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, 2004 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 46
The aggregate market value of shares of common stock held by
non-affiliatesof the registrant was approximately $3,419,222 as of November 12,
2004, 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
executiveofficer 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 12, 2004, there were outstanding 8,216,023 shares of Common
Stock.
Documents incorporated by reference:
Portions of IEC Electronics Corp.'s Proxy Statement for the 2005 Annual
Meeting of Stockholders are incorporated into Part III of this Form 10-K.
Page 2 of 46
TABLE OF CONTENTS
PART I
PAGE
Item 1: Business..................................................... 4
Item 2: Properties................................................... 7
Item 3: Legal Proceedings............................................ 7
Item 4: Submission of Matters to a Vote of Security Holders.......... 7
Executive Officers of Registrant............................. 8
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.......... 8
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............................. 15
Item 7A: Quantitative and Qualitative Disclosures about Market Risk... 19
Item 8: Financial Statements and Supplementary Data.................. 19
Item 9: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 20
Item 9A: Controls and Procedures...................................... 20
Item 9B: Other Information...................... ..................... 20
PART III
Item 10: Directors and Executive Officers of the Registrant........... 20
Item 11: Executive Compensation....................................... 20
Item 12: Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 20
Item 13: Certain Relationships and Related Transactions............... 21
Item 14: Principal Accountant Fees and Services....................... 21
PART IV
Item 15: Exhibits and Financial Statement Schedules................... 21
"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 46
PART I
ITEM 1. BUSINESS
Overview
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 automated manufacturing and test
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 services, on either a turnkey or consignment basis. These services
include product development, prototype assembly, material procurement, volume
assembly, test engineering support, statistical quality assurance, order
fulfillment and repair services. 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. The consolidated financial statements include the accounts of IEC and its
wholly owned subsidiary, IEC Electronics de Mexico. Operations in Texas and
Mexico were closed in July 2002. All significant intercompany transactions and
accounts have been eliminated.
During 2004, we initiated a restructuring and workforce reduction plan in
an effort to more closely align our resources with our current business
requirements and strategy. In connection with this restructuring, we incurred
$337,000 of expenses relating primarily to severance and hiring costs.
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 us to provide
manufacturing and test services to manufacturers producing telecommunication
equipment destined for shipment to the European Common Market. Our
state-of-the-art 10,000 square foot Technology Center includes pilot build,
prototype assembly, design engineering services, and an Advanced Materials
Technology Laboratory.
Our executive offices are located at 105 Norton Street, Newark, New York
14513. Our telephone number is (315)331-7742, and our Internet address is
www.iec-electronics.com.
Electronics Manufacturing Services: The Industry
The EMS industry specializes in providing program management, technical
support and manufacturing expertise required to take a product from the early
design and prototype stages through volume production and distribution.
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 their core competencies 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 as the economy continues to
rebound.
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.
Page 4 of 46
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 includes 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.
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.
Products and Services
We manufacture a wide range of assemblies, which are incorporated into many
different products. We provide electronic manufacturing services primarily for
telecommunications and wireless communication systems, test diagnostic
equipment, military and defense systems, transportation products, alternative
energy equipment, and medical instrumentation. During the fiscal year ended
September 30, 2004 we provided electronics manufacturing services to
approximately 20 different customers, including Teradyne Diagnostic Solutions
UK, Teradyne Test Division, Concerto Software, Inc., Excel Switching
Corporation, ViaSat, Inc, and Matrox Electronics Systems, Ltd.. 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 some 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.
Page 5 of 46
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.
Marketing and Sales
Our sales declined during 2004, primarily due to the loss of one major
customer. However, we have added a number of new customers and we have
experienced growth in sales with existing customers. These new customers did not
offset the sales loss associated with the one large customer. We have upgraded
our direct sales force as well as upgraded and expanded our nationwide network
of Manufacturers Representatives. Through this hybrid sales approach, we execute
a focused sales strategy targeting only those customers with product profiles
aligning with our core areas of expertise. For example, we are focusing on
customers developing complex, advanced technology products for a wide array of
market sectors ranging from toxic gas monitoring and detection through satellite
communications, medical, military and general industrial.
Typically, the demand profiles associated with these customers are in the
low to moderate volume range with high variability of mix requirements and end
item configurations. In fact, these products often represent emerging
technologies requiring high intensity of manufacturing support to seamlessly
transfer them from the early product development stage through prototyping onto
volume manufacturing. As these products exit the product development phase,
specialized capabilities are required to support rapid response prototyping
requirements in a dynamic engineering change environment as well as the
expertise to establish cost effective supply chain models. As a result, the
usual industry outsourcing models associated with these customers rarely include
supply alternatives in low cost labor regions such as Asia and Mexico.
Overall, our sales efforts are supported by advertising in trade media,
sales literature, Internet website, customer presentations, participation in
trade shows and direct mail promotions. Sales leads resulting from these
marketing activities are assigned to a representative covering a customer's
location for qualification and further development. In addition, referrals by
existing customers are an important source of new opportunities.
Backlog
Our backlog as of September 30, 2004 and September 30, 2003 was
approximately $6.0 million and $6.7 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 164 at October 28, 2004, including 20 employees
engaged in engineering, 131 in manufacturing and 13 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.
Page 6 of 46
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
Our administrative and manufacturing facility is located in Newark, New
York and contains an aggregate of approximately 300,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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 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 provided 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.
Prior to the scheduled trial, the parties arrived at a settlement, which
will have no material impact upon IEC. We have accrued the estimated settlement
costs. The settlement is subject to court approval. A hearing is scheduled for
November 30, 2004.
On August 13, 2003 General Electric Company ("GE") commenced an action in
the state of Connecticut against IEC and Vishay Intertechnology, Inc ("Vishay").
