10-K 1 file002.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 2001 or ------------------ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission file number 0-6508 ------ IEC ELECTRONICS CORP. -------------------------------------------------------------------------------- Exact name of registrant as specified in its charter Delaware 13-3458955 -------------------------------------------------------------------------------- State or other jurisdiction of IRS Employer ID No. incorporation or organization 105 Norton Street, Newark, New York 14513 -------------------------------------------------------------------------------- Address of principal executive offices Zip Code Registrant's telephone number, including area code: 315-331-7742 ------------ Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, $.01 par value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Page 1 of 60 The aggregate market value of shares of common stock held by non-affiliates of the registrant was approximately $3,029,398 as of January 11, 2002, based upon the closing price of the registrant's common stock on the Nasdaq National Market on such date. Shares of common stock held by each executive officer and director and by each person and entity who beneficially owns more than 5% of the outstanding common stock have been excluded in that such person or entity under certain circumstances may be deemed to be an affiliate. Such exclusion should not be deemed a determination or admission by registrant that such individuals or entities are, in fact, affiliates of registrant. As of January 11, 2002, there were outstanding 7,691,503 shares of Common Stock. Documents incorporated by reference: Portions of IEC Electronics Corp.'s Proxy Statement for the Annual Meeting of Stockholders to be held on February 27, 2002 are incorporated into Part III of this Form 10-K. Page 2 of 60 TABLE OF CONTENTS PART I PAGE Item 1: Business..................................................... 4 Item 2: Properties................................................... 11 Item 3: Legal Proceedings............................................ 11 Item 4: Submission of Matters to a Vote of Security Holders.......... 12 Executive Officers of Registrant............................. 12 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters......................................... 13 Item 6: Selected Consolidated Financial Data......................... 14 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 15 Item 7A: Quantitative and qualitative disclosures about market risk... 19 Item 8: Financial Statements and Supplementary Data.................. 19 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 19 PART III Item 10: Directors and Executive Officers of the Registrant........... 20 Item 11: Executive Compensation....................................... 20 Item 12: Security Ownership of Certain Beneficial Owners and Management.................................................. 20 Item 13: Certain Relationships and Related Transactions............... 20 PART IV Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 21 Page 3 of 60 PART I ITEM 1. BUSINESS ----------------- IEC Electronics Corp. ("IEC") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. The Company believes that it is a significant provider of electronics manufacturing services based upon its state-of-the-art manufacturing capabilities, volume of production and quality of its services. 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. The Company believes that, based upon its volume of production, it is one of the larger independent SMT electronics manufacturing services providers in the United States. As a 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"). IEC Electronics Corp., a Delaware corporation, is the successor by merger in 1990 to IEC Electronics Corp., a New York corporation which was organized in 1966. In June 1992, the Company acquired an EMS provider in Edinburg, Texas which it renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November 1994, the Company acquired an EMS provider in Arab, Alabama, which it renamed IEC Arab, Alabama Inc. ("Alabama"). In August 1998, the Company through its newly created Irish subsidiary, IEC Electronics - Ireland Limited,("Longford"), acquired certain assets of an EMS provider located in Longford, Ireland. In February 2001, the Company acquired IEC Electronicos de Mexico, located in Reynosa, Mexico. The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiaries, Texas and Alabama until January 26, 2000 when each of Texas and Alabama merged into IEC; 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"). In December 1999, the Company closed its underutilized Longford operations and transferred some of the customers served there to its other operations in New York and Texas. All significant intercompany transactions and accounts have been eliminated. In October 1998, the Company closed its Alabama facility. The facility's customers were transferred to the Company's other facilities, the equipment was moved to the Company's other locations, and a certain portion of the real estate was sold. On the remaining balance of real estate there is a building of approximately 106,500 square feet. The Company entered into a one-year lease agreement in August, 2001 which was later modified into a two-year lease in December 2001 for 57,000 square feet of it, under which the tenant is obligated to buy all of that real property before a revised date of August 15, 2003, if the tenant is able to secure financing for this purchase. In November 2001 the Company leased to a third party 1,000 square feet of the remaining 49,500 square feet of the Alabama facility under a month-to-month lease. In December, 1998, the Company entered into a Shelter Services Agreement with a Texas Limited Partnership and its Mexican corporate subsidiary which leased 50,000 square feet in a newly constructed industrial park in Reynosa, Mexico. This Maquiladora facility thereafter commenced manufacturing printed circuit board assemblies and wire harnesses, and began shipping in April 1999 as IEC Electronicos de Mexico. Effective February 1, 2001, the Company terminated the Shelter Services Agreement and exercised its option to acquire the Mexican subsidiary of the Texas Limited Partnership for one U.S. dollar ($1.00). On March 28, 2001, the subsidiary, now wholly owned by the Company, executed a new five-year lease agreement with a five-year renewal option combining the original 50,000 square feet with an additional 62,000 square feet at the Reynosa facility. Effective May 1, 2001, the Mexican subsidiary, IEC Electronicos de Mexico, S. De R.L. De C.V. occupied the entire 112,000 square foot facility. Page 4 of 60 In April 2001, the Company's Board of Directors approved a restructuring plan to consolidate its Texas and Mexico business operations, including reducing its cost structure and improving working capital. This restructuring plan will allow the Company to concentrate its investments, resources and management attention on lower cost, high volume production at its Mexico operation. The Company has achieved world-class ISO 9002 certification for the Reynosa, Mexico plant and is ISO 9001 certified at the Newark, New York plant. These certifications are international quality assurance standards that most OEMs consider crucial in qualifying their EMS providers. The Company's New York facility has received approval from the British Approvals Board for Telecommunications allowing it to provide manufacturing and test services to manufacturers producing telecommunication equipment destined for shipment to the European Common Market. During 1998, the Company opened a state-of-the-art 8,000 square foot Technology Center at its Newark, New York manufacturing facility. During 2000, the Technology Center added pilot build to its services, which also include prototype assembly and the Advanced Materials Technology Laboratory. Design Engineering services are also provided at the Newark, New York facility. The Company's executive offices are located at 105 Norton Street, Newark, New York 14513. The telephone number is (315) 331-7742, its internet address is www.iec-electronics.com, and its e-mail addresses include inq@iec-electronics.com and ir@iec-electronics.com. Electronics Manufacturing Services: The Industry The EMS industry specializes in providing the program management, technical and administrative support and manufacturing expertise required to take a product from the early design and prototype stages through volume production and distribution. It provides quality product, delivered on time and at the lowest cost, to the OEM. This full range of services gives the OEM an opportunity to avoid large capital investments in plant, equipment and staff and allows the OEM to concentrate instead on the areas of its greatest strengths: innovation, design and marketing. Utilizing EMS such as those provided by IEC gives the customer an opportunity to improve return on investment with greater flexibility in responding to market demands and exploiting new market opportunities. Primarily as a response to rapid technological change and increased competition in the electronics industry, OEMs have recognized that by utilizing EMS providers they can improve their competitive position, realize an improved return on investment and concentrate on areas of their greatest expertise such as research, product design and development and marketing. In addition, EMS allows OEMs to bring new products to market rapidly and adjust more quickly to fluctuations in product demand; avoid additional investment in plant, equipment and personnel; reduce inventory and other overhead costs; and establish known unit costs over the life of a contract. Many OEMs now consider EMS providers an integral part of their business and manufacturing strategy. Accordingly, the EMS industry has experienced significant growth as OEMs have established long-term working arrangements with EMS providers such as IEC. OEMs increasingly require EMS providers to provide complete turnkey manufacturing and material handling services, rather than working on a consignment basis in which the OEM supplies all materials and the EMS provider supplies labor. Turnkey contracts involve design, manufacturing and engineering support, the procurement of all materials, and sophisticated in-circuit and functional testing and distribution. The manufacturing partnership between OEMs and EMS providers involves an increased use of "just-in-time" inventory management techniques which minimize the OEM's investment in component inventories, personnel and related facilities, thereby reducing costs. In the industry there has been the increasing shift from PTH to SMT interconnection technologies. PTH technology involves the attachment of electronic components to printed circuit boards with leads or pins which are inserted into pre-drilled holes in the boards. The pins are then soldered to the electronic circuits. The drive for increasingly greater functional density has resulted in the emergence of SMT, which eliminates the need for holes and allows components to be placed on both sides of a printed circuit, contributing to size reductions of up to 50%. SMT requires expensive, highly automated assembly equipment and significantly more expertise than PTH technology. To achieve high yields, EMS providers must have extensive knowledge and experience in solder paste, solder reflow, thermal management, metal fatigue, adhesives, solvents, flux chemistry, surface analysis, intermetallic bonding and testing. The shift to SMT from PTH technology has increased the use of EMS providers by OEMs seeking to avoid the significant capital investment required for development and maintenance of SMT expertise. Page 5 of 60 The Company continually evaluates emerging technology and maintains a technology road map to ensure relevant processes are available to its customers when commercial and design factors so indicate. The current generation of interconnection technologies include chip scale packaging and ball grid array (BGA) assembly techniques. The Company has placed millions of plastic BGA's since 1994 and this year added Ceramic BGA placement for networking customers to its service offerings. Future advances will be directed by the Company's Technology Center which combines Prototype and Pilot Build Services with the capabilities of the Advanced Materials Technology Laboratory, and is supported by the Design Engineering Group. The Company's Strategy The Company's strategy is to cultivate strong manufacturing partnerships with established and emerging OEMs in the electronics industry. These long-term business partnerships involve the joint development of manufacturing and support strategies with OEM customers and promote customer satisfaction. In implementing this strategy, the Company offers its customers a full range of manufacturing solutions through flexibility in production, high quality and fast-turnaround manufacturing services and computer-aided testing. As part of its strategy, the Company recognizes the need to offer advanced manufacturing technologies to its customers and, as a consequence, has been actively involved with SMT since the early 1980's. During fiscal 2001, the Company invested approximately $4.0 million in capital equipment. The vast majority of this amount was invested to upgrade equipment and process automation projects. The Company believes that it operates one of the larger SMT facilities in the United States. IEC believes that the high cost of SMT assembly equipment and