UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 25, 2004
Commission file Number 0-6508
IEC ELECTRONICS CORP.
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 13-3458955
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Norton Street, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices (Zip Code)
(315) 331-7742
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.01 Par Value - 8,155,188 shares as of July 26, 2004.
Page 1 of 15
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of:
June 25, 2004 (Unaudited) and September 30, 2003............. 3
Consolidated Statements of Operations for the three months
ended: June 25, 2004 (Unaudited) and June 27, 2003
(Unaudited).................................................. 4
Consolidated Statements of Operations for the nine months
ended: June 25, 2004 (Unaudited) and June 27, 2003
(Unaudited) ................................................. 5
Consolidated Statements of Cash Flows for the nine months
ended: June 25, 2004 (Unaudited) and June 27, 2003
(Unaudited).................................................. 6
Notes to Consolidated Financial Statements (Unaudited)....... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 13
Item 4. Controls and Procedures......................................... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities.......................................... 14
Item 3. Defaults Upon Senior Securities................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures............................................................. 15
Page 2 of 15
Part 1. Financial Information
Item 1 -- Financial Statements
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 25, 2004 AND SEPTEMBER 30, 2003
(in thousands)
JUNE 25, 2004 SEPTEMBER 30, 2003
------------------ ------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 176 $ 793
Accounts receivable 2,991 4,004
Inventories 3,679 1,633
Deferred income taxes 250 250
Other current assets 250 329
Current assets-discontinued operations 55 121
------------------ ------------------
Total current assets 7,401 7,130
------------------ ------------------
FIXED ASSETS:
Land and land improvements 768 768
Building and improvements 3,994 3,995
Machinery and equipment 41,030 46,702
Furniture and fixtures 5,283 5,870
------------------ ------------------
SUB-TOTAL GROSS PROPERTY 51,075 57,335
LESS ACCUMULATED DEPRECIATION (48,577) (54,161)
------------------ ------------------
2,498 3,174
OTHER NON-CURRENT ASSETS 136 202
------------------ ------------------
$ 10,035 $ 10,506
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $ 1,534 $ 1,277
Accounts payable 3,779 2,740
Accrued payroll and related expenses 623 794
Other accrued expenses 686 675
Current liabilities-discontinued operations 197 216
------------------ ------------------
Total current liabilities 6,819 5,702
------------------ ------------------
LONG TERM VENDOR NOTES 264 456
LONG TERM BANK DEBT 408 934
------------------ ------------------
TOTAL LIABILITIES 7,491 7,092
------------------ ------------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, Authorized
- 500,000 shares; None issued or outstanding -- --
Common stock, $.01 par value, Authorized
- 50,000,000 shares; Issued - 8,143,505 and
- 8,021,387 shares (net of 573 treasury shares) 70 69
Additional paid-in capital 38,498 38,479
Accumulated deficit (35,932) (35,042)
Accumulated translation adjustments (92) (92)
------------------ ------------------
Total shareholders' equity 2,544 3,414
------------------ ------------------
$ 10,035 $ 10,506
================== ==================
The accompanying notes are an integral part of these financial statements.
Page 3 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 25, 2004 JUNE 27, 2003
------------- -------------
(Unaudited) (Unaudited)
Net sales $ 6,168 $ 14,030
Cost of sales 6,362 12,222
------------- -------------
Gross profit (194) 1,808
------------- -------------
Selling and administrative expenses 624 788
Restructuring charge 240 --
------------- -------------
Operating profit (loss) (1,058) 1,020
Interest and financing expense (90) (148)
Forgiveness of accounts payable -- (45)
Other income, net 2 26
------------- -------------
Net income (loss) before income taxes (1,146) 853
Income taxes -- --
------------- -------------
Net income (loss) $ (1,146) $ 853
============= =============
Net income (loss) per common and common equivalent share:
Basic $ (0.14) $ 0.11
Diluted $ (0.14) $ 0.10
Weighted average number of common and common equivalent shares outstanding:
Basic 8,139,937 7,980,953
Diluted 8,139,937 8,418,332
The accompanying notes are an integral part of these financial statements.
