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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 March 28, 2003
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 - 7,987,460 shares as of May 2, 2003.
Page 1 of 17
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of :
March 28, 2003 (Unaudited) and September 30, 2002............. 3
Consolidated Statements of Operations for the three months
ended: March 28, 2003 (Unaudited) and March 29, 2002
(Unaudited)................................................... 4
Consolidated Statements of Operations for the six months ended:
March 28, 2003 (Unaudited) and March 29, 2002 (Unaudited)..... 5
Consolidated Statement of Cash Flows for the six months ended:
March 28, 2003 (Unaudited) and March 29, 2002 (Unaudited)..... 6
Notes to Consolidated Financial Statements ................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities.......................................... 14
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
Signatures............................................................. 15
Page 2 of 17
PART 1 FINANCIAL INFORMATION
Item 1 -- Financial Statements
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 28, 2003 AND SEPTEMBER 30, 2002
(in thousands, except for share data)
MARCH 28,2003 SEPTEMBER 30,2002
---------------- ------------------
ASSETS (Unaudited)
Current Assets:
Accounts receivable $ 4,775 $ 5,480
Inventories 3,390 3,412
Other current assets 257 186
Current assets - discontinued operations 207 348
---------- ----------
Total current assets 8,629 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 (53,609) (52,781)
---------- ----------
Total fixed assets - net 3,505 4,333
Asset held for sale - 497
Other non-current assets 246 -
Non-current assets - discontinued operations 1 809
---------- ----------
$ 12,381 $ 15,065
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,374 $ 3,128
Accounts payable 4,275 6,250
Accrued payroll and related expenses 548 697
Other accrued expenses 822 1,497
Other current liabilities -
discontinued operations 300 1,426
---------- ----------
Total current liabilities 8,319 12,998
---------- ----------
Long-term vendor payable 760 -
Long-term debt 1,283 1,268
---------- ----------
Total liabilities 10,362 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 - 7,957,460 and
7,692,076 shares, respectively 80 77
Treasury stock, 573 shares; at cost (11) (11)
Additional paid-in capital 38,473 38,418
Retained earnings (36,470) (37,640)
Accumulated other comprehensive loss -
Cumulative translation adjustments (53) (45)
---------- ----------
Total shareholders' equity 2,019 799
---------- ----------
$ 12,381 $ 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 MARCH 28, 2003 AND MARCH 29, 2002
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 28, 2003 MARCH 29, 2002
-------------- --------------
(Unaudited) (Unaudited)
Net sales $ 15,469 $ 13,478
Cost of sales 14,223 13,747
------- -------
Gross profit (loss) 1,246 (269)
------- -------
Selling and administrative expenses 900 1,459
Restructuring expense - 400
------- -------
Operating profit (loss) 346 (2,128)
Interest and financing expense (191) (266)
Forgiveness of accounts payable 378 -
Other income, net 9 -
------- -------
Net income (loss) before income taxes 542 (2,394)
Income tax - -
------- -------
Net income (loss) from continuing
operations 542 (2,394)
Discontinued operations:
Income (loss) from operations of
IEC-Mexico disposed of (net
of income taxes of $0 in
2003 and $(7) in 2002) 184 (1,437)
--------- ----------
Net income (loss) $ 726 $ (3,831)
========= ==========
Net income (loss) per common and common equivalent share:
Basic and Diluted
Income (loss) from continuing
operations $ 0.07 $ (0.31)
Income (loss) from discontinued
operations $ 0.02 $ (0.19)
Income (loss) available to
common shareholders $ 0.09 $ (0.50)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,896,659 7,691,503
Diluted 8,178,102 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 OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 28, 2003 AND MARCH 29, 2002
(in thousands, except share and per share data)
6 MONTHS ENDED 6 MONTHS ENDED
MARCH 28, 2003 MARCH 29, 2002
-------------- --------------
(Unaudited) (Unaudited)
Net sales $ 25,070 $ 24,687
Cost of sales 22,835 24,577
------- -------
Gross profit 2,235 110
------- -------
Selling and administrative expenses 1,653 2,755
Restructuring (benefit) expense (63) 400
------- -------
Operating profit (loss) 645 (3,045)
Interest and financing expense (388) (423)
Forgiveness of accounts payable 623 -
Other income, net 105 -
------- -------
Net income (loss) before income taxes 985 (3,468)
Income taxes - -
------- -------
Net income (loss) from continuing
operations 985 (3,468)
Discontinued operations:
Income (loss) from operations of
IEC-Mexico disposed of (net
of income taxes of $0 in
2003 and $(36) in 2002) 184 (2,525)
--------- ----------
Net income (loss) $ 1,169 $ (5,993)
========= ==========
Net income (loss) per common and common equivalent share:
Basic and Diluted
Income (loss) from continuing
operations $ 0.13 $ (0.45)
Income (loss) from discontinued
operations $ 0.02 $ (0.33)
Income (loss) available to common
shareholders $ 0.15 $ (0.78)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,795,800 7,691,503
Diluted 8,022,291 7,691,503
The accompanying notes are an integral part of these financial statements.