the increased technical capability necessary to achieve an efficient, high yield SMT operation are significant competitive factors in the market for electronic assembly. The Company also believes that OEMs will increasingly contract for manufacturing on a turnkey basis as they seek to reduce their capital and inventory costs, as manufacturing technologies become more complex and as product life cycles shorten. Generally, turnkey contracts result in stable, close and long-term working relationships with customers. Since major OEMs require that EMS providers demonstrate the ability to offer SMT assembly services and to manage and support large turnkey contracts, there are significant barriers to entry in the EMS industry. Assembly Process The Company generally enters into formal agreements with its significant customers. These agreements generally provide for fixed prices for one year, absent any customer changes which impact cost of labor or material, and rolling forecasts of customer requirements. After establishing an OEM relationship, the Company offers its consultation services with respect to the manufacturability and testability of the product design. IEC often recommends design changes to reduce manufacturing costs and to improve the quality of the finished assemblies, and in some instances will produce original designs to the customer's specifications. Upon receipt, a customer's order is entered into the Company's computer system by customer service personnel and is reviewed by all departments. The Production Control Department generates a detailed manufacturing schedule. Bills of material and approved vendor lists are reviewed by the Engineering Department, which creates a detailed process to direct the flow of product through the plant. The Material Control Department utilizes a material requirement planning (MRP) program to generate the requisitions used by the Purchasing Department to procure all material and components from approved vendors in the quantities and at the time required by the production schedule. All incoming material is inspected to ensure compliance with customer specifications and delivered to the production floor on a "just-in-time" basis. Material and product movement are carefully and continuously computer-monitored throughout the assembly process to meet customer requirements. The placement and insertion of components on circuit board assemblies are accomplished by high-speed, vision and computer-controlled PTH or SMT machines. Any manual operations are performed prior to passage of the assemblies through various soldering processes. Statistical process control ("SPC") is used to provide consistent results in all steps of the manufacturing process. The manufactured assembly then moves into the test phase. IEC's computer-aided testing ensures delivery of high quality products on a consistent basis. Computer-driven in-circuit tests verify that all components have been properly placed or inserted and that the electrical circuits are complete. Functional tests determine if the board or system assembly is performing to customer specifications. Page 6 of 60 IEC assigns a program manager to each customer. The program manager maintains regular contact with the customer to assure timely and complete flow of information between the customer and the Company. Many products manufactured by the Company are in the early stages of their product cycle and therefore undergo numerous engineering changes. In addition, production quantities and schedules of certain products must be varied to respond to changes in customers' marketing opportunities. The Company assesses the impact of such changes on the production process and takes the appropriate action, such as restructuring bills of material, expediting procurement of new components and adjusting its manufacturing and testing plans. IEC believes that its ability to provide flexible and rapid response to customer needs is critical to its success. Products and Services The Company manufactures a wide range of assemblies which are incorporated into hundreds of different products. The Company provides electronic manufacturing services primarily for telecommunications equipment; measuring devices; medical instrumentation; imaging equipment; office equipment; micro, mini and mainframe computers; and computer peripheral equipment. During the fiscal year ended September 30, 2001 the Company provided electronics manufacturing services to approximately 55 different customers, including JDS Uniphase, ("JDSU"), GenRad, Inc. ("GenRad"), Symbol Technologies, Inc. ("Symbol"), Tellabs, Inc. ("Tellabs"), and Lucent Technologies, Inc.("Lucent"). The Company provides its services to multiple divisions and product lines of many of its customers and typically manufactures for a number of each customer's successive product generations. Materials Management In fiscal 2001, 2000, and 1999, turnkey contracts, under which the Company provided materials in addition to a value-added labor component, represented 96 percent, 97 percent and 95 percent of sales, respectively. Materials and the associated material handling expense often represent a very substantial portion of the total manufacturing cost of turnkey products. The Company generally procures material only to meet specific contract requirements. In addition, the Company's agreements with its significant customers generally provide for cancellation charges equal to the costs which are incurred by the Company as a result of a customer's cancellation of contracted quantities. The Company's internal systems provide effective controls for all materials, whether purchased by the Company or provided by the customer, through all stages of the manufacturing process, from receiving to final shipment. Suppliers Materials and components used in EMS, whether supplied by the OEM or by the Company, are available generally from a number of suppliers at negotiated prices which are firm for the life of the purchase order. However, at various times in the electronics industry there have been industry-wide short- ages of components which have temporarily delayed the Company's manufacture and shipment of products. The Company's business is not dependent upon any one supplier. In 1997, Master Distribution Programs were put in place with Arrow Electronics and Pioneer-Standard Electronics. These alliances have the benefit of reducing lead time on program parts, reducing the quotation process timetable, providing competitive pricing, providing some protection during periods of component allocation, providing better payment terms, reducing overhead cost and providing access to global resources. Marketing and Sales The Company markets its services through a direct sales force of 4 individuals, 14 program managers and 5 independent manufacturers' representatives, who currently employ approximately 36 sales people. In addition to the sales and marketing staff, the Company's executives are closely involved with marketing efforts. The Company conducts extensive market research to identify industries and to target companies where the opportunity exists to provide electronic manufacturing services across a number of product lines and product generations. The Company's sales effort is supported by advertising in numerous trade media, sales literature, internet website, video presentations, participation in trade shows and direct mail promotions. Inquiries resulting from these advertising and public relations activities are assigned to the manufacturers' representative covering the customer's location. IEC's direct sales force coordinates all such activity and monitors the performance of the manufacturers' representatives. In addition, referrals by existing customers are an important source of new opportunities. The Company's objective is to further diversify the customers and industries which it serves. Page 7 of 60 Backlog The Company's backlog as of September 30, 2001 and September 30, 2000 was approximately $21 million and $162 million, respectively. At December 31, 2001, the backlog was $31 million, and the book-to-bill ratio (newly signed purchase orders/sales) for the first quarter 2002 improved to 1.67. Backlog consists of contracts or purchase orders with delivery dates scheduled within the next 12 months. Substantially all of the current backlog is expected to be shipped within the Company's current fiscal year. Variations in the magnitude and duration of contracts received by the Company and customer delivery requirements may result in substantial fluctuations in backlog from period to period. Because customers may cancel or reschedule deliveries, backlog is not a meaningful indicator of future financial results. Governmental Regulation The Company's operations are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. Management believes that the Company's business is operated in compliance with applicable regulations promulgated by the Occupational Safety and Health Administration and the Environmental Protection Agency and corresponding state agencies which, respectively, pertain to health and safety in the workplace and the use, discharge, and storage of chemicals employed in the manufacturing process. Current costs of compliance are not material to the Company. However, new or modified requirements, not presently anticipated, could be adopted creating additional expense for the Company. Employees The Company's employees numbered approximately 700 at November 6, 2001, including 116 employees (of which 48 are in Mexico) engaged in engineering, 442 (of which 211 are in Mexico) in manufacturing and 142 (of which 48 are in Mexico) in administrative and marketing functions. None of the Company's U.S. employees are covered by a collective bargaining agreement. The Mexican employees are represented by a labor union. The Company has not experienced any work stoppages and believes that its employee relations are good. The Company has access to a large work force by virtue of its northeast location midway between Rochester and Syracuse, two upstate New York industrial cities, and by virtue of its Mexican location in Reynosa, 15 miles from the Texas border. Patents and Trademarks The Company holds patents unrelated to electronics manufacturing services and also employs various registered trademarks. The Company does not believe that either patent or trademark protection is material to the operation of its business. Safe Harbor for Forward-looking Statements under Securities Litigation Reform Act of 1995: Certain risk factors From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the Reform Act). The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to maximize to the fullest extent possible the protections of the Safe Harbor established in the Reform Act. Accordingly, such statements are qualified in their entirety by reference to and are accompanied by the following discussion of certain important factors that could cause actual results to differ materially from such forward looking statements. Stockholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to such analysts any material non-public information or other confidential information. Accordingly, stockholders should not assume that the Company agrees with any statement or report issued by any analyst regardless of the content of such statement or report. Accordingly, to the extent that reports issued by a securities analyst contain any projections, forecasts, or opinions, such reports are not the responsibility of the Company. Page 8 of 60 The risks included here are not exhaustive. Furthermore, reference is also made to other sections of this report which include additional factors which could adversely impact the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or a combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. General Economic Conditions The Company is exposed to general economic conditions which could have a material adverse impact on its business, operating results and financial condition. As a result of recent unfavorable economic conditions and reduced capital spending, sales have declined in fiscal 2001 compared to fiscal 2000. In particular, sales to OEMs in the telecommunications, workstation and server equipment manufacturing industry worldwide were impacted during fiscal 2001. If the economic conditions in the United States worsen either as the result of a protracted recession or in consequence of the after effects of the events of September 11, 2001, the Company may experience a material adverse impact on its business, operating results and financial condition. Financing Arrangements The Company has significant debt service obligations and has sustained operating losses for four consecutive fiscal years. As reported in Note 1 to the Consolidated Financial Statements, the Company's credit agreement expires on February 15, 2002. As a result of certain charges to inventory and receivables recorded on January 11, 2002, included in the accompanying financial statements as of September 30, 2001, to reflect contingencies involved in pending litigation, the Company is in violation of the amended agreement. It is currently in discussions with other lending institutions with respect to a new credit agreement. If it is unable to obtain a new credit agreement by February 15, 2002, or to obtain a further extension on its current credit agreement, the Company will be unable to service its current debt obligations and its business, operating results and financial condition would be materially adversely impacted. The degree to which the Company may be leveraged in the future could materially and adversely affect its ability to obtain financing for working capital, acquisitions or other purposes and could make it more vulnerable to industry downturns and competitive pressures. The Company's ability to meet its debt service obligations will be dependent upon its future performance, which will be subject to financial, business and other factors affecting its operations, many of which are beyond its control. The Company will require substantial amounts of cash to fund scheduled payments of principal and interest on its outstanding indebtedness, as well as future capital expenditures and any increased working capital requirements. If it is unable to meet its cash requirements out of cash flow from operations, there can be no assurance that it will be able to obtain alternative financing, that any such financing would be on favorable terms, or that it will be permitted to do so under the terms of its existing financing arrangements, or its financing arrangements in effect in the future. In the absence of such financing, the Company's ability to respond to changing business and economic conditions, to make future acquisitions, to experience adverse operating results or to fund required capital expenditures or increased working capital requirements may be adversely affected. Customer Concentration; Dependence On the Electronics Industry A small number of customers are currently responsible for a significant portion of the Company's net sales. During fiscal 2001, 2000, and 1999, the Company's five largest customers accounted for 57%, 75% and 60% of consolidated net sales, respectively. During fiscal 2001, JDS Uniphase, GenRad and Symbol, accounted for 13%, 12% and 11%, respectively, of consolidated net sales. No revenues from JDS Uniphase are anticipated during fiscal 2002. The Company is dependent upon continued revenues from its other large customers. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers could have a material adverse effect on the Company's results of operations. The Company has no firm long-term volume purchase commitments from its customers, and over the past few years has experienced reduced lead-times in customer orders. In addition, customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are increased because a majority of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting the electronics industry, in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company's results of operations. Page 9 of 60 Revenue Fluctuations The Company's revenues have fluctuated over the past five fiscal years. Net sales were $260.7 million in fiscal 1997, $248.2 million in fiscal 1998, $157.5 million in fiscal 1999, $204.2 million in fiscal 2000, and $160.6 million in fiscal 2001. Although the Company continues to broaden its portfolio of customers there can be no assurance that its revenues will increase. There can also be no assurance that the Company will successfully manage the integration of any business it may acquire in the future. As the Company manages its geographically dispersed operations and expands its operation in Mexico, it may experience certain inefficiencies. In addition, the Company's results of operations could be adversely affected if either of its facilities does not achieve growth sufficient to offset increased expenditures associated with geographic expansion. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its profitability would be adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. Potential Fluctuations in Operating Results The Company's margins and operating results are affected by a number of factors, including product mix, additional costs associated with new projects, price erosion within the electronics industry, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from major customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, and increased costs and shortages of components or labor. The Company's turnkey manufacturing, which typically results in higher net sales and gross profits but lower gross profit margins than consignment assembly and testing services, represents a substantial percentage of net sales. All of these factors can cause fluctuations in the Company's operating results over time. Because of these factors, there can be no assurance that the Company's margins or results of operations will not fluctuate or decrease in the future. Competition The electronics assembly and manufacturing industry is comprised of a large number of domestic and offshore companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers which evaluate its capacities against the merits of manufacturing products internally. The Company competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development, and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, the provision of value-added services, and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules, and reliable delivery of finished products on a timely and price-competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with facilities established where labor costs are lower. Availability of Components Substantially all of the Company's net sales are derived from turnkey manufacturing in which the Company provides both materials procurement and assembly services. In turnkey manufacturing, the Company potentially bears the risk of component price increases, which could adversely affect the Company's gross profit margins. At various times there have been shortages of components in the electronics industry. If significant shortages of components should occur, the Company may be forced to delay manufacturing and shipments, which could have a material adverse effect on the Company's results of operations. Availability of customer-consigned parts and unforeseen shortages of components on the world market are beyond the Company's control and could adversely affect revenue levels and operating efficiencies. Risks Associated with Mexican Operations The Company intends to continue to expand its manufacturing operations in Mexico, which will result in a significant portion of its net sales being subject to the normal risks associated with foreign operations. Such risks include unexpected difficulties in staffing and managing a foreign subsidiary and political and regulatory uncertainties. There can be no assurance that such factors will not have an adverse impact on the Company's ability to increase and maintain its revenues from its Mexican manufacturing operations. Page 10 of 60 Market Price of Common Stock The fluctuations in the Company's operating results as well as general market conditions have affected the price of the Company's Common Stock. On January 11, 2002, the closing price of the Company's Common Stock on The Nasdaq Stock Market ("Nasdaq") was $0.68 per share. The Company's Common Stock is currently listed on The Nasdaq National Market ("NNM") tier of Nasdaq. Nasdaq rules provide, among other things, that a company must maintain a minimum bid price of $1 per share in order to remain listed on NNM. Companies whose securities fall below the minimum bid price for 30 consecutive business days are given a 90-day grace period to regain compliance. A company may demonstrate compliance by meeting the standard for a minimum of ten consecutive business days. If a company fails to regain compliance within the applicable timeframe, it is subject to delisting. On September 27, 2001, Nasdaq announced there would be an across-the-board moratorium on the minimum price requirements until January 2, 2002. Under this temporary relief, companies were not to be cited for bid price deficiencies, and no deficiencies accrued during this period. The minimum bid price rule was reinstated effective January 3, 2002. It is not certain what impact that will have on the continued listing of the Company's Common Stock on NNM. There can be no assurance that the bid price of the Company's Common Stock will be at or above $1.00 for the requisite period of time. If the Company is unable to regain compliance, the Company anticipates that its Common Stock will be transferred to The Nasdaq SmallCap Market tier of Nasdaq. Environment Compliance The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present or future regulations could subject it to future liabilities or the suspension of production which could have a material adverse effect on the Company's business. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other expenses to comply with environmental regulations. Dependence on Key Personnel and Skilled Employees The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled employees. Failure to do so could adversely affect the Company's operations. ITEM 2. PROPERTIES ------------------- The Company's administrative and principal manufacturing facility is located in Newark, New York and contains an aggregate of approximately 300,000 square feet. The IEC Edinburg, Texas facility consists of approximately 87,000 square feet. The facility is primarily empty, houses a materials stockroom, and is currently being marketed for sale. The Reynosa, Mexico facility consists of approximately 112,000 square feet and is leased from a third party under an agreement expiring in 2006, with a 5-year renewal option. The Company's Arab, Alabama facility consists of approximately 106,500 square feet, of which 57,000 square feet is leased to a third party under an agreement expiring in August, 2003 and 1,000 square feet is leased to a third party under a month-to-month agreement. ITEM 3. LEGAL PROCEEDINGS -------------------------- Except as set forth below, there are no material legal proceedings pending to which the Company or any of its subsidiaries is a party or to which any of the Company's or subsidiaries' property is subject. To the Company's knowledge, there are no material legal proceedings to which any director, officer or affiliate of the Company, or any beneficial owner of more than 5 percent (5%) of Common Stock, or any associate of any of the foregoing, is a party adverse to the Company or any of its subsidiaries. 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 consists of a general denial and various affirmative defenses. The Company is in the process of moving for summary judgment and will prosecute the action vigorously, as management believes its case to be meritorious and regards the answer as a delaying tactic. 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 $950,000. The Company believes its case to be meritorious and will vigorously prosecute the action. Page 11 of 60 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ During the fourth quarter of fiscal 2001, no matters were submitted to a vote of security holders. EXECUTIVE OFFICERS OF THE REGISTRANT The Company's executive officers as of September 30, 2001, were as follows: Name Age Position Thomas W. Lovelock 58 President,Chief Executive Officer and Director Richard L. Weiss 57 Vice President, Chief Financial Officer and Treasurer Bill R. Anderson 56 Vice President and General Manager Newark Operations William A. Nabors 60 Vice President and General Manager Texas/Mexico Operations Randall C. Lainhart 42 Vice President, New Business Development Stephen H. Hotchkiss 51 Director of Marketing Kevin J. Monacelli 47 Controller Thomas W. Lovelock has served as IEC's President and Chief Executive Officer and as a Director since August 21, 2000. He was previously employed as President and Chief Executive Officer of Group Technologies, an EMS provider and subsidiary of Sypris Solutions in Tampa, Florida. Mr. Lovelock has also held the positions of President and Chief Executive Officer (1992-1997) at Bell Technologies,Inc., Vice President of Operations in the Communications Manufacturing Division of E-Systems, and various management positions at Analog Devices and Motorola. Richard L. Weiss, a certified public accountant, became Vice President, Chief Financial Officer and Treasurer of the Company on October 1, 1999, having joined the Company as Director of Finance in August 1999. Prior thereto, he had been Vice President, Finance of Microwave Data Systems, a division of California Microwave, Inc.