FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 2003 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-6508
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IEC ELECTRONICS CORP.
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Exact name of registrant as specified in its charter
Delaware 13-3458955
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State or other jurisdiction of IRS Employer ID No.
incorporation or organization
105 Norton Street, Newark, New York 14513
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Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 315-331-7742
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Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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Page 1 of 79
The aggregate market value of shares of common stock held by non-affiliates
of the registrant was approximately $14,405,848 as of November 19, 2003, based
upon the closing price of the registrant's common stock on the Over The Counter
Bulletin Board on such date. Shares of common stock held by each executive
officer and director and by each person and entity who beneficially owns more
than 5% of the outstanding common stock have been excluded in that such person
or entity under certain circumstances may be deemed to be an affiliate. Such
exclusion should not be deemed a determination or admission by registrant that
such individuals or entities are, in fact, affiliates of registrant.
As of November 19, 2003, there were outstanding 8,047,960 shares of Common
Stock.
Documents incorporated by reference:
Portions of IEC Electronics Corp.'s Proxy Statement for the 2004 Annual
Meeting of Stockholders are incorporated into Part III of this Form 10-K.
Page 2 of 79
TABLE OF CONTENTS
PART I
PAGE
Item 1: Business..................................................... 4
Item 2: Properties................................................... 7
Item 3: Legal Proceedings............................................ 8
Item 4: Submission of Matters to a Vote of Security Holders.......... 8
Executive Officers of Registrant............................. 8
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6: Selected Consolidated Financial Data......................... 10
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
Factors Affecting Future Results............................. 16
Item 7A: Quantitative and Qualitative Disclosures about Market Risk... 19
Item 8: Financial Statements and Supplementary Data.................. 19
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 19
Item 9A: Controls and Procedures...................................... 19
PART III
Item 10: Directors and Executive Officers of the Registrant........... 19
Item 11: Executive Compensation....................................... 21
Item 12: Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 20
Item 13: Certain Relationships and Related Transactions............... 20
Item 14: Principal Accountant Fees and Services....................... 20
PART IV
Item 15: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 20
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain statements that are, or
may be deemed to be, forward-looking statements within the meaning of
section-27A of the Securities Act of 1933 and section-21E of the Securities
Exchange Act of 1934, and are made in reliance upon the protections provided by
such Acts for forward-looking statements. These forward-looking statements (such
as when we describe what we "believe", "expect" or "anticipate" will occur, and
other similar statements) include, but are not limited to, statements regarding
future sales and operating results, future prospects, the capabilities and
capacities of business operations, any financial or other guidance and all
statements that are not based on historical fact, but rather reflect our current
expectations concerning future results and events. The ultimate correctness of
these forward-looking statements is dependent upon a number of known and unknown
risks and events, and is subject to various uncertainties and other factors that
may cause our actual results, performance or achievements to be different from
any future results, performance or achievements expressed or implied by these
statements. The following important factors, among others, could affect future
results and events, causing those results and events to differ materially from
those expressed or implied in our forward-looking statements: business
conditions and growth in our customer's industries, the electronic manufacturing
services industry and the general economy, variability of operating results, our
dependence on a limited number of major customers, the potential consolidation
of our customer base, availability of components, dependence on certain
industries, variability of customer requirements, other economic, business and
competitive factors affecting our customers, our industry and business generally
and other factors that we may not have currently identified or quantified. For a
further list and description of various risks, relevant factors and
uncertainties that could cause future results or events to differ materially
from those expressed or implied in our forward-looking statements, see the
"Factors Affecting Future Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections elsewhere in this
document. All forward-looking statements included in this Report on Form-10-K
are made only as of the date of this Report on Form-10-K, and we do not
undertake any obligation to publicly update or correct any forward-looking
statements to reflect events or circumstances that subsequently occur or which
we hereafter become aware of. You should read this document and the documents
that we incorporate by reference into this Annual Report on Form-10-K completely
and with the understanding that our actual future results may be materially
different from what we expect. We may not update these forward-looking
statements, even if our situation changes in the future. All forward-looking
statements attributable to us are expressly qualified by these cautionary
statements.
Page 3 of 79
PART I
ITEM 1. BUSINESS
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IEC Electronics Corp. ("IEC", "We", "Our") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. We provide high quality
electronics manufacturing services with state-of-the-art manufacturing
capabilities and production capacity. Utilizing computer controlled
manufacturing and test machinery and equipment, IEC provides manufacturing
services employing surface mount technology ("SMT") and pin-through-hole ("PTH")
interconnection technologies. As an independent full-service EMS provider, we
offer our customers a wide range of manufacturing and management services, on
either a turnkey or consignment basis, including design, prototype, material
procurement and control, manufacturing and test engineering support, statistical
quality assurance, complete resource management and distribution. Our strategy
is to cultivate strong manufacturing relationships with established and emerging
original equipment manufacturers ("OEMs").
IEC Electronics Corp., a Delaware corporation, is the successor by merger
in 1990 to IEC Electronics Corp., a New York corporation which was organized in
1966. In June 1992, we acquired an EMS provider in Edinburg, Texas which it
renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November 1994, we
acquired an EMS provider in Arab, Alabama, which we renamed IEC Arab, Alabama
Inc. ("Alabama"). In August 1998, through an Irish subsidiary, IEC Electronics -
Ireland Limited, ("Longford"), we acquired certain assets of an EMS provider
located in Longford, Ireland. In February 2001, we acquired IEC Electronicos de
Mexico, located in Reynosa, Mexico ("Mexico").
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries.
In October 1998, we closed our Alabama facility. In October 2002, we sold
the facility for $600,000. All significant intercompany transactions and
accounts have been eliminated.
On June 18, 2002, we signed an Asset Purchase Agreement to sell
substantially all of our Mexican assets to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out
amounts were received. In addition, EPI was to pay to IEC commissions based on
the net selling price of products shipped to certain former customers of IEC. No
such commissions were received. Under the terms of a related agreement, IEC and
Mexico were also released of all of their lease obligations to the landlord of
the Mexican facility. IEC recorded an after-tax loss on the sale of the business
of approximately $3.1 million.
In June 2002, IEC's Board of Directors approved a restructuring and
reduction of workforce plan at its Newark, NY facility. In connection with this
restructuring, IEC recorded a $448,000 charge to earnings during fiscal 2002
relating primarily to severance. All related payments were made as of September
30, 2003.
On February 28, 2003, we sold our Edinburg, Texas facility for $875,000 and
completed our restructuring initiative. As a result, we recorded a $184,000
restructuring benefit due to certain facility payments accrued in a prior fiscal
year that will no longer be paid out.
We achieved world-class ISO:9001-2002 certification in fiscal 2003 at our
Newark, New York plant. In fiscal 2002, IEC became an FDA registered contract
manufacturer of medical devices. These certifications are international quality
assurance standards that most OEMs consider crucial in qualifying their EMS
providers.
Our New York facility is self-certified to previously recognized British
Approvals Board for Telecommunications standards, allowing it to provide
manufacturing and test services to manufacturers producing telecommunication
equipment destined for shipment to the European Common Market.
During 1998, we opened a state-of-the-art 10,000 square foot Technology
Center at our Newark, New York manufacturing facility. During 2000, the
Technology Center added pilot build to its services, which also include
prototype assembly, design engineering services, and our Advanced Materials
Technology Laboratory.
Our executive offices are located at 105 Norton Street, Newark, New York
14513. The telephone number is (315) 331-7742, and our internet address is
www.iec-electronics.com.
Page 4 of 79
Electronics Manufacturing Services: The Industry
The EMS industry specializes in providing the program management, technical
and administrative support and manufacturing expertise required to take a
product from the early design and prototype stages through volume production and
distribution. It provides quality product, delivered on time and at the lowest
cost, to the OEM. This full range of services gives the OEM an opportunity to
avoid large capital investments in plant, equipment and staff and allows the OEM
to concentrate instead on the areas of its greatest strengths: innovation,
design and marketing. Utilizing EMS such as those provided by IEC gives the
customer an opportunity to improve return on investment with greater flexibility
in responding to market demands and exploiting new market opportunities.
Primarily as a response to rapid technological change and increased
competition in the electronics industry, OEMs have recognized that by utilizing
EMS providers they can improve their competitive position, realize an improved
return on investment and concentrate on areas of their greatest expertise such
as research, product design and development and marketing. In addition, EMS
allows OEMs to bring new products to market rapidly and adjust more quickly to
fluctuations in product demand; avoid additional investment in plant, equipment
and personnel; reduce inventory and other overhead costs; and establish known
unit costs over the life of a contract. Many OEMs now consider EMS providers an
integral part of their business and manufacturing strategy. Accordingly, the EMS
industry experienced significant growth through mid-2000. The downturn of the
telecommunications industry, and economic conditions in the United States as a
result of September 11, 2001 caused a slowdown in the EMS industry, but the
current long term forecast is for growth to resume in late 2003, as OEMs have
established long-term working arrangements with EMS providers such as IEC.
OEMs increasingly require EMS providers to provide complete turnkey
manufacturing and material handling services, rather than working on a
consignment basis in which the OEM supplies all materials and the EMS provider
supplies labor. Turnkey contracts involve design, manufacturing and engineering
support, the procurement of all materials, and sophisticated in-circuit and
functional testing and distribution.
We continually evaluate emerging technology and maintain a technology road
map to ensure relevant processes are available to our customers when commercial
and design factors so indicate. The current generation of interconnection
technologies include chip scale packaging and ball grid array (BGA) assembly
techniques. We have placed millions of plastic BGA's since 1994 and added
Ceramic BGA placement for networking customers to our service offerings in
fiscal 2001. Future advances will be directed by our Technology Center which
combines Prototype and Pilot Build Services with the capabilities of our
Advanced Materials Technology Laboratory, and is supported by our Design
Engineering Group.
