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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange -
- -
Act of 1934
For the quarterly period ended December 27, 2002
Commission file Number 0-6508
IEC ELECTRONICS CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 13-3458955
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Norton Street, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices (Zip Code)
(315) 331-7742
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.01 Par Value - 7,942,075 shares as of February 6, 2003.
Page 1 of 17
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of:
December 27, 2002 (Unaudited) and September 30, 2002.......... 3
Consolidated Statements of Operations for the three months
ended: December 27, 2002 (Unaudited) and December 28, 2001
(Unaudited)................................................... 4
Consolidated Statements of Cash Flows for the three months
ended: December 27, 2002 (Unaudited) and December 28, 2001
(Unaudited)................................................... 5
Notes to Consolidated Financial Statements (Unaudited)........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11
Item 3. Quantitative and Qualitatve Disclosures about Market Risk........ 14
Item 4. Controls and Procedures.......................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities.......................................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signature ............................................................. 15
Page 2 of 17
PART 1 FINANCIAL INFORMATION
Item 1 -- Financial Statements
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 2002 AND SEPTEMBER 30, 2002
(in thousands)
DECEMBER 27,2002 SEPTEMBER 30,2002
---------------- -----------------
ASSETS (Unaudited)
Current Assets:
Accounts receivable $ 4,578 $ 5,480
Inventories 2,847 3,412
Other current assets 205 186
Current assets-discontinued operations 286 348
---------- ----------
Total current assets 7,916 9,426
---------- ----------
Fixed Assets:
Land and land improvements 768 768
Building and improvements 3,995 3,995
Machinery and equipment 46,501 46,501
Furniture and fixtures 5,850 5,850
---------- ----------
Sub-total gross property 57,114 57,114
Less accumulated depreciation (53,195) (52,781)
---------- ----------
Total fixed assets - net 3,919 4,333
Asset held for sale - 497
Other non-current assets 139 -
Non-current assets - discontinued operations 801 809
---------- ----------
$ 12,775 $ 15,065
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,987 $ 3,128
Accounts payable 4,311 6,250
Accrued payroll and related expenses 550 697
Other accrued expenses 1,164 1,497
Other current liabilities -
discontinued operations 645 1,426
---------- ----------
Total current liabilities 9,657 12,998
---------- ----------
Long-term vendor payable 736 -
Long-term debt 1,141 1,268
---------- ----------
Total liabilities 11,534 14,266
---------- ----------
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 77 77
Treasury stock, 573 shares; at cost (11) (11)
Additional paid-in capital 38,418 38,418
Retained earnings (37,197) (37,640)
Accumulated other comprehensive loss -
Cumulative translation adjustments (46) (45)
---------- ----------
Total shareholders' equity 1,241 799
---------- ----------
$ 12,775 $ 15,065
========== ==========
The accompanying notes are an integral part of these financial statements
Page 3 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 27, 2002 AND DECEMBER 28, 2001
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
DECEMBER 27, 2002 DECEMBER 28, 2001
-------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 9,601 $ 11,209
Cost of sales 8,612 10,830
------- -------
Gross profit 989 379
------- -------
Selling and administrative expenses 753 1,296
Restructuring benefit (63) -
------- -------
Operating profit (loss) 299 (917)
Interest and financing expense (197) (157)
Forgiveness of accounts payable 245 -
Other income, net 96 -
------- -------
Net income (loss) before income taxes 443 (1,074)
Income taxes - -
------- -------
Net income (loss) from continuing
operations 443 (1,074)
Discontinued operations:
Loss from operations of IEC-
Mexico disposed of (net
of income taxes of $0 in
2003 and $(7) in 2002) - (1,088)
--------- ----------
Net income (loss) $ 443 $ (2,162)
========= ==========
Net loss per common and common equivalent share:
Basic and Diluted
Income (loss) from continuing
operations $ 0.06 $ (0.14)
Loss from discontinued operations $ - $ (0.14)
Income (loss) available to common
shareholders $ 0.06 $ (0.28)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,691,503 7,691,503
Diluted 7,838,378 7,691,503
The accompanying notes are an integral part of these financial statements.