(1990 - 1998). From 1974 - 1990, Mr. Weiss was employed by the RF Communications Group of Harris Corp. as a Manager of Finance and Operations and in various other managerial positions. Bill R. Anderson has served as Vice President and General Manager, Newark Operations since September 2001. Prior thereto, he was Vice President, Supply Chain Management and Materials (March 2001 to September 2001) and continues to remain responsible for those areas corporate wide. He held the positions of Vice President of Materials and of Executive Vice President and General Manager at IEC from 1995-1998. In 1998, he left the Company and became Vice President of North American Operations for SMT Centre (SMTC), Toronto, Canada, an EMS provider. From there, he accepted the position of Vice President of Materials and Supply Chain Management at MCMS, Inc., also an EMS provider, a position he held until March 2001, when he rejoined the Company. William A. Nabors became Vice President and General Manager of Texas and Mexico Operations in September 2001. Prior thereto, he held the positions of Vice President, Manufacturing Operations (October 2000-September 2001) and Vice President and General Manager of Newark Operations (June 2000-October 2000). Previously, Mr. Nabors was Vice President and General Manager (during 1998) of Austin High Volume Mfg. at XeTel Corporation. He also was Vice President of Manufacturing Operations at Tanisys Technology (June 1, 1995-October 1, 1997), and held key management positions at Compaq Computer. Randall C. Lainhart joined the Company in June 2001 as Vice President, New Business Development. Prior thereto, he was Vice President, Sales and Marketing for Matco Electronics, Inc., Binghamton, New York, (1994-2001), Director, New Business Development for SCI Systems, Inc. (1989-1994) and Director, New Business Development for Ferranti International, Lancaster, Pennsylvania, (1986-1989). At Ferranti International, he was also Director, Quality Assurance (1984-1986). Stephen H. Hotchkiss has served as Director of Marketing since June 2001. He previously served as Vice President of New Business Development (October 2000-June 2001) and Vice President, Sales and Marketing (November 1997-October 2000). Prior thereto, he had been Director of Sales of Marketing (November 1996-November 1997), Sales Manager (March 1996-November 1996), and Sales Representative (1977-1996). Kevin J. Monacelli joined IEC on May 31, 2000 as Director of Corporate Finance and was appointed Company Controller on November 30, 2000. He previously worked for 22 years in finance at Alling and Cory/xpedx, serving as its Controller the last 17 years. Prior to that, Mr. Monacelli was employed at Deloitte and Touche in Rochester, NY. Page 12 of 60 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND -------------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- (a) Market Information. The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol IECE. The following table sets forth, for the period stated, the high and low closing sales prices for the Common Stock as reported on The Nasdaq Stock Market. Closing Sales Price Period High Low October 1, 1999 - December 31, 1999 $ 3.063 $ 1.000 January 1, 2000 - March 31, 2000 $ 3.781 $ 2.000 April 1, 2000 - June 30, 2000 $ 2.969 $ 1.500 July 1, 2000 - September 30, 2000 $ 2.875 $ 1.500 October 1, 2000 - December 31, 2000 $ 2.063 $ 0.531 January 1, 2001 - March 31, 2001 $ 2.000 $ 0.656 April 1, 2001 - June 30, 2001 $ 1.440 $ 1.063 July 1, 2001 - September 30, 2001 $ 1.200 $ 0.520 The closing price of the Company's Common Stock on The Nasdaq Stock Market on January 11, 2002, was $0.68 per share. (b) Holders. As of January 11, 2002, there were approximately 134 holders of record of the Company's Common Stock. (c) Dividends. The Company did not pay any dividends on its Common Stock during the fiscal years ended September 30, 2001 and 2000. It is the current policy of the Board of Directors of the Company to retain earnings for use in the business of the Company. Certain financial covenants set forth in the Company's current loan agreement prohibit the Company from paying cash dividends. The Company does not plan to pay cash dividends on its Common Stock in the foreseeable future. Page 13 of 60 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA ----------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) Years Ended September 30, 2001 2000 1999 1998(1) 1997 ------------------------------------------------ Income Statement Data --------------------- Net Sales $ 160,638 $204,158 $157,488 $248,159 $260,686 ------------------------------------------------ Gross (Loss) Profit $ (3,544) $ 3,726 $ (5,766) $13,640 $ 28,094 ------------------------------------------------ Operating (Loss) Income $ (27,280) $ (7,864) $(22,051) $(7,554)$ 12,321 ------------------------------------------------ Net (Loss) Income $ (29,272) $ (8,031) $(20,565) $(6,160)$ 6,958 ------------------------------------------------ Net (Loss) Income per Common and common equivalent share: Basic $ (3.83) $(1.06) $ (2.72) $ (0.82)$ 0.93 Diluted $ (3.83) $(1.06) $ (2.72) $ (0.82)$ 0.91 ------------------------------------------------ Common and Common equivalent shares Basic 7,651 7,590 7,563 7,542 7,442 Diluted 7,651 7,590 7,563 7,542 7,617 ----------------------------------------------- Balance Sheet Data ------------------ Working Capital $ 1,163 $30,860 $ 33,424 $31,764 $ 34,622 ----------------------------------------------- Total Assets $ 38,126 $89,561 $ 93,919 $98,665 $152,070 ----------------------------------------------- Long-term debt, less current maturities $ - $15,266 $ 16,547 $ 7,138 $ 6,988 ----------------------------------------------- Shareholders' equity $ 11,809 $41,008 $ 48,845 $69,568 $ 75,461 ----------------------------------------------- (1) The results of operations and financial position as of and for the year ended September 30, 1998, include the operations of IEC Electronics - Ireland Limited, as of the acquisition date, August 31, 1998, through September 4, 2001. Page 14 of 60 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------- MANAGEMENT'S DISCUSSION OF OPERATIONS The information in this Management's Discussion & Analysis should be read in conjunction with the accompanying consolidated financial statements, the related Notes to Financial Statements and the Five-Year Summary of Financial Data. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement in Item 1 of this Form 10K. Overview -------- IEC had a challenging year in fiscal 2001 as it continued its transition from heavy reliance on customers in the personal computer industry to establishing a more diverse portfolio of customers, but focusing on telecommunications and industrial customers. During 2001, the telecommunications segment contracted dramatically and the Company suffered significant order reductions from its customers. The Company took a number of important steps in 2001, including a continued emphasis on business development from new and existing customers and establishing and completing a restructuring plan to consolidate its Texas and Mexico business operations, while significantly reducing its overhead structure to match lower revenues. Analysis of Operations ---------------------- Sales ----- (dollars in millions) % % For Year Ended September 30, 2001 2000 Change 1999 Change ---- ---- ------ ---- ------ Net Sales $160.6 $204.2 (21.4)% $157.5 29.7% The 21.4% decrease in fiscal 2001 net sales compared to fiscal year 2000 was primarily due to the loss of one major customer and the significant downturn in the telecommunications and industrial sectors of the U.S. economy. Subsequent to September 30, 2001, the book-to-bill ratio has improved and is currently at 1.67. The 29.7% increase in fiscal 2000 net sales compared to fiscal year 1999 was mainly attributable to the corporate strategy to broaden its customer base while maintaining the current level of production with its larger customers. The Company's percentage of turnkey sales has remained steady. Such sales represented 96%,97% and 95% of net sales in fiscal 2001, 2000 and 1999, respectively. Gross (Loss) Profit and Selling and Administrative Expenses ---------------------------------------------------- (as a % of Net Sales) For Year Ended September 30, 2001 2000 1999 ---- ---- ---- Gross (Loss) Profit (2.2%) 1.8% (3.7%) Selling and Administrative Expenses 6.1% 6.2% 7.8% Gross profit as a percentage of sales was (2.2%) in fiscal 2001 as compared to 1.8% in fiscal 2000. This decrease was a result of a combination of factors. The Company experienced lower overhead absorption due to underutilized capacity from lower sales volume, change of customer mix, and greater customer product complexity with requests for design changes which caused manufacturing production interruptions, restarts and increased set-up expenses, creating excess production downtime. A significant factor was a charge against inventory and receivables recorded on January 11, 2002, included in the accompanying financial statements as of September 30, 2001, to reflect litigation contingencies. Were it not for that charge, the fiscal 2001 gross profit percentage would have been 1.1%. During fiscal 2001, the Company has significantly reduced its overhead structure in an effort to match lower revenues. On an annualized basis, $14 million was removed. As a result, the breakeven level of business was almost half of the level in effect in fiscal 2000. Gross profit as a percentage of sales increased more than 5 percentage points in fiscal 2000 compared to fiscal 1999. This increase was primarily due to an increase in demand from the Company's two largest customers who provide higher margin percentages. This increase was also due to improved fixed manufacturing overhead absorption being mitigated by increased material and direct labor costs. Page 15 of 60 Selling and administrative expenses as a percentage of sales decreased slightly to 6.1% compared to 6.2% in fiscal 2000. This minimal change during a year when revenue decreased 21% was primarily a result of concentrated efforts to better match overhead expenses with the revenue stream. In fiscal year 2000, SG&A expenses as a percentage of sales decreased from fiscal 1999's 7.8% primarily due to an increase in the sales base. Selling and administrative expenditures decreased in fiscal 2001 to $9.8 million from $12.6 million in fiscal 2000, as a result of decreases in commissions expense related to decreased net sales, and other cost-cutting measures. Other Income and Expense ------------------------ (dollars in millions) For Year Ended September 30, 2001 2000 1999 ---- ---- ---- Interest Expense $2.0 $2.1 $1.1 Other Income $ - $2.0 $ - Interest expense decreased $131,000 to $2.0 million in fiscal 2001 from $2.1 million in fiscal 2000 due to lower interest rates throughout the year. Interest expense increased $1.0 million in fiscal 2000 from $1.1 million in fiscal 1999, due to higher borrowing levels and higher interest rates throughout the year. Other income of $2.0 million in fiscal 2000 is composed of life insurance proceeds due to the death of the former Chief Executive Officer in December, 1999. Income Taxes ------------ (as a % of loss before income taxes) For Year Ended September 30, 2001 2000 1999 ---- ---- ---- Effective Tax Rate -% -% (11.1%) In fiscal 2001, the Company recorded an income tax expense relating to foreign operations in the amount of $116,000, and an income tax benefit from the receipt of a prior year state refund in the amount of $95,000. The Company has recorded no benefit from U.S. income tax for fiscal years 2001 and 2000 as a result of net losses from fiscal 1998 through 2001, and accordingly, has a full valuation allowance against its net deferred tax asset including the net operating loss carry-forward. Restructuring Charge -------------------- (dollars in millions) For Year Ended September 30, 2001 2000 1999 ---- ---- ---- Restructuring Charge $ 1.4 $(1.0) $4.0 In April 2001, the Company's Board of Directors approved a restructuring plan to consolidate its Texas and Mexico business operations including reducing its cost structure and improving working capital. As part of the business-restructuring plan, the Company recorded a charge to earnings of $1.4 million in the third quarter of fiscal 2001. The charge related to facility consolidations ($1.0 million) and headcount reductions ($400,000). This restructuring plan will allow the Company to concentrate its investments, resources and management attention on lower cost, high volume production at its Mexico operations. As of September 30, 2001, a reserve balance of approximately $651,000 still remained. It is anticipated that all remaining charges against the accrual will be made during fiscal 2002. There have been no significant reallocations or re-estimates of this restructuring charge to date. In September 1999, the Company announced its plan to close its underutilized Irish operation (Longford) and transfer some of the customers served there to its other operations in New York and Texas. Accordingly, a restructuring charge of approximately $4.0 million was recorded in the fourth quarter of fiscal 1999. The components of the charge are as follows: the write-down of assets to be disposed of to their fair market value ($1.1 million), the write-down of goodwill ($670,000), severance and employee benefits ($619,000), accrual of the remaining lease payments and related building maintenance costs ($895,000) and repayment of a grant provided by the Irish Development Agency ($681,000). In February 2000 a third party purchased from the Company certain assets of Longford and assumed the lease of the Longford facility. This resulted in a benefit of $1.0 million from the reversal of a previously established restructuring reserve which included $800,000 relating to the lease and $200,000 recovered from a guarantee which had been executed by the company from whom the assets in Ireland had been purchased. The Company recorded charges against the accrual of approximately $54,000, $2.2 million and $700,000 during fiscal 2001, 2000 and 1999, respectively. There is no remaining balance at September 30, 2001. Page 16 of 60 In October 1998, the Company closed its underutilized Alabama facility and transferred the facility's customers to the Company's other operations in New York and Texas. Accordingly, a restructuring charge of $4.7 million was recorded in the fourth quarter of fiscal 1998. The components of the charge are as follows: the write-down of assets to be disposed of to their fair market value ($2.2 million), the write-down of goodwill ($1.3 million), and severance and employee benefits ($1.2 million). The Company recorded charges against the accrual of $85,000, $200,000, and $1.6 million in fiscal 2001, 2000, and 1999, respectively. As of September 30, 2001, a reserve balance of approximately $1,440,000 still remained. Of this balance, $1.2 million relates to the write-down of assets and is included in property, plant and equipment on the Consolidated Balance Sheet. There have been no significant reallocations