENTS, beginning of year - 4,007 2,278
-------------------------
CASH AND CASH EQUIVALENTS, end of year $ - $ - $ 4,007
==========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,860 $ 1,996 $ 926
==========================
Income taxes, net of refunds received $ (95)$ (2,971) $(1,907)
==========================
The accompanying notes to consolidated financial statements are
an integral part of these statements.
Page 30 of 60
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001, 2000 AND 1999
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -- --------------------------------------------------------
Business
IEC Electronics Corp. (IEC) is an independent EMS provider of complex printed
circuit board assemblies and electronic products and systems. IEC offers its
customers a wide range of manufacturing and management services, on either a
turnkey or consignment basis, including material procurement and control,
manufacturing and test engineering support, statistical quality assurance, and
complete resource management.
The Company has suffered recurring net losses. As a result of these losses, the
Company was in violation of certain financial covenants under its credit
agreement as of September 30, 2001. On 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 from January
31, 2003 to February 15, 2002. As a result of certain charges to inventory and
receivables recorded on January 11, 2002, included in the accompanying financial
statements as of September 30, 2001, to reflect contingencies involved in
pending litigation, the Company is in violation of the amended agreement. The
Company is currently in discussions with other lending institutions with respect
to a new credit agreement. While the Company believes it will be successful,
there can be no assurance that it will meet the February 15, 2002, expiration
date. In addition, management has been endeavoring to increase revenues and
reduce expenses in an effort to improve operating cash flow.
Consolidation
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries, IEC Electronics-Edinburg, Texas Inc. ("Texas")and IEC
Electronics-Arab, Alabama Inc. ("Alabama"), until January 26, 2000 when each of
Texas and Alabama merged into IEC; IEC Electronics-Ireland Limited ("Longford")
from August 31, 1998, until September 4, 2001, when it was merged into IEC; and
IEC Electronicos de Mexico from February 2001, (collectively, the "Company"). In
December 1999, the Company closed its underutilized Longford operations and
transferred some of the customers served there to its other operations in New
York and Texas. 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.
Accounts Payable
Trade accounts payable include drafts payable of $1.1 million and
$4.4 million at September 30, 2001, and September 30, 2000, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Page 31 of 60
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.
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.
Long-Lived Assets
In assessing and measuring the impairment of long-lived assets, the Company
applies 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 indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the long-lived asset or identifiable
intangible being tested for impairment was acquired in a purchase business
combination, the goodwill that arose in that transaction is included in the
asset grouping in determining whether an impairment has occurred. If some but
not all of the assets acquired in that transaction are being tested, goodwill is
allocated to the assets being tested for impairment based on the relative fair
values of the long-lived assets and identifiable intangibles acquired at the
acquisition date. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Additionally, where an impairment
loss is recognized for long-lived assets and identifiable intangibles where
goodwill has been allocated to the asset grouping, as described immediately
above, the carrying amount of the allocated goodwill is impaired (eliminated)
before reducing the carrying amounts of impaired long-lived assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
With respect to the carrying amounts of goodwill remaining after the testing for
impairment of long-lived assets and identifiable intangibles, including
enterprise level goodwill not subject to impairment testing under SFAS No. 121,
the Company assesses such carrying value for impairment whenever events or
changes in circumstances indicate that the carrying amount of such goodwill may
not be recoverable. The Company assesses the recoverability of this goodwill by
determining whether the amortization of goodwill over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
business. The amount of goodwill impairment, if any, is measured based on
projected discounted operating cash flows compared to the carrying value of such
goodwill.
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 does not believe that their future cash flows
support 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 the fourth quarter of 1999, certain fixed assets were no longer in use
and identified as impaired. The equipment was marketed for sale, and as such,
the carrying value of these assets was written down to the estimated recoverable
sales value, net of commissions, obtained from appraisals and used equipment
quotations. The effect of this impairment recognition totalled approximately
$400,000 and was included with depreciation expense for the year ended September
30, 1999. In fiscal 2000, $160,000 of these assets were returned to active use
due to volume increases.
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.