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. IEC, GE and
Vishay are discussing the possibility of non-binding mediation. IEC's position
is that the contract with GE was substantially completed and that it has
meritorious defenses and basis for a cross claim against Vishay.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2004, no matters were submitted to vote of
security holders.
Page 7 of 46
EXECUTIVE OFFICERS OF THE REGISTRANT
IEC's executive officers as of September 30, 2004, were as follows:
Name Age Position
W. Barry Gilbert 58 Chairman of the Board, Director and
Chief Executive Officer
Jeffrey T. Schlarbaum 38 Vice President of Sales and Marketing
Brian H. Davis 50 Vice President, Chief Financial Officer and Controller
Ann Wood 40 Vice President of Operations
W. Barry Gilbert has served as 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. Mr. Gilbert
previously held the position of President of the Thermal Management Group of
Bowthorpe (now known as Spirent) and was corporate Vice President and President
of the Analytical Products Division of Milton Roy Company, a manufacturer of
analytical instrumentation.
Jeffrey T. Schlarbaum joined IEC in May 2004 as Vice President of Sales
and Marketing. He has over 15 years of sales experience in the electronics
industry most recently serving as Regional Vice President of Sales for Plexus
Corp., a contract manufacturer of electronics products, Neenah, Wisconsin. Prior
to that, he worked as Vice President of Sales, Eastern Region for MCMS as well
as holding various senior sales and marketing management positions with MACK
Technologies and Conner Peripherals. He holds a Bachelors of Business
Administration degree from National University, and an MBA from Pepperdine
University.
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
at Thermo Spectronic, a manufacturer of laboratory equipment located in
Rochester, NY. Prior to that, Mr. Davis functioned in various Controller and
General Management positions with Life Sciences International and Milton Roy
Company. He holds a B.S. in Accounting from the Pennsylvania State University,
and an MBA from the Rochester Institute of Technology.
Ann Wood joined IEC in 1995 and has served in various roles within IEC. She
served as Director of Manufacturing prior to being named Vice President of
Operations in 2004. Ms. Wood is responsible for Manufacturing and Supply Chain
Management. She is a graduate of Alfred University with a concentration in
Industrial Engineering. She also earned an Executive MBA from the Rochester
Institute of Technology.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
(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, 2002 - December 31, 2002 $ 0.27 $ 0.06
January 1, 2003 - March 31, 2003 $ 0.57 $ 0.07
April 1, 2003 - June 30, 2003 $ 0.98 $ 0.39
July 1, 2003 - September 30, 2003 $ 1.53 $ 0.65
October 1, 2003 - December 31, 2003 $ 2.40 $ 1.05
January 1, 2004 - March 31, 2004 $ 2.40 $ 0.92
April 1, 2004 - June 30, 2004 $ 1.40 $ 0.85
July 1, 2004 - September 30, 2004 $ 1.03 $ 0.31
The closing price of IEC's Common Stock on the OTCBB on November 12, 2004,
was $0.55 per share.
Page 8 of 46
(b) Holders.
As of November 12, 2004, there were approximately 153 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, 2004.
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 plans
warrants and rights (excluding securities
reflected in column (a))
(a) (b) (c)
Equity compensation plans:
approved by security holders 1,102,035 $ 0.86 70,583
not approved by security holders - NA -
Total 1,102,035 $ 0.86 70,583
Issuance of Unregistered Securities
Not Applicable
Repurchases of IEC Securities
Not Applicable
Page 9 of 46
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Years Ended September 30, 2004 2003 2002 2001 2000
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INCOME STATEMENT DATA
Net sales $ 27,701 $ 48,201 $ 39,365 $114,771 $146,359
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Gross profit (loss) 1,977 $ 4,930 $ 2,297 $ 2,942 $ 10,339
----------------------------------------------------------------------
Operating income (loss) (828) $ 2,074 $ (3,026) $(16,208) $ 2,019
----------------------------------------------------------------------
Income (loss) from
continuing operations (828) $ 2,413 $ (3,771) $(17,439) $ 2,411
----------------------------------------------------------------------
Income (loss) from
discontinued operations 0 $ 184 $ (7,208) $(11,833) $(10,442)
----------------------------------------------------------------------
Net income (loss) (828) $ 2,597 $(10,979) $(29,272) $ (8,031)
----------------------------------------------------------------------
Income (loss) from continuing operations per common and common equivalent share:
Basic $ (0.10) $ 0.31 $ (0.49) $ (2.28) $ 0.32
Diluted $ (0.10) $ 0.29 $ (0.49) $ (2.28) $ 0.32
-----------------------------------------------------------------------
Income (loss) from discontinued operations per common and common equivalent share:
Basic $ 0.00 $ 0.02 $ (0.94) $ (1.55) $ (1.38)
Diluted $ 0.00 $ 0.02 $ (0.94) $ (1.55) $ (1.38)
-----------------------------------------------------------------------
Net income (loss) per common and common equivalent share:
Basic $ (0.10) $ 0.33 $ (1.43) $ (3.83) $ (1.06)
Diluted $ (0.10) $ 0.31 $ (1.43) $ (3.83) $ (1.06)
-----------------------------------------------------------------------
Common and common
equivalent shares
Basic 8,119 7,899 7,692 7,651 7,590
Diluted 8,119 8,274 7,692 7,651 7,590
-----------------------------------------------------------------------
BALANCE SHEET DATA
Working capital (deficiency) $ 726 $ 1,428 $ (3,572) $ 1,163 $30,860
----------------------------------------------------------------------
Total assets $ 8,530 $ 10,506 $ 15,065 $ 38,127 $89,561
----------------------------------------------------------------------
Long-term debt, including
current maturities $ 2,366 $ 2,667 $ 4,396 $ 13,382 $17,371
---------------------------------------------------------------------
Shareholders' equity $ 2,616 $ 3,414 $ 799 $ 11,809 $41,008
---------------------------------------------------------------------
Page 10 of 46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION OF OPERATIONS
The information in this Management's Discussion & Analysis should be read
in conjunction with the accompanying consolidated financial statements, the
related Notes to Financial Statements and the Five-Year Summary of Financial
Data. Forward-looking statements in this Management's Discussion and Analysis
are qualified by the cautionary statement preceding Item 1 of this Form 10K.