We are well positioned to utilize our very experienced workforce with
technical expertise. Our emphasis is on building the most challenging complete
systems with current work for Excel Switching, ViaSat and Teradyne as examples.
IEC has positioned itself as a leader of lead-free solder assembly technology
through early development and technical publications. Lead-free is mandated by
July 2006 for many electronic products sold in Europe.
IEC's Strategy
Our strategy is to cultivate strong manufacturing partnerships with
established and emerging OEMs in the electronics industry. These long-term
business partnerships involve the joint development of manufacturing and support
strategies with OEM customers and promote customer satisfaction. In implementing
this strategy, we offer our customers a full range of manufacturing solutions
through flexibility in production, high quality and fast-turnaround
manufacturing services and computer-aided testing.
Page 5 of 79
Assembly Process
We generally enter into formal agreements with our significant customers.
These agreements generally provide for fixed prices for one year, absent any
customer changes which impact cost of labor or material, and rolling forecasts
of customer requirements. After establishing an OEM relationship, we offer our
consultation services with respect to the manufacturability and testability of
the product design. We often recommend design changes to reduce manufacturing
costs and to improve the quality of the finished assemblies, and in some
instances will produce original designs to the customer's specifications.
Upon receipt, a customer's order is entered into our computer system by
customer service personnel and is reviewed by all departments. The Production
Control Department generates a detailed manufacturing schedule. Bills of
material and approved vendor lists are reviewed by the Engineering Department,
which creates a detailed process to direct the flow of product through the
plant. The Material Control Department utilizes a material requirement planning
(MRP) program to generate the requisitions used by the Purchasing Department to
procure all material and components from approved vendors in the quantities and
at the time required by the production schedule.
We assign a program manager to each customer. The program manager maintains
regular contact with the customer to assure timely and complete flow of
information between the customer and us. Many products we manufacture are in the
early stages of their product cycle and therefore undergo numerous engineering
changes. In addition, production quantities and schedules of certain products
must be varied to respond to changes in customers' marketing opportunities. We
assess the impact of such changes on the production process and take the
appropriate action, such as restructuring bills of material, expediting
procurement of new components and adjusting its manufacturing and testing plans.
We believe that our ability to provide flexible and rapid response to customer
needs in high change environment is critical to our success.
Products and Services
We manufacture a wide range of assemblies which are incorporated into many
different products. We provide electronic manufacturing services primarily for
broadband telecommunications equipment; measuring devices; medical
instrumentation; imaging equipment and diagnostic test equipment. During the
fiscal year ended September 30, 2003 we provided electronics manufacturing
services to approximately 20 different customers, including Motorola
("Motorola"), Teradyne Diagnostic Solutions UK ("Teradyne Diagnostic"), Teradyne
Test Division ("Teradyne Test"), and General Electric Transportation ("GE"). We
provide our services to multiple divisions and product lines of many of our
customers and typically manufacture for a number of each customer's successive
product generations. In most cases, we are the sole contract manufacturer for
the customer site or division, providing all services, prototype through box
build and functional test.
Materials Management
We generally procure material only to meet specific contract requirements.
In addition, our agreements with our significant customers generally provide for
cancellation charges equal to the costs which are incurred by us as a result of
a customer's cancellation of contracted quantities. Our internal systems provide
effective controls for all materials, whether purchased by us or provided by the
customer, through all stages of the manufacturing process, from receiving to
final shipment.
Availability of Components
Substantially all of our net sales are derived from turnkey manufacturing
in which we provide both materials procurement and assembly services. We are
well positioned with supplier relationships and material procurement expertise
to acquire needed materials. However, availability of customer-consigned parts
and unforeseen shortages of components on the world market are beyond our
control and could adversely affect revenue levels and operating efficiencies.
Suppliers
We have a Master Distribution Program in place with Arrow Electronics. This
alliance has the benefit of reducing lead time on program parts, reducing the
quotation process timetable, providing competitive pricing, providing some
protection during periods of component allocation, providing better payment
terms, reducing overhead cost, providing access to in-house stores and providing
access to global resources.
Page 6 of 79
Marketing and Sales
During 2003, we have successfully maintained and grown sales through
increases in services to existing customers. We are successfully pursuing new
business through the efforts of five newly contracted manufacturing
representative firms and our long-term relationship with a strong New England
representative firm headquartered in Boston. In addition to our sales and
marketing staff, our executives are closely involved with marketing efforts. We
conduct market research to identify industries and to target companies where the
opportunity exists to provide electronic manufacturing services across a number
of product lines and product generations.
Our sales effort is supported by advertising in trade media, sales
literature, internet website, video presentations, participation in trade shows
and direct mail promotions. Inquiries resulting from these advertising and
public relations activities are assigned to the representative covering the
customer's location. In addition, referrals by existing customers are an
important source of new opportunities. Our objective is to sell complex,
high-mix, full systems to regional customers who require both our technical
expertise and our ability to execute in a dynamic engineering change
environment. These customers can be found in many diverse industries including
telecommunications, medical, transportation, defense, avionics and others.
Backlog
Our backlog as of September 30, 2003 and September 30, 2002 was
approximately $6.7 million and $8.5 million, respectively. Backlog consists of
contracts or purchase orders with delivery dates scheduled within the next 12
months. Substantially all of the current backlog is expected to be shipped
within our current fiscal year. Variations in the magnitude and duration of
contracts received by us and customer delivery requirements may result in
substantial fluctuations in backlog from period to period.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental, waste management, health and safety
matters. Management believes that our business is operated in compliance with
applicable regulations promulgated by the Occupational Safety and Health
Administration and the Environmental Protection Agency and corresponding state
agencies which, respectively, pertain to health and safety in the work place and
the use, discharge, and storage of chemicals employed in the manufacturing
process. Current costs of compliance are not material to us. However, new or
modified requirements, not presently anticipated, could be adopted creating
additional expense for us.
Employees
IEC's employees numbered 182 at October 28, 2003, including 13 employees
engaged in engineering, 153 in manufacturing and 16 in administrative and
marketing functions. None of our employees are covered by a collective
bargaining agreement. We have not experienced any work stoppages and believe
that our employee relations are good. We have access to a large work force by
virtue of our northeast location midway between Rochester and Syracuse, two
upstate New York industrial cities.
Patents and Trademarks
We hold patents unrelated to electronics manufacturing services and also
employ various registered trademarks. We do not believe that either patent or
trademark protection is material to the operation of our business.
ITEM 2. PROPERTIES
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Our administrative and manufacturing facility is located in Newark, New
York and contains an aggregate of approximately 300,000 square feet.
Page 7 of 79
ITEM 3. LEGAL PROCEEDINGS
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Except as set forth below, there are no material legal proceedings pending
to which IEC or any of its subsidiaries is a party or to which any of IEC's or
subsidiaries' property is subject. To our knowledge, there are no material legal
proceedings to which any director, officer or affiliate of IEC, or any
beneficial owner of more than 5 percent (5%) of Common Stock, or any associate
of any of the foregoing, is a party adverse to IEC or any of its subsidiaries.
An action was commenced in United States District Court for the Southern
Division of Texas against IEC and several other corporate defendants, on August
12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for
exposure to lead, lead dust, chemicals and other substances used in the
manufacture of products by various defendants. The essence of the complaint
relates to alleged "in utero" exposure to the circulatory system of the then
unborn children, resulting in alleged tissue toxicity through the mothers,
causing damage to the central nervous system, brain and other organs of the
fetus. The complaint alleges theories of negligence, gross negligence, strict
liability, breach of warranty and fraud/negligent misrepresentation, and claims
unspecified damages for pain and suffering, a variety of special damages,
punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has
agreed to provide a defense of the claims with a reservation of rights, but has
expressly excluded any coverage for the claim for punitive damages. IEC has
denied liability and the case is still in the discovery phase. A trial is
tentatively scheduled for March 2004.
On August 13, 2003 an action was commenced by General Electric Company
("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc.
The action alleges causes of action for breach of a manufacturing services
contract which had an initial value of $4.4 million, breach of express warranty,
breach of implied warranty and a violation of the Connecticut Unfair Trade
Practices Act. Vishay supplied a component that IEC used to assemble printed
circuit boards for GE that GE contends failed to function properly requiring a
product recall. GE claims damages "in excess of $15,000" plus interest and
attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for
lack of jurisdiction and the motion is pending. The position of IEC is that the
contract with GE was substantially completed and that it has meritorious
defenses and a cross claim against Vishay.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the fourth quarter of fiscal 2003, no matters were submitted to a
vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
IEC's executive officers as of September 30, 2003, were as follows:
Name Age Position
W. Barry Gilbert 57 Chairman of the Board, Director and
Acting Chief Executive Officer
Bill R. Anderson 58 Vice President and
Chief Operating Officer
Brian H. Davis 49 Vice President, Chief Financial Officer
and Controller
W. Barry Gilbert has served as acting Chief Executive Officer since June
2002. He has been a director of IEC since February 1993, and Chairman of the
Board since February 2001. He is an adjunct faculty member at the William E.
Simon Graduate School of Business Administration of the University of Rochester.
From 1991-1999, Mr. Gilbert was President of the Thermal Management Group of
Bowthorpe Plc. of Crawley, West Sussex, England. Prior to that, he was corporate
Vice President and President, Analytical Products Division of Milton Roy
Company, a manufacturer of analytical instrumentation.
Bill R. Anderson has served as Chief Operating Officer since June 2002.
From September 2001 to June 2002, he was Vice President and General Manager,
Newark Operations and from March 2001 to September 2001, he was Vice President,
Supply Chain Management and Materials. He held the positions of Vice President
of Materials and of Executive Vice President and General Manager at IEC from
1995-1998. In 1998, he left IEC and became Vice President of North American
Operations for SMT Centre (SMTC), Toronto, Canada, an EMS provider. From there,
he accepted the position of Vice President of Materials and Supply Chain
Management at MCMS, Inc., also an EMS provider, a position he held until March
2001, when he rejoined IEC.