Page 32 of 60
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. The balance is presented net of accumulated
amortization of $4.3 million at September 30, 2000. Amortization of $324,000,
$353,000, and $400,000 was charged against operations for the years ended
September 30, 2001, 2000, and 1999, respectively.
Net goodwill in the amount of $9.6 million, related to the Newark operations was
written off in fiscal 2001. The write-off of net goodwill in the amount of
$670,000, related to the Longford operations was charged to the restructuring
reserve in fiscal 1999. The write-off of net goodwill of approximately $1.3
million during fiscal 1998 related to the Alabama facility and was charged to
the restructuring reserve. See Note 2.
Net Loss per Common and Common Equivalent Share (in thousands, except per share
and share data):
(Loss) Shares Per Share
Year-Ended (Numerator) (Denominator) Amount
- ------------------------ ------------ ------------ ---------
September 30, 2001
Basic and diluted EPS
Loss available to
common shareholders $ (29,272) 7,650,673 $ (3.83)
=========== ========= =========
September 30, 2000
Basic and diluted EPS
Loss available to
common shareholders $ (8,031) 7,590,046 $ (1.06)
=========== ========= =========
September 30, 1999
Basic and diluted EPS
Loss available to
common shareholders $ (20,565) 7,562,727 $ (2.72)
=========== ========= =========
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted-average common shares outstanding during the year.
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.
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.
Page 33 of 60
New Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141") "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years
beginning after December 15, 2001; however, as the Company wrote-off all
goodwill during fiscal 2001, adoption of this pronouncement will have no impact
on the Company.
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 will adopt this standard on October 1, 2002.
Upon adoption of 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. Management does not expect the adoption of SFAS No. 143 to
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" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". FAS 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". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on October 1, 2002.
Management is currently determining what effect, if any, FAS No. 144 will have
on its financial position and results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2. RESTRUCTURING:
In April 2001, the Company's Board of Directors approved a restructuring plan to
consolidate its Texas and Mexico business operations including reducing its cost
structure and improving working capital. As part of the business-restructuring
plan, the Company recorded a charge to earnings of $1.4 million in the third
quarter of fiscal 2001. The charge related to facility consolidations ($1.0
million) and headcount reductions ($400,000). This restructuring plan will allow
the Company to concentrate its investments, resources and management attention
on lower cost, high volume production at its Mexico operations. As of September
30, 2001, a reserve balance of approximately $651,000 still remained. It is
anticipated that all remaining charges against the accrual will be made during
fiscal 2002. There have been no significant reallocations or re-estimates of
this restructuring charge to date.
In September 1999, the Company announced its plan to close its underutilized
Longford operations and transfer some of the customers served there to its other
operations in New York and Texas. Accordingly, a restructuring charge of
approximately $4.0 million was recorded in the fourth quarter of fiscal 1999.
The components of the charge are as follows: the write-down of assets to be
disposed of to their fair market value ($1.1 million), the write-down of
goodwill ($670,000), severance and employee benefits ($619,000), accrual of the
remaining lease payments and related building maintenance costs ($895,000), and
repayment of a grant provided by the Irish Development Agency ($681,000). In
February 2000, a third party purchased from the Company certain assets of
Longford and assumed the lease of the Longford facility. This resulted in a
benefit of $1.0 million from the reversal of a previously established
restructuring reserve which included $800,000 relating to the lease and $200,000
recovered from a guarantee which had been executed by the company from whom the
assets in Longford had been purchased. The Company recorded charges against the
accrual of approximately $54,000, $2.2 million and $700,000 during fiscal 2001,
2000 and 1999, respectively. There is no remaining balance at September
30, 2001.
In August 1998, the Company announced its plan to close its underutilized
Alabama facility and transferred the facility's customers to the Company's other
operations in New York and Texas. Accordingly, a restructuring charge of $4.7
million was recorded in the fourth quarter of fiscal 1998. The components of the
charge are as follows: the write-down of assets to be disposed of to their fair
market value ($2.2 million), the write-down of goodwill ($1.3 million), and
severance and employee benefits ($1.2 million). The Company recorded charges
against the accrual of $85,000, $200,000, and $1.6 million in fiscal 2001, 2000,
and 1999, respectively. As of September 30, 2001, a reserve balance of
approximately $1,440,000 still remained. Of this balance, $1.2 million relates
to the write-down of assets and is included in property, plant and equipment on
the Consolidated Balance Sheet. There have been no significant reallocations or
re-estimates of the restructuring charges to date.