Page 4 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 27, 2002 AND DECEMBER 28, 2001
(in thousands)
3 MONTHS 3 MONTHS
ENDED ENDED
DECEMBER 27, DECEMBER 28,
2002 2001
----------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 443 $ (2,162)
Loss from discontinued operations - 1,088
Depreciation 414 403
Gain on sale of fixed assets (50) -
Changes in operating assets and liabilities:
Accounts receivable 902 3,412
Inventories 565 1,019
Other current assets (19) 96
Accounts payable 254 568
Accrued payroll and related expenses (147) (504)
Accrued insurance (98) (59)
Other accrued expenses (235) (42)
------- --------
Net cash flows from operating activities 2,029 3,819
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 547 -
-------- --------
Net cash flows from investing activities 547 -
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable (246) (259)
Repayments under line of credit agreements (1,479) (4,170)
Debt issuance costs (139) -
-------- ---------
Net cash flows from financing activities (1,864) (4,429)
-------- ---------
Cash (used in)from discontinued operations (711) 626
-------- ---------
Change in cash and cash equivalents 1 16
Effect of exchange rate changes (1) (16)
Cash and cash equivalents at beginning of period - -
-------- ---------
Cash and cash equivalents at end of period $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 127 $ 328
======== =========
Income taxes $ - $ -
======== =========
Conversion of accounts payable to long-term payable $ 736 -
======== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ 1,211 -
======== =========
The accompanying notes are an integral part of these financial statements.
Page 5 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 2002
(1) Business and Summary of Significant Accounting Policies
Business
- --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company is a significant
provider of high quality electronics manufacturing services with
state-of-the-art manufacturing capabilities and production capacity. Utilizing
computer controlled manufacturing and test machinery and equipment, the Company
provides manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, the Company offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment basis,
including design, prototype, material procurement and control, manufacturing and
test engineering support, statistical quality assurance, complete resource
management and distribution. The Company's strategy is to cultivate strong
manufacturing relationships with established and emerging original equipment
manufacturers ("OEMs").
Consolidation
- -------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned 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 Ltd. ("Longford")
from August 31, 1998, until September 4, 2001, when it was merged into IEC; and
IEC Electronicos de Mexico ("Mexico") from February 2001, (collectively, "IEC").
Operations in Alabama were closed in October 1998, in Longford in December 1999
and in Texas and Mexico in July 2002. All significant intercompany transactions
and accounts have been eliminated.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of product for both turnkey
and consignment contracts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
December 27, 2002 September 30, 2002
---------------- ------------------
(Unaudited)
Raw materials $ 1,839 $ 2,175
Work-in-process 965 1,214
Finished goods 43 23
---------------- ----------------
$ 2,847 $ 3,412
================ ================
Accounts Payable
- ----------------
Trade accounts payable include drafts payable of $56,000 and $302,000 at
December 27, 2002 and September 30, 2002, respectively.
Page 6 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 2002
Long-Lived Assets
- -----------------
As of October 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This standard
harmonizes the accounting for impaired assets and resolves some of the
implementation issues of Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". It retains the fundamental provisions of
SFAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. It also retains the basic provisions for presenting
discontinued operations in the income statement but broadens the scope to
include a component of an entity rather than a segment of a business. This
pronouncement did not have a material impact on the Company's financial
position, results of operations or cash flows.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The facility is recorded
at its carrying value of $800,000 at December 27, 2002 and is included in
non-current assets-discontinued operations.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's foreign subsidiaries are
translated based on the current exchange rate at the end of the period for the
balance sheet and a weighted-average rate for the period of the consolidated
statement of operations. Translation adjustments are recorded as a separate
component of equity. Transaction gains or losses are included in operations.