Overview
2004 was a year of transition for IEC. During the second half of 2003, a
major customer that accounted for more than half of our sales announced its
intention to begin manufacturing most of the products they purchased from IEC in
their own facility. During the second quarter of 2004, we received notification
from another customer that they plan to move a substantial amount of their
contract assembly work to China. We subsequently put programs in place to
strengthen the organization, broaden our customer base, increase profitability
and maximize shareholder value. We hired a new Vice President of Sales and
Marketing. We restructured our organization to align resources with our customer
requirements. We were profitable during three of our four quarters, including
our fourth quarter. We have added several new customers that we expect to
contribute to growth and profitability in the future.
Analysis of Operations
Sales (dollars in millions)
For Year Ended September 30, 2004 2003 2002
---- ---- ------
Net sales $27.8 $48.2 $39.4
The 42% decrease in fiscal 2004 net sales compared to fiscal year 2003
was primarily due to a reduction in business from a major customer that
accounted for more than 50% of our 2003 business. The 22% increase in fiscal
2003 net sales compared to fiscal 2002 was primarily due to increased demand
from the same customer.
Gross Profit and Selling and Administrative Expenses
- ----------------------------------------------------
(as a % of Net Sales)
For Year Ended September 30, 2004 2003 2002
---- ---- ----
Gross profit 7.1% 10.2% 5.8%
Selling and administrative expenses 8.7% 6.1% 10.7%
Gross profit as a percentage of sales was 7.1% in fiscal 2004 as compared
to 10.2% in fiscal 2003. The decrease was primarily attributable to high start
up costs related to several new customers, as well as fixed overhead costs being
spread over fewer revenue dollars.
Gross profit as a percentage of sales was 10.2% in fiscal 2003 as compared
to 5.8% in fiscal 2002. The increase was primarily attributable to our concerted
efforts to reduce manufacturing overhead costs. We also benefited from being
able to spread fixed overhead costs over more revenue dollars.
Selling and administrative expenses decreased by $0.5 million in fiscal
2004 compared to fiscal 2003. This decrease was in spite of an upgrade to our
direct sales force as well as the addition of a new Vice President of Sales and
Marketing. As a percentage of sales, selling and administrative expenses
increased to 8.7% in fiscal 2004 compared to 6.1% in fiscal 2003. The percentage
increase was due to expenses being spread over fewer sales dollars in 2004
compared to 2003.
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 higher revenues and a decrease in the number of employees.
Page 11 of 46
Other Income and Expense (dollars in millions)
- ------------------------
For Year Ended September 30, 2004 2003 2002
---- ---- ----
Interest and financing expense $0.3 $0.6 $0.9
Other income $0.3 $0.7 $0.2
Interest and financing expense decreased to $0.3 million in fiscal 2004
from $0.6 million in fiscal 2003. This is primarily due to debt reduction that
was achieved due to favorable cash flow from operations in 2003. 2003 interest
and finance expense decreased to $0.6 million from $0.9 million in fiscal 2002.
This was also due to debt reduction.
We had other income of $0.3 million in fiscal 2004. This was primarily due
to a gain on the sale of excess equipment. We had other income of $0.7 million
in fiscal 2003. This was primarily related to negotiated forgiveness of accounts
payable owed to various creditors. Other income of $0.2 million in fiscal 2002
was primarily due to 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, 2004 2003 2002
---- ---- ----
Effective tax rate - % (12.1)% - %
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 $20 million valuation
allowance against our net deferred tax assets including the net operating loss
carryforward.
Restructuring Charge (Benefit) (dollars in millions)
- -----------------------------
For Year Ended September 30, 2004 2003 2002
---- ---- ----
$0.3 ($0.1) $0.2
During Fiscal 2004, we incurred $337,000 in severance and hiring costs
related to our restructuring efforts.
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.
During Fiscal 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.
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 indicate 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 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.
Page 12 of 46
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 sold substantially all of the assets of IEC-Mexico to
Electronic Product Integration Corporation (EPI)for $730,000. 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, 2004 was $195,000. It is
anticipated that all remaining charges against the accrual will be made by March
2005.
On February 28, 2003, we sold our Edinburg, Texas facility for $875,000 and
completed our restructuring initiative. As a result, we recorded a $184,000
restructuring benefit due to certain facility payments accrued in a prior fiscal
year that will no longer be paid out.
Significant Events
Historically, a relatively small number of customers were responsible
for a significant portion of our net sales. During 2004, one of these customers
informed us of its plan to move substantial amounts of its contract assembly
work to China. However, over the course of this same year, we further
diversified our customer base to mitigate the dependence on a small number of
customers. Through this diversification effort, we reduced our risk of sales
concentration from two customers representing 87% of sales in 2003 to six
customers representing 82% of revenue in 2004. Furthermore, we anticipate our
focused sales approach in 2005 will also result in the further diversification
of our customer base through new customer additions.
During 2003 our largest customer, representing more than 50% of our sales
announced its intention to begin manufacturing most of the products it purchased
from IEC at its own facility.
Liquidity and Capital Resources
As reflected in the Consolidated Statements of Cash Flows for Fiscal 2004,
net cash provided by operations was ($.8) million.