Page 34 of 60
3. INVENTORIES:
The major classifications of inventories are as follows at September 30
(in thousands):
2001 2000
-------- --------
Raw materials $ 7,280 $23,331
Work-in-process 4,034 8,418
Finished goods 718 4,408
-------- --------
$12,032 $36,157
======== ========
4. PROPERTY, PLANT, AND EQUIPMENT:
The major classifications of property, plant, and equipment are as follows at
September 30 (in thousands):
2001 2000
-------- --------
Land and land improvements $ 1,102 $ 1,140
Buildings and improvements 9,975 9,694
Machinery and Equipment 62,933 63,811
Furniture and fixtures 6,552 6,621
-------- --------
$80,562 $81,266
Less- Accumulated depreciation
and amortization (69,925) (66,041)
-------- --------
$10,637 $15,225
======== ========
Depreciation and amortization was $5.3 million, $7.5 million, and $15.1 million
for the years ended September 30, 2001, 2000 and 1999, respectively.
Included in property, plant and equipment are land and land improvements with a
net book value of approximately $300,000, buildings and improvements with a net
book value of approximately $2.9 million which are currently available for sale.
During the fourth quarter of 1999, the Company completed a review of its fixed
asset lives and, in turn, shortened the estimated lives of certain categories of
equipment, effective July 1, 1999. The change in estimate was based on the
following: the downsizing of the business; the loss of certain "large run"
customers which have forced the Company to utilize a quick change-over
mentality; and changing technology, therefore obsoleting production equipment
more quickly. The effect of this change in estimate increased depreciation for
the year ended September 30, 1999 by approximately $4.7 million.
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
Page 35 of 60
5. LONG-TERM DEBT:
Long-term debt consists of the following at September 30 (in thousands):
2001 2000
-------- -------
Senior debt facility $13,382 $17,371
Less- Current portion 13,382 2,105
-------- -------
$ - $15,266
======== =======
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 from January 31, 2003 to February 15,
2002. Under the terms of the amendment, the revolving credit facility component
of the agreement, based on eligibility criteria for receivables and inventory,
was reduced from $25 million to $5 million. Amounts borrowed are limited to 85%
of qualified accounts receivable, 20% of raw materials and 30% of finished goods
inventory, but in no event is the inventory borrowing base greater than $2
million. The second component consists of a $10 million three-year term loan
with monthly principal installments based on a five-year amortization which
began in April 2000. At September 30, 2001, $13.4 million was outstanding,
consisting of $6.5 million and $6.9 million relating to the revolving credit
facility and term loan, respectively, with an additional $2.1 million available
under the revolving credit facility. As a result of certain changes to inventory
and receivables to reflect contingencies involved in pending litigation, the
Company is currently in violation of the amended agreement. Subject to
resolution related to the Company's violation of the amended agreement, the
availability under the revolver at December 21, 2001, under the most recent
amendment was $1.6 million.
Page 36 of 60
The Company is required to make an election to select either the prime rate or
LIBOR, as the basis for the interest rate calculation, any change in election is
subject to the terms of the credit agreement.
The interest rate on the revolving credit facility is calculated based on the
Company's debt-to-worth ratio as defined in the credit facility agreement.
Accordingly, the interest rate will range from a minimum of prime rate or LIBOR
plus 185 basis points to a maximum of prime rate plus 0.75 percent or LIBOR
plus 350 basis points. Based on the Company's debt-to-worth ratio at
September 30, 2001, the interest rate on the revolving credit facility is
6.65 percent.
The interest rate on the term note is calculated based on the Company's
debt-to-worth ratio as defined in the credit facility agreement. Accordingly,
the interest rate will range from a minimum of prime rate plus 0.125 percent or
LIBOR plus 200 basis points to a maximum of prime rate plus 1.00 percent or
LIBOR plus 375 basis points. Based on the Company's debt-to-worth ratio at
September 30, 2001, the interest rate on the term loan is 6.96 percent.