Page 4 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003
(in thousands, except share and per share data)
9 MONTHS ENDED 9 MONTHS ENDED
JUNE 25, 2004 JUNE 27, 2003
------------- -------------
(Unaudited) (Unaudited)
Net sales $ 19,985 $ 39,099
Cost of sales 18,885 35,056
------------- -------------
Gross profit 1,100 4,043
------------- -------------
Selling and administrative expenses 1,796 2,441
Restructuring charge / (benefit) 240 (63)
------------- -------------
Operating profit (loss) (936) 1,665
Interest and financing expense (275) (536)
Forgiveness of accounts payable 9 578
Other income, net 312 131
------------- -------------
Net income (loss) before income taxes (890) 1,838
Income taxes -- --
------------- -------------
Net income (loss) from continuing
operations (890) 1,838
Discontinued Operations:
Income from operations of
IEC-Mexico disposed of (net of
Income taxes of $0 in 2004 and
(7) in 2003) -- 184
------------- -------------
Net income (loss) $ (890) $ 2,022
============= =============
Net income (loss) per common and common equivalent share:
Basic
Continuing operations $ (0.11) $ 0.24
Discontinued operations $ 0.00 $ 0.02
Total $ (0.11) $ 0.26
Diluted
Continuing operations $ (0.11) $ 0.23
Discontinued operations $ 0.00 $ 0.02
Total $ (0.11) $ 0.25
Weighted average number of common and common equivalent shares outstanding:
Basic 8,094,502 7,858,203
Diluted 8,094,502 8,165,833
The accompanying notes are an integral part of these financial statements.
Page 5 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003
(in thousands)
9 MONTHS ENDED 9 MONTHS ENDED
JUNE 25, 2004 JUNE 27, 2003
------------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (890) $ 2,022
Income from discontinued operations -- (184)
Depreciation 851 1,145
Gain on sale of fixed assets (293) (50)
Common stock issued under directors' stock plan 12 8
Changes in operating assets and liabilities:
Accounts receivable 1,012 1,198
Inventories (2,046) (93)
Other current assets 79 (69)
Accounts payable 1,039 (370)
Accrued payroll and related expenses (171) 62
Other accrued expenses 11 (776)
------------- -------------
Net cash flows from operating activities (396) 2,893
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 293 547
Purchases of plant, property & equipment (109) (254)
Proceeds from sale of discontinued operations property -- 875
------------- -------------
Net cash flows from investing activities 184 1,168
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under loan agreements (461) (6,297)
Proceeds from borrowings -- 3,500
Debt issuance costs -- (263)
Common stock issued under refinancing plan -- 50
Proceeds from exercise of stock options 8 --
------------- -------------
Net cash flows from financing activities (453) (3,010)
------------- -------------
Cash from (used in) discontinued operations 48 (789)
------------- -------------
Change in cash and cash equivalents (617) 262
Effect of exchange rate changes -- (40)
Cash and cash equivalents at beginning of period 793 --
------------- -------------
Cash and cash equivalents at end of period $ 176 $ 222
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 275 $ 536
============= =============
Income taxes $ -- $ --
============= =============
Conversion of accounts payable to long-term payable $ -- $ 760
============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ -- $ 1,187
============= =============
The accompanying notes are an integral part of these financial statements.
Page 6 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 25, 2004
(1) Business and Summary of Significant Accounting Policies
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 provides 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 that follow the Company's
investment policy. The fair value of the Company's financial instruments
approximates carrying amounts due to the relatively short maturities and
variable interest rates of the instruments, which approximate current market
interest rates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
JUNE 25, 2004 September 30, 2003
------------------ ------------------
(Unaudited)
Raw materials $ 1,859 $ 1,128
Work-in-process 1,744 498
Finished goods 76 7
------------------ ------------------
$ 3,679 $ 1,633
================== ==================
Long-Lived Assets
In October 2002, the Company sold its Alabama facility for $547,000. A
gain of $50,000 was recorded in other income. In February 2003, the Company sold
its Texas facility for $875,000. A gain of $75,000 was recorded as part of
discontinued operations.
Page 7 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 25, 2004
Unaudited Financial Statements
The accompanying unaudited financial statements as of June 25, 2004,
and for the three month and nine months ended June 25, 2004 have been prepared
in accordance with generally accepted accounting principles for interim
financia1 information. In the opinion of management, all adjustments considered
necessary for a fair presentation, which consist solely of normal recurring
adjustments, have been included. The accompanying financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's September 30, 2003 Annual Report on Form 10-K.
Earnings Per Share
Net income per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic earnings per
share is calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share is calculated by adjusting the weighted-average shares
outstanding, assuming conversion of all potentially dilutive stock options.
New Pronouncements
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 adopted this standard as of October 1, 2003 with no material impact on
its financial position, results of operations or cash flows.
(2) Financing Agreements
The company's financing agreements contain various affirmative and
negative covenants including, among others, limitations on the amount available
under the revolving line of credit relative to the borrowing base, capital
expenditures, fixed charge coverage ratios, and minimum earnings before
interest, taxes, depreciation and amortization (EBITDA). IEC's lender granted
the company a waiver for its failure to comply with the fixed charge coverage
ratio and EBITDA covenants during the quarter ended June 25, 2004.