On January 14, 2003, we completed a new $7,300,000 financing agreement
composed of a $5,000,000 Senior Secured Facility (the "Facility") with Keltic
Financial Partners L.P. ("Keltic"), a $2,200,000 Secured Term Loan (the "Term
Loan") with SunTrust Bank ("SunTrust) 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 $1.2 million on September 30, 2004.
$1,025,000, $267,000, and $667,000, respectively, were outstanding at
September 30, 2004 under the revolving line of credit with Keltic, the term loan
with Keltic and the SunTrust loan.
The financing agreements contain various affirmative and negative covenant
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 were in compliance with these
covenants at September 30, 2004. 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. The balance due on these notes was $407,000 as of September 30, 2004.
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.
Page 13 of 46
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.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in IEC's financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact IEC's
financial position or its results of operations.
Impact of Inflation
The impact of inflation on our operations has been minimal due to the fact
that we are able to adjust our bids to reflect any inflationary increases in
cost.
New Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishments 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
adopted this standard as of October 1, 2003 with no material impact on our
financial position, results of operations or cash flows.
Page 14 of 46
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 require 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 adopted this
standard as of December 31, 2003, with no 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 adopted this standard as of July 1, 2003, with
no 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 characteristics 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 adopted this standard on such effective dates, with no 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
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.
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.
Page 15 of 46
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 2004, 2003, and 2002, our five largest
customers accounted for 76%, 93% and 81% of consolidated net sales,
respectively. During fiscal 2004, Teradyne, Inc. and Teradyne Diagnostic
Solutions accounted for 15% and 33%, 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. 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.
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
Page 16 of 46
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.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
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.
Page 17 of 46
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-pricing 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 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.
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.
Page 18 of 46
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.
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 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 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).
Page 19 of 46
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
(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the
participation of IEC's 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
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 Chief
Executive Officer and Chief Financial Officer concluded that IEC'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 IEC 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.
(b) Changes in internal control over financial reporting
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 September 30, 2004, that materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
ITEM 9B OTHER INFORMATION
None
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 2005 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.
IEC has adopted a Code of Business Conduct and Ethics (the "Code"), which
applies to all of its directors, officers (including IEC's Chief Executive
Officer, Chief Financial Officer, and other senior financial officers), and
employees. The Code, a copy of which was filed as Exhibit 14 to IEC's Current
Report on Form 8-K filed on September 1, 2004, may be viewed on IEC's website,
www.iec-electronics.com, under its "Investor Relations - Corporate Governance"
captions, and is available in print (free of charge) to any person upon request
to Chief Financial Officer, IEC Electronics Corp., 105 Norton Street, Newark, NY
14513, telephone (315) 331-7742. Any amendment to, or waiver of, a provision of
the Code which applies to IEC's Chief Executive Officer, Chief Financial
Officer, or other senior financial officers and relates to the elements of a
"code of ethics" as defined by the Securities and Exchange Commission will also
be posted on the website.
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 2005 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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 2005
Annual Meeting of Stockholders and is incorporated in this report by reference
thereto.
Page 20 of 46
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 2005 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
"Independent Public Accountants" contained in the definitive proxy statement
issued in connection with the 2005 Annual Meeting of Stockholders and is
incorporated in this report by reference thereto.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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................................ 24
Consolidated Balance Sheets as of
September 30, 2004 and 2003............................................ 25
Consolidated Statements of Operations for the years
ended September 30, 2004, 2003 and 2002 .............................. 26
Consolidated Statements of Comprehensive Income (Loss) and
Shareholders' Equity for the years ended September 30, 2004,
2003 and 2002.......................................................... 27
Consolidated Statements of Cash Flows for the years
ended September 30, 2004, 2003 and 2002................................ 28
Notes to Consolidated Financial Statements.............................. 29
Selected Quarterly Financial Data (unaudited)........................... 37
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
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)
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)
Page 21 of 46
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 Loan agreement between IEC Electronics Corp., and Keltic Financial
Partners, LLP, dated January 14, 2003 (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2003).
10.9 Loan and Security Agreement between IEC Electronics Corp., and
Suntrust Bank Dated January 13, 2003 (Incorporated by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2003).
10.10 Supplier agreement between IEC Electronics Corp., and Arrow CMS
Distribution Group of Arrow Electronics, Inc. dated December 27,
2002 (Incorporated by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the year ended September 30, 2003).
10.11 Amendment Number 1 to Term Note between IEC Electronics Corp., and
Suntrust Bank Dated September 26, 2003 (Incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-K for the
year ended September 30, 2003).
10.12 First Amendment, dated as of March 23, 2004, to the Loan Agreement
dated January 14, 2003, by and between Keltic Financial Partners, LP
and IEC Electronics Corp. (Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 26, 2004).
10.13 Waiver, dated as of June 25, 2004 to the Loan Agreement, dated
January 14, 2003, by and between Keltic Financial Partners, LP and
IEC Electronics Corp.(Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 25, 2004)
10.14 Severance Agreement dated April 29, 2004 between IEC Electronics Corp.
and William R. Anderson. ................................................ 38
14 Code of Business Conduct and Ethics (Incorporated by Reference to
Exhibit 14 to the Company's Current Report of Form 8-K filed on
September 1, 2004)
21.1 Subsidiaries of IEC Electronics Corp. ....................................... 42
23.1 Consent of Rotenberg & Co., LLP ............................................ 43
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 ............................... 44
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 ............................... 45
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ........ 46
*Management contract or compensatory plan or arrangement
Page 22 of 46
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 17, 2004.
IEC Electronics Corp.