Brian H. Davis joined IEC in April 2003 as Vice President, Chief Financial
Officer and Controller. Mr. Davis previously served as Vice President of Finance
from 1996 - 2003 at Thermo Spectronic, a manufacturer of laboratory equipment
located in Rochester, NY. Prior to that, Mr. Davis functioned in various
Controller positions with Life Sciences International and Milton Roy Company.
Page 8 of 79
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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(a) Market Information.
IEC's Common Stock began trading on The Over the Counter Bulletin Board
("OTCBB") under the symbol IECE.OB on December 3, 2002. Prior to that, IEC's
Common Stock was traded on the Nasdaq Stock Market.
The following table sets forth, for the period stated, the high and low
closing sales prices for the Common Stock as reported on The Nasdaq Stock
Market or the OTCBB, as applicable.
Closing Sales Price
Period High Low
October 1, 2001 - December 31, 2001 $ 0.850 $ 0.400
January 1, 2002 - March 31, 2002 $ 0.680 $ 0.360
April 1,2002 - June 30, 2002 $ 0.570 $ 0.110
July 1, 2002 - September 30, 2002 $ 0.160 $ 0.070
October 1, 2002 - December 31, 2002 $ 0.270 $ 0.060
January 1, 2003 - March 31, 2003 $ 0.570 $ 0.070
April 1, 2003 - June 30, 2003 $ 0.980 $ 0.390
July 1, 2003 - September 30, 2003 $ 1.530 $ 0.650
The closing price of IEC's Common Stock on the OTCBB on November 19, 2003,
was $1.79 per share.
(b) Holders.
As of November 19, 2003, there were approximately 158 holders of record of
IEC's Common Stock.
(c) Dividends.
IEC has never paid dividends on its Common Stock. It is the current policy
of the Board of Directors of IEC to retain earnings for use in our business.
Certain financial covenants set forth in IEC's current loan agreement prohibit
IEC from paying cash dividends. We do not plan to pay cash dividends on our
Common Stock in the foreseeable future.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information concerning IEC's equity
compensation plans as of September 30, 2003.
Plan Category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Equity compensation plans
approved by security holders 1,310,800 $1.25 242,916
Equity compensation plans not
approved by security holders - NA -
Total 1,310,800 $1.25 242,916
Page 9 of 79
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
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SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Years Ended September 30,
2003 2002 2001 2000 1999
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Income statement data
Net sales $ 48,201 $ 39,365 $114,771 $146,359 $122,593
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Gross profit (loss) 4,930 $ 2,297 $ 2,942 $ 10,339 $ (4,888)
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Operating income (loss) 2,074 $ (3,026) $(16,208) $ 2,019 $(19,172)
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Income (loss) from
continuing operations 2,413 $ (3,771) $(17,439) $ 2,411 $(18,005)
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Income (loss) from
discontinued operations 184 $ (7,208) $(11,833) $(10,442) $ (2,560)
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Net income (loss) 2,597 $(10,979) $(29,272) $ (8,031) $(20,565)
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Income (loss) from continuing operations per common and common equivalent
share:
Basic $ 0.31 $ (0.49) $ (2.28) $ 0.32 $ (2.38)
Diluted $ 0.29 $ (0.49) $ (2.28) $ 0.32 $ (2.38)
--------------------------------------------------------------------------------
Income (loss) from discontinued operations per common and common equivalent
share:
Basic $ 0.02 $ (0.94) $ (1.55) $ (1.38) $ (0.34)
Diluted $ 0.02 $ (0.94) $ (1.55) $ (1.38) $ (0.34)
--------------------------------------------------------------------------------
Net income (loss) per common and common equivalent share:
Basic $ 0.33 $ (1.43) $ (3.83) $ (1.06) $ (2.72)
Diluted $ 0.31 $ (1.43) $ (3.83) $ (1.06) $ (2.72)
--------------------------------------------------------------------------------
Common and common
equivalent shares
Basic 7,899 7,692 7,651 7,590 7,563
Diluted 8,274 7,692 7,651 7,590 7,563
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Balance sheet data
Working capital (deficiency) $ 1,329 $ (3,572) $ 1,163(1) $ 30,860 $ 33,424
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Total assets $ 10,506 $ 15,065 $ 38,127 $ 89,561 $ 93,919
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Long-term debt, less current
maturities $ 1,390 $ 1,268 $ - $ 15,266 $ 16,547
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Shareholders' equity $ 3,414 $ 799 $ 11,809 $ 41,008 $ 48,845
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(1) All debt is recorded as current for reporting purposes.
Page 10 of 79
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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MANAGEMENT'S DISCUSSION OF OPERATIONS
The information in this Management's Discussion & Analysis should be read
in conjunction with the accompanying consolidated financial statements, the
related Notes to Financial Statements and the Five-Year Summary of Financial
Data. Forward-looking statements in this Management's Discussion and Analysis
are qualified by the cautionary statement preceding Item 1 of this Form 10K.
Overview
- --------
We had a successful year in fiscal 2003 as we completed our restructuring
and returned to profitability. We were profitable during each quarter of 2003.
Long term debt has been reduced by $2.6 million since our January 14, 2003
refinancing. We took a number of important steps in 2003, including a continued
emphasis on business development. During the year, we were able to add five new
manufacturer's representative organizations, several new customers and win new
business from existing customers.
Analysis of Operations
- ----------------------
Sales
-----
(dollars in millions)
% %
For Year Ended September 30, 2003 2002 Change 2001 Change
---- ---- ------ ---- ------
Net sales $48.2 $39.4 22.3% $114.8 (66)%
The increase in fiscal 2003 net sales compared to fiscal 2002 was primarily
due to increased demand from our major customers.
The decrease in fiscal 2002 net sales compared to fiscal year 2001 was
primarily due to the loss of 4 major customers and the significant downturn in
the telecommunications and industrial sectors of the U.S. economy.
Gross Profit and Selling and Administrative Expenses
- ----------------------------------------------------
(as a % of Net Sales)
For Year Ended September 30, 2003 2002 2001
---- ---- ----
Gross profit 10.2% 5.8% 2.6%
Selling and administrative expenses 6.1% 10.7% 6.1%
Gross profit as a percentage of sales was 10.2% in fiscal 2003 as compared
to 5.8% in fiscal 2002. The increase of more than 4 percentage points was
primarily attributable to our concerted efforts to reduce manufacturing
overhead.
Gross profit as a percentage of sales was 5.8% in fiscal 2002 as compared
to 2.6% in fiscal 2001. The increase of more than 3 percentage points was
primarily attributable to the sale of fully reserved inventory to Acterna
Corporation for $1.1 million as part of an out of court settlement. In addition,
the 2001 amount was considerably lower due to the charge against inventory and
receivables.
Page 11 of 79
Selling and administrative expenses as a percentage of sales decreased to
6.1% in fiscal 2003 compared to 10.7% in fiscal 2002. The decrease is primarily
due to a decrease in the number of employees.
Selling and administrative expenses as a percentage of sales increased to
10.7% in fiscal 2002 compared to 6.1% in fiscal 2001 as certain costs remained
fixed with a significantly lower sales volume.
Other Income and Expense
- ------------------------
(dollars in millions)
For Year Ended September 30, 2003 2002 2001
---- ---- ----
Interest and financing expense $0.6 $0.9 $1.3
Other income $0.7 $0.2 $ -
Interest and financing expense decreased $0.3 million to $0.6 million in
fiscal 2003 from $0.9 million in fiscal 2002. This is primarily due to debt
reduction that was achieved due to favorable cash flow from operations. Interest
and finance expense decreased $0.4 million to $0.9 million from $1.3 million in
fiscal 2001. This was also due to debt reduction.
We had other income of $0.7 million in fiscal 2003. $0.6 million was
related to negotiated forgiveness of accounts payable owed to various creditors
and $0.1 million was related to the sale of our Alabama facility.
Other income of $0.2 million in fiscal 2002 is composed of interest income
received from Acterna Corporation as part of an out of court settlement.
Income Taxes
- ------------
(as a % of income (loss) before income taxes)
For Year Ended September 30, 2003 2002 2001
---- ---- ----
Effective tax rate (12.1)% -% (0.1)%
We recorded a $260,000 tax benefit during fiscal 2003. This is due to a
$250,000 adjustment against valuation allowances that had been established
against our net deferred tax assets and $10,000 from the utilization of a state
net operating loss carryforward. We continue to maintain a large valuation
allowance against our net deferred tax assets including the net operating loss
carryforward.
In fiscal 2001, we recorded an income tax benefit from the receipt of a
prior year state refund in the amount of $95,000.
Restructuring Charge (Benefit)
- -----------------------------
(dollars in millions)
For Year Ended September 30, 2003 2002 2001
---- ---- ----
($0.1) $0.2 $ -
During Fiscal 2003, we recorded a benefit from restructuring of $63,000.
This was due to certain severance payments accrued in 2002 that will no longer
be paid out.
In June 2002, our Board of Directors approved a restructuring and reduction
of workforce plan at our Newark, NY facility. In connection with this
restructuring, we recorded a $448,000 charge to earnings in fiscal 2002 relating
primarily to severance. Offsetting this charge was a $240,000 reduction in a
reserve previously recorded for our Arab, Alabama facility that was no longer
needed due to the sale of the facility in October 2002.
Page 12 of 79
Asset Impairment Writedown
- --------------------------
In assessing and measuring the impairment of long-lived assets, we apply
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicated that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used was measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset.
During the fourth quarter of 2001, certain fixed assets and intangible
assets were identified as impaired. As a result of the overall softening of the
electronics manufacturing services industry and a change in our business
strategy, we did not believe that their future cash flows supported the
carrying value of the long-lived assets and goodwill. The current market values
were compared to the net book value of the related long-lived assets with the
difference representing the amount of the impairment loss. The effect of this
impairment recognition totaled approximately $12.6 million, of which $9.6
million represented a writeoff of goodwill and $3.0 million represented a
writedown of property, plant and equipment.