or re-estimates of the restructuring charges to date. Asset Impairment Writedown -------------------------- In assessing and measuring the impairment of long-lived assets, the Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the long-lived asset or identifiable intangible being tested for impairment was acquired in a purchase business combination, the goodwill that arose in that transaction is included in the asset grouping in determining whether an impairment has occurred. If some but not all of the assets acquired in that transaction are being tested, goodwill is allocated to the assets being tested for impairment based on the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Additionally, where an impairment loss is recognized for long-lived assets and identifiable intangibles where goodwill has been allocated to the asset grouping, as described immediately above, the carrying amount of the allocated goodwill is impaired (eliminated) before reducing the carrying amounts of impaired long-lived assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. With respect to the carrying amounts of goodwill remaining after the testing for impairment of long-lived assets and identifiable intangibles, including enterprise level goodwill not subject to impairment testing under SFAS No. 121, the Company assesses such carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount of such goodwill may not be recoverable. The Company assesses the recoverability of this goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired business. The amount of goodwill impairment, if any, is measured based on projected discounted operating cash flows compared to the carrying value of such goodwill. During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in the Company's business strategy, the Company does not believe that their future cash flows support the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment. During the fourth quarter of 1999, certain fixed assets were no longer in use and identified as impaired. The equipment was marketed for sale, and as such, the carrying value of these assets was written down to the estimated recoverable sales value, net of commissions, obtained from appraisals and used equipment quotations. The effect of this impairment recognition totalled approximately $400,000 and was included with depreciation expense for the year ended September 30, 1999. In fiscal 2000, $160,000 of these assets were returned to active use due to volume increases. Page 17 of 60 Liquidity and Capital Resources ------------------------------- As reflected in the Consolidated Statement of Cash Flows for 2001, of the $11.2 million of cash provided by operating activities, $4.0 million was used to fund investing activities, and $7.2 million was used to pay down bank debt. Capital additions were $4.0 million in 2001 and $1.8 million in 2000. These expenditures were primarily used to upgrade the manufacturing capabilities of the Company. 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. Under the terms of the amendment, the revolving credit facility component of the agreement, based on eligibility criteria for receivables and inventory, was reduced from $25 million to $5 million. Amounts borrowed are limited to 85% of qualified accounts receivable, 20% of raw materials and 30% of finished goods inventory, but in no event is the inventory borrowing base greater than $2 million. The second component consists of a $10 million three-year term loan with monthly principal installments based on a five-year amortization which began in April 2000. At September 30, 2001, $13.4 million was outstanding, consisting of $6.5 million and $6.9 million relating to the revolving credit facility and term loan, respectively, with an additional $2.1 million available under the revolving credit facility. As a result of certain changes to inventory and receivables to reflect contingencies involved in pending litigation, the Company is currently in violation of the amended agreement. Subject to resolution related to the Company's violation of the amended agreement, the availability under the revolver at December 21, 2001, under the most recent amendment was $1.6 million. Interest on this revolving credit facility is determined at the Company's option on a LIBOR or prime rate basis, plus a margin. A facility fee is paid on the unused portion of the facility. 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, included in the accompanying financial statements as of September 30, 2001, the Company is in violation of the amended agreement. 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 February 15, 2002, expiration date of the current agreement. Since the Company's loan agreement currently expires on February 15, 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 February 15, 2002, or obtains an extension of its existing credit agreement and providing it meets with substantial success in its pending litigation and meets its performance targets, management believes the Company will generate sufficient cash flows in 2002 to meet the obligations. Impact of Inflation ------------------- The impact of inflation on the Company's operations for the last three years 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. Page 18 of 60 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). We will adopt this standard on October 1, 2002. Upon adoption of SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. Management does not expect the adoption of SFAS 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- Quantitative and Qualitative Disclosures about Market Risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of 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 bor- rowings 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- The information required by this item is incorporated herein by reference to pages 25 through 44 of this Form 10-K and is indexed under Item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON --------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- There have been no disagreements on accounting and financial disclosure matters. Page 19 of 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------------------------------ The information required by this item is presented under the caption entitled "Election of Directors - Nominees for Election as Directors" contained in the definitive proxy statement issued in connection with the Annual Meeting of Stockholders to be held February 27, 2002 and is incorporated in this report by reference thereto. The information regarding Executive Officers of the Registrant is found in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION -------------------------------- The information required by this item is presented under the caption entitled "Executive Officer Compensation" contained in the definitive proxy statement issued in connection with the Annual Meeting of Stockholders to be held February 27, 2002 and is incorporated in this report by reference thereto, except, however, the sections entitled "Performance Graph" and "Report of the Compensation Committee of the Board of Directors" are not incorporated in this report by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND ------------------------------------------------------------- MANAGEMENT ---------- The information required by this item is presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the definitive proxy statement issued in connection with the Annual Meeting of Stockholders to be held February 27, 2002 and is incorporated in this report by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------- The information required by this item is presented under the caption "Executive Officer Compensation - Certain Transactions" contained in the definitive proxy statement issued in connection with the Annual Meeting of Stockholders to be held February 27, 2002 and is incorporated in this report by reference thereto. Page 20 of 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON ---------------------------------------------------------------- FORM 8-K -------- (a) The following documents are filed as part of this report and as response to Item 8: Page (1) and (2) Financial Statements and Supplementary Schedule Report of Independent Public Accountants...................... 25 Consolidated Balance Sheets as of September 30, 2001 and 2000.................................. 26 Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999 .................... 28 Consolidated Statements of Comprehensive Income (Loss) and Shareholders' Equity for the years ended September 30, 2001, 2000 and 1999................................................ 29 Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999...................... 30 Notes to Consolidated Financial Statements.................... 31 Schedule I Valuation and Qualifying Accounts................. 44 All other schedules are either inapplicable or the information is included in the financial statements and, therefore, have been omitted. (3) Exhibits Exhibit No. Title Page 3.1 Amended and Restated Certificate of Incorporation of DFT Holdings Corp. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.2 Amended Bylaws of IEC Electronics Corp. (Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000.) 3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings Corp. (Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings Corp. - New York. (Incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.5 Certificate of Ownership and Merger merging IEC Electronics Corp. into DFT Holdings Corp. - Delaware. (Incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.6 Certificate of Merger of IEC Acquisition Corp. into IEC Electronics Corp. (Incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.7 Certificate of Amendment of Certificate of Incorporation of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on Feb. 26, 1998 (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ende March 27, 1998) 3.8 Certificate of Designations of the Series A Preferred Stock of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on June 3, 1998. 3.9 Certificate of Ownership and Merger merging IEC Electronics-Edinburg, Texas Inc. into IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on January 26, 2000. (Incorporated by reference to Exhibit 3.13of the Company's Annual Report on Form 10-K for the year ended September 30, 2000) 3.10 Articles of Merger of IEC Electronics-Edinburg, Texas Inc. into IEC Electronics Corp. filed with the Secretary of State of the State of Texas on January 26, 2000. (Incorporated by reference to Exhibit 3.14 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000. Page 21 of 60 3.11 Certificate of Ownership and Merger merging IEC Arab, Alabama, Inc. into IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on January 26, 2000. (Incorporated by reference to Exhibit 3.15 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000) 3.12 Articles of Merger of IEC Arab, Alabama Inc. into IEC Electronics Corp. filed with the Secretary of State of the State of Alabama on January 26, 2000. (Incorporated by reference to Exhibit 3.16 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000) 4.1 Specimen of Certificate for Common Stock. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics Corp. and ChaseMellon Shareholder Services. LLC., as Rights Agents (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 2, 1998) 10.1* IEC Electronics Corp. 1989 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 10.2* Form of Amended and Restated Incentive Stock Option Agreement. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 10.3* Form of Non-Qualified Stock Option Agreement. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 10.4* Form of Indemnity Agreement. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1993) 10.5* IEC Electronics Corp. 1993 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 10.6* Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.7* Form of Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.8* Form of Non-Employee Director Stock Option Agreement (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.9* Form of Change-in-Control Agreement between IEC Electronics Corp. and each of its Vice Presidents, dated as of May 1, 1998. (Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998.) 10.10* IEC Electronics Corp. Savings and Security Plan effective June 1, 1997 (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997). 10.11* Amendment to IEC Electronics Corp. Savings and Security Plan effective June 1, 1998. (Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998). Page 22 of 60 10.12* IEC Electronics Corp. Director Compensation Plan (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998). 10.13 Loan and Security Agreement dated as of December 28, 1999, among IEC ELECTRONICS CORP. and IEC ELECTRONICS-EDINBURG, TEXAS INC. (collectively, "Debtor") and HSBC BANK USA as agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital"), as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999). 10.14 Amendment No. 1 dated as of March 30, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 amont IEC ELECTRONICS CORP. ("IEC) and IEC ELECTRONICS-EDINBURG, TEXAS INC. ("IEC-Edinburg") (collectively, "Debtor") and HSBC BANK USA, as Agent ("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.15 Amendment No. 2 dated as of December 1, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC ELECTRONICS CORP. ("IEC") and IEC ELECTRONICS-EDINBURG, TEXAS INC.