By:/s/ W. Barry Gilbert
-------------------------
W. Barry Gilbert
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 Chief Executive Officer and
- ---------------------- Chairman of the Board
(W. Barry Gilbert) November 17, 2004
/s/Brian H. Davis Vice President,
- ----------------- Chief Financial Officer
(Brian H. Davis) and Controller
November 17, 2004
/s/David J. Beaubien Director November 17, 2004
- --------------------
(David J. Beaubien)
/s/Robert P. B. Kidd Director November 17, 2004
- -------------------
(Robert P. B. Kidd)
/s/Eben S. Moulton Director November 17, 2004
- ------------------
(Eben S. Moulton)
/s/Justin L. Vigdor Director November 17, 2004
- -------------------
(Justin L. Vigdor)
/s/James C. Rowe Director November 17, 2004
- ------------------
(James C. Rowe)
/s/Dermott O'Flanagan Director November 17, 2004
- ---------------------
(Dermott O'Flanagan)
Page 23 of 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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) & Subsidiaries as of September 30,
2004 and 2003, and the related consolidated statements of operations,
comprehensive income and stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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 consolidated financial statement presentation. We believe
that our audits provide 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. & Subsidiaries as of September 30, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Rotenberg & Co., LLP
- ------------------------
Rotenberg & Co., LLP
Rochester, New York
October 19, 2004
Page 24 of 46
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND 2003
(in thousands)
ASSETS
2004 2003
----------------------
CURRENT ASSETS:
Cash $ - $ 793
Accounts receivable (net allowance for doubtful 3,710 4,004
Accounts of $500 and $200 respectively)
Inventories 1,882 1,633
Deferred income taxes 250 250
Other current assets 338 450
-----------------------
Total current assets 6,180 7,130
-----------------------
FIXED ASSETS:
Land and land improvements $ 768 768
Building and improvements 3,995 3,995
Machinery and equipment 40,951 46,702
Furniture and fixtures 5,283 5,870
-----------------------
SUB-TOTAL GROSS PROPERTY 50,997 57,335
LESS ACCUMULATED DEPRECIATION (48,761) (54,161)
-----------------------
2,236 3,174
OTHER NON-CURRENT ASSETS 114 202
-----------------------
$ 8,530 $ 10,506
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
2004 2003
-------------------------
CURRENT LIABILITIES:
Short term borrowings $ 1,905 $ 1,277
Accounts payable 2,253 2,740
Accrued payroll and related expenses 549 794
Other accrued expenses 747 891
-------------------------
Total current liabilities 5,454 5,702
-------------------------
Long term vendor payable 227 456
Long term bank debt 233 934
-------------------------
TOTAL LIABILITIES 5,914 7,092
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, Authorized
- 500,000 shares; Issued and outstanding - none - -
Common stock, $.01 par value, Authorized
- 50,000,000 shares; Issued - 8,215,458 and
8,021,960 shares (net of 573 treasury shares) 71 69
Additional paid-in capital 38,507 38,479
Accumulated deficit (35,870) (35,042)
Accumulated translation adjustments (92) (92)
-------------------------
Total shareholders' equity 2,616 3,414
--------------------------
$ 8,530 $ 10,506
==========================
The accompanying notes are an integral part of these financial statements.
Page 25 of 46
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(in thousands, except per share and share data)
2004 2003 2002
----------------------------------
Net sales $ 27,701 $ 48,201 $ 39,365
Cost of sales 25,724 43,271 37,068
---------------------------------
Gross profit 1,977 4,930 2,297
Operating expenses
Selling and administrative expenses 2,409 2,919 4,209
Restructuring (benefit) charge 337 (63) 214
Asset impairment writedown - - 900
---------------------------------
Total operating expenses 2,746 2,856 5,323
---------------------------------
Operating income (loss) (769) 2,074 (3,026)
Interest and financing expense (386) (642) (932)
Forgiveness of accounts payable 10 578 -
Other income 316 143 188
---------------------------------
Net income (loss) before income taxes (828) 2,153 (3,771)
(Benefit from) provision for income taxes - (260) -
---------------------------------
Income (loss) from continuing operations (828) 2,413 (3,771)
---------------------------------
Discontinued operations:
Income (loss) from operations of IEC-Mexico
disposed of (net of income taxes of
$0, $56, and $116 in 2004, 2003 and
2002, respectively) - 184 (4,069)
Estimated (loss) on disposal of IEC-Mexico
(net of income taxes of $0 in 2004,
2003 and 2002) - - (3,139)
---------------------------------
- 184 (7,208)
---------------------------------
Net income (loss) $ (828) $ 2,597 $ (10,979)
=================================
Net income (loss) per common and common equivalent share:
Basic
Income (loss) from cont. operations $ (0.10) $ 0.31 $ (0.49)
Income (loss) from discont. ops. $ 0.00 $ 0.02 $ (0.94)
Income (loss) available to
common shareholders $ (0.10) $ 0.33 $ (1.43)
Diluted
Income (loss) from cont. operations $ (0.10) $ 0.29 $ (0.49)
Income (loss) from discont. ops. $ 0.00 $ 0.02 $ (0.94)
Income (loss) available to
common shareholders $ (0.10) $ 0.31 $ (1.43)
Weighted average number of common and common equivalent shares outstanding:
Basic 8,118,587 7,898,699 7,691,503
===================================
Diluted 8,118,587 8,273,977 7,691,503
===================================
The accompanying notes are an integral part of these financial statements.
Page 26 of 46
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(in thousands)
Accumulated
Other
Additional Retained Comprehensive Total
Comprehensive Common Paid-In Earnings Income Treasury Shareholders
Loss Stock Capital (Deficit) (Loss) Stock Equity
-------------------------------------------------------------------------------------------
BALANCE, $ 77 $ 38,418 $(26,661) $ (14) $ (11) $ 11,809
September 30, 2001
Net Loss $(10,979) -- -- $(10,979) -- -- $(10,979)
Other comprehensive
Loss, currency
Translation adjustments $ (31) -- -- -- $ (31) -- $ (31)
-------------------------------------------------------------------------------------------
Comprehensive loss $(11,010)
========
BALANCE, $ 77 $ 38,418 $(37,640) $ (45) $ (11) $ 799
September 30, 2002
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
Shares issued under
Directors and Employee
Stock Plan $ 2 $ 28 -- -- -- $ 30
Net Income $ (828) -- -- $ (828) -- -- $ (828)
Other comprehensive
Loss, currency
translation adjustments $ -- -- -- -- $ -- -- $ --
-------------------------------------------------------------------------------------------
Comprehensive income $ (828)
========
BALANCE,
September 30, 2004 $ 82 $ 38,507 $(35,870) $ (92) $ (11) $ 2,616
The accompanying notes are an integral part of these financial statements.