During August 1998, we initiated a plan to dispose of our Arab, Alabama
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $900,000 for fiscal 2002. The
facility was sold in October 2002 for $600,000.
During April 2001, we initiated a plan to dispose of our Edinburg, Texas
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $1.04 million for fiscal 2002 and
was reflected in discontinued operations. The facility was sold on February 28,
2003 for $875,000.
Discontinued Operations
- -----------------------
On June 18, 2002, we signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out
amounts were received. Under the terms of a related agreement, IEC and
IEC-Mexico were also released of all of their lease obligations to the landlord
of the Mexican facility. We recorded an after-tax loss on the sale of the
business of approximately $3.1 million in fiscal 2002. The reserve balance at
September 30, 2003 was $216,000. It is anticipated that all remaining charges
against the accrual will be made by December 2003.
On February 28, 2003, We sold its Edinburg, Texas facility for $875,000 and
completed its restructuring initiative. As a result, we recorded a $184,000
restructuring benefit due to certain facility payments accrued in a prior fiscal
year that will no longer be paid out.
Significant Events
- ------------------
A small number of customers are currently responsible for a significant
portion of our net sales.
One of these customers has announced its intention to begin manufacturing
most of the products it currently purchases from IEC at its own facility. We
believe that we will be able to retain a piece of that business.
We have recently added several new customers and have received additional
business from existing customers. Furthermore, we expect to add additional
customers in the near future.
Page 13 of 79
Liquidity and Capital Resources
- -------------------------------
As reflected in the Consolidated Statements of Cash Flows for Fiscal 2003,
net cash provided by operations was $4.6 million. Of this, $4.1 million was used
to reduce IEC's debt.
On January 14, 2003, we completed a new $7,300,000 financing agreement
composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000
Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the
IEC directors. The Facility, which has a 3 year maturity, bears interest at the
rate of prime plus 2%. It involves a revolving line of credit for up to
$3,850,000 based upon advances on eligible accounts receivable and inventory, a
term loan of $600,000, secured by machinery and equipment, to be amortized over
a 36 month period and a term loan of $550,000 secured by a first mortgage lien
against our Edinburg, Texas real estate which was paid in full upon the sale of
the facility in February 2003. The Term Loan is secured by a general security
agreement, and indirectly by the assignment of a certain promissory note and a
first mortgage on the IEC plant in Newark, New York. It is payable with interest
at prime plus 1.5% in monthly installments over a period of 3 years. The
availability under the revolver was $2.2 million on September 30, 2003.
$0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under
the revolving line of credit with Keltic, the term loan with Keltic and the
SunTrust loan, respectively.
The financing agreements contain various affirmative and negative covenants
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). We are in compliance with these
covenants. In connection with the financing, we entered into agreements with
certain of our trade creditors providing for extended payment terms involving an
aggregate of approximately $2.0 million of past due balances. In addition,
certain trade creditors agreed to discounted payment terms. Such discounts
amounted to $0.6 million and were recorded in the first half of fiscal 2003.
Application of Critical Accounting Policies
- -------------------------------------------
Our financial statements and accompanying notes are prepared in accordance
with generally accepted accounting principles in the United States. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses. These
estimates and assumptions are affected by management's application of accounting
policies. Critical accounting policies for us include revenue recognition,
impairment of long-lived assets, accounting for legal contingencies and
accounting for income taxes.
We recognize revenue in accordance with Staff Accounting Bulletin No.101,
"Revenue Recognition in Financial Statements." Sales are recorded when products
are shipped to customers. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are provided for in the
same period the related sales are recorded.
We evaluate our long-lived assets for financial impairment on a regular
basis in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate
the recoverability of long-lived assets not held for sale by measuring the
carrying amount of the assets against the estimated discounted future cash flows
associated with them. At the time such evaluations indicate that the future
discounted cash flows of certain long-lived assets are not sufficient to recover
the carrying value of such assets, the assets are adjusted to their fair values.
We are subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", requires that an estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. We evaluate, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact our financial position
or our results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in IEC's financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact IEC's
financial position or its results of operations.
Page 14 of 79
Impact of Inflation
- -------------------
The impact of inflation on our operations has been minimal due to the fact
that we ares able to adjust its bids to reflect any inflationary increases in
cost.
New Pronouncements
- ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under
SFAS No. 143, the fair value of a liability for an asset retirement obligation
will be recognized in the period in which it is incurred. The associated
retirement costs will be capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's useful
life. The adoption of SFAS No. 143 did not have a material effect on our
financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". We adopted this standard as
of October 1, 2002 with no material effect on our financial position, results of
operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. We adopted this
standard as of January 1, 2003 with no material effect on our financial
position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
SFAS 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 applies to all exit or disposal
activities initiated after December 31, 2002. We adopted this standard as of
January 1, 2003 with no material effect on our financial position, results of
operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses
revenue recognition on arrangements encompassing multiple elements that are
delivered at different points in time, defining criteria that must be met for
elements to be considered to be a separate unit of accounting. If an element is
determined to be a separate unit of accounting, the revenue for the element is
recognized at the time of delivery. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We do
not expect that the pronouncement will have a material impact on our financial
position, results of operations or cash flows.
Page 15 of 79
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure". SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, the Statement amends the previous disclosure
requirements of SFAS 123 to require prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported financial results and requires these disclosures in interim
financial information. IEC continues to account for stock-based employee
compensation under APB Opinion 25, but has adopted the new disclosure
requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46 "Consolidation of Variable
Interest Entities." ("FIN 46"). FIN 46 requires that if an entity has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to January 31, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. In October 2003 the FASB
deferred the effective date for applying the provision of FIN 46 until the first
interim or annual period ending after December 15, 2003. We do not expect that
the pronouncement will have a material impact on our financial position, results
of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
Statement 149 is intended to result in more consistent reporting of contracts as
either freestanding derivative instruments subject to Statement 133 in its
entirety, or as hybrid instruments with debt host contracts and embedded
derivative features. In addition, SFAS 149 clarifies the definition of a
derivative by providing guidance on the meaning of initial net investments
related to derivatives. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. We do not expect that the pronouncement will have
a material impact on our financial position, results of operations or cash
flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement 150"). SFAS 150 establishes standards for classifying and measuring
as liabilities certain financial instruments that embody obligations of the
issuer and have characteristic of both liabilities and equity. SFAS 150
represents a significant change in practice in the accounting for a number of
financial instruments, including mandatory redeemable equity instruments and
certain equity derivatives that frequently are used in connection with share
repurchase programs. SFAS 150 is effective for all financial instruments created
or modified after May 31, 2003, and to other instruments as of September 1,
2003. We do not expect that the pronouncement will have a material impact on our
financial position, results of operations or cash flows.
FACTORS AFFECTING FUTURE RESULTS
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO A NUMBER OF FACTORS, MANY OF
WHICH ARE BEYOND OUR CONTROL.
Our annual and quarterly results may vary significantly depending on
various factors, including:
- adverse changes in general economic conditions
- the level and timing of customer orders
- the level of capacity utilization of our manufacturing facility and
associated fixed costs
- the composition of the costs of revenue between materials, labor and
manufacturing overhead
- price competition
- our level of experience in manufacturing a particular product
- the degree of automation used in our assembly process
- the efficiencies achieved in managing inventories and fixed assets
- fluctuations in materials costs and availability of materials
- the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and shortages of components or
labor.
Page 16 of 79
The volume and timing of orders placed by our customers vary due to
variation in demand for our customers' products, our customers' inventory
management, new product introductions and manufacturing strategy changes, and
consolidations among our customers. In the past, changes in customer orders have
had a significant effect on our results of operations due to corresponding
changes in the level of overhead absorption. Any one or a combination of these
factors could adversely affect our annual and quarterly results of operations in
the future.
BECAUSE WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, A REDUCTION IN SALES TO ANY
ONE OF OUR CUSTOMERS COULD CAUSE A SIGNIFICANT DECLINE IN OUR REVENUE.
A small number of customers are currently responsible for a significant
portion of our net sales. During fiscal 2003, 2002, and 2001, our five largest
customers accounted for 93%, 81% and 72% of consolidated net sales,
respectively. During fiscal 2003, Motorola and Teradyne accounted for 55% and
32%, respectively, of consolidated net sales. The percentage of IEC's sales to
its major customers may fluctuate from period to period.
We are dependent upon the continued growth, viability and financial
stability of our customers whose industries have experienced rapid technological
change, short product life cycles, consolidation, and pricing and margin
pressures. We expect to continue to depend upon a relatively small number of
customers for a significant percentage of our net sales. Any consolidation among
our customers could further reduce the number of customers that generate a
significant percentage of our revenues and exposes us to increased risks
relating to dependence on a small number of customers. A significant reduction
in sales to any of our customers or a customer exerting significant pricing and
margin pressures on us, would have a material adverse effect on our results of
operations. We cannot assure you that present or future customers will not
terminate their manufacturing arrangements with us or significantly change,
reduce or delay the amount of manufacturing services ordered from us. If they
do, it could have a material adverse effect on our results of operations. In
addition, we generate significant account receivables in connection with
providing manufacturing services to our customers. If one or more of our
customers were to become insolvent or otherwise were unable to pay for the
manufacturing services provided by us, our operating results and financial
condition would be adversely affected.
OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE.
Our customers compete in markets that are characterized by rapidly changing
technology, evolving industry standards and continuous improvements in products
and services. These conditions frequently result in short product life cycles.
Our success will depend largely on the success achieved by our customers in
developing and marketing their products. If technologies or standards supported
by our customers' products become obsolete or fail to gain widespread commercial
acceptance, our business could be materially adversely affected.
