UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange -
- -
Act of 1934
For the quarterly period ended March 29, 2002
Commission file Number 0-6508
IEC ELECTRONICS CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 13-3458955
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Norton Street, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices (Zip Code)
(315) 331-7742
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $0.01 Par Value - 7,692,076 shares as of May 17, 2002.
THIS FILING INCLUDES UNAUDITED FINANCIAL STATEMENTS THAT HAVE NOT BEEN REVIEWED
BY AN INDEPENDENT PUBLIC ACCOUNTANT IN ACCORDANCE WITH RULE 10-01(d) OF
REGULATION S-X PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION, AS THE
COMPANY HAS ELECTED NOT TO HAVE ITS AUDITORS, ARTHUR ANDERSEN LLP, REVIEW SUCH
FINANCIAL STATEMENTS. SEE: "PART 1 - ITEM 1. FINANCIAL STATEMENTS - INFORMATION
WITH RESPECT TO FINANCIAL STATEMENTS."
Page 1 of 18
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Information with Respect to Financial Statements.............. 3
Consolidated Balance Sheets as of :
March 29, 2002 (Unaudited) and September 30, 2001............. 3
Consolidated Statements of Operations for the three months
ended: March 29, 2002 (Unaudited) and March 30, 2001
(Unaudited)................................................... 4
Consolidated Statements of Operations for the six months ended:
March 29, 2002 (Unaudited) and March 30, 2001 (Unaudited)..... 5
Consolidated Statement of Cash Flows for the six months ended:
March 29, 2002 (Unaudited) and March 30, 2001 (Unaudited)..... 6
Notes to Consolidated Financial Statements (Unaudited)........ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Item 2. Changes in Securities.......................................... 16
Item 3. Defaults Upon Senior Securities................................ 16
Item 4. Submission of Matters to a Vote of Security Holders............ 16
Item 5. Other Information.............................................. 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signature ............................................................. 18
Page 2 of 18
PART 1 FINANCIAL INFORMATION
Item 1 -- Financial Statements
Information With Respect to Financial Statements
- ------------------------------------------------
This filing includes unaudited financial statements that have not been reviewed
by an independent public accountant in accordance with Rule 10-01(d) of
Regulation S-X promulgated by the Securities and Exchange Commission, as the
Company has elected not to have its auditors, Arthur Andersen LLP, review such
financial statements.
The Company has been advised that the Rochester, New York office of Arthur
Andersen, who have been the Company's independent public accountants since June
1979, is being dissolved, and, accordingly, the Company is in the process of
appointing new independent auditors. Upon the formal appointment and acceptance
by a successor auditing firm, the Company intends to have the successor firm
review the financial statements for the quarterly period ended March 29, 2002 in
accordance with Rule 10-01(d). If upon completion of such review, there is a
change to the interim financial statements included herein, the Company will
file an amendment to this Quarterly Report on Form 10-Q; if upon completion of
such review, there is no change to the interim financial statements, the Company
will so state in its next Quarterly Report on Form 10-Q.
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 29, 2002 AND SEPTEMBER 30, 2001
(in thousands, except for share data)
MARCH 29,2002 SEPTEMBER 30,2001
---------------- ------------------
ASSETS (Unaudited)
Current Assets:
Accounts receivable $ 12,282 $ 14,926
Inventories 7,281 12,032
Other current assets 567 522
---------- ----------
Total current assets 20,130 27,480
---------- ----------
Property, Plant and Equipment, net 9,487 10,637
---------- ----------
Other assets 7 9
---------- ----------
$ 29,624 $ 38,126
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 9,642 $ 13,382
Accounts payable 9,796 7,398
Accrued payroll and related expenses 1,628 2,014
Accrued insurance 748 848
Other accrued expenses 2,015 2,675
---------- ----------
Total current liabilities 23,829 26,317
---------- ----------
Long-Term Debt - -
---------- ----------
Shareholders' Equity:
Preferred stock, par value $.01 per share
Authorized - 500,000 shares
Outstanding - 0 shares - -
Common stock, par value $.01 per share
Authorized - 50,000,000 shares
Issued and outstanding - 7,692,076 77 77
Additional paid-in capital 38,418 38,418
Retained deficit (32,654) (26,661)
Accumulated other comprehensive loss -
Cumulative translation adjustment (35) (14)
Treasury stock, at cost - 573 shares (11) (11)
---------- ----------
Total shareholders' equity 5,795 11,809
---------- ----------
$ 29,624 $ 38,126
========== ==========
<FN>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements
</FN>
Page 3 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 29, 2002 AND MARCH 30, 2001
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 29, 2002 MARCH 30, 2001
-------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 17,503 $ 45,592
Cost of sales 18,828 43,121
------- -------
Gross (loss) profit (1,325) 2,471
------- -------
Selling and administrative expenses 1,702 2,902
Additional writedown of asset held for sale 400 -
------- -------
Operating loss (3,427) (431)
Interest expense (376) (433)
Other income, net 1 6
------- -------
Loss before provision for
income taxes (3,802) (858)
Provision for income taxes 29 99
------- -------
Net loss $ (3,831) $ (957)
======= =======
Net loss per common and common equivalent share:
Basic and Diluted $ (0.50) $ (0.13)
Weighted average number of common and common equivalent shares outstanding:
Basic and Diluted 7,691,503 7,631,345
<FN>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements.
</FN>
Page 4 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 29, 2002 AND MARCH 30, 2001
(in thousands, except share and per share data)
6 MONTHS ENDED 6 MONTHS ENDED
MARCH 29, 2002 MARCH 30, 2001
-------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 33,288 $105,248
Cost of sales 34,969 101,007
------- --------
Gross (loss) profit (1,681) 4,241
Selling and administrative expenses 3,293 5,716
Additional writedown of asset held for sale 400 -
------- --------
Operating loss (5,374) (1,475)
Interest expense (589) (938)
Life insurance proceeds - -
Other income, net 6 29
------- --------
Loss before provision for
income taxes (5,957) (2,384)
Provision for income taxes 36 99
------- --------
Net loss $ (5,993) $ (2,483)
======= =======
Net loss per common and equivalent share:
Basic and Diluted $ (0.78) $ (0.33)
Weighted average number of common and common equivalent shares outstanding:
Basic and Diluted 7,691,503 7,629,811
<FN>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements.
</FN>
Page 5 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 29, 2002 AND MARCH 30, 2001
(in thousands)
6 MONTHS 6 MONTHS
ENDED ENDED
MARCH 29, MARCH 30,
2002 2001
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,993) $ (2,483)
Adjustments to reconcile net loss
to net cash (used in)provided by operating activities:
Depreciation and amortization 1,031 2,800
Gain on sale of fixed assets - (23)
Amortization of cost in excess of net assets acquired - 177
Common stock issued under Directors Stock Plan - 9
Additional writedown of asset held for sale 400 -
Changes in operating assets and liabilities:
(Increase) decrease
Accounts receivable 2,645 1,689
Inventories 4,751 (994)
Other current assets (45) (405)
Other assets 2 65
Increase (Decrease)
Accounts payable 2,120 3,915
Accrued payroll and related expenses (387) 431
Accrued income taxes 36 99
Accrued insurance (100) (7)
Other accrued expenses (696) 203
------- --------
Net cash provided by operating activities 3,764 5,476
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (281) (2,020)
Proceeds from sale of equipment - 23
-------- --------
Net cash used in investing activities (281) (1,997)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in drafts payable 279 (1,000)
Repayments under revolving credit facilities (2,688) (1,420)
Principal payments on term loan (1,053) (1,053)
-------- ---------
Net cash used in financing activities (3,462) (3,473)
-------- ---------
Net increase in cash and cash equivalents 21 6
Effect of exchange rate changes (21) (6)
Cash and cash equivalents at beginning of period - -
-------- ---------
Cash and cash equivalents at end of period $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 599 $ 885
======== =========
Income taxes $ - $ -
======== =========
<FN>
The accompanying notes to unaudited consolidated financial statements
are an integral part of these financial statements.
</FN>
Page 6 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2002
(1) Business and Summary of Significant Accounting Policies
Business
- --------
IEC Electronics Corp. (IEC) is an independent electronics manufacturing services
("EMS") provider of complex printed circuit board assemblies and electronic
products and systems. IEC offers its customers a wide range of manufacturing
and management services, on either a turnkey or consignment basis, including
material procurement and control, manufacturing and test engineering support,
statistical quality assurance, and complete resource management.
The Company has suffered recurring net losses. As a result of these losses, the
Company was in violation of certain financial covenants under its credit
agreement as of September 30, 2001. On December 21, 2001, the Company's banks
waived the non-compliance, amended certain covenants to allow the Company more
flexibility and changed the expiration date of the credit agreement from January
31, 2003 to February 15, 2002. As a result of certain charges to inventory and
receivables recorded on January 11, 2002, included in the financial statements
as of September 30, 2001, primarily to reflect contingencies involved in pending
litigation, the Company was again in violation of the amended agreement. The
Company's banks have agreed to a series of extensions, the most recent of which
expires June 30, 2002. The Company is currently in discussions with other
lending institutions with respect to a new credit agreement. While the Company
believes it will be successful, there can be no assurance that it will meet the
June 30, 2002 expiration date. In addition, management has been endeavoring to
increase revenues and reduce expenses in an effort to improve operating cash
flow.
Consolidation
- -------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiaries, IEC Electronics-Edinburg, Texas Inc. ("Texas") and
IEC Electronics-Arab, Alabama Inc. ("Alabama"), until January 26, 2000 when each
of Texas and Alabama merged into IEC; IEC Electronics-Ireland Limited
("Longford") from August 31, 1998, until September 4, 2001, when it was merged
into IEC; and IEC Electronicos de Mexico from February 2001, (collectively, the
"Company"). All significant intercompany transactions and accounts have been
eliminated.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of product for both turnkey and
consignment contracts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market. The
major classifications of inventories are as follows at period end (in
thousands):
March 29, 2002 September 30, 2001
---------------- ----------------
(Unaudited)
Raw materials $ 4,728 $ 7,280
Work-in-process 2,553 4,034
Finished goods 0 718
---------------- ----------------
$ 7,281 $12,032
================ ================
Accounts Payable
- ----------------
Trade accounts payable include drafts payable of $1.4 million and $1.1 million
at March 29, 2002 and September 30, 2001, respectively.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's foreign subsidiaries are translated
based on the current exchange rate at the end of the period for the balance
sheet and a weighted-average rate for the period of the consolidated statement
of operations. Translation adjustments are recorded as a separate component of
equity. Transaction gains or losses are included in operations.
Page 7 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2002
Unaudited Financial Statements
- ------------------------------
The accompanying unaudited financial statements as of March 29, 2002, and for
the three and six months ended March 29, 2002 have been prepared in accordance
with generally accepted accounting principles for the interim financia1
information. In the opinion of management, all adjustments considered necessary
for a fair presentation, which consist solely of normal recurring adjustments
have been included. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's September 30, 2001 Annual Report on Form 10-K.
Net Loss per Common and Common Equivalent Share
- ------------------------------------------------
(in thousands, except for share and per share data)
(Loss) Shares Per Share
Three Months Ended (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
March 29, 2002
Basic and diluted EPS
Loss available to common Shareholders $(3,831) 7,691,503 $(0.50)
====================================
March 30, 2001
Basic and diluted EPS
Loss available to common Shareholders $ (957) 7,631,345 $(0.13)
====================================
(Loss) Shares Per Share
Six Months Ended (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
March 29, 2002
Basic and diluted EPS
Loss available to common Shareholders $(5,993) 7,691,503 $(0.78)
====================================
March 30, 2001
Basic and diluted EPS
Loss available to common Shareholders $(2,483) 7,629,811 $(0.33)
====================================
Basic EPS was computed by dividing reported earnings available to common
shareholders by weighted-average common shares outstanding during the three and
six month periods. No reconciliation is provided as the effect would be
antidilutive.
Page 8 of 18
New Pronouncements
- ------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141") "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 are effective for fiscal years
beginning after December 15, 2001; however, as the Company wrote-off all
goodwill during fiscal 2001, adoption of this pronouncement will have no impact
on the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (FAS No. 143). We will adopt this standard on October 1, 2001.
Upon adoption of FAS No. 143, the fair value of a liability for an asset
retirement obligation will be recognized in the period in which it is incurred.
The associated retirement costs will be capitalized as part of the carrying
amount of the long-lived asset and subsequently allocated to expense over the
asset's useful life. Management does not expect the adoption of FAS No. 143 to
have a material effect on the financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of". FAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on October 1, 2002.
Management is currently determining what effect, if any, FAS No. 144 will have
on its financial position and results of operations.
(2) Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"(SFAS No. 130)on October 1, 1998. SFAS No. 130
requires comprehensive income and its components to be presented in the
financial statements. Comprehensive income, which includes net (loss) income
and foreign currency translation adjustments, was as follows for the three
and six months ended March 29, 2002 and March 30, 2001(in thousands):
3 MONTHS 3 MONTHS
ENDED ENDED
March 29, March 30,
2002 2001
---------- -----------
(Unaudited) (Unaudited)
Net loss $ (3,831) $ (957)
Other comprehensive loss:
Foreign currency translation adjustments (5) (6)
---------- -----------
Comprehensive loss $ (3,836) $ (963)
========== ===========
6 MONTHS 6 MONTHS
ENDED ENDED
March 29, March 30,
2002 2001
---------- -----------
(Unaudited) (Unaudited)
Net loss $ (5,993) $ (2,483)
Other comprehensive loss:
Foreign currency translation adjustments (21) (6)
---------- -----------
Comprehensive loss $ (6,014) $ (2,489)
========== ===========
Page 9 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2002
(3) Financing Arrangements
----------------------
As of September 30, 2001, the Company was not in compliance with certain
financial covenants under its secured asset-based credit agreement. As of
December 21, 2001, the Company's banks waived the non-compliance, amended
certain covenants to allow the Company more flexibility and changed the
expiration date of the credit agreement from January 31, 2003 to February 15,
2002. Subsequent amendments were made to the credit agreement as of February 15,
2002, February 28, 2002, March 15, 2002 and April 8, 2002, which, among other
things, continued to extend the expiration date of the credit agreement. As a
result of the April 8, 2002 amendment, the expiration date of the credit
agreement is currently June 30, 2002.
As amended, the credit agreement provides for a revolving credit facility
component of $5 million. Amounts borrowed are limited to 85% of qualified
accounts receivable, a certain percentage of raw materials (20% through March
14, 2002; 15% from March 15, 2002 through March 24, 2002; 10% from March 25,
2002 through March 31, 2002; 5% from April 1, 2002 through April 7, 2002; and 0%
from April 8, 2002 and thereafter) and a certain percentage of work in process
inventory (30% through March 14, 2002 and 0% from March 15, 2002 and
thereafter). In no event could the inventory borrowing base be greater than $1
million. The interest rate on the revolving credit facility was increased from
prime rate plus 0.50% (from December 21, 2001 through January 31, 2002) to prime
rate plus 0.75% (from February 1, 2002 through February 27, 2002), prime rate
plus 1.00% (from February 28, 2002 through March 14, 2002), prime rate plus 2%
(from March 15, 2002 through April 8, 2002), prime rate plus 2.25% (from April
8, 2002 through April 30, 2002), prime rate plus 2.50% (from May 1, 2002 through
May 31, 2002), and prime rate plus 2.75% (from June 1, 2002 through June 30,
2002).
The second component of the credit facility consists of a $10 million three-year
term loan with monthly principal installments based on a five-year amortization
which began in April 2000. The interest rate on the term loan facility was
increased from prime rate plus 0.75% (from December 21, 2001 through January 31,
2002) to prime rate plus 1.00% (from February 1, 2002 through February 27,
2002), prime rate plus 1.25% (from February 28, 2002 through March 15, 2002),
prime rate plus 2.50% (from March 15, 2002 through April 8, 2002), prime rate
plus 2.75% (from April 8, 2002 through April 30, 2002), prime rate plus 3.00%
percent (from May 1, 2002 through May 31, 2002), and prime rate plus 3.25% (from
June 1, 2002 through June 30, 2002).
At March 29, 2002, $9.6 million was outstanding, consisting of $3.8 million
and $5.8 million relating to the revolving credit facility and term loan,
respectively, with an additional $1.0 million available under the revolving
credit facility. At May 16, 2002, the availability under the revolver was $1.0
million, and $1.8 million was outstanding on the revolver and $5.4 million was
outstanding on the term loan.
The credit facility contains specific affirmative and negative covenants,
including, among others, the maintenance of certain financial covenants, as well
as limitations on amounts available under the lines of credit relating to the
borrowing base, capital expenditures, lease payments and additional debt. The
more restrictive of the covenants require the Company to maintain a minimum
tangible net worth, maximum debt-to-tangible net worth ratio, and a minimum
earnings before interest and taxes (EBIT). As a result of certain charges to
inventory and receivables to reflect contingencies involved in pending
litigation recorded on January 11, 2002, and included in the financial
statements as of September 30, 2001, the Company was in violation of the amended
credit agreement. The February, March and April amendments and extensions
described above were made notwithstanding said violation. The Company is
currently in discussions with other lending institutions with respect to a new
credit agreement. While the Company believes it will be successful, there can be
no assurance that it will meet the June 30, 2002 expiration of the current
agreement.
Since the Company's credit agreement currently expires on June 30, 2002, it has
classified the entire term loan and revolver as current debt. The Company's
liquidity is dependent on the ability to generate positive cash flow. Provided
the Company obtains a new credit agreement by June 30, 2002 or obtains an
extension of its existing credit agreement and meets its performance targets,
management believes the Company will generate sufficient cash flows in 2002 to
continue its current operations. To assist with its liquidity, the Company has
generally extended the payment dates of its accounts payable and in the case of
certain of its principal vendors has negotiated extended payment terms.
However, the Company's recurring losses and liquidity issues raise substantial
doubts about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Page 10 of 18
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 29, 2002
(4) Litigation
- --------------
The Company is from time to time subject to routine legal proceedings and claims
which arise in the ordinary course of its business. Although occasional adverse
decisions, or settlements, may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or operations of the Company.
On November 16, 2001, the Company commenced an action in New York State Supreme
Court against Acterna Corporation. The complaint asserts claims for unpaid
invoices and breach of contract for which the Company seeks approximately $7.0
million. The defendant's answer was served on January 8, 2002 and consisted of a
general denial and various affirmative defenses. The Company moved for summary
judgment, and oral arguments were heard on February 13, 2002. On February 21,
2002, a New York State Supreme Court Justice granted the Company's summary
judgment motion against Acterna Corporation in the amount of $1,580,077.13 on
its First Cause of Action for an account stated. Acterna Corporation has since
filed a motion to reargue which has not been acted upon and a Notice of Appeal
and has posted the necessary bond during the appeal process. Acterna's time to
perfect the appeal expires on May 21, 2002. If it fails to do so, the Company
intends to move to dismiss the appeal. As to the other causes of action
enumerated by the Company against Acterna Corporation, a discovery scheduling
Order has been executed by the Court, and the trial is scheduled to commence
with jury selection on October 25, 2002. The Company shall continue to
vigorously prosecute the action against Acterna Corporation, as management
firmly believes its case to be meritorious and regards Acterna Corporation's
actions as stall tactics and legal posturing.
On October 4, 2001, the Company commenced an action against ID Systems, Inc.
seeking approximately $177,000 for unpaid invoices and breach of contract. An
answer was served on December 14, 2001, denying the Company's claims and
asserting counterclaims totaling $700,000. In March 2002, the Company received
$25,000 from ID Systems, Inc. to settle and resolve its action against them.
(5) Strategic Planning
------------------
Effective March 25, 2002, the Company retained the services of Lincoln Partners,
LLC, an investment banking firm specializing in merger and acquisition services,
capital raising and financial advisory services particularly for firms in the
electronic manufacturing services industry, to assist the Company in reviewing
strategic alternatives to enhance shareholder value. The Company's facilities
in Edinburg, Texas and Arab, Alabama have been listed for sale with The
Binswanger Companies.
Page 11 of 18
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Results of Operations - Three Months Ended March 29, 2002,
Compared to the Three Months Ended March 30, 2001.
-----------------------------------------------------------
Net sales for the three month period ended March 29, 2002, were $17.5 million,
compared to $45.6 million for the comparable period of the prior fiscal year, a
decrease of 61.6 percent. The decrease in sales is primarily due to the
prolonged overall softening in the telecommunications and industrial sectors of
the U.S. economy. Turnkey sales were 94.4 percent of net sales in the quarter as
compared to 95.9 percent for the comparable period of the prior year.
The gross loss was ($1.3 million) or (7.6) percent of sales for the three month
period ended March 29, 2002, versus $2.5 million or 5.4 percent of sales in the
comparable period of the prior year. The decrease in gross profit percentage was
primarily due to fixed manufacturing overhead costs being absorbed by a
significantly lower sales volume.
Selling and administrative expenses decreased to $1.7 million in the three
months ended March 29, 2002, from $2.9 million in the comparable period of the
prior year, a decrease of 41.3 percent. This decrease is primarily due to lower
commission expense from lower sales volume as well as a decrease in the number
of employees. As a percentage of net sales, selling and administrative expenses
increased to 9.7 percent from 6.4 percent in comparison to the same quarter of
the prior fiscal year as certain costs remained fixed with a significantly lower
sales volume.
The Company recorded a pre-tax charge of $400,000 in the three months ended
March 29, 2002. This was due to an additional writedown of the Company's Alabama
building held for sale as a result of a softening in the commercial real estate
market.
The Company recorded approximately $296,000 of special charges in the three
months ended March 29, 2002, due to bank and consulting fees incurred to comply
with new bank requirements under the current amendment to the banking agreement.
These expenses are continuing during the current quarter.
The Company has recorded no benefit from income tax as a result of the net loss,
and accordingly, has a full valuation allowance against its net deferred tax
asset including the net operating loss carry-forward. The Company has recorded
tax expense relating to foreign operations in the amount of $29,000 in the three
months ended March 29, 2002, as compared to $99,000 for the comparable period of
the prior year, a decrease of 70.7%. This decrease was primarily caused by lower
intercompany revenue due to lower production volume.
Net loss for the three months ended March 29, 2002 was $(3.8) million versus
$(957) thousand in the comparable quarter of the prior year. Diluted loss per
share was $(0.50)as compared to diluted loss per share of $(0.13) in the
comparable quarter of the prior fiscal year.
Page 12 of 18
Management's Discussion and Analysis of Financial Condition and Results
- ------------------------------------------------------------------------
of Operations
- ------------------------------------
Results of Operations - Six Months Ended March 29, 2002, Compared to Six
- ------------------------------------------------------------------------
Months Ended March 30, 2001.
- ----------------------------
Net sales for the six month period ended March 29, 2002, were $33.3 million,
compared to $105.2 million for the comparable period of the prior year, a
decrease of 68.3%. The decrease in sales is primarily due to the prolonged
overall softening in the telecommunications and industrial sectors of the U.S.
economy. Turnkey sales were 94.5 percent of net sales in the six month period as
compared to 95.9 percent for the comparable period of the prior fiscal year.
Gross loss was ($1.7) million or (5.0) percent of sales for the six month period
ended March 29, 2002, versus $4.2 million or 4.0 percent of sales in the
comparable period of the prior year. The decrease in gross profit percentage was
primarily due to fixed manufacturing overhead costs being absorbed by a
significantly lower sales volume.
Selling and administrative expenses decreased to $3.3 million in the six months
ended March 29, 2002, from $5.7 million in the comparable period of the prior
fiscal year, a decrease of 42.1%. This decrease is primarily due to lower
commission expense from lower sales volume, as well as a decrease in the number
of employees . As a percentage of net sales, selling and administrative expenses
increased to 9.9 percent from 5.4 percent in comparison to the same quarter of
the prior fiscal year as certain costs remained fixed with a significantly lower
sales volume.
The Company recorded a pre-tax charge of $400,000 in the six months ended March
29, 2002. This was due to an additional writedown of the Company's Alabama
building held for sale as a result of a softening in the commercial real estate
market.
The Company recorded approximately $296,000 of special charges in the six months
ended March 29, 2002, due to bank and consulting fees incurred to comply
with new bank requirements under the current amendment to the banking agreement.
These expenses are continuing during the current quarter.
The Company has recorded no benefit from income tax as a result of the net loss,
and accordingly, has a full valuation allowance against its net deferred tax
asset including the net operating loss carry-forward. The Company has recorded
tax expense relating to foreign operations in the amount of $36,000 in the six
months ended March 29, 2002, as compared to $99,000 for the comparable period of
the prior year, a decrease of 63.6%. This decrease was primarily caused by lower
intercompany revenue due to lower production volume.
Net loss for the six month period was $(6.0) million versus $(2.5) million in
the comparable period of the prior fiscal year. Diluted loss per share was
$(0.78) as compared to diluted loss per share of $(0.33) in the comparable
period of the prior fiscal year.
Liquidity and Capital Resources
- -------------------------------
Net sales for the month of March 2002 were $7.5 million, representing 42.9
percent of the total net sales for the three month period ending March 29, 2002.
Net sales for the month of March 2001 were $19.0 million, representing 41.7
percent of the total net sales for the three month period ending March 30, 2001.
The Company operates on a fiscal quarter consisting of four weeks in the first
and second months and five weeks in the third month.
As reflected in the Consolidated Statements of Cash Flows for the six months
ending March 29, 2002, net cash provided by operations was $3.8 million. Of
this, $3.5 million was used to decrease the Company's debt and $281,000 was used
to purchase equipment. Depreciation for the six month period ending March 29,
2002 was $1.0 million, as compared to $2.8 million for the comparable period of
the prior fiscal year. This decrease is primarily attributable to fewer
purchases of property, plant and equipment the last three years and a $3.0
million writedown of impaired property, plant and equipment taken in the 4th
quarter of last year. The overall decrease in sales caused by the slowdown in
the Electronic Manufacturing Services industry has resulted in accounts
receivable collections, including those of inventory sold back to customers,
outpacing new billings by $2.6 million. The lower sales volume has also resulted
in reducing inventory levels by $4.8 million since inventory is not being
replaced as existing orders are being filled or inventory is being sold back to
customers. An additional $2.1 million of cash flow was generated from an
increase in accounts payable.
As of September 30, 2001, the Company was not in compliance with certain
financial covenants under its secured asset-based credit agreement. As of
December 21, 2001, the Company's banks waived the non-compliance, amended
certain covenants to allow the Company more flexibility and changed the
expiration date of the credit agreement from January 31, 2003 to February 15,
2002. Subsequent amendments were made to the credit agreement as of February 15,
2002, February 28, 2002, March 15, 2002 and April 8, 2002, which, among other
things, continued to extend the expiration date of the credit agreement. As a
result of the April 8, 2002 amendment, the expiration date of the credit
agreement is currently June 30, 2002.
Page 13 of 18
As amended, the credit agreement provides for a revolving credit facility
component of $5 million. Amounts borrowed are limited to 85% of qualified
accounts receivable, a certain percentage of raw materials (20% through March
14, 2002; 15% from March 15, 2002 through March 24, 2002; 10% from March 25,
2002 through March 31, 2002; 5% from April 1, 2002 through April 7, 2002; and 0%
from April 8, 2002 and thereafter) and a certain percentage of work in process
inventory (30% through March 14, 2002 and 0% from March 15, 2002 and
thereafter). In no event could the inventory borrowing base be greater than $1
million. The interest rate on the revolving credit facility was increased from
prime rate plus 0.50% (from December 21, 2001 through January 31, 2002) to prime
rate plus 0.75% (from February 1, 2002 through February 27, 2002), prime rate
plus 1.00% (from February 28, 2002 through March 14, 2002), prime rate plus 2%
(from March 15, 2002 through April 8, 2002), prime rate plus 2.25% (from April
8, 2002 through April 30, 2002), prime rate plus 2.50% (from May 1, 2002 through
May 31, 2002), and prime rate plus 2.75% (from June 1, 2002 through June 30,
2002).
The second component of the credit facility consists of a $10 million three-year
term loan with monthly principal installments based on a five-year amortization
which began in April 2000. The interest rate on the term loan facility was
increased from prime rate plus 0.75% (from December 21, 2001 through January 31,
2002) to prime rate plus 1.00% (from February 1, 2002 through February 27,
2002), prime rate plus 1.25% (from February 28, 2002 through March 15, 2002),
prime rate plus 2.50% (from March 15, 2002 through April 8, 2002), prime rate
plus 2.75% (from April 8, 2002 through April 30, 2002), prime rate plus 3.00%
percent (from May 1, 2002 through May 31, 2002), and prime rate plus 3.25% (from
June 1, 2002 through June 30, 2002).
At March 29, 2002, $9.6 million was outstanding, consisting of $3.8 million
and $5.8 million relating to the revolving credit facility and term loan,
respectively, with an additional $1.0 million available under the revolving
credit facility. At May 16, 2002, the availability under the revolver was $1.0
million, and $1.8 million was outstanding on the revolver and $5.4 million was
outstanding on the term loan.
The credit facility contains specific affirmative and negative covenants,
including, among others, the maintenance of certain financial covenants, as well
as limitations on amounts available under the lines of credit relating to the
borrowing base, capital expenditures, lease payments and additional debt. The
more restrictive of the covenants require the Company to maintain a minimum
tangible net worth, maximum debt-to-tangible net worth ratio, and a minimum
earnings before interest and taxes (EBIT). As a result of certain charges to
inventory and receivables to reflect contingencies involved in pending
litigation recorded on January 11, 2002, and included in the financial
statements as of September 30, 2001, the Company was in violation of the amended
credit agreement. The February, March and April amendments and extensions
described above were made notwithstanding said violation. The Company is
currently in discussions with other lending institutions with respect to a new
credit agreement. While the Company believes it will be successful, there can be
no assurance that it will meet the June 30, 2002 expiration of the current
agreement.
Since the Company's credit agreement currently expires on June 30, 2002, it has
classified the entire term loan and revolver as current debt. The Company's
liquidity is dependent on the ability to generate positive cash flow. Provided
the Company obtains a new credit agreement by June 30, 2002 or obtains an
extension of its existing credit agreement and meets its performance targets,
management believes the Company will generate sufficient cash flows in 2002 to
continue its current operations. To assist with its liquidity, the Company has
generally extended the payment dates of its accounts payable and in the case of
certain of its principal vendors has negotiated extended payment terms. In
addition, effective March 25, 2002, the Company retained the services of Lincoln
Partners, LLC, an investment banking firm specializing in merger and acquisition
services, capital raising and financial advisory services particularly for firms
in the electronic manufacturing services industry, to assist the Company in
reviewing strategic alternatives to enhance shareholder value. The Company's
facilities in Edinburg, Texas and Arab, Alabama have been listed for sale with
The Binswanger Companies.
However, the Company's recurring losses and liquidity issues raise substantial
doubts about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Page 14 of 18
Impact of Inflation
- -------------------
The impact of inflation on the Company's operations has been minimal due to the
fact that it is able to adjust its bids to reflect any inflationary increases in
cost.
New Pronouncements
- ------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, ("FAS 141") "Business Combinations" and
No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS No. 141
requires that all business combinations be accounted for under the purchase
method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. FAS No. 142 requires
that ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. FAS No. 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is before
June 30, 2001. The provisions of FAS No. 142 will be effective for fiscal years
beginning after December 15, 2001; however, as the Company wrote-off all
goodwill during fiscal 2001, adoption of this pronouncement will have no impact
on the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (FAS No. 143). We will adopt this standard on October 1, 2002.
Upon adoption of FAS No. 143, the fair value of a liability for an asset
retirement obligation will be recognized in the period in which it is incurred.
The associated retirement costs will be capitalized as part of the carrying
amount of the long-lived asset and subsequently allocated to expense over the
asset's useful life. Management does not expect the adoption of FAS No. 143 to
have a material effect on the financial results of the Company.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS No. 144"). FAS No. 144 supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". FAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business". FAS No. 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on October 1, 2002.
Management is currently determining what effect, if any, FAS No. 144 will have
on its financial position and results of operations.
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 the Company due to adverse changes in financial
rates. The Company is exposed to market risk in the area of interest rates. This
exposure is directly related to its Term Loan and Revolving Credit borrowings
under the Credit Agreement, due to their variable interest rate pricing.