Page 27 of 46
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(in thousands)
2004 2003 2002
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (828) $ 2,597 $(10,979)
Non-cash adjustments:
(Income) loss from discontinued operations - (184) 4,069
Loss on sale of discontinued operations - - 3,139
Depreciation and amortization 1,138 1,457 1,637
Gain on sale of fixed assets (298) (50) (6)
Issuance of directors fees in stock 17 8 -
Asset impairment writedown - - 900
Changes in operating assets and
liabilities:
Accounts receivable 294 1,476 5,634
Inventories (249) 1,779 3,434
Deferred income taxes - (250) -
Other current assets 46 (144) 31
Accounts payable (487) (1,325) 1,469
Accrued expenses (369) (724) (1,362)
--------------------------------
Net cash flows from operating activities (736) 4,640 7,966
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (113) (274) (190)
Proceeds from sale of property 298 547 61
Proceeds from sale of discontinued operations - 875 730
--------------------------------
Net cash flows from investing activities 185 1,148 601
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under loan agreements (1,326) (3,019) (4,780)
Borrowings (payments) on line of credit 1,025 (4,395) (4,708)
Proceeds from borrowing 3,500 -
Debt issuance costs - (263) -
Common stock issued under financing plan - 50 -
Proceeds from exercise of stock options 13 6 -
--------------------------------
Net cash flows from financing activities (288) (4,121) (9,488)
--------------------------------
Cash (used in) from discontinued operations 46 (827) 951
--------------------------------
Change in cash and cash equivalents (793) 840 30
Effect of exchange rate changes - (47) (30)
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 $ 386 $ 642 $ 1,461
Income taxes, net of refunds received $ - $ (10) $ -
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 28 of 46
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004, 2003 AND 2002
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company is a significant
provider of high quality electronics manufacturing services with
state-of-the-art manufacturing capabilities and production capacity. Utilizing
computer controlled manufacturing and test machinery and equipment, the Company
provides manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, the Company offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment basis,
including design, prototype, material procurement and control, manufacturing and
test engineering support, statistical quality assurance, complete resource
management and distribution. The Company's strategy is to cultivate strong
manufacturing relationships with established and emerging original equipment
manufacturers ("OEMs").
Consolidation
The consolidated financial statements include the accounts of IEC and its
wholly-owned 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.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectable trade accounts
receivable based on the age of outstanding invoices and management's evaluation
of collectibility of outstanding balances.
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.
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
Financial instruments consist of cash and cash equivalents, accounts
receivable and payable, accrued liabilities, and debt. The carrying amount of
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value. The fair value of the Company's debt is
estimated based upon similar market rate debt issues.
Page 29 of 46
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 are 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
are 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.
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.
Reclassifications
Certain amounts in 2003 and 2002 have been reclassified to conform with the
2004 presentation.
New Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4,
44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS
No. 145). SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. 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
adopted this standard as of October 1, 2003 with no material impact on our
financial position, results of operations or cash flows.
Page 30 of 46
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 require 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 adopted this
standard as of December 31, 2003, with no 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 adopted this standard as of July 1, 2003, with
no 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 characteristics 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 adopted this standard on such effective dates, with no material impact
on our financial position, results of operations or cash flows.
2. INVENTORIES
Inventories are stated at the lower of weighted average cost (first-in,
first-out) or market. The major classifications of inventories are as follows at
period end (in thousands):
2004 2003
------- -------
Raw Materials $ 1,162 $ 1,128
Work-in-process 711 498
Finished goods 9 7
-------- --------
$ 1,882 $ 1,633
======== ========
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.
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.
Page 31 of 46
Depreciation and amortization was $1.1 million, $1.5 million, and $1.6
million for the years ended September 30, 2004, 2003 and 2002, 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. DISCONTINUED OPERATIONS
On June 18, 2002, the Company sold substantially all of the assets of
Mexico to Electronic Product Integration Corporation (EPI) for $730,000. The
Company recorded an after-tax loss on the sale of the business of approximately
$3.1 million.
Net sales of IEC-Mexico were $10.8 million for the year ended September 30,
2002 and are not included in net sales in the accompanying consolidated
statements of operations.
5. RESTRUCTURING
During Fiscal 2004, we incurred $337,000 in severance and hiring costs
related to our restructuring efforts.
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.
6. LONG-TERM DEBT:
Long-term debt consists of the following at September 30 (in thousands):
2004 2003
------- -------
Term loans $ 933 $ 1,592
Vendor term notes 407 1,075
Less - Current portion (880) (1,277)
-------- -------
$ 460 $ 1,390
======== =======
Page 32 of 46
On January 14, 2003, IEC completed a new $7,300,000 financing composed of a
$5,000,000 Senior Secured Facility with Keltic Financial Partners LLP
("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust") and a
$100,000 infusion by certain of the IEC directors. The Keltic Facility, which
has a 3 year maturity, bears interest at the rate of prime plus 6%. 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 which was paid in full upon the sale of the Company's Texas plant in
February 2003. The SunTrust Term Loan is secured 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 prime rate at September 30, 2004 was 4.75%.