WE DEPEND ON THE ELECTRONICS INDUSTRY, WHICH CONTINUALLY PRODUCES
TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO
CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS WOULD HARM OUR
BUSINESS.
Factors affecting the electronics industry in general could seriously harm
our customers and, as a result, us.
Page 17 of 79
These factors include:
- the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, which result in short product life
cycles;
- the inability of our customers to develop and market their products,
some of which are new and untested, the potential that our customers'
products may become obsolete or the failure of our customers'
products to gain widespread commercial acceptance; and
- recessionary periods in our customers' markets.
If any of these factors materialize or if we are unable to offer
technologically advanced, cost effective, quick response manufacturing service
to customers, demand for our services would decline and our business would
suffer.
MOST OF OUR CUSTOMERS DO NOT COMMIT TO LONG-TERM PRODUCTION SCHEDULES,
WHICH MAKES IT DIFFICULT FOR US TO SCHEDULE PRODUCTION AND ACHIEVE MAXIMUM
EFFICIENCY OF OUR MANUFACTURING CAPACITY.
The volume and timing of sales to our customers may vary due to:
- variation in demand for our customers' products
- our customers' attempts to manage their inventory
- electronic design changes
- changes in our customers' manufacturing strategy
- acquisitions of or consolidations among customers
- recessionary conditions in customers' industries
Due in part to these factors, most of our customers do not commit to firm
production schedules for more than one quarter in advance. Our inability to
forecast the level of customer orders with certainty makes it difficult to
schedule production and maximize utilization of manufacturing capacity. In the
past, we have been required to increase staffing and other expenses in order to
meet the anticipated demand of our customers. Anticipated orders from many of
our customers have, in the past, failed to materialize or delivery schedules
have been deferred as a result of changes in our customers' business needs,
thereby adversely affecting our results of operations. On other occasions, our
customers have required rapid increases in production, which have placed an
excessive burden on our resources. Such customer order fluctuations and
deferrals could have a material adverse effect on us in the future.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR
DELAY PRODUCTION.
Electronics manufacturing service providers must provide increasingly rapid
product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers and we continue to experience
reduced lead-times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons. The success
of our customers' products in the market affects our business. Cancellations,
reductions or delay by a significant customer or by a group of customers could
negatively impact our operating results.
In addition, we make significant decisions, including determining the
levels of business that we will seek and accept, production schedules, component
procurement commitments, personnel needs and other resource requirements, based
on our estimate of customer requirements. The short-term nature of our
customers' commitments and the possibility of rapid changes in demand for their
products reduces our ability to accurately estimate the future requirements of
those customers. Because many of our costs and operating expenses are relatively
fixed, a reduction in customer demand can harm our gross margins and operating
results. On occasion, customers may require rapid increases in production, which
can stress our resources and reduce operating margins.
WE COMPETE WITH NUMEROUS PROVIDERS OF ELECTRONIC MANUFACTURING SERVICES,
INCLUDING OUR CURRENT OR POTENTIAL CUSTOMERS WHO MAY DECIDE TO
MANUFACTURE ALL OF THEIR PRODUCTS INTERNALLY.
The electronic manufacturing services business is highly competitive. We
compete against numerous domestic and foreign manufacturers with global
operations as well as those who operate on a local or regional basis. Many of
our competitors have international operations and some have substantially
greater manufacturing, financial, research and development, and marketing
resources than us. We also face potential competition from the manufacturing
operations of our current and potential customers, who are continually
evaluating the merits of manufacturing products internally versus the advantages
of outsourcing.
Page 18 of 79
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES
FOR OUR SERVICES.
Some of our competitors have substantially greater managerial,
manufacturing, engineering, technical, financial, systems, research and
development, sales and marketing resources than we do.
We may be operating at a cost disadvantage compared to manufacturers who
have greater direct buying power from component suppliers, distributors and raw
material suppliers or who have lower cost structures as a result of their
geographic location or the services they provide. As a result, competitors may
have a competitive advantage. Our manufacturing processes are generally not
subject to significant proprietary protection, and companies with greater
resources or a greater market presence may enter our market or increase their
competition with us. We also expect our competitors to continue to improve the
performance of their current products or services, to reduce their current
products or service sales prices and to introduce new products or services that
may offer greater performance and improved pricing. Any of these could cause a
decline in sales, loss of market acceptance of our products or services, profit
margin compression, or loss of market share.
IF WE DO NOT MANAGE OUR BUSINESS EFFECTIVELY, OUR PROFITABILITY COULD DECLINE.
Our ability to manage our business effectively will require us to continue
to implement and improve our operational, financial and management information
systems; continue to develop the management skills of our managers and
supervisors; and continue to train, motivate and manage our employees. Our
failure to effectively do so could have a material adverse effect on our results
of operations.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR COMPONENTS THAT ARE CRITICAL TO
OUR MANUFACTURING PROCESSES. A SHORTAGE OF THESE COMPONENTS OR AN INCREASE IN
THEIR PRICE COULD INTERRUPT OUR OPERATIONS AND REDUCE OUR PROFITS.
Substantially all of our net revenue is derived from turnkey manufacturing
in which we provide materials procurement. While many of our customer contracts
permit quarterly or other periodic adjustments to pricing based on decreases and
increases in component prices and other factors, we typically bear the risk of
component price increases that occur between any such re-pricings or, if such
re-pricing is not permitted, during the balance of the term of the particular
customer contract. Accordingly, certain component price increases could
adversely affect our gross profit margins. Almost all of the products we
manufacture require one or more components that are available from a limited
number of suppliers. Some of these components are allocated from time to time in
response to supply shortages. In some cases, supply shortages will substantially
curtail production of all assemblies using a particular component. In addition,
at various times industry wide shortages of electronic components have occurred.
Such circumstances have produced insignificant levels of short-term interruption
of our operations, but could have a material adverse effect on our results of
operations in the future.
OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK
Most of our contract manufacturing services are provided on a turnkey
basis, where we purchase some or all of the materials required for designing,
product assembling and manufacturing. These services involve greater resource
investment and inventory risk management than consignment services, where the
customer provides materials. Accordingly, various component price increases and
inventory obsolescence could adversely affect our selling price, gross margins
and operating results.
In our turnkey operations, we must order parts and supplies based on
customer forecasts, which may be for a larger quantity of product than is
included in the firm orders ultimately received from those customers. Customers'
cancellation or reduction of orders can result in expenses to us. While our
customer agreements typically include provisions which require customers to
reimburse us for excess inventory specifically ordered to meet their forecasts,
we may not be able to collect on these obligations. In that case, we could have
excess inventory and/or cancellation or return charges from our supplies.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH
COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are highly
complex and may, at times, contain design or manufacturing errors or failures.
Despite our quality control and quality assurance efforts, defects may occur.
Defects in the products we manufacture, whether caused by a design,
manufacturing or component failure or error, may result in delayed shipments to
customers or reduced or cancelled customer orders and may affect our business
reputation. In addition, these defects may result in liability claims against
us. Even if customers or component suppliers are responsible for the defects,
they may be unwilling or unable to assume responsibility for any costs or
payments.
Page 19 of 79
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND
MANUFACTURING PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are
characterized by rapidly changing technology and evolving process development.
The continued success of our business will depend upon our ability to:
- hire, retain and expand our qualified engineering and technical
personnel;
- maintain technological leadership;
- develop and market manufacturing services that meet changing customer
needs; and
- successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations provide the assembly and testing
technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment, which could reduce our operating
margins and our operating results. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements could have an adverse
effect on our business.
WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH ANY OF OUR KEY PERSONNEL, THE LOSS OF
WHICH COULD HURT OUR OPERATIONS.
Our continued success depends largely on the efforts and skills of our key
managerial and technical employees. The loss of the services of certain of these
key employees or an inability to attract or retain qualified employees could
have a material adverse effect on us. We do not have employment agreements or
non-competition agreements with our key employees.
COMPLIANCE OR THE FAILURE TO COMPLY WITH CURRENT AND FUTURE ENVIRONMENTAL
REGULATIONS COULD CAUSE US SIGNIFICANT EXPENSE.
We are subject to a variety of federal, state, local and foreign
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during our manufacturing process. If we fail to
comply with any present and future regulations, we could be subject to future
liabilities or the suspension of production. In addition, such regulations could
restrict our ability to expand our facilities or could require us to acquire
costly equipment, or to incur other significant expenses to comply with
environmental regulations.
THE AGREEMENTS GOVERNING OUR EXISTING DEBT CONTAIN VARIOUS COVENANTS THAT IMPACT
UPON THE OPERATION OF OUR BUSINESS.
The agreements and instruments governing our existing debt and our secured
credit facility contain various restrictive covenants that, among other things,
require us to comply with or maintain certain financial tests and ratios
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios and minimum earnings before interest, taxes, depreciation
and amortization (EBITDA) and restrict our ability to:
- incur debt;
- incur or maintain liens;
- make acquisitions of businesses or entities;
- make investments, including loans, guarantees and advances;
- engage in mergers, consolidations or certain sales of assets;
- engage in transactions with affiliates; and
- pay dividends or engage in stock redemptions.
Our secured credit facilities are secured by a general security agreement
covering receivables, inventory, equipment, intangibles, investment property and
deposit accounts and indirectly by a first mortgage on our Newark plant.
Our ability to comply with covenants contained in our existing debt and our
secured credit facility may be affected by events beyond our control, including
prevailing economic, financial and industry conditions. Our failure to comply
with our debt-related covenants could result in an acceleration of our
indebtedness and cross-defaults under our other indebtedness, which may have a
material adverse effect on our financial condition. We are currently in
compliance with all of our covenants.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL.