("IEC-Edinburg")(collectively, "Debtor") and HSBC BANK USA, as Agent("Agent") and HSBC BANK USA ("HSBC Bank") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital") as Lenders. (Incorporated by reference to Exhibit 10.25 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000). 10.16 Amendment No. 3 dated as of April 24, 2001 to Loan and Security Agreement originally dated as of December 28, 1999 among IEC Electronics Corp. ("IEC") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital"). 45 10.17* Retirement and Deferred Compensation Agreement dated September 30, 1999 between Russell E. Stingel and IEC Electronics Corp.(incor- porated by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.18* Employment Agreement made as of August 11, 2000 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.27 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000.) 10.19* First Amendment dated as of October 23, 2001 and effective as of August 21, 2001 to Employment Agreement between IEC Electronics Corp. and Thomas W. Lovelock. 49 10.20* Employment Agreement made as of November 1, 2000, effective as of June 5, 2000, between IEC Electronics Corp. and William Nabors. (Incorporated by reference to Exhibit 10.28 of the Company's Annual Report on Form 10-K for the year ended September 30, 2000.) 10.21* First Amendment dated as of August 24, 2001 to Employment Agreement dated as of November 1, 2000 and effective as of June 5, 2000 between IEC Electronics Corp. and William Nabors. 50 10.22* Employment Agreement between IEC Electronics Corp. and Bill R. Anderson dated as of March 29, 2001 (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.23 Lease Agreement dated as of March 21, 2001 between Matamoros Industrial Partners, L.P. and IEC Electronicos de Mexico, S. de R.L. de C.V.(incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.24* 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.25* Change-in-Control Agreement dated as of June 6, 2001 between IEC Electronics Corp. and Randall C. Lainhart. 51 10.26 Amendment No. 4 dated as of December 21, 2001 ("Amendment") to Loan and Security Agreement originally dated as of December 28, 1999 and originally among IEC Electronics Corp. ("IEC" or "Debtor") and IEC Electronics-Edinburg, Texas Inc. ("IEC-Edinburg") and HSBC Bank USA, as Agent ("Agent") and HSBC Bank USA ("HSBC Bank") and General Electric Capital Corporation ("GE Capital") as Lenders. 55 11.1 Statement relating to computation of per share earnings. See Note 1 to the Notes to the Company's Consolidated Financial Statements contained herein. 21.1 Subsidiaries of IEC Electronics Corp. 59 23.1 Consent of Arthur Andersen LLP 60 (b) Reports on Form 8-K: None *Management contract or compensatory plan or arrangement Page 23 of 60 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 14, 2002. IEC Electronics Corp. By:/s/Thomas W. Lovelock ----------------------- Thomas W. Lovelock President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/W. Barry Gilbert Chairman of the Board ---------------------- (W. Barry Gilbert ) January 14, 2002 /s/Thomas W. Lovelock President, Chief Executive Officer ---------------------- and Director January 14, 2002 (Thomas W. Lovelock) /s/Richard Weiss Vice President, Chief Financial ----------------- Officer and Treasurer (Richard Weiss) (Principal Financial and Accounting Officer) January 14, 2002 /s/David J. Beaubien Director January 14, 2002 -------------------- (David J. Beaubien) /s/Russell E. Stingel Director January 14, 2002 --------------------- (Russell E. Stingel) /s/Robert P. B. Kidd Director January 14, 2002 ------------------- (Robert P. B. Kidd) /s/Eben S. Moulton Director January 14, 2002 ------------------ (Eben S. Moulton) /s/Justin L. Vigdor Director January 14, 2002 ------------------- (Justin L. Vigdor) /s/James C. Rowe Director January 14, 2002 ------------------ (James C. Rowe) /s/Dermott O'Flanagan Director January 14, 2002 ------------------ (Dermott O'Flanagan) Page 24 of 60 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To IEC Electronics Corp.: We have audited the accompanying consolidated balance sheets of IEC Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations, comprehensive income (loss) and shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IEC Electronics Corp. and subsidiaries as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and its debt is due on February 15, 2002, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP Rochester, New York, November 16, 2001 (except with respect to the matter discussed in Notes 1 and 5, as to which the date is January 11, 2002) Page 25 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND 2000 (in thousands)
ASSETS 2001 2000 ---------------------- CURRENT ASSETS: Accounts receivable, net of allowance for doubtful accounts of $950 in 2001 and $614 in 2000 $ 14,926 $ 27,915 Inventories 12,032 36,157 Other current assets 522 75 ---------------------- Total current assets 27,480 64,147 ---------------------- PROPERTY, PLANT, AND EQUIPMENT, net 10,637 15,225 ---------------------- OTHER ASSETS: Costs in excess of net assets acquired, net - 9,889 Other assets 9 300 ---------------------- 9 10,189 ----------------------- $ 38,126 $ 89,561 ====================== The accompanying notes to consolidated financial statements are an integral part of these balance sheets
Page 26 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND 2000 (in thousands, except share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------------------- CURRENT LIABILITIES: Current portion of long-term debt $ 13,382 $ 2,105 Accounts payable 7,398 25,295 Accrued payroll and related expenses 2,014 2,572 Accrued insurance 848 1,583 Other accrued expenses 2,675 1,732 ------------------------- Total current liabilities 26,317 33,287 ------------------------- LONG-TERM DEBT - 15,266 ------------------------- COMMITMENTS & CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY: Preferred stock, par value $.01 per share, authorized - 500,000 shares; issued and outstanding - none - - Common stock, par value $.01 per share, authorized - 50,000,000 shares; issued and outstanding - 7,692,076 and 7,626,565 shares, respectively 77 76 Additional paid-in capital 38,418 38,332 Retained (deficit) earnings (26,661) 2,611 Accumulated other comprehensive loss - Cumulative translation adjustment (14) - Treasury stock, at cost - 573 shares (11) (11) ------------------------- Total shareholders' equity 11,809 41,008 -------------------------- $ 38,126 $ 89,561 ========================= The accompanying notes to consolidated financial statements are an integral part of these balance sheets
Page 27 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (in thousands, except per share and share data)
2001 2000 1999 -------------------------------- Net sales $ 160,638 $204,158 $157,488 Cost of sales 164,182 200,432 163,254 ------------------------------- Gross (loss) profit (3,544) 3,726 (5,766) Selling and administrative expenses 9,743 12,634 12,320 Restructuring charge (benefit) 1,400 (1,044) 3,965 Asset impairment writedown 12,593 - - ------------------------------- Total operating expenses 23,736 11,590 16,285 ------------------------------- Operating loss (27,280) (7,864) (22,051) Interest expense 2,003 2,134 1,124 Other income, net 32 1,962 19 ------------------------------- Loss before income taxes (29,251) (8,036) (23,156) Provision for (benefit from) income taxes 21 (5) (2,591) ------------------------------- Net loss $ (29,272) $ (8,031) $(20,565) =============================== Net loss per common and common equivalent share: Basic and diluted $ (3.83) $ (1.06) $ (2.72) =============================== Weighted average number of common and common equivalent shares outstanding: Basic and diluted 7,650,673 7,590,046 7,562,727 ============================== The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 28 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS) AND SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (in thousands)
Accumulated Other Comprehensive Additional Retained Comprehensive Total Income Common Paid-In Earnings Income Treasury Shareholders' (Loss) Stock Capital (Deficit) (Loss) Stock Equity ---------------------------------------------------------------------------------------------- BALANCE, September 30, 1998 $ 76 $38,563 $31,207 $ 133 $ (411) $69,568 Shares issued under Directors Stock Plan - 3 - - - 3 Net loss $ (20,565) - - (20,565) - - (20,565) Other comprehensive loss, currency translation adjustments (161) - - - (161) - (161) ------------------------------------------------------------------------------------------------------ Comprehensive loss $(20,726) ========= BALANCE, September 30, 1999 76 38,566 10,642 (28) (411) 48,845 Executive Signing Bonus (181) 200 19 Shares issued in lieu of cash to suppliers and others - (78) - - 200 122 Shares issued under Directors - 25 - - - 25 Stock Plan Net loss $ (8,031) - - (8,031) - - (8,031) Other comprehensive income, currency translation adjustments 28 - - - 28 - 28 ------------------------------------------------------------------------------------------------------ Comprehensive loss $ (8,003) ========= BALANCE, September 30, 2000 76 38,332 2,611 - (11) 41,008 Shares issued under Directors Stock Plan 1 86 87 Net loss $(29,272) (29,272) (29,272) Other comprehensive loss, currency translation adjustments (14) (14) (14) ------------------------------------------------------------------------------------------------------ Comprehensive loss $(29,286) ========= BALANCE, September 30, 2001 $ 77 $38,418 $(26,661) $ (14) $ (11) $ 11,809 ==================================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 29 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (in thousands)
2001 2000 1999 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(29,272)$(8,031) $(20,565) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5,267 7,546 15,145 Deferred income taxes - - 322 Loss (gain) on sale of fixed assets 231 18 (33) Amortization of costs in excess of net assets acquired 324 353 400 Common stock issued under Directors Stock Plan 87 25 3 Asset impairment writedown (recovery) 12,593 (365) 2,137 Changes in operating assets and liabilities: (Increase)Decrease Accounts receivable 12,989 (4,180) (930) Inventories 24,125 (5,429) (10,687) Income taxes receivable - 2,966 (1,009) Other current assets (447) 441 (85) Other assets 291 (284) 252 Increase (Decrease) Accounts payable (14,631) (909) 8,474 Accrued payroll and related expenses (558) (1,295) 17 Accrued insurance (735) 775 (555) Other accrued expenses 983 823 610 -------------------------- Net cash provided by (used in) operating activities 11,247 (7,546) (6,504) -------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (3,961) (1,824) (2,434) Proceeds from sale of equipment 23 1,294 310 Utilization of restructuring provision for building/equipment (40) (116) - -------------------------- Net cash used in investing activities (3,978) (646) (2,124) -------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in drafts payable (3,266) 4,385 - Net (repayments) borrowings under revolving credit facilities (1,884) 824 10,600 Principal payments on long-term debt (2,105) (1,052) (158) -------------------------- Net cash (used in) provided by financing activities (7,255) 4,157 10,442 -------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14 (4,035) 1,814 Effect of exchange rate changes (14) 28 (85) CASH AND CASH EQUIVALENTS, beginning of year - 4,007 2,278 ------------------------- CASH AND CASH EQUIVALENTS, end of year $ - $ - $ 4,007 ========================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 1,860 $ 1,996 $ 926 ========================== Income taxes, net of refunds received $ (95)$ (2,971) $(1,907) ========================== The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 30 of 60 IEC ELECTRONICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001, 2000 AND 1999 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- -------------------------------------------------------- Business IEC Electronics Corp. (IEC) is an independent 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 accompanying financial statements as of September 30, 2001, to reflect contingencies involved in pending litigation, the Company is in violation of the amended agreement. 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 February 15, 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"). In December 1999, the Company closed its underutilized Longford operations and transferred some of the customers served there to its other operations in New York and Texas. 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. Accounts Payable Trade accounts payable include drafts payable of $1.1 million and $4.4 million at September 30, 2001, and September 30, 2000, respectively. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Page 31 of 60 Property, Plant, and Equipment Property, plant, and equipment are stated at cost and are depreciated over various estimated useful lives using the straight-line method. Maintenance and repairs are charged to expense as incurred; renewals and improvements are capitalized. At the time of retirement or other disposition of property, plant, and equipment, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income. Long-Lived Assets In assessing and measuring the impairment of long-lived assets, the Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the long-lived asset or identifiable intangible being tested for impairment was acquired in a purchase business combination, the goodwill that arose in that transaction is included in the asset grouping in determining whether an impairment has occurred. If some but not all of the assets acquired in that transaction are being tested, goodwill is allocated to the assets being tested for impairment based on the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Additionally, where an impairment loss is recognized for long-lived assets and identifiable intangibles where goodwill has been allocated to the asset grouping, as described immediately above, the carrying amount of the allocated goodwill is impaired (eliminated) before reducing the carrying amounts of impaired long-lived assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. With respect to the carrying amounts of goodwill remaining after the testing for impairment of long-lived assets and identifiable intangibles, including enterprise level goodwill not subject to impairment testing under SFAS No. 121, the Company assesses such carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount of such goodwill may not be recoverable. The Company assesses the recoverability of this goodwill by determining whether the amortization of goodwill over its remaining life can be recovered through undiscounted future operating cash flows of the acquired business. The amount of goodwill impairment, if any, is measured based on projected discounted operating cash flows compared to the carrying value of such goodwill. During the fourth quarter of 2001, certain fixed assets and intangible assets were identified as impaired. As a result of the overall softening of the electronics manufacturing services industry and a change in the Company's business strategy, the Company does not believe that their future cash flows support the carrying value of the long-lived assets and goodwill. The current market values were compared to the net book value of the related long-lived assets with the difference representing the amount of the impairment loss. The effect of this impairment recognition totaled approximately $12.6 million, of which $9.6 million represented a writeoff of goodwill and $3.0 million represented a writedown of property, plant and equipment. During the fourth quarter of 1999, certain fixed assets were no longer in use and identified as impaired. The equipment was marketed for sale, and as such, the carrying value of these assets was written down to the estimated recoverable sales value, net of commissions, obtained from appraisals and used equipment quotations. The effect of this impairment recognition totalled approximately $400,000 and was included with depreciation expense for the year ended September 30, 1999. In fiscal 2000, $160,000 of these assets were returned to active use due to volume increases. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value. Current Assets and Liabilities - The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of those instruments. Debt - The fair value of the Company's debt is estimated based upon the quoted market prices for the same or similar issues which approximates its carrying amount. Page 32 of 60 Costs in Excess of Net Assets Acquired Costs in excess of net assets acquired of $14.1 million were being amortized on a straight-line basis over 40 years. The balance is presented net of accumulated amortization of $4.3 million at September 30, 2000. Amortization of $324,000, $353,000, and $400,000 was charged against operations for the years ended September 30, 2001, 2000, and 1999, respectively. Net goodwill in the amount of $9.6 million, related to the Newark operations was written off in fiscal 2001. The write-off of net goodwill in the amount of $670,000, related to the Longford operations was charged to the restructuring reserve in fiscal 1999. The write-off of net goodwill of approximately $1.3 million during fiscal 1998 related to the Alabama facility and was charged to the restructuring reserve. See Note 2. Net Loss per Common and Common Equivalent Share (in thousands, except per share and share data): (Loss) Shares Per Share Year-Ended (Numerator) (Denominator) Amount ------------------------ ------------ ------------ --------- September 30, 2001 Basic and diluted EPS Loss available to common shareholders $ (29,272) 7,650,673 $ (3.83) =========== ========= ========= September 30, 2000 Basic and diluted EPS Loss available to common shareholders $ (8,031) 7,590,046 $ (1.06) =========== ========= ========= September 30, 1999 Basic and diluted EPS Loss available to common shareholders $ (20,565) 7,562,727 $ (2.72) =========== ========= ========= Basic EPS was computed by dividing reported earnings available to common shareholders by weighted-average common shares outstanding during the year. Foreign Currency Translation The assets and liabilities of the Company's foreign subsidiary are translated based on the current exchange rate at the end of the period for the balance sheet and weighted-average rate for the period for the statement of operations. Translation adjustments are recorded as a separate component of equity. Transaction gains or losses are included in operations. Comprehensive Income Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the statements of comprehensive income (loss)and shareholders' equity. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Page 33 of 60 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" (SFAS No. 143). We will adopt this standard on October 1, 2002. Upon adoption of SFAS No. 143, the fair value of a liability for an asset retirement obligation will be recognized in the period in which it is incurred. The associated retirement costs will be capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset's useful life. Management does not expect the adoption of SFAS 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. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 2. RESTRUCTURING: In April 2001, the Company's Board of Directors approved a restructuring plan to consolidate its Texas and Mexico business operations including reducing its cost structure and improving working capital. As part of the business-restructuring plan, the Company recorded a charge to earnings of $1.4 million in the third quarter of fiscal 2001. The charge related to facility consolidations ($1.0 million) and headcount reductions ($400,000). This restructuring plan will allow the Company to concentrate its investments, resources and management attention on lower cost, high volume production at its Mexico operations. As of September 30, 2001, a reserve balance of approximately $651,000 still remained. It is anticipated that all remaining charges against the accrual will be made during fiscal 2002. There have been no significant reallocations or re-estimates of this restructuring charge to date. In September 1999, the Company announced its plan to close its underutilized Longford operations and transfer some of the customers served there to its other operations in New York and Texas. Accordingly, a restructuring charge of approximately $4.0 million was recorded in the fourth quarter of fiscal 1999. The components of the charge are as follows: the write-down of assets to be disposed of to their fair market value ($1.1 million), the write-down of goodwill ($670,000), severance and employee benefits ($619,000), accrual of the remaining lease payments and related building maintenance costs ($895,000), and repayment of a grant provided by the Irish Development Agency ($681,000). In February 2000, a third party purchased from the Company certain assets of Longford and assumed the lease of the Longford facility. This resulted in a benefit of $1.0 million from the reversal of a previously established restructuring reserve which included $800,000 relating to the lease and $200,000 recovered from a guarantee which had been executed by the company from whom the assets in Longford had been purchased. The Company recorded charges against the accrual of approximately $54,000, $2.2 million and $700,000 during fiscal 2001, 2000 and 1999, respectively. There is no remaining balance at September 30, 2001. In August 1998, the Company announced its plan to close its underutilized Alabama facility and transferred the facility's customers to the Company's other operations in New York and Texas. Accordingly, a restructuring charge of $4.7 million was recorded in the fourth quarter of fiscal 1998. The components of the charge are as follows: the write-down of assets to be disposed of to their fair market value ($2.2 million), the write-down of goodwill ($1.3 million), and severance and employee benefits ($1.2 million). The Company recorded charges against the accrual of $85,000, $200,000, and $1.6 million in fiscal 2001, 2000, and 1999, respectively. As of September 30, 2001, a reserve balance of approximately $1,440,000 still remained. Of this balance, $1.2 million relates to the write-down of assets and is included in property, plant and equipment on the Consolidated Balance Sheet. There have been no significant reallocations or re-estimates of the restructuring charges to date. Page 34 of 60 3. INVENTORIES: The major classifications of inventories are as follows at September 30 (in thousands): 2001 2000 -------- -------- Raw materials $ 7,280 $23,331 Work-in-process 4,034 8,418 Finished goods 718 4,408 -------- -------- $12,032 $36,157 ======== ======== 4. PROPERTY, PLANT, AND EQUIPMENT: The major classifications of property, plant, and equipment are as follows at September 30 (in thousands): 2001 2000 -------- -------- Land and land improvements $ 1,102 $ 1,140 Buildings and improvements 9,975 9,694 Machinery and Equipment 62,933 63,811 Furniture and fixtures 6,552 6,621 -------- -------- $80,562 $81,266 Less- Accumulated depreciation and amortization (69,925) (66,041) -------- -------- $10,637 $15,225 ======== ======== Depreciation and amortization was $5.3 million, $7.5 million, and $15.1 million for the years ended September 30, 2001, 2000 and 1999, respectively. Included in property, plant and equipment are land and land improvements with a net book value of approximately $300,000, buildings and improvements with a net book value of approximately $2.9 million which are currently available for sale. During the fourth quarter of 1999, the Company completed a review of its fixed asset lives and, in turn, shortened the estimated lives of certain categories of equipment, effective July 1, 1999. The change in estimate was based on the following: the downsizing of the business; the loss of certain "large run" customers which have forced the Company to utilize a quick change-over mentality; and changing technology, therefore obsoleting production equipment more quickly. The effect of this change in estimate increased depreciation for the year ended September 30, 1999 by approximately $4.7 million. The principal depreciation and amortization lives used are as follows: Estimated Description Useful Lives ---------------------------- ------------ Land improvements 10 years Buildings and improvements 5 to 40 years Machinery and equipment 3 to 5 years Furniture and fixtures 3 to 7 years Page 35 of 60 5. LONG-TERM DEBT: Long-term debt consists of the following at September 30 (in thousands): 2001 2000 -------- ------- Senior debt facility $13,382 $17,371 Less- Current portion 13,382 2,105 -------- ------- $ - $15,266 ======== ======= 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. Under the terms of the amendment, the revolving credit facility component of the agreement, based on eligibility criteria for receivables and inventory, was reduced from $25 million to $5 million. Amounts borrowed are limited to 85% of qualified accounts receivable, 20% of raw materials and 30% of finished goods inventory, but in no event is the inventory borrowing base greater than $2 million. The second component consists of a $10 million three-year term loan with monthly principal installments based on a five-year amortization which began in April 2000. At September 30, 2001, $13.4 million was outstanding, consisting of $6.5 million and $6.9 million relating to the revolving credit facility and term loan, respectively, with an additional $2.1 million available under the revolving credit facility. As a result of certain changes to inventory and receivables to reflect contingencies involved in pending litigation, the Company is currently in violation of the amended agreement. Subject to resolution related to the Company's violation of the amended agreement, the availability under the revolver at December 21, 2001, under the most recent amendment was $1.6 million. Page 36 of 60 The Company is required to make an election to select either the prime rate or LIBOR, as the basis for the interest rate calculation, any change in election is subject to the terms of the credit agreement. The interest rate on the revolving credit facility is calculated based on the Company's debt-to-worth ratio as defined in the credit facility agreement. Accordingly, the interest rate will range from a minimum of prime rate or LIBOR plus 185 basis points to a maximum of prime rate plus 0.75 percent or LIBOR plus 350 basis points. Based on the Company's debt-to-worth ratio at September 30, 2001, the interest rate on the revolving credit facility is 6.65 percent. The interest rate on the term note is calculated based on the Company's debt-to-worth ratio as defined in the credit facility agreement. Accordingly, the interest rate will range from a minimum of prime rate plus 0.125 percent or LIBOR plus 200 basis points to a maximum of prime rate plus 1.00 percent or LIBOR plus 375 basis points. Based on the Company's debt-to-worth ratio at September 30, 2001, the interest rate on the term loan is 6.96 percent. As of February 1, 2002, the interest rates will increase by 0.25 percent for both the prime and LIBOR rates. 