$1,025,000, $267,000, and $667,000 were outstanding at September 30, 2004
under the revolving line of credit with Keltic, the term loan with Keltic and
the SunTrust loan, respectively.
The Keltic and Suntrust loan agreements contain various affirmative and
negative covenants including, among others, limitations on the amount available
under the revolving line of credit relative to the borrowing base, capital
expenditures, fixed charge coverage ratios, and minimum earnings before
interest, taxes, depreciation and amortization (EBITDA). In connection with the
financing the Company entered into agreement with certain of its trade creditors
providing for extended payment terms on past due balances.
Aggregate debt maturities over the next five fiscal years and thereafter
are as follows (in thousands):
2005 $ 880
2006 383
2007 64
2008 10
2009 3
-----------
Total $1,340
7. INCOME TAXES:
The provision for (benefit from) income taxes in fiscal 2004, 2003 and 2002
is summarized as follows (in thousands):
2004 2003 2002
---- ---- ----
Current
Federal $ - $ - $ -
State/Other - (10) -
Deferred
Federal - (188) -
State/Other - (62) -
------ ----- -----
(Benefit from) provision for
income taxes, net $ - (260) -
The components of the deferred tax asset (liability) at September 30 are as
follows (in thousands):
2004 2003 2002
---- ---- ----
Net operating loss and AMT
credit carryovers $16,184 $ 15,614 $14,858
Accelerated depreciation 85 291 621
New York State investment tax credits 3,235 3,237 3,237
Compensated absences 93 91 119
Inventories 101 90 985
Receivables 170 26 151
Restructuring reserve 42 48 470
Other 374 489 666
------ ------ ------
20,284 19,886 21,107
Valuation allowance (20,034) (19,636) (21,107)
------- ------- -------
$ 250 $ 250 $ -
====== ======= =======
Page 33 of 46
The Company has a net operating loss carryforward of $46.9 million
(expiring in years through 2024). The Company has available approximately $4.9
million in New York State investment tax credits (expiring in years through
2017). In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers the scheduled
reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. The Company expects the deferred
tax assets, net of the valuation allowance, at September 30, 2004 to be realized
as a result of the reversal of existing taxable temporary differences.
The differences between the effective tax rates and the statutory federal
income tax rates for fiscal years 2004, 2003 and 2002 are summarized as follows:
2004 2003 2002
---- ---- ----
Federal Tax (Benefit) at
statutory rates (34.0)% 34.0% (34.0)%
Goodwill adjustments - - -
Provision for state taxes, net
of Federal Benefit - 5.0 -
Life Insurance - - -
Other - - 0.1
Utilization of NOL
Carryforwards - (39.0) -
Valuation Allowance (34.0) (12.1) 33.9
------- ------ -------
- % (12.1)% - %
8. SHAREHOLDERS' EQUITY: Stock-Based Compensation Plans
In December 2001, the Board of Directors authorized the 2001 Stock Option
and Incentive Plan, reserving 1,500,000 shares of common stock for issuance to
directors, officers, consultants or independent contractors providing services
to the Company and key employees. This plan superceded a similar plan that was
adopted in 1993. The option price for incentive options must be at least 100
percent of the fair market value at date of grant, or if the holder owns more
than 10 percent of total common stock outstanding at the date of grant, then not
less than 110 percent of the fair market value at the date of grant. The Plan
was approved by shareholders in February 2002. In conjunction with the approval
of this plan, no further grants will be made under the 1993 SOP and the 1993 SOP
was terminated. Stock options issued under the 2001 plan generally terminate
seven years from date of grant.
Generally, incentive stock options granted during the period between July
1995 through September 2004 vest in increments of 25 percent. Nonqualified stock
options granted during fiscal years 1999 to 2004 vest in increments of 33 1/3
percent.
Changes in the status of options under the SOP at September 30, are
summarized as follows:
Weighted
Shares Average
Under Exercise Available
September 30, Option Price for Grant Exercisable
------------- ---------- -------- ---------- -----------
2001 1,062,700 3.17 246,300 414,226
Options authorized 1,500,000
Options terminated (246,300)
Options granted 338,250 0.07
Options exercised - -
Options forfeited (530,100) 2.68
----------
2002 870,850 2.27 1,171,250 362,283
Options granted 643,200 0.61
Options exercised (34,500) 0.17
Options forfeited (168,750) 4.26
----------
2003 1,310,800 242,916 649,908
Options granted 244,000 1.09
Options exercised (175,755) 0.07
Options forfeited (277,010) 3.38
----------
2004 1,102,035 70,583 481,871
Page 34 of 46
The following table summarizes information about stock options outstanding as of
September 30, 2004:
Options Outstanding Options Exercisable
-------------------------------------- --------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Prices 2004 Life Price 2004 Price
- -------------- ---------------- ---------- --------- ---------------- ---------
$ 0.07 130,250 2.79 $ 0.07 130,250 $ 0.07
$ 0.09 122,500 3.28 $ 0.09 122,500 $ 0.09
$ 0.200 - $ 0.210 70,000 4.46 $ 0.21 40,000 $ 0.20
$ 0.400 70,285 5.52 $ 0.40 17,571 $ 0.40
$ 0.520 - $ 0.730 44,500 5.61 $ 0.66 9,750 $ 0.63
$ 0.950 275,000 4.50 $ 0.95 - n/a
$ 1.01 100,000 6.59 $ 1.01 - n/a
$ 1.12 64,000 6.62 $ 1.12 - n/a
$ 1.29 30,100 4.35 $ 1.29 - n/a
$ 1.50 - $ 1.52 97,000 2.39 $ 1.50 77,000 $ 1.50
$ 1.62 - $ 1.87 61,300 2.95 $ 1.65 47,600 $ 1.63
$ 2.50 - $ 3.87 37,200 1.40 $ 3.64 37,200 $ 3.64
------------- ------------
1,102,035 481,871
============= ============
The weighted average fair value of options granted during fiscal 2004, 2003
and 2002 was $0.96, $1.09 and $0.61, respectively. The fair value of options is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rate of 3.4
percent, 3.0 percent and 4.1 percent, for fiscal 2004, 2003 and 2002
respectively; volatility of 118.3 percent, 78.6 percent and 76.6 percent for
fiscal 2004, 2003 and 2002, respectively; and expected option life of 4.1 years,
6.7 years and 6.5 years for fiscal 2004, 2003 and 2002, respectively. The
dividend yield was 0 percent. Forfeitures are recognized as they occur.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and the disclosure only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no
compensation expense has been recognized for its stock-based compensation plans.