Unaudited Financial Statements
- -------------------------------
The accompanying unaudited financial statements as of December 27, 2002,
and for the three months ended December 27, 2002 have been prepared in
accordance with generally accepted accounting principles for interim financia1
information. In the opinion of management, all adjustments considered necessary
for a fair presentation, which consist solely of normal recurring adjustments
have been included. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's September 30, 2002 Annual Report on Form 10-K.
Earnings Per Share
- ------------------
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic earnings per
share is calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share is calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options,
warrants and convertible securities.
New Pronouncements
- ------------------
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. Management does not expect
the adoption of SFAS 145 to have a material impact on the financial statements.
Page 7 of 17
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by SFAS 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 applies
to all exit or disposal activities initiated after December 31, 2002. Management
does not expect the adoption of SFAS 146 to have a material impact on the
financial statements.
In October 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 147, "Accounting for Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9" (SFAS 147). SFAS 147 amends SFAS 72 and no longer
requires companies to recognize, and subsequently amortize, any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset.
In addition, SFAS 147 amends SFAS 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets that
are held and used. Management does not expect the adoption of SFAS 147 to have a
material impact on the financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123"
(SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for fiscal years ending after December 15, 2002 and for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. Management is evaluating what impact this statement will have
on the financial statements.
(2) Comprehensive Income (Loss)
---------------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") on October 1, 1998. SFAS 130
requires comprehensive income and its components to be presented in the
financial statements. Comprehensive income, which includes net income (loss) and
foreign currency translation adjustments, was as follows for the three months
ended December 27, 2002 and December 28, 2001(in thousands):
3 MONTHS 3 MONTHS
ENDED ENDED
DECEMBER 27, DECEMBER 28,
2002 2001
----------- ------------
(Unaudited) (Unaudited)
Net income (loss) $ 443 $ (2,162)
Other comprehensive loss:
Foreign currency translation adjustments (1) (16)
---------- -----------
Total comprehensive income (loss) $ 442 $ (2,178)
========== ===========
Page 8 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 2002
(3) Discontinued Operations
-----------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount, based upon
sales revenues received by EPI from certain former customers of the Company
during the period between July 1, 2002 and January 31, 2003, in an amount up to
$700,000. In addition, EPI will pay to the Company commissions based on the net
selling price of products shipped to certain former customers of the Company
during various time periods between June 18, 2002 and March 31, 2003. As of
December 27, 2002, no additional amounts were earned under the agreement. Under
the terms of a related agreement, the Company and IEC-Mexico were also released
of all of their lease obligations to the landlord of the Mexican facility. EPI
paid the Company $315,000 in June 2002, $265,000 in July 2002 and $150,000 in
September 2002. The Company recorded an after-tax loss on the sale of the
business of approximately $3.1 million in fiscal 2002. The reserve balance at
December 27, 2002 was $235,000. It is anticipated that all remaining charges
against the accrual will be made by September 2003. The Consolidated Financial
Statements and related notes have been restated, where applicable, to reflect
IEC-Mexico as a discontinued operation.
Net sales of IEC-Mexico for the three months ended December 27, 2002 and
December 28, 2001 were $0 and $4.6 million, respectively. These amounts are not
included in net sales in the accompanying consolidated statements of operations.
Assets and liabilities of discontinued operations consisted of the
following:
December 27, 2002 September 30, 2002
----------------- ------------------
Accounts receivable $ 80,697 $ 141,075
Inventories - -
Other current assets 205,292 206,746
--------- ----------
Total current assets 285,989 347,821
Property, plant and equipment, net 800,000 800,000
Other assets 836 9,166
--------- ----------
Total non-current assets 800,836 809,166
--------- ----------
Total assets $1,086,825 $1,156,987
========== ==========
Accounts payable $ 393,890 $ 668,232
Accrued payroll and related expenses 17,460 37,044
Other accrued expenses 233,559 720,222
---------- -----------
Total current liabilities $ 644,909 $1,425,498
========== ===========
Net assets of discontinued
operations $ 441,916 $ (268,511)
========== ===========
(4) Financing Arrangements
----------------------
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 to February 15, 2002 from January 31,
2003. Subsequent amendments were made to the credit agreement as of February 15,
2002, February 28, 2002, March 15, 2002, April 8, 2002, June 20, 2002, October
1, 2002, November 12, 2002 and January 1, 2003 which, among other things,
continued to extend the expiration date of the credit agreement. As a result of
the January 1, 2003 amendment, the expiration date of the credit agreement was
January 17, 2003.