As of February 1, 2002, the interest rates will increase by 0.25 percent for
both the prime and LIBOR rates.
The credit facility contains specific affirmative and negative covenants,
including, among others, the maintenance of certain financial covenants, as well
as limitations on amounts available under the lines of credit relating to the
borrowing base, capital expenditures, lease payments and additional debt. The
more restrictive of the covenants require the Company to maintain a minimum
tangible net worth, maximum debt-to-tangible net worth ratio, and a minimum
earnings before interest and taxes (EBIT). As a result of certain charges to
inventory and receivables recorded on January 11, 2002, included in the
accompanying financial statements as of September 30, 2001, to reflect
contingencies involved in pending litigation, the Company is in violation of the
amended agreement. The Company is currently in discussions with other lending
institutions with respect to a new credit agreement. While the Company believes
it will be successful, there can be no assurance that it will meet the February
15, 2002, expiration date of the current agreement.
Since the Company's loan agreement currently expires on February 15, 2002, it
has classified the entire term loan and revolver as current debt. The Company's
liquidity is dependent on the ability to generate positive cash flow. Provided
the Company obtains a new credit agreement by February 15, 2002, or obtains an
extension of its existing credit agreement and providing it meets with
substantial success in its pending litigation and meets its performance targets,
management believes the Company will generate sufficient cash flows in 2002 to
meet the obligations.
Page 37 of 60
6. LIFE INSURANCE PROCEEDS:
The Company's former President and Chief Executive Officer died suddenly on
December 11, 1999. In the second quarter of fiscal 2000, the Company received
non-taxable income from insurance proceeds of approximately $2.0 million, which
is included in other income.
7. INCOME TAXES:
The provision for (benefit from) income taxes in fiscal 2001, 2000 and 1999 is
summarized as follows (in thousands):
2001 2000 1999
------- ------- -------
Current
Federal $ - $ - $(3,083)
State/Other 21 (5) 170
Deferred - - 322
-------- --------- --------
Provision for (benefit from)
income taxes, net $ 21 $ (5) $(2,591)
======== ========= ========
The components of the deferred tax asset (liability) at September 30 are as
follows(in thousands):
2001 2000
---- ----
Net operating loss and AMT credit carryovers $ 8,167 $ 6,747
Asset impairment loss 1,030 -
Accelerated depreciation (1,255) (1,750)
New York state investment tax credits 3,435 3,300
Compensated absences 293 350
Inventories 3,609 1,463
Receivables 323 132
Restructuring reserve 711 518
Other 41 41
------- --------
16,354 10,801
Valuation allowance (16,354) (10,801)
------- -------
$ - $ -
======= =======
A full valuation allowance has been established against the net deferred tax
asset due to recent losses and tax carryback limitations. The Company has a net
operating loss carryforward of $23.3 million (expiring in years through 2021).
The Company has available approximately $5.0 million in New York State
investment tax credits through 2009.
Page 38 of 60
The differences between the effective tax rates and the statutory federal income
tax rates for fiscal years 2001, 2000 and 1999 are summarized as follows:
2001 2000 1999
----- ----- -----
Benefit from income taxes
at statutory rates (34.0)% (34.0)% (34.0)%
Goodwill adjustments 14.1 1.5 0.5
Provision for state taxes,net - - 0.5
Life Insurance - (8.5) -
Other 0.9 1.8 0.2
Valuation Allowance 19.0 39.2 21.7
----- ----- ------
- % - % (11.1)%
===== ===== ======
8. SHAREHOLDERS' EQUITY:
Stock-Based Compensation Plans
In November 1993, the Company adopted the 1993 Stock Option Plan (SOP) which
replaced and superseded the 1989 Stock Option Plan.
Under the SOP, a total of 1,400,000 shares, inclusive of the foregoing, were
reserved for key employees, officers, directors and consultants as of September
30, 2001. 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. Stock options
issued prior to 1992 terminate 10 years from date of grant, while incentive and
nonqualified stock options issued subsequent to 1991 terminate seven and five
years from date of grant, respectively.