(3) Discontinued Operations
On June 18, 2002, the Company signed an Asset Purchase Agreement to
sell substantially all of the assets of IEC-Mexico to Electronic Product
Integration Corporation for $730,000. The Company recorded an after-tax loss on
the sale of approximately $3.1 million in fiscal 2002. The reserve balance at
June 25, 2004 was $197,000.
On February 28, 2003, the Company sold its Edinburg, Texas facility for
$875,000 and completed its restructuring initiative. The Company recorded an
$184,000 restructuring benefit during Q2 2003 due to certain facility payments
accrued in a prior fiscal year that will no longer be paid out.
Assets and liabilities of discontinued operations consisted of the following:
JUNE 25, 2004 September 30, 2003
------------------ ------------------
(Unaudited)
Current assets $ 55 $ 121
Accrued expenses 197 216
------------------ ------------------
Net assets of discontinued operations $ (142) $ (95)
================== ==================
Page 8 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 25, 2004
(4) Stock Option Plans
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for its stock option plans. SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", requires disclosure of
pro forma net income per share as if the fair valued-based method had been
applied in measuring compensation cost for the stock-based awards. The following
table illustrates the effect on net earnings and earnings per share had the
Company adopted the fair value based method of accounting for stock-based
employee compensation for all periods presented.
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTH ENDED
JUNE 25, 2004 JUNE 27, 2003 JUNE 25, 2004 JUNE 27, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
Net earnings, as reported $ (1,146) $ 853 $ (890) $ 2,022
Pro forma net earnings $ (1,162) $ 695 $ (938) $ 2,143
Earnings per share:
Basic - as reported $ (0.14) $ 0.11 $ (0.11) $ 0.26
Basic - pro forma $ (0.14) $ 0.09 $ (0.12) $ 0.27
Diluted - as reported $ (0.14) $ 0.10 $ (0.11) $ 0.25
Diluted - pro forma $ (0.14) $ 0.08 $ (0.12) $ 0.26
(5) Litigation
Except as set forth below, there are no material legal proceedings
pending to which the Company or any of its subsidiaries is a party or to which
any of the Company or its subsidiaries' property is subject. To our knowledge,
there are no material legal proceedings to which any director, officer or
affiliate of the Company, or any beneficial owner of more than 5 percent (5%) of
Common Stock, or any associate of any of the foregoing, is a party adverse to
the Company or any of its subsidiaries.
An action was commenced in United States District Court for the
Southern Division of Texas against the Company and several other corporate
defendants, on August 12,2002. Three plaintiffs alleged 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 their unborn children, resulting in alleged tissue
toxicity through the mothers, causing damage to the central nervous system,
brain and other organs of the fetus. The complaint alleges theories of
negligence, gross negligence, strict liability, breach of warranty and
fraud/negligent misrepresentation, and claims unspecified damages for pain and
suffering, a variety of special damages, punitive damages and attorneys' fees.
Royal & Sunalliance Insurance Company has agreed to provide a defense of the
claims with a reservation of rights, but has expressly excluded any coverage for
the claim for punitive damages. The company denied liability. The parties have
arrived at a settlement, which would not materially impact the Company. The
settlement is subject to court approval. A hearing is scheduled in September,
2004."
On August 13, 2003 General Electric Company ("GE") commenced an action
in the state of Connecticut against the Company 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 the Company 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. The Company has made a motion to dismiss the
action in Connecticut for lack of jurisdiction and the motion is pending. GE has
filed a motion seeking leave to file an amended complaint, which the Company has
opposed. This motion is also pending. The position of the Company is that the
contract with GE was substantially completed and that it has meritorious
defenses and basis for a cross claim against Vishay.
(6) Restructuring
During May 2004, we commenced a restructuring initiative that included hiring a
new Vice President of Sales and Marketing and a separation agreement for our
Chief Operating Officer. The $240,000 cost associated with this initiative was
charged against income during the current quarter. The accrued portion will be
paid out by November, 2004.
Page 9 of 15
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------------------------------------------------------
Results of Operations - Three Months Ended June 25, 2004,
Compared to the Three Months Ended June 27, 2003.
-----------------------------------------------------------
Net sales for the three month period ended June 25, 2004, were $6.2
million, compared to $14.0 million for the comparable period of the prior fiscal
year, a decrease of 56 percent. The decrease in sales is due to a decline in
orders from one of our major customers. Turnkey sales were 90 percent of net
sales in the quarter as compared to 95 percent for the comparable period of the
prior year.