Page 9 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 2002
As last amended, the credit agreement provided for a revolving credit
facility component of $1.0 million. Amounts borrowed were limited to 85% of
qualified accounts receivable. The interest rate on the revolving credit
facility was increased at the time of the various amendments and on December 27,
2002 was prime rate plus 6.00%. On January 14, 2003 it was prime rate plus
6.00%.
The second component of the credit facility consisted of a $10 million
three-year term loan with monthly principal installments based on a five-year
amortization which began in April 2000. The interest rate on the term loan
facility was increased at the time of the various amendments and at December 27,
2002 was prime rate plus 6.00%. On January 14, 2003 it was prime rate plus
6.00%.
At December 27, 2002, $2.9 million was outstanding, consisting of $1.7
million and $1.2 million relating to the revolving credit facility and term
loan, respectively, with an additional $43,000 available under the revolving
credit facility.
See discussion of the new financing facility in Note 6 to the financial
statements.
(5) 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 August 12, 2002, an action was commenced in United States District Court
for the Southern Division of Texas (Civil Action No. M-02-358) against the
Company and several other corporate defendants. The plaintiffs (Armando Gonzalez
and Maria Sylvia Gonzalez, husband and wife, as Next Friends of Adrian Gonzalez,
a Minor, et al.) allege a "toxic tort" action against the defendants, for
exposure to lead, lead dust, chemicals and other substances used in the
manufacture of products by the defendants. The essence of the complaint relates
to alleged "in utero" exposure to the circulatory system of the then unborn
children, resulting in alleged tissue toxicity through the mothers, causing
damage to the central nervous system, brain and other organs of the fetus. The
complaint alleges theories of negligence, gross negligence, strict liability,
breach of warranty and fraud/negligent misrepresentation, and claims unspecified
damages for pain and suffering, a variety of special damages, punitive damages
and attorneys fees. An answer has been filed denying liability on the part of
the Company. Discovery has not begun and no trial date has been set. Royal &
Sunalliance Insurance Company has agreed to provide a defense of the claims with
a reservation of rights, but has expressly excluded any coverage for the claim
for punitive damages.
(6) Subsequent Events
-----------------
On January 14, 2003, the Company completed a new $7,300,000 financing
agreement composed of a $5,000,000 Senior Secured Facility (the "Facility), a
$2,200,000 Secured Term Loan (the "Term Loan") and a $100,000 infusion by
certain of the Company's directors. The Facility, which has a 3 year maturity,
bears interest at the rate of prime plus 2%. It involves a revolving line of
credit for up to $3,850,000 based upon advances on eligible accounts receivable
and inventory, a term loan of $600,000, secured by machinery and equipment, to
be amortized over a 36 month period and a term loan of $550,000 secured by a
first mortgage lien against the Company's Edinburg, Texas real estate which loan
is due at the earlier of the sale of that real estate or one year from the date
of closing. The Term Loan is secured by a general security agreement, and
indirectly by the assignment of a certain promissory note and a first mortgage
on the Company's plant in Newark, New York. It is payable with interest at prime
plus 1.5% in monthly installments over a period of 3 years. Of the funds
provided by the new financing, $1,540,016 was used to repay all but $100,000 of
indebtedness to the Company's prior lenders who will retain a subordinated
interest in substantially all of the Company's assets until the Texas real
estate is sold. On January 14, 2003, following the completion of the financing,
the availability under the revolver was $1,200,000.
The financing agreements contain various affirmative and negative covenants
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA).
Page 10 of 17
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Results of Operations - Three Months Ended December 27, 2002,
Compared to the Three Months Ended December 28, 2001.