Our common stock is traded on the Over-the-Counter Bulletin Board The
market price of our common stock has fluctuated substantially in the past and
could fluctuate substantially in the future, based on a variety of factors,
including future announcements concerning us or our key customers or
competitors, government regulations, litigation, changes in earnings estimates
by analysts, fluctuations in quarterly operating results, or general conditions
in the EMS industry.
Page 20 of 79
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk represents the
risk of loss that may impact the consolidated financial position, results of
operations or cash flows of IEC due to adverse changes in financial rates. We
are exposed to market risk in the area of interest rates. One exposure is
directly related to its Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required by this item is incorporated herein by reference
to pages 25 through 42 of this Form 10-K and is indexed under Item 14(a)(1) and
(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There have been no disagreements on accounting and financial disclosure
matters.
ITEM 9A CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was performed under the supervision and with the
participation of the Company's management, including our acting Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K as required by Rule 13a-15 under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation,
our acting Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective as of the end of
the period covered by the Annual Report on 10-K to provide reasonable assurance
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the SEC rules and forms.
In connection with the evaluation described above, our management,
including our acting Chief Executive Officer and Chief Financial Officer,
identified no change in our internal control over financial reporting that
occurred during our fiscal quarter ended September 30, 2003, and that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this item is presented under the caption
entitled "Election of Directors - Nominees for Election as Directors" contained
in the definitive proxy statement issued in connection with the 2004 Annual
Meeting of Stockholders and is incorporated in this report by reference thereto.
The information regarding Executive Officers of the Registrant is found in Part
I of this report.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is presented under the caption
entitled "Executive Officer Compensation" contained in the definitive proxy
statement issued in connection with the 2004 Annual Meeting of Stockholders and
is incorporated in this report by reference thereto, except, however, the
sections entitled "Performance Graph" and "Report of the Compensation Committee
of the Board of Directors" are not incorporated in this report by reference.
Page 21 of 79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The information required by this item is presented under the caption
entitled "Security Ownership of Certain Beneficial Owners and Management"
contained in the definitive proxy statement issued in connection with the 2004
Annual Meeting of Stockholders and is incorporated in this report by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is presented under the caption
"Executive Officer Compensation - Certain Transactions" contained in the
definitive proxy statement issued in connection with the 2004 Annual Meeting of
Stockholders and is incorporated in this report by reference thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The information required by this item is presented under the caption "Audit
Committee Report" contained in the definitive proxy statement issued in
connection with the 2004 Annual Meeting of Stockholders and is incorporated in
this report by reference thereto.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report and as
response to Item 8:
Page
(1) and (2) Financial Statements and Supplementary Schedule
Report of Independent Public Accountants...................... 27
Consolidated Balance Sheets as of
September 30, 2003 and 2002.................................. 28
Consolidated Statements of Operations for the years
ended September 30, 2003, 2002 and 2001 .................... 29
Consolidated Statements of Comprehensive Income (Loss) and
Shareholders' Equity for the years ended September 30, 2003,
2002 and 2001................................................ 30
Consolidated Statements of Cash Flows for the years
ended September 30, 2003, 2002 and 2001...................... 31
Notes to Consolidated Financial Statements.................... 32
Selected Quarterly Financial Data (unaudited)................ 42
All other schedules are either inapplicable or the information is
included in the financial statements and, therefore, have been
omitted.
(3) Exhibits
Exhibit No. Title Page
3.1 Amended and Restated Certificate of Incorporation of DFT Holdings
Corp. (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-56498)
3.2 Amended Bylaws of IEC Electronics Corp. (Incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2002).
3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings
Corp. (Incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1, Registration No. 33-56498)
3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings
Corp. - New York. (Incorporated by reference to Exhibit 3.4 to
the Company's Registration Statement on Form S-1, Registration
No. 33-56498)
3.5 Certificate of Ownership and Merger merging IEC Electronics Corp.
into DFT Holdings Corp. - Delaware. (Incorporated by reference to
Exhibit 3.5 to the Company's Registration Statement on Form S-1,
Registration No. 33-56498)
Page 22 of 79
3.6 Certificate of Merger of IEC Acquisition Corp. into IEC
Electronics Corp. (Incorporated by reference to Exhibit 3.6 to
the Company's Registration Statement on Form S-1, Registration
No. 33-56498)
3.7 Certificate of Amendment of Certificate of Incorporation of IEC
Electronics Corp. filed with the Secretary of State of the State
of Delaware on Feb. 26, 1998 (Incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 27, 1998)
3.8 Certificate of Designations of the Series A Preferred Stock of
IEC Electronics Corp. filed with the Secretary of State of the
State of Delaware on June 3, 1998. (Incorporated by reference to
Exhibit 3.8 of the Company's Annual Report on Form 10-K for the
year ended September 30, 1998)
4.1 Specimen of Certificate for Common Stock. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1, Registration No. 33-56498)
4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics
Corp. and ChaseMellon Shareholder Services. LLC., as Rights
Agents (Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated June 2, 1998)
10.1* Form of Indemnity Agreement. (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended July 2, 1993)
10.2* IEC Electronics Corp. 1993 Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1998)
10.3* Form of Incentive Stock Option Agreement (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement
on Form S-8, Registration No. 33-79360)
10.4* Form of Non-Statutory Stock Option Agreement (Incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement
on Form S-8, Registration No. 33-79360)
10.5* Form of Non-Employee Director Stock Option Agreement
(Incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form S-8, Registration No. 33-79360)
10.6* IEC Electronics Corp. 2001 Stock Option and Incentive Plan
(Incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 2002).
10.7 2001 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 30, 2001).
10.8* IEC Electronics Corp. Savings and Security Plan effective June 1,
1997 (incorporated by reference to Exhibit 10.17 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1997).
10.9* Amendment to IEC Electronics Corp. Savings and Security Plan
effective June 1, 1998. (Incorporated by reference to Exhibit
10.22 to the Company's Annual Report on Form 10-K for the year
ended September 30, 1998).
10.10* Amendment to IEC Electronics Corp. Savings and Security Plan
effective April 1, 2002 (Incorporated by reference to Exhibit
10.34 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2002).
10.11 Loan and Security Agreement dated as of December 28, 1999,
among IEC ELECTRONICS CORP. and IEC ELECTRONICS-EDINBURG,
TEXAS INC. (collectively, "Debtor") and HSBC BANK USA as
agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL
ELECTRIC CAPITAL CORPORATION ("GE Capital"), as Lenders
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999).
10.12 Amendment No. 1 dated as of March 30, 2000 to Loan and Security
Agreement originally dated as of December 28, 1999 amount IEC
ELECTRONICS CORP. ("IEC) and IEC ELECTRONICS-EDINBURG, TEXAS
INC. ("IEC-Edinburg") (collectively, "Debtor") and HSBC BANK
USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and
GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000)
10.13 Amendment No. 2 dated as of December 1, 2000 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
ELECTRONICS CORP. ("IEC") and IEC ELECTRONICS-EDINBURG, TEXAS
INC.("IEC-Edinburg")(collectively, "Debtor") and HSBC BANK USA,
as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL
ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders.
(Incorporated by reference to Exhibit 10.25 of the Company's
Annual Report on Form 10-K for the year ended September 30,
2000).
10.14 Amendment No. 3 dated as of April 24, 2001 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC
Bank USA ("HSBC Bank") and General Electric Capital Corporation
("GE Capital"). (Incorporated by reference to Exhibit 10.16 of
the Company's Annual Report on Form 10-K for the year ended
September 30, 2001).
Page 23 of 79
10.15 Amendment No. 4 dated as of December 21, 2001 ("Amendment") to
Loan and Security Agreement originally dated as of December 28,
1999 and originally among IEC Electronics Corp. ("IEC" or
"Debtor") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and
HSBC Bank USA ("HSBC Bank") and General Electric Capital
Corporation ("GE Capital") as Lenders.(Incorporated by
reference to Exhibit 10.26 of the Company's Annual Report
on Form 10-K for the year ended September 30, 2001).
10.16 Amendment No. 5 dated as of February 15, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999
among IEC Electronics Corp. ("IEC") and IEC Electronics-
Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA,
as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and
General Electric Capital Corporation ("GE Capital")
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on February 20, 2002).
10.17 Amendment No. 6 dated as of February 28, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999
among IEC Electronics Corp. ("IEC") and IEC Electronics-
Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA,
as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and
General Electric Capital Corporation ("GE Capital")
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on March 6, 2002).
10.18 Amendment No. 7 dated as of March 15, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc.
("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC
Bank USA ("HSBC Bank") and General Electric Capital Corporation
("GE Capital")(incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on March 21, 2002).
10.19 Amendment No. 8 dated as of April 8, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas
Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and
HSBC Bank USA ("HSBC Bank") and General Electric Capital
Corporation ("GE Capital")(incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed on April
9, 2002).
10.20 Amendment Number 9 dated as of June 20, 2002 to Loan and Security
Agreement originally dated as of December 28, 1999 among IEC
Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas
Inc. ("IEC-Edinburg")and HSBC Bank USA, as Agent ("Agent") and
HSBC Bank USA ("HSBC Bank") and General Electric Capital
Corporation ("GE Capital"); Letter Modifications to Amendment
Number 9 dated August 9, 2002, August 23, 2002, September 17,
2002 and September 24, 2002 (Incorporated by reference
to Exhibit 10.30 to the Company's Annual Report on Form 10-K for
the year ended September 30, 2002).
10.21 Amendment Number 10 dated as of October 1, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999
among IEC Electronics Corp. ("IEC") and IEC Electronics-
Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as
Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General
Electric Capital Corporation ("GE Capital") (Incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the year ended September 30, 2002).
10.22 Amendment Number 11 dated as of November 13, 2002 to Loan and
Security Agreement originally dated as of December 28, 1999
among IEC Electronics Corp. ("IEC") and IEC Electronics-
Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as
Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General
Electric Capital Corporation ("GE Capital") (Incorporated by
reference to Exhibit 10.32 to the Company's Annual Report on Form
10-K for the year ended September 30, 2002).