Five customers accounted for 73% of our sales for the quarter ended
June 25, 2004.
Gross profit was ($0.2) million or (3) percent of sales for the three
month period ended June 25, 2004, versus $1.8 million or 13 percent of sales in
the comparable period of the prior fiscal year. The decrease in gross profit
percentage was largely due to a $394,000 bad debt provision, and extra costs
required to support start up efforts for three new customers. The remainder of
the decrease was due to fixed overhead costs being spread over fewer sales
dollars.
Selling and administrative expenses were $0.6 million for the three
month period ended June 25, 2004, and $0.8 million for the comparable period of
the prior fiscal year. The decrease was primarily due to lower sales
commissions. Selling and administrative expenses were 10 percent of sales during
the current period, compared to 6 percent of sales during the same quarter of
the prior fiscal year. The percentage increase is due to fixed costs being
spread over fewer sales dollars.
Restructuring costs were $240,000 for the three month period ended June
25, 2004. The costs were primarily related to hiring a new Vice President of
Sales and Marketing, and a separation agreement for our former Chief Operating
Officer.
Interest expense was $90,000 for the three month period ended June 25,
2004, down from $148,000 in the comparable period of the prior fiscal year. The
decrease of 39 percent was primarily due to a reduction in debt.
During the three month period ended June 27, 2003, we recorded a
$45,000 charge against forgiveness of accounts payable. This was done to correct
an improper estimate that was made in a prior period.
We have recorded no benefit from income tax. As a result of our
cumulative net losses, we have recorded a full valuation allowance against the
deferred tax asset, which was generated from the net operating loss.
Net loss for the three months ended June 25, 2004 was ($1.1) million
versus a net income of $0.9 million in the comparable quarter of the prior
fiscal year.
Diluted loss per share was $0.14 as compared to diluted income per
share of $0.10 in the comparable quarter of the prior fiscal year.
Page 10 of 15
-----------------------------------------------------------
Results of Operations - Nine Months Ended June 25, 2004,
Compared to the Nine Months Ended June 27, 2003.
-----------------------------------------------------------
Net sales for the nine month period ended June 25, 2004, were $20.0
million, compared to $39.1 million for the comparable period of the prior fiscal
year, a decrease of 49 percent. The decrease in sales is due to a decline in
orders from one of our major customers. Turnkey sales were 91 percent of net
sales in the nine months as compared to 93 percent for the comparable period of
the prior year.
Five customers accounted for 81% of our sales for the nine months ended
June 25, 2004.
Gross profit was $1.1 million or 6 percent of sales for the nine month
period ended June 25, 2004, versus $4.0 million or 10 percent of sales in the
comparable period of the prior fiscal year. The prior year result included a
$557,000 charge to write off a promissory note from Acterna Corporation. The
current year results include $380,000 of bad debt expense. The balance of the
year over year decrease in gross profit percentage is due to new customer start
up costs, and fixed overhead costs being spread over fewer sales dollars.
Selling and administrative expenses decreased to $1.8 million for the
nine month period ended June 25, 2004, from $2.4 million in the comparable
period of the prior fiscal year, a decrease of 26 percent. This decrease is
primarily due to lower sales commissions. As a percentage of net sales, selling
and administrative expenses increased to 9 percent compared to 6 percent in the
same period of the prior fiscal year.
Restructuring costs were $240,000 for the nine month period ended June
25, 2004, compared to a benefit of $63,000 for the comparable period of the
prior fiscal year. The current period restructuring costs were primarily related
to hiring a new Vice President of Sales and Marketing, and a separation
agreement for our former Chief Operating Officer. The prior year benefit was due
to a reversal of excess accruals associated with the closure of our Texas
operations.
Interest expense decreased to $275,000 for the nine month period ended
June 25, 2004, from $536,000 in the comparable period of the prior fiscal year,
a decrease of 49 percent. This decrease is primarily due to a reduction in debt.
During the nine month period ended June 27, 2003, we were able to
negotiate a $578,000 forgiveness of accounts payable.
We had other income of $312,000 for the nine months ended June 25,
2004. This income was primarily related to a gain on the sale of excess
equipment. We had other income of $131,000 for the nine months ended June 27,
2003. This income was primarily related to a gain on the sale of our Alabama
operation.
We have recorded no benefit from income tax. As a result of our
cumulative net losses, we have recorded a full valuation allowance against the
deferred tax asset, which was generated from the net operating loss.
Net loss for the nine months ended June 25, 2004 was ($0.9) million
versus a net income of $1.8 million in the comparable period of the prior fiscal
year.
Diluted loss per share was $0.11 as compared to diluted income per
share of $0.23 in the comparable period of the prior fiscal year.