Page 5 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 28, 2003 AND MARCH 29, 2002
(in thousands)
6 MONTHS 6 MONTHS
ENDED ENDED
MARCH 28, MARCH 29,
2003 2002
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,169 $ (5,993)
(Income) loss from discontinued operations (184) 2,525
Depreciation and amortization 845 809
Deferred income taxes
Gain on sale of fixed assets (50) -
Common stock issued under directors' stock plan 8 -
Asset impairment writedown - 400
Changes in operating assets and liabilities:
Accounts receivable 705 1,258
Inventories 21 2,640
Other current assets (70) (58)
Accounts payable (444) 1,508
Accrued payroll and related expenses (148) (244)
Accrued insurance (327) (100)
Other accrued expenses (348) (167)
------- --------
Net cash flows from operating activities 1,177 2,578
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment - (110)
Proceeds from sale of property 547 -
Proceeds from sale of discontinued operations property 875 -
-------- --------
Net cash flows from investing activities 1,422 (110)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 416 (259)
Repayments under line of credit agreements (4,205) (3,740)
Proceeds from borrowings 3,500 -
Principal payments on term debt (1,221) -
Debt issuance costs (263) -
Common stock issued under refinancing plan 50 -
-------- ---------
Net cash flows from financing activities (1,723) (4,000)
-------- ---------
Cash (used in)from discontinued operations (867) 1,553
-------- ---------
Change in cash and cash equivalents 9 21
Effect of exchange rate changes (9) (21)
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 $ 387 $ 424
======== =========
Income taxes $ - $ -
======== =========
Conversion of accounts payable to long-term payable $ 760 -
======== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ 1,187 -
======== =========
The accompanying notes are an integral part of these financial statements.
Page 6 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2003
(1) Business and Summary of Significant Accounting Policies
Business
- --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company is a significant
provider of high quality electronics manufacturing services with
state-of-the-art manufacturing capabilities and production capacity. Utilizing
computer controlled manufacturing and test machinery and equipment, the Company
provides manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, the Company offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment basis,
including design, prototype, material procurement and control, manufacturing and
test engineering support, statistical quality assurance, complete resource
management and distribution. The Company's strategy is to cultivate strong
manufacturing relationships with established and emerging original equipment
manufacturers ("OEMs").
Consolidation
- -------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico") from February
2001, (collectively, "IEC"). Operations in Texas and Mexico were closed in July
2002. All significant intercompany transactions and accounts have been
eliminated.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of product for both turnkey
and consignment contracts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
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):
March 28, 2003 September 30, 2002
---------------- ------------------
(Unaudited)
Raw materials $ 2,185 $ 2,175
Work-in-process 979 1,214
Finished goods 226 23
---------------- ----------------
$ 3,390 $ 3,412
================ ================
Accounts Payable
- ----------------
Trade accounts payable include drafts payable of $718,000 and $302,000 at
March 28, 2003 and September 30, 2002, respectively.
Long-Lived Assets
- -----------------
In October 2002, the Company sold its Alabama facility for $547,000. A gain
of $50,000 was recorded in other income.
In February 2003, the Company sold its Texas facility for $875,000. A gain
of $75,000 was recorded as part of discontinued operations.
Page 7 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2003
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 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 March 28, 2003, and
for the three and six months ended March 28, 2003 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.