10.23 Amendment Number 12 dated as of January 1, 2003 to Loan and 53
Security Agreement originally dated as of December 28, 1999
among IEC Electronics Corp. ("IEC") and IEC Electronics-
Edinburg, Texas Inc. ("IEC-Edinburg")and HSBC Bank USA, as
Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General
Electric Capital Corporation ("GE Capital") (Incorporated by
reference to Exhibit 10.33 to the Company's Annual Report on
Form 10-K for the year ended September 30, 2002).
Page 24 of 79
10.24* Employment Agreement made as of August 11, 2000 between IEC
Electronics Corp. and Thomas W. Lovelock. (Incorporated by
reference to Exhibit 10.27 of the Company's Annual Report on
Form 10-K for the year ended September 30, 2000.)
10.25* First Amendment dated as of October 23, 2001 and effective as
of August 21, 2001 to Employment Agreement between IEC
Electronics Corp. and Thomas W. Lovelock. (Incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the year ended September 30, 2001).
10.26* Severance Agreement dated June 6, 2002 between IEC Electronics
Corp. and Thomas W. Lovelock. (Incorporated by reference
to Exhibit 10.28 to the Company's Annual Report on Form 10-K for
the year ended September 30, 2002).
10.27* Supplemental Severance Agreement dated December 6, 2002 between
IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-K for the year ended September 30, 2002).
10.28 Loan Agreement between IEC Electronics Corp., and Keltic 43
Financial Partners, LLP, dated January 14, 2003.
10.29 Loan and Security Agreement between IEC Electronics Corp. and
Suntrust Bank dated January 13, 2003. 64
10.30 Supplier agreement between IEC Electronics Corp. and Arrow CMS
Distribution Group of Arrow Electronics, Inc. dated December 27,
2002 69
10.31 Amendment Number 1 to Term Note between IEC Electronics Corp.
and SunTrust Bank dated September 26, 2003 73
21.1 Subsidiaries of IEC Electronics Corp. 74
23.1 Consent of Rotenberg & Co., LLP 75
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 76
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 77
32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 78
32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 79
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and
Exchange Commission on July 21, 2003. It announced earnings for the
quarter ended June 27, 2003 and a press release relating to the
earnings was attached thereto.
(ii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on October 29, 2003. It announced financial
results for the fiscal quarter and the year ended September 30, 2003
and a press release relating to the financial results was attached
thereto.
Page 25 of 79
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 21, 2003.
IEC Electronics Corp.
By:/s/ W. Barry Gilbert
-------------------------
W. Barry Gilbert
Acting Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/W. Barry Gilbert Acting Chief Executive Officer and
- ---------------------- Chairman of the Board
(W. Barry Gilbert) November 21, 2003
/s/Brian H. Davis Vice President,
- ----------------- Chief Financial Officer
(Brian H. Davis) and Controller
November 21, 2003
/s/David J. Beaubien Director November 21, 2003
- --------------------
(David J. Beaubien)
/s/Robert P. B. Kidd Director November 21, 2003
- -------------------
(Robert P. B. Kidd)
/s/Eben S. Moulton Director November 21, 2003
- ------------------
(Eben S. Moulton)
/s/Justin L. Vigdor Director November 21, 2003
- -------------------
(Justin L. Vigdor)
/s/James C. Rowe Director November 21, 2003
- ------------------
(James C. Rowe)
/s/Dermott O'Flanagan Director November 21, 2003
- ---------------------
(Dermott O'Flanagan)
Page 26 of 79
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
IEC Electronics Corp.
Newark, New York
We have audited the accompanying consolidated balance sheets of IEC
Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30,
2003 and 2002, and the related consolidated statements of operations,
comprehensive income and shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IEC
Electronics Corp. and subsidiaries as of September 30, 2003 and 2002 and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The financial statements for the year ended September 30, 2001 were audited
by other auditors who have ceased operations whose report dated November 16,
2001 (except with respect to the matter discussed in Notes 1 and 5, as to which
the date was January 11, 2002), on those statements included an explanatory
paragraph describing conditions that raised substantial doubt about the
Company's ability to continue as a going concern.
/s/ Rotenberg & Co., LLP
- ------------------------
Rotenberg & Co., LLP
Rochester, New York
October 21, 2003
Page 27 of 79
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
(in thousands)
ASSETS
2003 2002
--------------------
CURRENT ASSETS:
Cash $ 793 $ -
Accounts receivable 4,004 5,480
Inventories 1,633 3,412
Deferred income taxes 250 -
Other current assets 329 186
Current assets-discontinued operations 121 348
-----------------------
Total current assets 7,130 9,426
-----------------------
FIXED ASSETS:
Land and land improvements $ 768 768
Building and improvements 3,995 3,995
Machinery and equipment 46,702 46,501
Furniture and fixtures 5,870 5,850
-----------------------
SUB-TOTAL GROSS PROPERTY 57,335 57,114
LESS ACCUMULATED DEPRECIATION (54,161) (52,781)
-----------------------
3,174 4,333
ASSET HELD FOR SALE - 497
LONG-TERM ASSETS-DISCONTINUED OPERATIONS - 809
OTHER NON-CURRENT ASSETS 202 -
-----------------------
$ 10,506 $ 15,065
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
2003 2002
-------------------------
CURRENT LIABILITIES:
Bank borrowings and current portion of
long-term debt $ 1,277 $ 3,128
Accounts payable 2,740 6,250
Accrued payroll and related expenses 794 697
Other accrued expenses 675 1,497
Other current liabilities-discontinued operations 216 1,426
-------------------------
Total current liabilities 5,702 12,988
-------------------------
LONG TERM VENDOR PAYABLE 456 -
LONG TERM DEBT - TOTAL 934 1,268
-------------------------
TOTAL LIABILITIES 7,092 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 - 8,021,960 and 7,692,076 shares,
respectively 80 77
Treasury stock, 573 shares; at cost (11) (11)
Additional paid-in capital 38,479 38,418
Accumulated deficit (35,042) (37,640)
Accumulated other comprehensive loss-
Cumulative translation adjustments (92) (45)
-------------------------
Total shareholders' equity 3,414 799
--------------------------
$ 10,506 $ 15,065
==========================
The accompanying notes are an integral part of these financial statements.
Page 28 of 79
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(in thousands, except per share and share data)
2003 2002 2001
----------------------------------
Net sales $ 48,201 $ 39,365 $114,771
Cost of sales 43,271 37,068 111,829
---------------------------------
Gross profit 4,930 2,297 2,942
Operating expenses
Selling and administrative expenses 2,919 4,209 7,049
Restructuring (benefit) charge (63) 214 -
Asset impairment writedown - 900 12,101
---------------------------------
Total operating expenses 2,856 5,323 19,150
---------------------------------
Operating income (loss) 2,074 (3,026) (16,208)
Interest and financing expense (642) (932) (1,331)
Forgiveness of accounts payable 578 - -
Other income 143 188 5
---------------------------------
Net income (loss) before income taxes 2,153 (3,771) (17,534)
(Benefit from) provision for income taxes (260) - (95)
---------------------------------
Income (loss) from continuing operations 2,413 (3,771) (17,439)
---------------------------------
Discontinued operations:
Income (loss) from operations of IEC-Mexico
disposed of (net of income taxes of
$0, $56, and $116 in 2003, 2002 and
2001, respectively) 184 (4,069) (11,833)
Estimated (loss) on disposal of IEC-Mexico
(net of income taxes of $0 in 2003,
2002 and 2001) - (3,139) -
---------------------------------
184 (7,208) (11,833)
---------------------------------
Net income (loss) $ 2,597 $(10,979) $ (29,272)
=================================
Net income (loss) per common and common equivalent share:
Basic
Income (loss) from cont. operations $ 0.31 $ (0.49) $ (2.28)
Income (loss) from discont. ops. $ 0.02 $ (0.94) $ (1.55)
Income (loss) available to
common shareholders $ 0.33 $ (1.43) $ (3.83)
Diluted
Income (loss) from cont. operations $ 0.29 $ (0.49) $ (2.28)
Income (loss) from discont. ops. $ 0.02 $ (0.94) $ (1.55)
Income (loss) available to
common shareholders $ 0.31 $ (1.43) $ (3.83)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,898,699 7,691,503 7,650,673
===================================
Diluted 8,273,977 7,691,503 7,650,673
===================================
The accompanying notes are an integral part of these financial statements
Page 29 of 79
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(in thousands)
Accumulated
Other
Additional Retained Comprehensive Total
Comprehensive Common Paid-In Earnings Income Treasury Shareholders
Loss Stock Capital (Deficit) (Loss) Stock Equity
----------------------------------------------------------------------------------------------
BALANCE, September 30, 2000 $76 $38,332 $2,611 - $(11) $41,008
Shares issued under Directors
Stock Plan $1 $86 $87
Net loss $(29,272) - - $(29,272) - - $(29,272)
Other comprehensive loss,
currency translation
adjustments $(14) - - - $(14) - $(14)
------------------------------------------------------------------------------------------------------
Comprehensive loss $(29,286)
=========
BALANCE, September 30, 2001 $77 $38,418 $(26,661) $(14) $(11) $11,809
Net Loss $(10,979) - - $(10,979) - - $(10,979)
Other comprehensive loss,
currency translation
adjustments $(31) - - - $(31) - $(31)
-----------------------------------------------------------------------------------------------------
Comprehensive loss $(11,010)
==========
BALANCE, September 30,2002 $77 $38,418 $(37,640) $(45) $(11) $799
Shares issued under Directors and
Employee Stock Plan $3 $61 - - - $64
Net Income $2,597 - - $2,598 - - $2,598
Other comprehensive loss,
currency translation
adjustments $(47) - - - $(47) - $(47)
----------------------------------------------------------------------------------
Comprehensive income $2,550
==========
BALANCE, September 30, 2003 $80 $38,479 $(35,042) $(92) $(11) $3,414
The accompanying notes are an integral part of these financial statements.