Discontinued Operations
On February 28, 2003, IEC sold its Edinburg, Texas facility and
completed its restructuring initiative. As a result, IEC recorded a $184,000
restructuring benefit due to certain facility payments accrued in a prior fiscal
year that will no longer be paid out.
Page 11 of 15
Liquidity and Capital Resources
Cash decreased to $0.2 million at June 25, 2004, from $0.8 million at
September 30, 2003. Availability under our line of credit was $0.8 million on
June 25, 2004. As reflected in the Consolidated Statements of Cash Flows for the
nine months ending June 25, 2004, net cash from operating activities was ($0.4
million) and cash from investing activities was $0.2 million. Cash was used to
pay down bank debt ($0.5 million). Depreciation for the nine month periods
ending June 25, 2004 and June 27, 2003 was $0.8 million and $1.1 million,
respectively. Accounts receivable decreased by $1.0 million because of lower
sales. Inventory increased by $2.0 million, and accounts payable increased by
$1.0 million. Both changes are due to materials purchased in anticipation of
fourth quarter 2004 production requirements.
We currently have a $4,450,000 Senior Secured Facility (the "Facility")
and a $2,200,000 Secured Term Loan (the "Term Loan"). The Facility, which
matures on January 14, 2006, 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 and a term loan of $600,000, secured
by machinery and equipment, to be amortized over a 36 month period. 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, maturing on January 14, 2006.
$599,000, $317,000, and $792,000 were outstanding at June 25, 2004
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). Our lender has granted us a waiver for
our failure to comply with the fixed charge coverage ratio and EBITDA covenants
during the quarter ended June 25, 2004.
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.
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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 our financial statements or tax returns. Fluctuations in
the actual outcome of these future tax consequences could materially impact our
financial position or our results of operations
Impact of Inflation
The impact of inflation on our operations has been minimal due to the
fact that we are able to adjust our bids to reflect any inflationary increases
in costs.
New Pronouncements
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
adopted this standard on October 1, 2003 with no impact on our financial
position, results of operations or cash flow.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures about Market Risk represents
the risk of loss that may impact the consolidated financial position, results of
operations or cash flows of IEC due to adverse changes in financial rates. We
are exposed to market risk in the area of interest rates. One exposure is
directly related to our Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
Item 4 -- Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our management, including our 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
Quarterly Report on Form 10-Q as required by Rule 13a-15 under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by the Quarterly Report on 10-Q 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 Chief Executive Officer and Chief Financial Officer, identified no
change in our internal control over financial reporting that occurred during our
fiscal quarter ended June 25, 2004, and that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
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Forward-looking Statements
Forward-looking statements in this Form 10-Q include, without
limitation, statements relating to the Company's plans, future prospects,
strategies, objectives, expectations, intentions and adequacy of resources and
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements may be identified by their use
of words like "plans", "expects", "aims", "believes", "projects", "anticipates",
"intends", "estimates", "will", "should", "could", and other expressions that
indicate future events and trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, among others,
the following: general economic and business conditions, the timing of orders
and shipments, availability of material, product mix, changes in customer
requirements and in the volume of sales to principal customers, competition and
technological change, the ability of the Company to control manufacturing and
operating costs, and satisfactory relationships with vendors. The Company's
actual results of operations may differ significantly from those contemplated by
such forward-looking statements as a result of these and other factors,
including factors set forth in the Company's Annual Report on Form 10-K for the
year ended September 30, 2003 and in other filings with the Securities and
Exchange Commission.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The descriptions of our legal proceedings set forth in Item 3 of our
Annual Report on Form 10-K for the fiscal year ended September 30, 2003, and in
note (4) to the notes to the consolidated financial statements contained herein,
are incorporated herein by reference.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None
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Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
The following documents are filed as exhibits to this Report:
10.1 Waiver, dated as of June 25, 2004, to the Revolving Loan
Agreement, dated January 14, 2003, by and between Keltic
Financial Partners, LP and IEC Electronics Corp.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
b. Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and
Exchange Commission on April 23, 2004. The report announced
earnings for the three and six month periods ended March 26,
2004 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 May 7, 2004 to announce the appointment
of a new Vice-President of Sales and Marketing and the
retirement of the Chief Operating Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IEC ELECTRONICS CORP.
REGISTRANT
Dated: July 29, 2004 /s/ W. BARRY GILBERT
--------------------------------------
W. Barry Gilbert
Chairman and
Chief Executive Officer
Dated: July 29, 2004 /s/ BRIAN H. DAVIS
--------------------------------------
Brian H. Davis
Chief Financial Officer and Controller
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