(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 and six
months ended March 28, 2003 and March 29, 2002 (in thousands):
3 MONTHS 3 MONTHS
ENDED ENDED
MARCH 28, MARCH 29,
2003 2002
----------- ------------
(Unaudited) (Unaudited)
Net income (loss) $ 726 $ (3,831)
Other comprehensive loss:
Foreign currency translation adjustments (7) (5)
---------- -----------
Total comprehensive income (loss) $ 719 $ (3,836)
========== ===========
6 MONTHS 6 MONTHS
ENDED ENDED
MARCH 28, MARCH 29,
2003 2002
----------- ------------
(Unaudited) (Unaudited)
Net income (loss) $ 1,169 $ (5,993)
Other comprehensive loss:
Foreign currency translation adjustments (8) (21)
---------- -----------
Total comprehensive income (loss) $ 1,161 $ (6,014)
========== ===========
Page 8 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2003
(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. As of March
28, 2003, 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 March 28, 2003
was $193,000. 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 and six months ended March 28, 2003
were $0; and for the three and six months ended March 29, 2002 were $4.0 and
$8.6 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 (in thousands):
March 28, 2003 September 30, 2002
----------------- ------------------
Accounts receivable $ 11 $ 141
Other current assets 196 207
--------- ----------
Total current assets 207 348
Property, plant and equipment, net - 800
Other assets 1 9
--------- ----------
Total non-current assets 1 809
--------- ----------
Total assets $ 208 $ 1,157
========== ==========
Accounts payable $ 26 $ 668
Accrued payroll and related expenses 16 37
Other accrued expenses 258 720
---------- -----------
Total current liabilities $ 300 $ 1,425
========== ===========
Net assets of discontinued
operations $ (92) $ (268)
=========== ===========
(4) Financing Arrangements
----------------------
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 retained a subordinated interest
in substantially all of the Company's assets until the Texas real estate was
sold. On January 14, 2003, following the completion of the financing, the
availability under the revolver was $1,200,000. On February 28, 2003, IEC sold
its Edinburg, Texas facility for $875,000 and paid off $700,000 in term loans
related to the facility including $100,000 to the Company's prior lender. The
availability under the revolver was $1.9 million on March 28, 2003.
Page 9 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2003
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). The Company is in compliance with these
covenants.
(5) Stock Option Plans
- ----------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its stock option plans. During the second quarter of fiscal 2003, the
Company adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". The following table
illustrates the effect on net earnings and earnings per share had the Company
adopted the fair value based method of accounting for stock-based employee
compensation for all periods presented.
3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED
MARCH 28,2003 MARCH 29, 2002 MARCH 28,2003 MARCH 29, 2002
------------- --------------- -------------- --------------
Net earnings, as reported $ 726 $ (3,831) $ 1,169 $ (5,993)
Pro forma net earnings $ 1,019 $ (3,821) $ 1,448 $ (5,973)
Earnings per share:
Basic - as reported $ 0.09 $ (0.50) $ 0.15 $ (0.78)
Basic - pro forma $ 0.13 $ (0.50) $ 0.19 $ (0.78)
Diluted - as reported $ 0.09 $ (0.50) $ 0.15 $ (0.78)
Diluted - pro forma $ 0.13 $ (0.50) $ 0.18 $ (0.78)
(6) 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. The case is in the discovery phase. 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.
Page 10 of 17
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Results of Operations - Three Months Ended March 28, 2003,
Compared to the Three Months Ended March 29, 2002.
-----------------------------------------------------------
Net sales for the three month period ended March 28, 2003, were $15.5
million, compared to $13.5 million for the comparable period of the prior fiscal
year, an increase of 15 percent. The increase in sales is primarily due to
increased demand from our major customers. Turnkey sales were 94 percent of net
sales in the quarter as compared to 93 percent for the comparable period of the
prior year.
The gross profit was $1.2 million or 8.1 percent of sales for the three
month period ended March 28, 2003, versus a loss of $(0.03) million or (2.0)
percent of sales in the comparable period of the prior year. The increase in
gross profit percentage was primarily due to IEC's concerted efforts to reduce
its manufacturing overhead costs.
On March 31, 2003, Acterna Corporation announced that it was in default of
its senior debt obligations. On April 1, 2003, Acterna failed to make a payment
on its promissory note due to IEC. On April 8, 2003, IEC commenced legal action
to collect the remaining principal balance of $557,000. IEC also recorded a
pre-tax charge of $557,000 as a provision against the remaining amount due from
Acterna during the current quarter. This was charged against cost of goods sold.
Gross profit was 8.1% of sales for the three months ended March 28, 2003,
without the Acterna adjustment gross profit would have been 11.7% of sales.