Had the Company recognized compensation cost based upon the fair value at he
date of grant for awards under its plans consistent with the methodology
prescribed by SFAS No. 123, net income (loss) and net income (loss) per common
and common equivalent share would have been as follows for years ended September
30 (in thousands, except per share data):
2004 2003 2002
------------------ ------------------------ ------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------ ------ ---------- --------- -------- ----------
Net income (loss) $ (828) $ (961) $ 2,597 $ 2,539 $(10,979) $ (10,940)
====== ====== ========== ========= ======== ==========
Net income (loss)
per common and common
equivalent share:
Basic $(0.10) $(0.12) $ 0.33 $ 0.32 $ (1.43) $ (1.42)
====== ====== ========== ========= ======== ==========
Diluted $(0.10) $(0.12) $ 0.31 $ 0.29 $ (1.43) $ (1.42)
====== ====== ========== ========= ======== ==========
Because the SFAS No. 123 method of accounting had not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Treasury Stock
The treasury balance is 573 shares with a cost of $11,000.
Page 35 of 46
9. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS:
Financial instruments which potentially subject the Company to
concentrations of a significant credit risk consist primarily of cash, cash
equivalents, and trade accounts receivable. The Company has concentrations of
credit risk due to sales to its major customers.
The Company's revenues are derived primarily from sales to customers in the
industrial and telecommunications industries and are concentrated among specific
companies. For the fiscal year ended September 30, 2004, five customers
accounted for 76 percent of the Company's net sales. For the fiscal year ended
September 30, 2003, three customers accounted for 87 percent of the Company's
net sales. For the fiscal year ended September 30, 2002, three customers
accounted for 59 percent of the Company's net sales.
At September 30, 2004, amounts due from two customers represented 27
percent and 25 percent of trade accounts receivable. At September 30, 2003,
amounts due from two customers represented 34 and 32 percent of trade accounts
receivable. The Company performs ongoing credit evaluations of its customers'
financial positions and generally does not require collateral.
10. COMMITMENTS AND CONTINGENCIES:
As of September 30, 2004, the Company was obligated under non-cancelable
operating leases, primarily for manufacturing and office equipment. These leases
generally contain rental options and provisions for payment of the lease for
executory costs (taxes, maintenance and insurance). Rental expenses on equipment
were $26,000, $187,000, and $352,000 for fiscal 2004, 2003 and 2002,
respectively.
Litigation
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 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 provided a
defense of the claims with a reservation of rights, but has expressly excluded
any coverage for the claim for punitive damages. The company has denied
liability. Prior to the scheduled trial, the parties arrived at a settlement,
which will have no material impact upon the Company. The company has accrued the
estimated settlement costs. The settlement is subject to court approval. A
hearing is scheduled on November 30, 2004.
On August 13, 2003 General Electric Company ("GE") commenced an action in
the state of Connecticut against IEC and Vishay Intertechnology, Inc ("Vishay").
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. IEC has made a motion to dismiss the action
in Connecticut for lack of jurisdiction and the motion is pending. The company,
GE and Vishay are discussing the possibility of non-binding mediation. 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.
11. RETIREMENT PLAN:
The Company has a retirement savings plan, established pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive
benefit of its eligible employees and beneficiaries. Eligible employees may
elect to contribute a portion of their compensation each year to the plan.
Effective June 1, 1998, The Board of Directors approved a change in the employer
match from 33 percent of the amount contributed by participant to 100 percent of
the first 3 percent of employee contributions, and 50 percent of the next 3
percent of employee contributions. The match is discretionary and was suspended
indefinitely as of October 1, 2001. There was no matching contribution made for
fiscal 2004, 2003, or 2002. The plan also allows the Company to make an annual
discretionary contribution determined by the Board of Directors. There were no
discretionary contributions for fiscal 2004, 2003, or 2002.
Page 36 of 46
12. SUBSEQUENT EVENTS:
There have been no material subsequent events.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
(in thousands, except per share data)
YEAR ENDED SEPTEMBER 30,2004:
Net sales $ 6,519 $ 7,298 $ 6,168 $ 7,716
Gross profit (loss) 570 723 (194) 877
Net income (loss) 132 124 (1,146) 62
Basic earnings(loss) per share $ 0.02 $ 0.02 $ (0.14) $ 0.00
Diluted earnings(loss) per share $ 0.02 $ 0.01 $ (0.14) $ 0.01
YEAR ENDED SEPTEMBER 30,2003:
Net sales $ 9,601 $15,469 $ 14,030 $ 9,101
Gross profit (loss) 989 1,246 1,808 886
Net (loss) income from
continuing operations 443 542 853 575
Net (loss) income from
discontinued IEC-Mexico
operations - 184 - -
Net (loss) income 443 726 853 575
Basic and diluted EPS
Continuing operations 0.06 0.07 0.11 0.07
Discontinued IEC-Mexico
operations - 0.02 - -
------ ------ ------ ------
Net (loss) income per share $ 0.06 $ 0.09 $ 0.11 $ 0.07
====== ====== ====== ======
Page 37 of 46