Generally, incentive stock options granted during the period between July 1995
through September 2001 vest in increments of 25 percent. Nonqualified stock
options granted during fiscal year 2001, 2000 and 1999 vest in increments of 33
1/3 percent.
Page 39 of 60
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
------------- ---------- -------- -------- -----------
1998 652,036 10.23 656,964 338,911
Options granted 123,000 3.75
Options exercised - -
Options forfeited (150,539) 12.48
----------
1999 624,497 8.38 684,503 367,372
Options granted 378,000 2.04
Options exercised -
Options forfeited (130,122) 7.39
----------
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
==========
The following table summarizes information about stock options outstanding as of
September 30, 2001:
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 2001 Life Price 2001 Price
- -------------- ---------------- ---------- --------- ---------------- ---------
$ 0.520 -$ 1.625 462,800 6.063 $ 1.313 40,667 $ 1.333
$ 1.688 -$ 2.500 293,000 5.744 $ 1.973 97,834 $ 1.947
$ 3.250 -$ 3.875 60,900 4.587 $ 3.686 30,850 $ 3.756
$ 5.000 -$ 6.250 96,500 2.082 $ 6.250 96,500 $ 6.250
$ 7.625 -$ 9.750 145,000 1.274 $ 8.859 145,000 $ 8.859
$10.825 -$ 16.50 4,500 1.137 $ 16.500 3,375 $ 16.500
------------- ------------
1,062,700 414,226
============= ============
The weighted average fair value of options granted during fiscal 2001, 2000 and
1999 was $.97, $1.33, and $2.25, 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 5.19
percent, 6.21 percent and 5.05 percent, for fiscal 2001, 2000 and 1999,
respectively; volatility of 78.76 percent, 58.27 percent, and 53.25 percent for
fiscal 2001, 2000 and 1999, respectively; and expected option life of 6.7 years
for fiscal 2001 and 7 years for fiscal 2000 and 1999, respectively. The dividend
yield was 0 percent. Forfeitures are recognized as they occur.
Page 40 of 60
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". 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 loss and net loss per common and common equivalent share would have
been as follows for years ended September 30 (in thousands, except per share
data):
2001 2000 1999
---------------- --------------- ---------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------ -------- ------- ------- -------
Net loss $(29,272)$(29,503) $ (8,031) $(8,461) $(20,565) $(20,726)
========= ======== ======= ======== ======= =======
Net loss per
common and common
equivalent share:
Basic and diluted $ (3.83) $ (3.86) $ (1.06) $(1.11) $(2.72) $(2.74)
======== ========= ======== ======== ======= =======
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
During fiscal 2000, the Company issued 20,000 shares out of
treasury for services rendered and executive signing bonus. The treasury balance
is 573 shares with a book value of $11,000.
9. 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 North American
customers in the industrial and telecommunications industries and are
concentrated among specific companies. For the fiscal year ended September 30,
2001, five customers accounted for 13 percent, 12 percent, 11 percent, 11
percent and 10 percent of the Company's net sales. For the fiscal year ended
September 30, 2000, three customers accounted for 35 percent, 16 percent and 11
percent of the Company's net sales. For the fiscal year ended September 30,
1999, three customers accounted for 23 percent, 18 percent and 10 percent of the
Company's net sales.
At September 30, 2001, amounts due from three customers represented 26 percent,
16 percent and 15 percent of trade accounts receivable. At September 30, 2000,
amounts due from three customers represented 23 percent, 22 percent and 13
percent of trade accounts receivable. The Company performs ongoing credit
evaluations of its customers' financial positions and generally does not require
collateral.
Sales to foreign source customers (primarily in Europe) totaled approximately
3 percent, 7 percent, and 15 percent of total net sales in fiscal years 2001,
2000 and 1999, respectively.
Page 41 of 60
10. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
In December, 1998, the Company entered into a Shelter Services Agreement with a
Texas Limited Partnership and its Mexican corporate subsidiary which leased
50,000 square feet in a newly constructed industrial park in Reynosa, Mexico.