Selling and administrative expenses decreased to $0.9 million in the three
months ended March 28, 2003, from $1.5 million in the comparable period of the
prior year, a decrease of 38.3 percent. This decrease is primarily due to a
decrease in the number of employees. As a percentage of net sales, selling and
administrative expenses decreased to 5.8 percent from 10.8 percent in comparison
to the same quarter of the prior fiscal year.
IEC had other income of $387,000 for the three months ended March 28, 2003.
Of the other income, $378,000 was related to negotiated forgiveness of accounts
payable owed to various creditors.
IEC has recorded no income tax expense as a result of its net operating
loss carryforwards that were created in prior years and that will be utilized
against current year and future income.
Net income from continuing operations for the three months ended March 28,
2003 was $0.5 million versus a net loss from continuing operations of $(2.4)
million in the comparable quarter of the prior fiscal year.
Diluted income per share from continuing operations was $0.07 as compared
to diluted loss per share from continuing operations of $(0.31) 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. As of March
28, 2003, 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 March 28, 2003 was $193,000. 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.
On February 28, 2003, IEC sold its Edinburg, Texas facility and completed
its restructuring initiative. As a result, IEC recorded a $184,000 restructuring
benefit due to certain facility payments accrued in a prior fiscal year that
will no longer be paid out.
Page 11 of 17
Management's Discussion and Analysis of Financial Condition and Results
- ------------------------------------------------------------------------
of Operations
- -------------
Results of Operations - Six Months Ended March 28, 2003, Compared to Six
- ------------------------------------------------------------------------
Months Ended March 29, 2002.
- ----------------------------
Net sales for the six month period ended March 28, 2003, were $25.1
million, compared to $24.7 million for the comparable period of the prior year,
an increase of 1.6%. Turnkey sales were 93 percent of net sales for both
periods.
Gross profit was $2.2 million or 8.9 percent of sales for the six month
period ended March 28, 2003, versus $0.1 million or 0.4 percent of sales in the
comparable period of the prior year. The increase in gross profit percentage was
primarily due to IEC's concerted efforts to reduce its manufacturing overhead
costs. This was slightly offset by a change in product mix. Gross profit
benefited from a $450,000 adjustment in net inventory reserves related to excess
inventory that was used in operations or sold back to customers. Gross profit
was negatively impacted by a $557,000 provision made against a promissory note
from Acterna Corporation.
Selling and administrative expenses decreased to $1.7 million in the six
months ended March 28, 2003, from $2.8 million in the comparable period of the
prior fiscal year, a decrease of 40.0%. This decrease is primarily due to a
decrease in the number of employees. As a percentage of net sales, selling and
administrative expenses decreased to 6.6 percent from 11.2 percent in comparison
to the same six month period of the prior fiscal year.
IEC recorded a pre-tax charge of $400,000 in the six months ended March 29,
2002. This was due to an additional writedown of IEC's Alabama building which
was held for sale as a result of a softening in the commercial real estate
market.
IEC recorded approximately $201,000 of special charges in the six months
ended March 29, 2002, due to bank and consulting fees incurred to comply with
bank requirements under the then current amendment to the banking agreement, of
which $109,000 is included in interest and financing expense.
IEC had other income of $728,000 for the six months ended March 28, 2003.
Of the other income, $623,000 was related to negotiated forgiveness of accounts
payable owed to various creditors and $50,000 related to the sale of Alabama as
discussed in the prior quarter 10Q.
IEC has recorded no income tax expense as a result of its net operating
loss carryforwards that were created in prior years that will be utilized
against current year income.
Net income from continuing operations for the six months ended March 28,
2003 was $1.0 million versus a net loss of $3.5 million in the comparable period
of the prior fiscal year.
Diluted income per share from continuing operations was $0.12 as compared
to a diluted loss of $(0.45) in the comparable period of the prior fiscal year.
Discontinued Operations
- -----------------------
On February 28, 2003, IEC sold its Edinburg, Texas facility and completed
its restructuring initiative. As a result, IEC recorded a $184,000 restructuring
benefit due to certain facility payments accrued in a prior fiscal year that
will no longer be paid out.
Significant Events
- -----------------------
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. During Fiscal 2002, two customers
accounted for 67% of consolidated net sales. During the first six months of
2003, two customers accounted for 90% of consolidated net sales.
One of these customers has announced its intention to begin manufacturing
most of the products it currently purchases from the Company at its own
facility. The Company believes that it will be able to retain a meaningful piece
of that business.