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 recorded on January 11, 2002, included in the accompanying financial statements as of September 30, 2001, to reflect contingencies involved in pending litigation, the Company is in violation of the amended agreement. 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 February 15, 2002, expiration date of the current agreement. Since the Company's loan agreement currently expires on February 15, 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 February 15, 2002, or obtains an extension of its existing credit agreement and providing it meets with substantial success in its pending litigation and meets its performance targets, management believes the Company will generate sufficient cash flows in 2002 to meet the obligations. Page 37 of 60 6. LIFE INSURANCE PROCEEDS: The Company's former President and Chief Executive Officer died suddenly on December 11, 1999. In the second quarter of fiscal 2000, the Company received non-taxable income from insurance proceeds of approximately $2.0 million, which is included in other income. 7. INCOME TAXES: The provision for (benefit from) income taxes in fiscal 2001, 2000 and 1999 is summarized as follows (in thousands): 2001 2000 1999 ------- ------- ------- Current Federal $ - $ - $(3,083) State/Other 21 (5) 170 Deferred - - 322 -------- --------- -------- Provision for (benefit from) income taxes, net $ 21 $ (5) $(2,591) ======== ========= ======== The components of the deferred tax asset (liability) at September 30 are as follows(in thousands): 2001 2000 ---- ---- Net operating loss and AMT credit carryovers $ 8,167 $ 6,747 Asset impairment loss 1,030 - Accelerated depreciation (1,255) (1,750) New York state investment tax credits 3,435 3,300 Compensated absences 293 350 Inventories 3,609 1,463 Receivables 323 132 Restructuring reserve 711 518 Other 41 41 ------- -------- 16,354 10,801 Valuation allowance (16,354) (10,801) ------- ------- $ - $ - ======= ======= A full valuation allowance has been established against the net deferred tax asset due to recent losses and tax carryback limitations. The Company has a net operating loss carryforward of $23.3 million (expiring in years through 2021). The Company has available approximately $5.0 million in New York State investment tax credits through 2009. Page 38 of 60 The differences between the effective tax rates and the statutory federal income tax rates for fiscal years 2001, 2000 and 1999 are summarized as follows: 2001 2000 1999 ----- ----- ----- Benefit from income taxes at statutory rates (34.0)% (34.0)% (34.0)% Goodwill adjustments 14.1 1.5 0.5 Provision for state taxes,net - - 0.5 Life Insurance - (8.5) - Other 0.9 1.8 0.2 Valuation Allowance 19.0 39.2 21.7 ----- ----- ------ - % - % (11.1)% ===== ===== ====== 8. SHAREHOLDERS' EQUITY: Stock-Based Compensation Plans In November 1993, the Company adopted the 1993 Stock Option Plan (SOP) which replaced and superseded the 1989 Stock Option Plan. Under the SOP, a total of 1,400,000 shares, inclusive of the foregoing, were reserved for key employees, officers, directors and consultants as of September 30, 2001. The option price for incentive options must be at least 100 percent of the fair market value at date of grant, or if the holder owns more than 10 percent of total common stock outstanding at the date of grant, then not less than 110 percent of the fair market value at the date of grant. Stock options issued prior to 1992 terminate 10 years from date of grant, while incentive and nonqualified stock options issued subsequent to 1991 terminate seven and five years from date of grant, respectively. Generally, incentive stock options granted during the period between July 1995 through September 2001 vest in increments of 25 percent. Nonqualified stock options granted during fiscal year 2001, 2000 and 1999 vest in increments of 33 1/3 percent. Page 39 of 60 Changes in the status of options under the SOP at September 30, are summarized as follows: Weighted Shares Average Under Exercise Available September 30, Option Price for Grant Exercisable ------------- ---------- -------- -------- ----------- 1998 652,036 10.23 656,964 338,911 Options granted 123,000 3.75 Options exercised - - Options forfeited (150,539) 12.48 ---------- 1999 624,497 8.38 684,503 367,372 Options granted 378,000 2.04 Options exercised - Options forfeited (130,122) 7.39 ---------- 2000 872,375 5.78 436,625 490,917 Options granted 493,450 1.33 Options exercised - - Options forfeited (303,125) 7.68 ---------- 2001 1,062,700 3.17 246,300 414,226 ========== The following table summarizes information about stock options outstanding as of September 30, 2001: Options Outstanding Options Exercisable -------------------------------------- -------------------------- Number Weighted Number Outstanding Average Weighted Exercisable Weighted Range of at Remaining Average at Average Exercise September 30, Contractual Exercise September 30, Exercise Prices 2001 Life Price 2001 Price -------------- ---------------- ---------- --------- ---------------- --------- $ 0.520 -$ 1.625 462,800 6.063 $ 1.313 40,667 $ 1.333 $ 1.688 -$ 2.500 293,000 5.744 $ 1.973 97,834 $ 1.947 $ 3.250 -$ 3.875 60,900 4.587 $ 3.686 30,850 $ 3.756 $ 5.000 -$ 6.250 96,500 2.082 $ 6.250 96,500 $ 6.250 $ 7.625 -$ 9.750 145,000 1.274 $ 8.859 145,000 $ 8.859 $10.825 -$ 16.50 4,500 1.137 $ 16.500 3,375 $ 16.500 ------------- ------------ 1,062,700 414,226 ============= ============ The weighted average fair value of options granted during fiscal 2001, 2000 and 1999 was $.97, $1.33, and $2.25, respectively. The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.19 percent, 6.21 percent and 5.05 percent, for fiscal 2001, 2000 and 1999, respectively; volatility of 78.76 percent, 58.27 percent, and 53.25 percent for fiscal 2001, 2000 and 1999, respectively; and expected option life of 6.7 years for fiscal 2001 and 7 years for fiscal 2000 and 1999, respectively. The dividend yield was 0 percent. Forfeitures are recognized as they occur. Page 40 of 60 The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation". Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company recognized compensation cost based upon the fair value at the date of grant for awards under its plans consistent with the methodology prescribed by SFAS No. 123, net loss and net loss per common and common equivalent share would have been as follows for years ended September 30 (in thousands, except per share data): 2001 2000 1999 ---------------- --------------- --------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ------ -------- ------- ------- ------- Net loss $(29,272)$(29,503) $ (8,031) $(8,461) $(20,565) $(20,726) ========= ======== ======= ======== ======= ======= Net loss per common and common equivalent share: Basic and diluted $ (3.83) $ (3.86) $ (1.06) $(1.11) $(2.72) $(2.74) ======== ========= ======== ======== ======= ======= Because the SFAS No. 123 method of accounting had not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Treasury Stock During fiscal 2000, the Company issued 20,000 shares out of treasury for services rendered and executive signing bonus. The treasury balance is 573 shares with a book value of $11,000. 9. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS: Financial instruments which potentially subject the Company to concentrations of a significant credit risk consist primarily of cash, cash equivalents, and trade accounts receivable. The Company has concentrations of credit risk due to sales to its major customers. The Company's revenues are derived primarily from sales to North American customers in the industrial and telecommunications industries and are concentrated among specific companies. For the fiscal year ended September 30, 2001, five customers accounted for 13 percent, 12 percent, 11 percent, 11 percent and 10 percent of the Company's net sales. For the fiscal year ended September 30, 2000, three customers accounted for 35 percent, 16 percent and 11 percent of the Company's net sales. For the fiscal year ended September 30, 1999, three customers accounted for 23 percent, 18 percent and 10 percent of the Company's net sales. At September 30, 2001, amounts due from three customers represented 26 percent, 16 percent and 15 percent of trade accounts receivable. At September 30, 2000, amounts due from three customers represented 23 percent, 22 percent and 13 percent of trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial positions and generally does not require collateral. Sales to foreign source customers (primarily in Europe) totaled approximately 3 percent, 7 percent, and 15 percent of total net sales in fiscal years 2001, 2000 and 1999, respectively. Page 41 of 60 10. COMMITMENTS AND CONTINGENCIES: Lease Commitments In December, 1998, the Company entered into a Shelter Services Agreement with a Texas Limited Partnership and its Mexican corporate subsidiary which leased 50,000 square feet in a newly constructed industrial park in Reynosa, Mexico. This Maquiladora facility thereafter commenced manufacturing printed circuit board assemblies and wire harnesses, and began shipping in April 1999 as IEC Electronicos de Mexico. Effective February 1, 2001, the Company terminated the Shelter Services Agreement and exercised its option to acquire the Mexican subsidiary of the Texas Limited Partnership for one U.S. dollar ($1.00). On March 28, 2001, the subsidiary, now wholly owned by the Company, executed a new five-year lease agreement with a five-year renewal option combining the original 50,000 square feet with an additional 62,000 square feet at the Reynosa facility. Effective May 1, 2001, the Mexican subsidiary, IEC Electronicos de Mexico, S. De R.L. De C.V. occupied the entire 112,000 square foot facility. Rental expense for the Mexico facility was $465,000 and $312,000 for fiscal 2001 and 2000, respectively. As of September 30, 2001, the Company was obligated under non-cancelable operating leases, primarily for office equipment. These leases generally con- tain rental options and provisions for payment of the lease for executory costs (taxes, maintenance and insurance). Rental expenses on equipment was $255,000 and $25,000 for fiscal 2001 and 2000, respectively. The following is a schedule of future minimum payments (in thousands): Mexico Office Year Facility Equipment Total ---- -------- --------- ----- 2002 $ 659 $ 38 $ 697 2003 659 26 685 2004 659 23 682 2005 659 23 682 2006 384 9 393 ------ ------ ------ $3,020 $ 119 $3,139 ====== ====== ====== 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 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 consists of a general denial and various affirmative defenses. The Company is in the process of moving for summary judgment and will prosecute the action vigorously, as management believes its case to be meritorious and regards the answer as a delaying tactic. 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 $950,000. The Company believes its case to be meritorious and will vigorously prosecute the action. 11. RETIREMENT PLAN: The Company has a retirement savings plan, established pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive benefit of its eligible employees and beneficiaries. Eligible employees may elect to contribute a portion of their compensation each year to the plan. Effective June 1, 1998, The Board of Directors approved a change in the employer match from 33 percent of the amount contributed by participant to 100 percent of the first 3 percent of employee contributions, and 50 percent of the next 3 percent of employee contributions. The matching Company contributions were approximately $623,000, $792,000 and $744,000 for the years ended September 30, 2001, 2000 and 1999, respectively. The plan also allows the Company to make an annual discretionary contribution determined by the Board of Directors. There were no discretionary contributions for fiscal 2001, 2000, or 1999. Page 42 of 60 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- ---------- (in thousands, except per share data) YEAR ENDED SEPTEMBER 30,2001: Net sales $59,655 $45,592 $40,032 $ 15,359 Gross profit (loss) 1,769 2,471 1,135 (8,919) Net loss (1,525) (957) (3,209) (23,581) Net loss per common and common equivalent share: Basic and diluted (0.20) (0.13) (0.42) (3.08) YEAR ENDED SEPTEMBER 30,2000: Net sales $43,770 $64,338 $54,694 $ 41,356 Gross profit 29 2,367 703 627 Net loss (1,223) (606) (2,813) (3,389) Net loss per common and common equivalent share: Basic and diluted (0.16) (0.08) (0.37) (0.45) Page 43 of 60 SCHEDULE I IEC ELECTRONICS CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999 (in thousands) 2001 2000 1999 ------------------------------ Accounts receivable reserve balance, $ 614 $ 176 $ 1,975 at beginning of year Provision for doubtful accounts 384 525 - Write-off of doubtful accounts, net of recoveries 48 87 1,799 ------------------------------ Balance, at end of year $ 950 $ 614 $ 176 ============================== 2001 2000 1999 ------------------------------ Restructuring reserve balance, $ 1,579 $ 5,067 $ 3,396 at beginning of year Provision for restructuring 1,400 - 3,965 Deductions 888 2,444 2,294 Reversals - 1,044 ------------------------------ Balance, at end of year* $ 2,091 $ 1,579 $ 5,067 ============================== *Balance includes $1.2 million related to writedown of building to its estimated fair market value and is included as a component of property, plant and equipment on the Consolidated Balance Sheet. Page 44 of 60