Page 30 of 79
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(in thousands)
2003 2002 2001
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,597 $ (10,979) $(29,272)
Non-cash adjustments:
(Income) loss from discontinued operations (184) 4,069 11,833
Loss on sale of discontinued operations - 3,139 -
Depreciation and amortization 1,457 1,637 4,005
Gain on sale of fixed assets (50) (6) (4)
Goodwill amortization - - 324
Issuance of directors fees in stock 8 - 87
Asset impairment writedown - 900 12,101
Changes in operating assets and
liabilities:
Accounts receivable 1,476 5,634 6,232
Inventories 1,779 3,434 14,511
Deferred income taxes (250) - -
Other current assets (144) 31 149
Accounts payable (1,325) 1,469 (4,320)
Accrued expenses (724) (1,362) (649)
------------------------------
Net cash flows from operating activities 4,640 8,092 14,997
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (274) (190) (3,120)
Proceeds from sale of property 547 61 20
Utilization of restructuring provision for
building/equipment - - (40)
Proceeds from sale of discontinued operations 875 730 -
------------------------------
Net cash flows from investing activities 1,148 601 (3,140)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable (238) (502) (639)
Net payments on revolving credit facilities (4,395) (4,708) (1,884)
Proceeds from borrowing 3,500 - -
Principal payments on long-term debt (2,781) (4,278) (2,105)
Debt issuance costs (263) - -
Common stock issued under financing plan 50 - -
Proceeds from exercise of stock options 6 - -
------------------------------
Net cash flows from financing activities (4,121) (9,488) (4,628)
------------------------------
Cash (used in) from discontinued operations (827) 951 (7,215)
------------------------------
Change in cash and cash equivalents 840 30 14
Effect of exchange rate changes (47) (30) (14)
Cash and cash equivalents, beginning of year - - -
-----------------------------
Cash and cash equivalents, end of year $ 793 $ - $ -
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 642 $ 1,461 $ 1,860
Income taxes, net of refunds received $ (10) $ - $ (95)
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 31 of 79
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, 2002 AND 2001
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------------------------------
Business
- --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company is a significant
provider of high quality electronics manufacturing services with
state-of-the-art manufacturing capabilities and production capacity. Utilizing
computer controlled manufacturing and test machinery and equipment, the Company
provides manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, the Company offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment
basis, including design, prototype, material procurement and control,
manufacturing and test engineering support, statistical quality assurance,
complete resource management and distribution. The Company's strategy is to
cultivate strong manufacturing relationships with established and emerging
original equipment manufacturers ("OEMs").
Consolidation
- -------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico"), (collectively,
"IEC"). Operations in Texas and Mexico were closed in July 2002. All significant
intercompany transactions and accounts have been eliminated.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of product for both turnkey
and consignment contracts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Long-Lived Assets
- -----------------
The Company evaluates its long-lived assets for financial impairment on a
regular basis in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." IEC
evaluates the recoverability of long-lived assets not held for sale by measuring
the carrying amount of the assets against the estimated discounted future cash
flows associated with them. At the time such evaluations indicate that the
future discounted cash flows of certain long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their fair
values.
Previously, the Company applied the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This statement required
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used was measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
Page 32 of 79
During the fourth quarter of 2001, certain fixed assets and intangible
assets were identified as impaired. As a result of the overall softening of the
electronics manufacturing services industry and a change in the Company's
business strategy, the Company did not believe that their future cash flows
supported the carrying value of the long-lived assets and goodwill. The current
market values were compared to the net book value of the related long-lived
assets with the difference representing the amount of the impairment loss. The
effect of this impairment recognition totaled approximately $12.6 million, of
which $9.6 million represented a writeoff of goodwill and $3.0 million
represented a writedown of property, plant and equipment.
During fiscal year 2002, the company wrote down the value of its Arab,
Alabama facility to its estimated recoverable sales value, net of commissions.
The effect of this impairment recognition totaled approximately $900,000.
During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas
facility. In conjunction with this decision, the asset was written down to its
estimated recoverable sales value, net of commissions. The effect of this
impairment recognition totaled approximately $1.04 million in fiscal 2002.
Fair Value of Financial Instruments
- -----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
that value.
Current Assets and Liabilities - The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the short maturity of those instruments.
Debt - The fair value of the Company's debt is estimated based upon the
quoted market prices for the same or similar issues which approximates its
carrying amount.
Costs in Excess of Net Assets Acquired
- --------------------------------------
Costs in excess of net assets acquired of $14.1 million were being
amortized on a straight-line basis over 40 years. Amortization of $324,000 was
charged against operations for the year ended September 30, 2001.
The remaining net goodwill in the amount of $9.6 million, related to the
Newark operations was written off in fiscal 2001.
Earnings Per Share
- ------------------
Net income (loss) per common share is computed in accordance with SFAS No.
128, "Earnings Per Share". Basic earnings per common share is calculated by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for each period. Diluted earnings per common share
is calculated by adjusting the weighted-average shares outstanding assuming
conversion of all potentially dilutive stock options, warrants and convertible
securities.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's foreign subsidiary are
translated based on the current exchange rate at the end of the period for the
balance sheet and weighted-average rate for the period for the statement of
operations. Translation adjustments are recorded as a separate component of
equity. Transaction gains or losses are included in operations.
Page 33 of 79
Comprehensive Income
- --------------------
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments and is presented in the statements of
comprehensive income (loss) and shareholders' equity.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Pronouncements
- ------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We adopted this standard on October 1, 2002. Under
SFAS No. 143, the fair value of a liability for an asset retirement obligation
will be recognized in the period in which it is incurred. The associated
retirement costs will be capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's useful
life. The adoption of SFAS No. 143 did not have a material effect on the
financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". The Company adopted this
standard as of October 1, 2002 with no material effect on its financial
position, results of operations or cash flows.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical corrections (SFAS
No. 145). The Company adopted this standard as of January 1, 2003 with no
material effect on its financial position, results of operations or cash flows.
In June 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
SFAS 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 applies to all exit or disposal
activities initiated after December 31, 2002. The Company adopted this standard
as of January 1, 2003 with no material effect on its financial position, results
of operations or cash flows.
In November 2002, the EITF reached a consensus on issue 00-21, "Revenue
Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses
revenue recognition on arrangements encompassing multiple elements that are
delivered at different points in time, defining criteria that must be met for
elements to be considered to be a separate unit of accounting. If an element is
determined to be a separate unit of accounting, the revenue for the element is
recognized at the time of delivery. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect that the pronouncement will have a material impact on
its financial position, results of operations or cash flows.
Page 34 of 79
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148 (SFAS 148), "Accounting for Stock Based Compensation -
Transition and Disclosure." SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, the Statement amends the previous disclosure
requirements of SFAS 123 to require prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported financial results and requires these disclosures in interim
financial information. The Company continues to account for stock-based employee
compensation under APB Opinion 25, but has adopted the new disclosure
requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation No. 46 "Consolidation of
Variable Interest Entities." (FIN 46). FIN 46 requires that if an entity has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to January 31, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. In October 2003 the FASB
deferred the effective date for applying the provision of FIN 46 until the first
interim or annual period ending after December 15, 2003. The Company does not
expect that the pronouncement will have a material impact on its financial
position, results of operations or cash flows.
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149).
Statement 149 is intended to result in more consistent reporting of contracts as
either freestanding derivative instruments subject to Statement 133 in its
entirety, or as hybrid instruments with debt host contracts and embedded
derivative features. In addition, SFAS 149 clarifies the definition of a
derivative by providing guidance on the meaning of initial net investments
related to derivatives. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The Company does not expect that the pronouncement
will have a material impact on its financial position, results of operations or
cash flows.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). SFAS 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristic of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments as of September 1, 2003.
The Company does not expect that the pronouncement will have a material impact
on its financial position, results of operations or cash flows.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. INVENTORIES
- -------------------
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
2003 2002
------- -------
Raw Materials $ 1,128 $ 2,175
Work-in-process 498 1,214
Finished goods 7 23
-------- --------
$ 1,633 $ 3,412
======== ========
3. PROPERTY, PLANT, AND EQUIPMENT
- ---------------------------------
Property, plant, and equipment are stated at cost and are depreciated over
various estimated useful lives using the straight-line method.
Page 35 of 79
Maintenance and repairs are charged to expense as incurred; renewals and
improvements are capitalized. At the time of retirement or other disposition of
property, plant, and equipment, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in other income.
Depreciation and amortization was $1.5 million, $1.8 million, and $4.0
million for the years ended September 30, 2003, 2002 and 2001, respectively.
The principal depreciation and amortization lives used are as follows:
Estimated
Description Useful
Lives
- ---------------------------- ------------
Land improvements 10 years
Buildings and improvements 5 to 40 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 7 years
4. ASSET HELD FOR SALE
- ----------------------
Included in asset held for sale in 2002 was land and land improvements with
a net book value of approximately $114,000 and buildings and improvements with a
net book value of approximately $383,000.
5. DISCONTINUED OPERATIONS
- ------------------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No such
Earn-out amounts were received. In addition, EPI was to pay to the Company
commissions based on the net selling price of products shipped to certain former
customers. No such commissions were received. Under the terms of a related
agreement, the Company and Mexico were also released of all of their lease
obligations to the landlord of the Mexican facility. The Company recorded an
after-tax loss on the sale of the business of approximately $3.1 million.
Net sales of IEC-Mexico were $0, $10.8 million, and $45.9 million for the
years ended September 30, 2003, 2002 and 2001, respectively. These amounts are
not included in net sales in the accompanying consolidated statements of
operations.
Assets and liabilities of IEC-Mexico to be disposed of consisted of the
following at September 30: