UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange -
- - Act of 1934
For the quarterly period ended June 27, 2003
Commission file Number 0-6508
IEC ELECTRONICS CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 13-3458955
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Norton Street, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices (Zip Code)
(315) 331-7742
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $0.01 Par Value - 7,993,210 shares as of July 21, 2003.
Page 1 of 17
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Information with Respect to Financial Statements.............. 3
Consolidated Balance Sheets as of:
June 27, 2003 (Unaudited) and September 30, 2002.............. 3
Consolidated Statements of Operations for the three months
ended: June 27, 2003 (Unaudited) and June 28, 2002
(Unaudited)................................................... 4
Consolidated Statements of Operations for the nine months ended:
June 27, 2003 (Unaudited) and June 28, 2002 (Unaudited)....... 5
Consolidated Statement of Cash Flows for the nine months ended:
June 27, 2003 (Unaudited) and June 28, 2002 (Unaudited)....... 6
Notes to Consolidated Financial Statements (Unaudited)........ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 14
Item 4. Controls and Procedures.......................................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities and use of proceeds...................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures............................................................. 15
Page 2 of 17
PART 1 FINANCIAL INFORMATION
Item 1 -- Financial Statements
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 27, 2003 AND SEPTEMBER 30, 2002
(in thousands, except for share data)
JUNE 27,2003 SEPTEMBER 30,2002
---------------- ------------------
ASSETS (Unaudited)
Current Assets:
Cash $ 222 $ -
Accounts receivable 4,282 5,480
Inventories 3,505 3,412
Other current assets 255 186
Current assets-discontinued operations 85 348
---------- ----------
Total current assets 8,349 9,426
---------- ----------
Fixed Assets:
Land and land improvements 768 768
Building and improvements 3,995 3,995
Machinery and equipment 46,756 46,501
Furniture and fixtures 5,850 5,850
---------- ----------
Sub-total gross property 57,369 57,114
Less accumulated depreciation (53,888) (52,781)
---------- ----------
Total fixed assets - net 3,481 4,333
Asset held for sale - 497
Non-current assets - discontinued operations - 809
Other non-current assets 224 -
---------- ----------
$ 12,054 $ 15,065
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings and current portion
of long-term debt $ 1,894 $ 3,128
Accounts payable 3,934 6,250
Accrued payroll and related expenses 759 697
Other accrued expenses 720 1,497
Other current liabilities -
discontinued operations 255 1,426
---------- ----------
Total current liabilities 7,562 12,998
---------- ----------
Long-term vendor payable 544 -
Long-term debt 1,108 1,268
---------- ----------
Total liabilities 9,214 14,266
---------- ----------
Shareholders' Equity:
Preferred stock, par value $0.01 per share
Authorized - 500,000 shares;
Issued and outstanding - none - -
Common stock, par value $.01 per share
Authorized - 50,000,000 shares;
Issued and outstanding - 7,987,460 and
7,692,076, respectively 80 77
Treasury stock, 573 shares; at cost (11) (11)
Additional paid-in capital 38,473 38,418
Retained earnings (35,618) (37,640)
Accumulated other comprehensive loss -
Cumulative translation adjustments (84) (45)
---------- ----------
Total shareholders' equity 2,840 799
---------- ----------
$ 12,054 $ 15,065
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
Page 3 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 27, 2003 AND JUNE 28, 2002
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 27, 2003 JUNE 28, 2002
-------------- ------------------
(Unaudited) (Unaudited)
Net sales $14,030 $ 6,038
Cost of sales 12,222 5,622
------- -------
Gross profit 1,808 416
------- -------
Selling and administrative expenses 788 866
Restructuring charge - 448
Writedown of assets held for sale - 500
------- -------
Operating profit (loss) 1,020 (1,398)
Interest and financing expense (148) (254)
Other income (expense), net 26 (45)
Forgiveness of accounts payable (45) -
------- -------
Net income (loss) before income taxes 853 (1,697)
Income taxes - -
------- -------
Net income (loss) from continuing
operations 853 (1,697)
Discontinued operations:
Income (loss) from operations of
IEC-Mexico disposed of (net
of income taxes of $0 in
2003 and $26 in 2002) - (644)
Estimated loss on disposal of
IEC-Mexico (net of income
taxes of $0 in 2003 and 2002) - (4,527)
------- -------
853 (5,171)
------- -------
Net income (loss) $ 853 $ (6,868)
========= ==========
Net income (loss) per common and common equivalent share:
Basic
Income (loss) from continuing
operations $ 0.11 $ (0.22)
Income (loss) from discontinued
operations $ 0.00 $ (0.67)
Income (loss) available to common
shareholders $ 0.11 $ (0.89)
Diluted
Income (loss) from continuing
operations $ 0.10 $ (0.22)
Income (loss) from discontinued
operations $ 0.00 $ (0.67)
Income (loss) available to common
shareholders $ 0.10 $ (0.89)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,980,953 7,691,503
Diluted 8,418,332 7,691,503
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
Page 4 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 27, 2003 AND JUNE 28, 2002
(in thousands, except share and per share data)
9 MONTHS ENDED 9 MONTHS ENDED
JUNE 27, 2003 JUNE 28, 2002
-------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 39,099 $ 30,725
Cost of sales 35,056 30,199
------- --------
Gross profit 4,043 526
Selling and administrative expenses 2,441 3,620
Restructuring (benefit) expense (63) 448
Writedown of asset held for sale - 900
------- --------
Operating profit (loss) 1,665 (4,442)
Interest and financing expense (536) (678)
Forgiveness of accounts payable 578 -
Other income (expense), net 131 (44)
------- --------
Net income (loss) before income taxes 1,838 (5,164)
Income taxes - -
------- --------
Net income (loss) from continuing
operations 1,838 (5,164)
Discontinued operations:
Income (loss) from operations of
IEC-Mexico disposed of (net
of income taxes of $0 for
2003 and $72 for 2002) 184 (3,169)
Estimated loss on disposal of
IEC-Mexico (net of income taxes
of $0 in 2003 and 2002) - (4,527)
------- --------
184 (7,696)
------- --------
Net income (loss) $ 2,022 $(12,860)
========= =========
Net loss per common and common equivalent share:
Basic
Income (loss) from continuing
operations $ 0.24 $ (0.67)
Income (loss) from discontinued
operations $ 0.02 $ (1.00)
Income (loss) available to common
shareholders $ 0.26 $ (1.67)
Diluted
Income (loss) from continuing
operations $ 0.23 $ (0.67)
Income (loss) from discontinued
operations $ 0.02 $ (1.00)
Income (loss) available to common
shareholders $ 0.25 $ (1.67)
Weighted average number of common and common equivalent shares outstanding:
Basic 7,858,203 7,691,503
Diluted 8,165,833 7,691,503
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
Page 5 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 27, 2003 AND JUNE 28, 2002
(in thousands)
9 MONTHS 9 MONTHS
ENDED ENDED
JUNE 27, JUNE 28,
2003 2002
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,022 $ (12,860)
(Income) loss from discontinued operations (184) 3,169
Loss on sale of discontinued operations - 4,527
Depreciation and amortization 1,145 1,223
(Gain) loss on sale of fixed assets (50) 45
Common stock issued under Directors Stock Plan 8 -
Asset impairment writedown - 900
Changes in operating assets and liabilities:
(Increase) decrease
Accounts receivable 1,198 5,643
Inventories (93) 2,185
Other current assets (69) 29
Accounts payable (593) 2,017
Accrued payroll and related expenses 62 (587)
Accrued insurance (323) 84
Other accrued expenses (453) (138)
------- --------
Net cash flows from operating activities 2,668 6,237
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (254) (190)
Proceeds from sale of property 547 28
Proceeds from sale of discontinued operations property 875 315
-------- --------
Net cash flows from investing activities 1,168 153
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in drafts payable 225 (419)
Repayments under line of credit agreements (4,396) (5,352)
Proceeds from borrowings 3,500 -
Principal payment on term debt (1,901) (1,579)
Debt issuance costs (263) -
Common stock issued under financing plan 50 -
-------- ---------
Net cash flows from financing activities (2,785) (7,350)
-------- ---------
Cash (used in) from discontinued operations (789) 984
-------- ---------
Change in cash and cash equivalents 262 24
Effect of exchange rate changes (40) (24)
Cash and cash equivalents at beginning of period - -
-------- ---------
Cash and cash equivalents at end of period $ 222 $ -
======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 536 $ 804
Income taxes $ - $ -
Conversion of accounts payable to long term payable $ 760 $ -
Non-cash investing and financing activities:
Conversion of accounts payable to debt $ 1,187 $ -
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
Page 6 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 2003
(1) Business and Summary of Significant Accounting Policies
Business
- --------
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company is a significant
provider of high quality electronics manufacturing services with
state-of-the-art manufacturing capabilities and production capacity. Utilizing
computer controlled manufacturing and test machinery and equipment, the Company
provides manufacturing services employing surface mount technology ("SMT") and
pin-through-hole ("PTH") interconnection technologies. As an independent
full-service EMS provider, the Company offers its customers a wide range of
manufacturing and management services, on either a turnkey or consignment basis,
including design, prototype, material procurement and control, manufacturing and
test engineering support, statistical quality assurance, complete resource
management and distribution. The Company's strategy is to cultivate strong
manufacturing relationships with established and emerging original equipment
manufacturers ("OEMs").
Consolidation
- -------------
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico") (collectively,
"IEC"). Operations in Texas and Mexico were closed in July 2002. All significant
intercompany transactions and accounts have been eliminated.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of product for both turnkey
and consignment contracts.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions which follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
June 27, 2003 September 30, 2002
---------------- ----------------
(Unaudited)
Raw materials $ 1,673 $ 2,175
Work-in-process 1,790 1,214
Finished goods 41 23
---------------- ----------------
$ 3,505 $ 3,412
================ ================
Accounts Payable
- ----------------
Trade accounts payable include drafts payable of $527,000 and $302,000 at
June 27, 2003 and September 30, 2002, respectively.
Page 7 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 2003
Long-lived Assets
- -----------------
In October 2002, the Company sold its Alabama facility for $547,000. A gain
of $50,000 was recorded in other income.
In February 2003, the Company sold its Texas facility for $875,000. A gain
of $75,000 was recorded as part of discontinued operations.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's foreign subsidiary are
translated based on the current exchange rate at the end of the period for the
balance sheet and a weighted-average rate for the period of the consolidated
statement of operations. Translation adjustments are recorded as a separate
component of equity. Transaction gains or losses are included in operations.
Unaudited Financial Statements
- ------------------------------
The accompanying unaudited financial statements as of June 27, 2003, and
for the three and nine months ended June 27, 2003 have been prepared in
accordance with generally accepted accounting principles for interim financia1
information. In the opinion of management, all adjustments considered necessary
for a fair presentation, which consist solely of normal recurring adjustments
have been included. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's September 30, 2002 Annual Report on Form 10-K.
Earnings Per Share
- ------------------
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Basic earnings per
share is calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share is calculated by adjusting the weighted-average shares
outstanding assuming conversion of all potentially dilutive stock options,
warrants and convertible securities.
(2) Comprehensive Loss
------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") on October 1, 1998. SFAS 130
requires comprehensive income and its components to be presented in the
financial statements. Comprehensive income, which includes net income (loss) and
foreign currency translation adjustments, was as follows for the three and nine
months ended June 27, 2003 and June 28, 2002 (in thousands):
3 MONTHS 3 MONTHS
ENDED ENDED
June 27, June 28,
2003 2002
---------- -----------
(Unaudited) (Unaudited)
Net income (loss) $ 853 $ (6,868)
Other comprehensive loss:
Foreign currency translation adjustments (31) (3)
---------- -----------
Comprehensive income (loss) $ 822 $ (6,871)
========== ===========
9 MONTHS 9 MONTHS
ENDED ENDED
June 27, June 28,
2003 2002
---------- -----------
(Unaudited) (Unaudited)
Net income (loss) $ 2,022 $ (12,860)
Other comprehensive loss:
Foreign currency translation adjustments (39) (24)
---------- -----------
Comprehensive income (loss) $ 1,983 $ (12,884)
========== ===========
Page 8 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 2003
(3) Discontinued Operations
-----------------------
On June 18, 2002, the Company signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. As of June
27, 2003, no additional amounts were earned under the agreement. Under the terms
of a related agreement, the Company and IEC-Mexico were also released of all of
their lease obligations to the landlord of the Mexican facility. EPI paid the
Company $315,000 in June 2002, $265,000 in July 2002 and $150,000 in September
2002. The Company recorded an after-tax loss on the sale of the business of
approximately $3.1 million in fiscal 2002. The reserve balance at June 27, 2003
was $193,000. It is anticipated that all remaining charges against the accrual
will be made by September 2003. The Consolidated Financial Statements and
related notes have been restated, where applicable, to reflect IEC-Mexico as a
discontinued operation.
Net sales of IEC-Mexico for the three and nine months ended June 27, 2003
were $0; and for the three and nine months ended June 28, 2002 were $2.1 and
$10.8 million, respectively. These amounts are not included in net sales in the
accompanying consolidated statements of operations.
Assets and liabilities of discontinued operations consisted of the
following (in thousands):
June 27, 2003 September 30, 2002
------------- ------------------
Accounts receivable $ - $ 141
Other current assets 85 207
--------- ----------
Total current assets 85 348
Property, plant and equipment, net - 800
Other assets - 9
--------- ----------
Total non-current assets - 809
--------- ----------
Total assets $ 85 $ 1,157
========== ===========
Accounts payable $ 16 $ 668
Accrued payroll and related expenses 50 37
Other accrued expenses 189 720
---------- -----------
Total current liabilities $ 255 $ 1,425
========== ===========
Net assets of discontinued
operations $ (170) $ (268)
========== ===========
(4) Financing Arrangements
----------------------
On January 14, 2003, the Company completed a new $7,300,000 financing
agreement composed of a $5,000,000 Senior Secured Facility (the "Facility"), a
$2,200,000 Secured Term Loan (the "Term Loan") and a $100,000 infusion by
certain of the Company's directors. The Facility, which has a 3 year maturity,
bears interest at the rate of prime plus 2%. It involves a revolving line of
credit for up to $3,850,000 based upon advances on eligible accounts receivable
and inventory, a term loan of $600,000, secured by machinery and equipment, to
be amortized over a 36 month period and a term loan of $550,000 secured by a
first mortgage lien against the Company's Edinburg, Texas real estate which loan
is due at the earlier of the sale of that real estate or one year from the date
of closing. The Term Loan is secured by a general security agreement, and
indirectly by the assignment of a certain promissory note and a first mortgage
on the Company's plant in Newark, New York. It is payable with interest at prime
plus 1.5% in monthly installments over a period of 3 years. Of the funds
provided by the new financing, $1,540,016 was used to repay all but $100,000 of
indebtedness to the Company's prior lenders who retained a subordinated interest
in substantially all of the Company's assets until the Texas real estate was
sold. On January 14, 2003, following the completion of the financing, the
availability under the revolver was $1,200,000. On February 28, 2003, the
Company sold its Edinburg, Texas facility for $875,000 and paid off $700,000 in
term loans related to the facility including $100,000 to the Company's prior
lender. The availability under the revolver was $1.9 million on June 27, 2003.
Page 9 of 17
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 2003
The financing agreements contain various affirmative and negative covenants
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). The Company is in compliance with these
covenants.
(5) Stock Option Plans
- ----------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its stock option plans. During the second quarter of fiscal 2003, the
Company adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". The following table
illustrates the effect on net earnings and earnings per share had the Company
adopted the fair value based method of accounting for stock-based employee
compensation for all periods presented.
<table>
3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
JUNE 27,2003 JUNE 28, 2002 JUNE 27, 2003 JUNE 28, 2002
------------- --------------- -------------- --------------
Net earnings, as reported $ 853 $ (6,868) $ 2,022 $ (12,860)
Pro forma net earnings $ 695 $ (6,858) $ 2,143 $ (12,830)
Earnings per share:
Basic - as reported $ 0.11 $ (0.89) $ 0.26 $ (1.67)
Basic - pro forma $ 0.09 $ (0.89) $ 0.27 $ (1.67)
Diluted - as reported $ 0.10 $ (0.89) $ 0.25 $ (1.67)
Diluted - pro forma $ 0.08 $ (0.89) $ 0.26 $ (1.67)
</table>
(6) Litigation
- --------------
The Company is from time to time subject to routine legal proceedings and
claims which arise in the ordinary course of its business. Although occasional
adverse decisions (or settlements) may occur, the Company believes that the
final disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
On August 12, 2002, an action was commenced in United States District Court
for the Southern Division of Texas (Civil Action No. M-02-358) against the
Company and several other corporate defendants. The plaintiffs (Armando Gonzalez
and Maria Sylvia Gonzalez, husband and wife, as Next Friends of Adrian Gonzalez,
a Minor, et al.) allege a "toxic tort" action against the defendants, for
exposure to lead, lead dust, chemicals and other substances used in the
manufacture of products by the defendants. The essence of the complaint relates
to alleged "in utero" exposure to the circulatory system of the then unborn
children, resulting in alleged tissue toxicity through the mothers, causing
damage to the central nervous system, brain and other organs of the fetus. The
complaint alleges theories of negligence, gross negligence, strict liability,
breach of warranty and fraud/negligent misrepresentation, and claims unspecified
damages for pain and suffering, a variety of special damages, punitive damages
and attorneys fees. An answer has been filed denying liability on the part of
the Company. The case is in the discovery phase. Royal & Sunalliance Insurance
Company has agreed to provide a defense of the claims with a reservation of
rights, but has expressly excluded any coverage for the claim for punitive
damages.
Page 10 of 17
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Results of Operations - Three Months Ended June 27, 2003, Compared to
the Three Months Ended June 28, 2002.
-----------------------------------------------------------
Net sales for the three month period ended June 27, 2003, were $14.0
million, compared to $6.0 million for the comparable period of the prior fiscal
year, an increase of 133 percent. The increase in sales is primarily due to
increased demand from IEC's major customers. Turnkey sales were 95 percent of
net sales in the quarter as compared to 87 percent for the comparable period of
the prior year.
Gross profit was $1.8 million or 13 percent of sales for the three month
period ended June 27, 2003, versus $0.4 million or 7 percent of sales in the
comparable period of the prior year. The increase in gross profit percentage is
primarily due to IEC's concerted efforts to reduce manufacturing overhead costs.
Selling and administrative expenses decreased to $0.8 million in the three
months ended June 27, 2003, from $0.9 million in the comparable period of the
prior year, a decrease of 9 percent. This decrease is primarily due to a
decrease in the number of employees. As a percentage of net sales, selling and
administrative expenses decreased to 6 percent from 14 percent in comparison to
the same quarter of the prior fiscal year.
IEC recorded a pre-tax charge of $448,000 in the three months ended June
28, 2002. This was due to the restructuring and reduction in workforce at IEC's
Newark, NY facility.
IEC also recorded a pre-tax charge of $500,000 in the three months ended
June 28, 2002. This was due to an additional writedown of IEC's Alabama building
held for sale as a result of a softening in the comercial real estate market.
IEC has recorded no income tax expense as a result of its net operating
loss carryforwards that were created in prior years and that will be utilized
against current and future year income.
Net income from continuing operations for the three months ended June 27,
2003 was $0.9 million versus a loss of $(1.7) million in the comparable quarter
of the prior year. Diluted income per share from continuing operations was $0.10
as compared to diluted loss per share from continuing operations of $(0.22) in
the comparable quarter of the prior fiscal year.
Page 11 of 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ---------------------------------------------------------------
Results of Operations - Nine Months Ended June 27, 2003, Compared to Nine Months
Ended June 28, 2002.
- --------------------------------------------------------------------------------
Net sales for the nine month period ended June 27, 2003, were $39.1
million, compared to $30.7 million for the comparable period of the prior year,
an increase of 27%. Turnkey sales were 94 percent of net sales in the nine month
period as compared to 92 percent for the comparable period of the prior fiscal
year.
Gross profit was $4.0 million or 10 percent of sales for the nine month
period ended June 27, 2003, versus $0.5 million or 1.7 percent of sales in the
comparable period of the prior year. Gross profit benefited from a $450,000
adjustment in net inventory reserves related to excess inventory that was used
in operations or sold back to customers. Gross profit was negatively impacted by
a $557,000 provision made against a promissory note from Acterna Corporation.
Otherwise, the increase in gross profit percentage is primarily due to IEC's
concerted efforts to reduce manufacturing overhead costs.
Selling and administrative expenses decreased to $2.4 million in the nine
months ended June 27, 2003, from $3.6 million in the comparable period of the
prior fiscal year, a decrease of 33%. This decrease is primarily due to a
decrease in the number of employees. As a percentage of net sales, selling and
administrative expenses decreased to 6 percent from 12 percent in comparison to
the same quarter of the prior fiscal year.
IEC recorded a pre-tax charge of $448,000 in the nine months ended June 28,
2002. This was due to the restructuring and reduction in workforce at IEC's
Newark, NY facility.
IEC also recorded a pre-tax charge of $900,000 in the nine months ended
June 28, 2002. This was due to an additional writedown of IEC's Alabama building
held for sale as a result of a softening in the commercial real estate market.
IEC had other income of $709,000 for the nine months ended June 27, 2003.
Of the other income, $578,000 was related to negotiated forgiveness of accounts
payable owed to various creditors, and $50,000 related to the sale of its
Alabama facility as discussed in IEC's FOrm 10Q for the quarter ended December
27, 2002.
IEC has recorded no income tax expense as a result of its net operating
loss carryforwards that were created in prior years and that will be utilized
against current and future year income.
Net income from continuing operations for the nine month period was $1.8
million versus net loss from continuing operations of $(5.2) million in the
comparable period of the prior fiscal year. Diluted earnings per share from
continuing operations was $0.23 as compared to diluted income per share from
continuing operations of $(0.67) in the comparable period of the prior fiscal
year.
Discontinued Operations
- -----------------------
On June 18, 2002, IEC signed an Asset Purchase Agreement to sell
substantially all of the assets of IEC-Mexico to Electronic Product Integration
Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. As of June
27, 2003, no additional amounts were earned under the agreement. Under the terms
of a related agreement, IEC and IEC-Mexico were also released of all of their
lease obligations to the landlord of the Mexican facility. EPI paid IEC $315,000
in June 2002, $265,000 in July 2002 and $150,000 in September 2002. IEC recorded
an after-tax loss on the sale of the business of approximately $3.1 million in
fiscal 2002. The reserve balance at June 27, 2003 was $193,000. It is
anticipated that all remaining charges against the accrual will be made by
September 2003. The Consolidated Financial Statements and related notes have
been restated, where applicable, to reflect IEC-Mexico as a discontinued
operation.
On February 28, 2003, IEC sold its Edinburg, Texas facility and completed
its restructuring initiative. As a result, IEC recorded a $184,000 restructuring
benefit due to certain facility payments accrued in a prior fiscal year that
will no longer be paid out.
Page 12 of 17
Significant Events
- ------------------
The Company's revenues are derived primarily from sales to North American
customers in the industrial and telecommunications industries and are
concentrated among specific companies. During Fiscal 2002, two customers
accounted for 67% of consolidated net sales. During the first nine months of
2003, two customers accounted for 90% of consolidated net sales.
One of these customers has announced its intention to begin manufacturing
most of the products it currently purchases from the Company at its own
facility. The Company believes that it will be able to retain a piece of that
business.
The Company has recently added several new customers and has received
additional business from existing customers. Furthermore, the Company expects to
add additional customers in the near future.
Liquidity and Capital Resources
- -------------------------------
As reflected in the Consolidated Statements of Cash Flows for the nine
months ended June 27, 2003, net cash provided by operations was $2.7 million
and $1.4 million was provided from the sale of the property. Of this, $2.7
million was used to reduce IEC's debt.
On January 14, 2003, IEC completed a new $7,300,000 financing agreement
composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000
Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the
IEC directors. The Facility, which has a 3 year maturity, bears interest at the
rate of prime plus 2%. It involves a revolving line of credit for up to
$3,850,000 based upon advances on eligible accounts receivable and inventory, a
term loan of $600,000, secured by machinery and equipment, to be amortized over
a 36 month period and a term loan of $550,000 secured by a first mortgage lien
against IEC's Edinburg, Texas real estate which loan was due at the earlier of
the sale of that real estate or one year from the date of closing. The Term Loan
is secured by a general security agreement, and indirectly by the assignment of
a certain promissory note and a first mortgage on the IEC plant in Newark, New
York. It is payable with interest at prime plus 1.5% in monthly installments
over a period of 3 years. Of the funds provided by the new financing, $1,540,016
was used to repay all but $100,000 of indebtedness to IEC's prior lenders who
will retain a subordinated interest in substantially all of IEC's assets until
the Texas real estate is sold. On January 14, 2003, following the completion of
the financing, the availability under the revolver was $1,200,000. On February
28, 2003, IEC sold its Edinburg, Texas facility for $875,000 and paid off
$700,000 in term loans related to the facility. The availability under the
revolver was $1.9 million on June 27, 2003.
The financing agreements contain various affirmative and negative covenants
including, among others, limitations on the amount available under the revolving
line of credit relative to the borrowing base, capital expenditures, fixed
charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). IEC is in compliance with these
covenants. In connection with the financing, IEC entered into agreements with
certain of its trade creditors providing for extended payment terms involving an
aggregate of approximately $2.0 million of past due balances. In addition,
certain trade creditors agreed to discounted payment terms. Such discounts
amounted to $0.6 million and were recorded in the first half of fiscal 2003.
Application of Critical Accounting Policies
- -------------------------------------------
IEC's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for IEC include
revenue recognition, impairment of long-lived assets, accounting for legal
contingencies and accounting for income taxes.
IEC recognizes revenue in accordance with Staff Accounting Bulletin No.101,
"Revenue Recognition in Financial Statements." Sales are recorded when products
are shipped to customers. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are provided for in the
same period the related sales are recorded.
IEC evaluates its long-lived assets for financial impairment on a regular
basis in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." IEC evaluates
the recoverability of long-lived assets not held for sale by measuring the
carrying amount of the assets against the estimated discounted future cash flows
associated with them. At the time such evaluations indicate that the future
discounted cash flows of certain long-lived assets are not sufficient to recover
the carrying value of such assets, the assets are adjusted to their fair values.
Page 13 of 17
IEC is subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", requires that an estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is at least a reasonable possibility that a loss has been
incurred. IEC evaluates, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact IEC's financial
position or its results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. Judgment is
required in assessing the future tax consequences of events that have been
recognized in IEC's financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact IEC's
financial position or its results of operations.
Impact of Inflation
- -------------------
The impact of inflation on IEC's operations has been minimal due to the
fact that it is able to adjust its bids to reflect any inflationary increases in
cost.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Quantitative and Qualitative Disclosures about Market Risk represents the
risk of loss that may impact the consolidated financial position, results of
operations or cash flows of IEC due to adverse changes in financial rates. IEC
is exposed to market risk in the area of interest rates. One exposure is
directly related to its Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
Item 4 -- Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, IEC's principal executive officer and principal financial
officer have concluded that IEC's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act") are effective to ensure that information required to be
disclosed by IEC in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. Subsequent to the date of that
evaluation, there have been no significant changes in IEC's internal controls or
in other factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material
weaknesses.
Forward-looking Statements
- --------------------------
Forward-looking statements in this Form 10-Q include, without limitation,
statements relating to the Company's plans, future prospects, strategies,
objectives, expectations, intentions and adequacy of resources and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements may be identified by their use of words
like "plans", "expects", "aims", "believes", "projects", "anticipates",
"intends", "estimates", "will", "should", "could", and other expressions that
indicate future events and trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, among others,
the following: general economic and business conditions, the timing of orders
and shipments, availability of material, product mix, changes in customer
requirements and in the volume of sales to principal customers, competition and
technological change, the ability of the Company to control manufacturing and
operating costs, and satisfactory relationships with vendors. The Company's
actual results of operations may differ significantly from those contemplated by
such forward-looking statements as a result of these and others factors,
including factors set forth in the Company's Annual Report on Form 10-K for the
year ended September 30, 2002 and in other filings with the Securities and
Exchange Commission.
Page 14 of 17
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The description of IEC's legal proceedings set forth in Item 3 of IEC's
Annual Report on Form 10-K for the fiscal period ended September 30, 2002 is
incorporated herein by reference.
Item 2 -- Changes in Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
The following documents are filed as exhibits to this Report:
99.1 A certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
99.2 A certification of the Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
b. Reports on Form 8-K
(i) A current report on Form 8-K was filed with the Securities and Exchange
Commission on April 10, 2003. The report provided information regarding the
appointment of a new Chief Financial Officer.
(ii) A current report on Form 8-K was filed with the Securities and
Exchange Commission on May 5, 2003. It announced earnings for the three months
ended March 28, 2003 and a press release relating to the earnings was attached
thereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IEC ELECTRONICS CORP.
REGISTRANT
Dated: July 21, 2003 /s/ W. Barry Gilbert
-----------------------------
W. Barry Gilbert
Chairman and
Acting Chief Executive Officer
Dated: July 21, 2003 /s/ Brian H. Davis
------------------------------
Brian H. Davis
Chief Financial Officer and Controller
Page 15 of 17
CERTIFICATIONS
I, W. Barry Gilbert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IEC Electronics
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 21, 2003 IEC Electronics Corp.
By: /s/ W. Barry Gilbert
------------------------
W. Barry Gilbert
Chairman and
Acting Chief Executive Officer
Page 16 of 17
CERTIFICATIONS
I, Brian H. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IEC Electronics
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 21, 2003 IEC Electronics Corp.
By: /s/ Brian H. Davis
--------------------------
Brian H. Davis
Chief Financial Officer
and Controller
Page 17 of 17