-----------------------------------------------------------
Net sales for the three month period ended December 27, 2002, were $9.6
million, compared to $11.2 million for the comparable period of the prior fiscal
year, a decrease of 14.3 percent. The decrease in sales is due to the prolonged
overall softening in the telecommunications and industrial sectors of the U.S.
economy and the consequential impact on IEC's financial position. Turnkey sales
were 92 percent of net sales in the quarter as compared to 93 percent for the
comparable period of the prior year.
Gross profit was $1.0 million or 10.3 percent of sales for the three month
period ended December 27, 2002, versus $0.4 million or 3.4 percent of sales in
the comparable period of the prior fiscal year. The increase in gross profit
percentage is primarily due to a $450,000 adjustment in an inventory reserve
recorded during the current quarter related to excess inventory that was used in
operations or sold back to customers. This accounted for 4.7% of the
improvement. In addition, gross profit margin was improved by a reduction in
manufacturing overhead costs due to IEC's concerted efforts to reduce costs in
all areas.
Selling and administrative expenses decreased to $0.8 million for the three
month period ended December 27, 2002, from $1.3 million in the comparable period
of the prior fiscal year, a decrease of 41.9 percent. This decrease is primarily
due to lower commission expense from lower sales volume as well as a decrease in
the number of employees. As a percentage of net sales, selling and
administrative expenses decreased to 7.8 percent from 11.6 percent in comparison
to the same quarter of the prior fiscal year.
IEC recorded a benefit from restructuring of $63,000 in the three months
ended December 27, 2002. This was due to certain severance payments accrued in
the prior fiscal year that will no longer be paid out.
IEC had other income of $341,000 for the three months ended December 27,
2002. Of the other income, $245,000 was related to negotiated forgiveness of
accounts payable owed to various creditors and $50,000 was related to a gain
recorded on the sale of its Arab, Alabama facility during the quarter.
IEC recorded approximately $184,000 of special charges in the three months
ended December 27, 2002, due to bank and consulting fees incurred to comply with
new bank requirements under the then current amendment to the banking agreement,
of which $102,000 is included in interest and financing expense.
IEC has recorded no benefit from income tax as a result of its cumulative
net losses, and accordingly, has a full valuation allowance against its net
deferred tax asset including the net operating loss carry-forward.
Net income from continuing operations for the three months ended December
27, 2002 was $0.4 million versus a net loss from continuing operations of $1.1
million in the comparable quarter of the prior fiscal year.
Diluted income per share from continuing operations was $0.06 as compared
to diluted loss per share from continuing operations of $(0.14) in the
comparable quarter of the prior fiscal year.
Discontinued Operations
- -----------------------
On June 18, 2002, IEC signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount, based upon
sales revenues received by EPI from certain former customers of IEC during the
period between July 1, 2002 and January 31, 2003, in an amount up to $700,000.
In addition, EPI will pay to IEC commissions based on the net selling price of
products shipped to certain former customers of IEC during various time periods
between June 18, 2002 and March 31, 2003. As of December 27, 2002, no additional
amounts were earned under the agreement. Under the terms of a related agreement,
IEC and IEC-Mexico were also released of all of their lease obligations to the
landlord of the Mexican facility. EPI paid IEC $315,000 in June 2002, $265,000
in July 2002 and $150,000 in September 2002. IEC recorded an after-tax loss on
the sale of the business of approximately $3.1 million in fiscal 2002. The
reserve balance at December 27, 2002 was $235,000. It is anticipated that all
remaining charges against the accrual will be made by September 2003. The
Consolidated Financial Statements and related notes have been restated, where
applicable, to reflect IEC-Mexico as a discontinued operation.
Page 11 of 17
Liquidity and Capital Resources
- -------------------------------
Net sales for the month of December 2002 were $3.3 million, representing
34.3 percent of the total net sales for the three month period ending December
27, 2002. Net sales for the month of December 2001 were $5.1 million,
representing 45.6 percent of the total net sales for the three month period
ending December 28, 2001. IEC operates on a fiscal quarter consisting of four
weeks in the first and second months and five weeks in the third month.