This Maquiladora facility thereafter commenced manufacturing printed circuit
board assemblies and wire harnesses, and began shipping in April 1999 as IEC
Electronicos de Mexico.
Effective February 1, 2001, the Company terminated the Shelter Services
Agreement and exercised its option to acquire the Mexican subsidiary of the
Texas Limited Partnership for one U.S. dollar ($1.00). On March 28, 2001, the
subsidiary, now wholly owned by the Company, executed a new five-year lease
agreement with a five-year renewal option combining the original 50,000 square
feet with an additional 62,000 square feet at the Reynosa facility. Effective
May 1, 2001, the Mexican subsidiary, IEC Electronicos de Mexico, S. De R.L. De
C.V. occupied the entire 112,000 square foot facility.
Rental expense for the Mexico facility was $465,000 and $312,000 for fiscal 2001
and 2000, respectively.
As of September 30, 2001, the Company was obligated under non-cancelable
operating leases, primarily for office equipment. These leases generally con-
tain rental options and provisions for payment of the lease for executory costs
(taxes, maintenance and insurance). Rental expenses on equipment was $255,000
and $25,000 for fiscal 2001 and 2000, respectively.
The following is a schedule of future minimum payments (in thousands):
Mexico Office
Year Facility Equipment Total
---- -------- --------- -----
2002 $ 659 $ 38 $ 697
2003 659 26 685
2004 659 23 682
2005 659 23 682
2006 384 9 393
------ ------ ------
$3,020 $ 119 $3,139
====== ====== ======
Litigation
The Company is from time to time subject to routine legal proceedings and claims
which arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
On November 16, 2001, the Company commenced an action in New York State Supreme
Court against Acterna Corporation. The complaint asserts claims for unpaid
invoices and breach of contract for which the Company seeks approximately $7.0
million. The defendant's answer was served on January 8, 2002 and consists of a
general denial and various affirmative defenses. The Company is in the process
of moving for summary judgment and will prosecute the action vigorously, as
management believes its case to be meritorious and regards the answer as a
delaying tactic.
On October 4, 2001, the Company commenced an action against ID Systems, Inc.
seeking approximately $177,000 for unpaid invoices and breach of contract. An
answer was served on December 14, 2001, denying the Company's claims and
asserting counterclaims totaling $950,000. The Company believes its case to be
meritorious and will vigorously prosecute the action.
11. 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 matching Company contributions were
approximately $623,000, $792,000 and $744,000 for the years ended
September 30, 2001, 2000 and 1999, respectively. 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 2001, 2000, or
1999.
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12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
(in thousands, except per share data)
YEAR ENDED SEPTEMBER 30,2001:
Net sales $59,655 $45,592 $40,032 $ 15,359
Gross profit (loss) 1,769 2,471 1,135 (8,919)
Net loss (1,525) (957) (3,209) (23,581)
Net loss per common
and common equivalent share:
Basic and diluted (0.20) (0.13) (0.42) (3.08)
YEAR ENDED SEPTEMBER 30,2000:
Net sales $43,770 $64,338 $54,694 $ 41,356
Gross profit 29 2,367 703 627
Net loss (1,223) (606) (2,813) (3,389)
Net loss per common
and common equivalent share:
Basic and diluted (0.16) (0.08) (0.37) (0.45)
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SCHEDULE I
IEC ELECTRONICS CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
(in thousands)
2001 2000 1999
------------------------------
Accounts receivable reserve balance, $ 614 $ 176 $ 1,975
at beginning of year
Provision for doubtful accounts 384 525 -
Write-off of doubtful accounts, net of
recoveries 48 87 1,799
------------------------------
Balance, at end of year $ 950 $ 614 $ 176
==============================
2001 2000 1999
------------------------------
Restructuring reserve balance, $ 1,579 $ 5,067 $ 3,396
at beginning of year
Provision for restructuring 1,400 - 3,965
Deductions 888 2,444 2,294
Reversals - 1,044
------------------------------
Balance, at end of year* $ 2,091 $ 1,579 $ 5,067
==============================
*Balance includes $1.2 million related to writedown of building to its estimated
fair market value and is included as a component of property, plant and
equipment on the Consolidated Balance Sheet.
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