Liquidity and Capital Resources
- -------------------------------
As reflected in the Consolidated Statements of Cash Flows for the six
months ending March 28, 2003, net cash provided by operations was $1.2 million
and $1.4 million was provided from the sale of the property. Of this, $1.7
million was used to reduce IEC's debt.
Page 12 of 17
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 was 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. On February
28, 2003, IEC sold its Edinburg, Texas facility for $875,000 and paid off
$700,000 in term loans related to the facility. The availability under the
revolver was $1.9 million on March 28, 2003.
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). IEC is in compliance with these
covenants. 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 $2.0 million of past due balances. In addition,
certain trade creditors agreed to discounted payment terms. Such discounts
amounted to $0.6 million and were recorded in the first half of fiscal 2003.
Application of Critical Accounting Policies
- -------------------------------------------
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 long-lived assets, 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.
Page 13 of 17
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. One exposure is
directly related to its Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
Item 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
- --------------------------
Forward-looking statements in this Form 10-Q include, without limitation,
statements relating to the Company's plans, future prospects, strategies,
objectives, expectations, intentions and adequacy of resources and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements may be identified by their use of words
like "plans", "expects", "aims", "believes", "projects", "anticipates",
"intends", "estimates", "will", "should", "could", and other expressions that
indicate future events and trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, among others,
the following: general economic and business conditions, the timing of orders
and shipments, availability of material, product mix, changes in customer
requirements and in the volume of sales to principal customers, competition and
technological change, the ability of the Company to control manufacturing and
operating costs, and satisfactory relationships with vendors. The Company's
actual results of operations may differ significantly from those contemplated by
such forward-looking statements as a result of these and others factors,
including factors set forth in the Company's Annual Report on Form 10-K for the
year ended September 30, 2002 and in other filings with the Securities and
Exchange Commission.
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 period ended September 30, 2002 is
incorporated herein by reference.
Item 2 -- Changes in Securities
(c) and (d) In order to complete the January 14, 2003 refinancing, the
Company's new lenders required that the directors invest $100,000 in the
Company. Certain of the Company's directors agreed to loan the Company $50,000.
In addition, IEC sold to three of its directors an aggregate of 249,999 shares
(the "Shares") of common stock, par value $0.01 per share, for an aggregate
consideration of $50,000 or $0.20 per share. The closing price of IEC's shares
of common stock on the Over the Counter Bulletin Board on January 14, 2003 was
$0.10 per share. IEC used the proceeds from the sale of the shares, together
with funds from a new financing, to repay indebtedness to IEC's senior lenders.
The Shares were issued under IEC's 2001 Stock Option and Incentive Plan (the
"2001 Plan"), pursuant to exemptions under Section 4(2) and Section 4(6) of the
Securities Act of 1933, as amended (the "Securities Act"). On March 17, 2003,
the Shares were registered under the Securities Act on a Registration Statement
on Form S-8 (Registration No. 103847).
Page 14 of 17
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on March 12, 2003.
(b) The names of the directors elected at the Annual Meeting are as follows:
David J. Beaubien
W. Barry Gilbert
Robert P.B. Kidd
Eben S. Moulton
Dermott O'Flanagan
James C. Rowe
Justin L. Vigdor
(c) At the Annual Meeting, the tabulation of the votes with respect to each
nominee was as follows:
Nominee Votes FOR Authority Withheld
------- --------- ------------------
David J. Beaubien 6,661,674 82,450
W. Barry Gilbert 6,642,415 101,709
Robert P.B. Kidd 6,662,074 82,050
Eben S. Moulton 6,664,015 80,109
Dermott O'Flanagan 6,640,015 104,109
James C. Rowe 6,664,015 80,109
Justin L. Vigdor 6,661,472 82,652
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 April 10, 2003. The report provided information regarding the
appointment of a new Chief Financial Officer.
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: May 5, 2003 /s/ W. Barry Gilbert
-----------------------------
W. Barry Gilbert
Chairman and
Acting Chief Executive Officer
Dated: May 5, 2003 /s/ Kevin J. Monacelli
------------------------------
Kevin J. Monacelli
Principal 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: May 5, 2003 IEC Electronics Corp.
By: /s/ W. Barry Gilbert
------------------------
W. Barry Gilbert
Chairman and
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: May 5, 2003 IEC Electronics Corp.
By: /s/ Kevin J. Monacelli
--------------------------
Kevin J. Monacelli
Principal Accounting Officer
Page 17 of 17