As reflected in the Consolidated Statements of Cash Flows for the three
months ending December 27, 2002, net cash was provided by: operating activities
($2.0 million) and investing activities ($0.5 million). Net cash was used to pay
down bank debt ($1.7 million). Depreciation for the three month periods ending
December 27, 2002 and December 28, 2001 was $0.4 million. Improvement in
collection terms with major customers and improved collection efforts has
resulted in a $0.9 million reduction in accounts receivable. Inventory levels
have been reduced by $0.6 million due to consumption of freed up excess material
as new orders have been received, as well as inventory being sold back to
customers.
As of September 30, 2001, IEC was not in compliance with certain financial
covenants under its secured asset-based credit agreement. As of December 21,
2001, IEC's banks waived the non-compliance, amended certain covenants to allow
IEC more flexibility and changed the expiration date of the credit agreement to
February 15, 2002 from January 31, 2003. Subsequent amendments were made to the
credit agreement as of February 15, 2002, February 28, 2002, March 15, 2002,
April 8, 2002, June 20, 2002, October 1, 2002, November 12, 2002 and January 1,
2003 which, among other things, continued to extend the expiration date of the
credit agreement. As a result of the January 1, 2003 amendment, the expiration
date of the credit agreement was January 17, 2003.
As last amended, the credit agreement provided for a revolving credit
facility component of $1.0 million. Amounts borrowed were limited to 85% of
qualified accounts receivable. The interest rate on the revolving credit
facility was increased at the time of the various amendments and on December 27,
2002 was prime rate plus 6.00%. On January 14, 2003 it was prime rate plus
6.00%.
The second component of the credit facility consisted of a $10 million
three-year term loan with monthly principal installments based on a five-year
amortization which began in April 2000. The interest rate on the term loan
facility was increased at the time of the various amendments and at December 27,
2002 was prime rate plus 6.00%. On January 14, 2003 it was prime rate plus
6.00%.
At December 27, 2002, $2.9 million was outstanding, consisting of $1.7
million and $1.2 million relating to the revolving credit facility and term
loan, respectively, with an additional $43,000 available under the revolving
credit facility.
On January 14, 2003, IEC completed a new $7,300,000 financing agreement
composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000
Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the
IEC directors. The Facility, which has a 3 year maturity, bears interest at the
rate of prime plus 2%. It involves a revolving line of credit for up to
$3,850,000 based upon advances on eligible accounts receivable and inventory, a
term loan of $600,000, secured by machinery and equipment, to be amortized over
a 36 month period and a term loan of $550,000 secured by a first mortgage lien
against IEC's Edinburg, Texas real estate which loan is due at the earlier of
the sale of that real estate or one year from the date of closing. The Term Loan
is secured by a general security agreement, and indirectly by the assignment of
a certain promissory note and a first mortgage on the IEC plant in Newark, New
York. It is payable with interest at prime plus 1.5% in monthly installments
over a period of 3 years. Of the funds provided by the new financing, $1,540,016
was used to repay all but $100,000 of indebtedness to IEC's prior lenders who
will retain a subordinated interest in substantially all of IEC's assets until
the Texas real estate is sold. On January 14, 2003, following the completion of
the financing, the availability under the revolver was $1,200,000.
The financing agreements contain various affirmative and negative covenants
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). In connection with the financing, IEC
entered into agreements with certain of its trade creditors providing for
extended payment terms involving an aggregate of approximately $1,400,000 of
past due balances. In addition, certain trade creditors agreed to discounted
payment terms. Such discounts amounted to $245,000 and were recorded in the
first quarter of fiscal 2003.
Page 12 of 17
Application of Critical Accounting Policies
- -------------------------------------------
IEC's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for IEC include
revenue recognition, impairment of marketing rights, accounting for legal
contingencies and accounting for income taxes.
IEC recognizes revenue in accordance with Staff Accounting Bulletin No.101,
"Revenue Recognition in Financial Statements." Sales are recorded when products
are shipped to customers. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are provided for in the
same period the related sales are recorded.