Management believes that interest rate fluctuations will not have a material
impact on the Company's results of operations.
Forward-looking Statements
- --------------------------
Except for historical information, statements in this quarterly report are
forward-looking made pursuant to the safe harbor created by the Private
Securities Litigation Reform Act of 1995 and are therefore subject to certain
risks and uncertainties including timing of orders and shipments, availability
of material, product mix and general market conditions that could cause actual
results to differ materially from those projected in the forward looking
statements. Investors should consider the risks and uncertainties discussed in
the September 30, 2001, Form 10K and its other filings with the Securities and
Exchange Commission.
Page 15 of 18
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The description of the Company's legal proceedings set forth in Item 3 of the
Company's Annual Report on Form 10-K for the fiscal period ended September 30,
2001, and in Item 1. of Part II of the Company's Form 10-Q for the quarterly
period ended December 31, 2001, are incorporated herein by reference.
Acterna Corporation
- -------------------
On November 16, 2001, the Company commenced an action in New York State Supreme
Court against Acterna Corporation. The complaint asserts claims for unpaid
invoices and breach of contract for which the Company seeks approximately $7.0
million. The defendant's answer was served on January 8, 2002 and consisted of a
general denial and various affirmative defenses. The Company moved for summary
judgment, and oral arguments were heard on February 13, 2002. On February 21,
2002, a New York State Supreme Court Justice granted the Company's summary
judgment motion against Acterna Corporation in the amount of $1,580,077.13 on
its First Cause of Action for an account stated. Acterna Corporation has since
filed a motion to reargue which has not been acted upon and a Notice of Appeal
and has posted the necessary bond during the appeal process. Acterna's time to
perfect the appeal expires on May 21, 2002. If it fails to do so, the Company
intends to move to dismiss the appeal. As to the other causes of action
enumerated by the Company against Acterna Corporation, a discovery scheduling
Order has been executed by the Court, and the trial is scheduled to commence
with jury selection on October 25, 2002. The Company shall continue to
vigorously prosecute the action against Acterna Corporation, as management
firmly believes its case to be meritorious and regards Acterna Corporation's
actions as stall tactics and legal posturing.
ID Systems, Inc.
- ----------------
In March 2002, the Company received $25,000 from ID Systems, Inc. to settle and
resolve its action against them.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on February 27, 2002
(b) The names of the directors elected at the Annual Meeting are as follows:
David J. Beaubien
W. Barry Gilbert
Robert P.B. Kidd
Thomas W. Lovelock
Eben S. Moulton
Dermott O'Flanagan
James C. Rowe
Justin L. Vigdor
(c)(i) At the Annual Meeting, the tabulation of the votes with respect to
each nominee was as follows:
Nominee Votes FOR Authority Withheld
------- --------- ------------------
David J. Beaubien 6,205,710 726,549
W. Barry Gilbert 6,204,451 727,808
Robert P. B. Kidd 6,203,110 729,149
Thomas W. Lovelock 6,212,691 719,568
Eben S. Moulton 6,211,851 720,408
Dermott O'Flanagan 6,177,225 755,034
James C. Rowe 6,214,851 717,408
Justin L. Vigdor 6,211,510 720,749
Page 16 of 18
(c)(ii) At the Annual Meeting, the stockholders also voted upon a proposal
to approve the Company's 2001 Stock Option and Incentive Plan. The tabulation of
votes with respect to such matter are as follows:
Votes Votes Votes Broker
FOR AGAINST OUTSTANDING NON-VOTES
2,292,211 974,514 11,565 3,653,969
Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and
Exchange Commission on February 20, 2002. The report contained
information about Amendment No. 5 to the Company's Loan and Security
Agreement and about the possible delisting of the Company's stock
from The Nasdaq National Market.
(ii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on February 22, 2002. The report contained
information about the Company's action against Acterna Corporation.
(iii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on March 6, 2002. The report contained
information about Amendment No. 6 to the Company's Loan and Security
Agreement.
(iv) A current report on Form 8-K was filed with the Securities and
Exchange Commission on March 21, 2002. The report contained
information about Amendment No. 7 to the Company's Loan and Security
Agreement.
(v) A current report on Form 8-K was filed with the Securities and
Exchange Commission on April 9, 2002. The report contained
information about Amendment No. 8 to the Company's Loan and Security
Agreement.
Page 17 of 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IEC ELECTRONICS CORP.
REGISTRANT
Dated: May 20, 2002 /s/Thomas W. Lovelock
-----------------------------
Thomas W. Lovelock
President and Chief Executive Officer
Dated: May 20, 2002 /s/Richard L. Weiss
------------------------------
Richard L. Weiss
Vice President,
Chief Financial Officer and Treasurer
Page 18 of 18