IEC evaluates its long-lived assets for financial impairment on a regular
basis in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." IEC evaluates
the recoverability of long-lived assets not held for sale by measuring the
carrying amount of the assets against the estimated discounted future cash flows
associated with them. At the time such evaluations indicate that the future
discounted cash flows of certain long-lived assets are not sufficient to recover
the carrying value of such assets, the assets are adjusted to their fair values.
IEC is subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", requires that an estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. IEC evaluates, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact IEC's financial
position or its results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in IEC's financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact IEC's
financial position or its results of operations.
Impact of Inflation
- -------------------
The impact of inflation on IEC's operations 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 April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for IEC beginning January 1, 2003. Management does not expect the
adoption of SFAS 145 to have a material impact on the financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by SFAS 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 applies
to all exit or disposal activities initiated after December 31, 2002. Management
does not expect the adoption of SFAS 146 to have a material impact on the
financial statements.
Page 13 of 17
In October 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 147, "Accounting for Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9" (SFAS 147). SFAS 147 amends SFAS 72 and no longer
requires companies to recognize, and subsequently amortize, any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset.
In addition, SFAS 147 amends SFAS 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS 144 requires for other long-lived assets that
are held and used. Management does not expect the adoption of SFAS 147 to have a
material impact on the financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123"
(SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for fiscal years ending after December 15, 2002 and for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. Management is evaluating what impact this statement will have
on the financial statements.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk represents the
risk of loss that may impact the consolidated financial position, results of
operations or cash flows of IEC due to adverse changes in financial rates. IEC
is exposed to market risk in the area of interest rates. This exposure is
directly related to its Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
Item 4 -- Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, IEC's principal executive officer and principal financial
officer have concluded that IEC's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act") are effective to ensure that information required to be
disclosed by IEC in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in
IEC's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Forward-looking Statements
- --------------------------
Except for historical information, statements in this quarterly report are
forward-looking made pursuant to the safe harbor created by the Private
Securities Litigation Reform Act of 1995 and are therefore subject to certain
risks and uncertainties including timing of orders and shipments, availability
of material, product mix and general market conditions that could cause actual
results to differ materially from those projected in the forward looking
statements. Investors should consider the risks and uncertainties discussed in
the September 30, 2002, Form 10K and its other filings with the Securities and
Exchange Commission.
Page 14 of 17
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The description of IEC's legal proceedings set forth in Item 3 of IEC's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002 are
incorporated herein by reference.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
The following documents are filed as exhibits to this Report:
99.1 A certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
99.2 A certification of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.
b. Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and
Exchange Commission on October 25, 2002. The report contained
information about IEC's Bank Amendment Number 10 with HSBC
Bank USA and General Electric Capital Corporation.
(ii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on November 1, 2002. The report contained
information about IEC's acceptance of term sheets involving a
new senior secured credit facility and secured term loan. The report
also contained information about it's imminent delisting from the
NASDAQ SmallCap Market.
SIGNATURES
Pursuant to the requirements 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.
IEC ELECTRONICS CORP.
REGISTRANT
Dated: February 10, 2003 /s/W. Barry Gilbert
-----------------------------
W. Barry Gilbert
Chairman and Acting Chief
Executive Officer
Dated: February 10, 2003 /s/Kevin J. Monacelli
------------------------------
Kevin J. Monacelli
Controller
(Principal Financial and
Accounting Officer)
Page 15 of 17
CERTIFICATIONS
I, W. Barry Gilbert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IEC Electronics
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 10, 2003 IEC Electronics Corp.
By: /s/ W. Barry Gilbert
------------------------
W. Barry Gilbert
Acting Chief Executive Officer
Page 16 of 17
CERTIFICATIONS
I, Kevin J. Monacelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IEC Electronics
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 10, 2003 IEC Electronics Corp.
By: /s/ Kevin J. Monacelli
--------------------------
Kevin J. Monacelli
Controller &
Principal Financial Accounting
Officer
Page 17 of 17