-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UIb0ZaCvr2CyWtLTJnVOJk/O5wJCR2ZwRpJK/6SENfG12sw2a0hL+v2qgst7DVCT GZKZt410I322o+u4Oo2atw== 0000049728-03-000014.txt : 20031121 0000049728-03-000014.hdr.sgml : 20031121 20031121170203 ACCESSION NUMBER: 0000049728-03-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IEC ELECTRONICS CORP CENTRAL INDEX KEY: 0000049728 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 133458955 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06508 FILM NUMBER: 031018776 BUSINESS ADDRESS: STREET 1: 105 NORTON ST CITY: NEWARK STATE: NY ZIP: 14513 BUSINESS PHONE: 3153317742 MAIL ADDRESS: STREET 1: PO BOX 271 CITY: NEWARK STATE: NY ZIP: 14513 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL ELECTRONICS CORP DATE OF NAME CHANGE: 19730601 10-K 1 iec10k2003.txt FY 2003 10-K 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, 2003 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 [ ]. Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X -- -- Page 1 of 79 The aggregate market value of shares of common stock held by non-affiliates of the registrant was approximately $14,405,848 as of November 19, 2003, based upon the closing price of the registrant's common stock on the Over The Counter Bulletin Board on such date. Shares of common stock held by each 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 November 19, 2003, there were outstanding 8,047,960 shares of Common Stock. Documents incorporated by reference: Portions of IEC Electronics Corp.'s Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated into Part III of this Form 10-K. Page 2 of 79 TABLE OF CONTENTS PART I PAGE Item 1: Business..................................................... 4 Item 2: Properties................................................... 7 Item 3: Legal Proceedings............................................ 8 Item 4: Submission of Matters to a Vote of Security Holders.......... 8 Executive Officers of Registrant............................. 8 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters......................................... 9 Item 6: Selected Consolidated Financial Data......................... 10 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 11 Factors Affecting Future Results............................. 16 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 Item 9A: Controls and Procedures...................................... 19 PART III Item 10: Directors and Executive Officers of the Registrant........... 19 Item 11: Executive Compensation....................................... 21 Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 20 Item 13: Certain Relationships and Related Transactions............... 20 Item 14: Principal Accountant Fees and Services....................... 20 PART IV Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 20 "SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of section-27A of the Securities Act of 1933 and section-21E of the Securities Exchange Act of 1934, and are made in reliance upon the protections provided by such Acts for forward-looking statements. These forward-looking statements (such as when we describe what we "believe", "expect" or "anticipate" will occur, and other similar statements) include, but are not limited to, statements regarding future sales and operating results, future prospects, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, but rather reflect our current expectations concerning future results and events. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events, and is subject to various uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance or achievements expressed or implied by these statements. The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements: business conditions and growth in our customer's industries, the electronic manufacturing services industry and the general economy, variability of operating results, our dependence on a limited number of major customers, the potential consolidation of our customer base, availability of components, dependence on certain industries, variability of customer requirements, other economic, business and competitive factors affecting our customers, our industry and business generally and other factors that we may not have currently identified or quantified. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the "Factors Affecting Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections elsewhere in this document. All forward-looking statements included in this Report on Form-10-K are made only as of the date of this Report on Form-10-K, and we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or which we hereafter become aware of. You should read this document and the documents that we incorporate by reference into this Annual Report on Form-10-K completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Page 3 of 79 PART I ITEM 1. BUSINESS - ----------------- IEC Electronics Corp. ("IEC", "We", "Our") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. We provide high quality electronics manufacturing services with state-of-the-art manufacturing capabilities and production capacity. Utilizing computer controlled manufacturing and test machinery and equipment, IEC provides manufacturing services employing surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection technologies. As an independent full-service EMS provider, we offer our customers a wide range of manufacturing 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. Our strategy is to cultivate strong manufacturing relationships with established and emerging original equipment manufacturers ("OEMs"). IEC Electronics Corp., a Delaware corporation, is the successor by merger in 1990 to IEC Electronics Corp., a New York corporation which was organized in 1966. In June 1992, we acquired an EMS provider in Edinburg, Texas which it renamed IEC Electronics-Edinburg, Texas Inc. ("Texas"). In November 1994, we acquired an EMS provider in Arab, Alabama, which we renamed IEC Arab, Alabama Inc. ("Alabama"). In August 1998, through an Irish subsidiary, IEC Electronics - Ireland Limited, ("Longford"), we acquired certain assets of an EMS provider located in Longford, Ireland. In February 2001, we acquired IEC Electronicos de Mexico, located in Reynosa, Mexico ("Mexico"). The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiaries. In October 1998, we closed our Alabama facility. In October 2002, we sold the facility for $600,000. All significant intercompany transactions and accounts have been eliminated. On June 18, 2002, we signed an Asset Purchase Agreement to sell substantially all of our Mexican assets to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out amounts were received. In addition, EPI was to pay to IEC commissions based on the net selling price of products shipped to certain former customers of IEC. No such commissions were received. Under the terms of a related agreement, IEC and Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. IEC recorded an after-tax loss on the sale of the business of approximately $3.1 million. In June 2002, IEC's Board of Directors approved a restructuring and reduction of workforce plan at its Newark, NY facility. In connection with this restructuring, IEC recorded a $448,000 charge to earnings during fiscal 2002 relating primarily to severance. All related payments were made as of September 30, 2003. On February 28, 2003, we sold our Edinburg, Texas facility for $875,000 and completed our restructuring initiative. As a result, we recorded a $184,000 restructuring benefit due to certain facility payments accrued in a prior fiscal year that will no longer be paid out. We achieved world-class ISO:9001-2002 certification in fiscal 2003 at our Newark, New York plant. In fiscal 2002, IEC became an FDA registered contract manufacturer of medical devices. These certifications are international quality assurance standards that most OEMs consider crucial in qualifying their EMS providers. Our New York facility is self-certified to previously recognized British Approvals Board for Telecommunications standards, allowing it to provide manufacturing and test services to manufacturers producing telecommunication equipment destined for shipment to the European Common Market. During 1998, we opened a state-of-the-art 10,000 square foot Technology Center at our Newark, New York manufacturing facility. During 2000, the Technology Center added pilot build to its services, which also include prototype assembly, design engineering services, and our Advanced Materials Technology Laboratory. Our executive offices are located at 105 Norton Street, Newark, New York 14513. The telephone number is (315) 331-7742, and our internet address is www.iec-electronics.com. Page 4 of 79 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 experienced significant growth through mid-2000. The downturn of the telecommunications industry, and economic conditions in the United States as a result of September 11, 2001 caused a slowdown in the EMS industry, but the current long term forecast is for growth to resume in late 2003, 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. We continually evaluate emerging technology and maintain a technology road map to ensure relevant processes are available to our customers when commercial and design factors so indicate. The current generation of interconnection technologies include chip scale packaging and ball grid array (BGA) assembly techniques. We have placed millions of plastic BGA's since 1994 and added Ceramic BGA placement for networking customers to our service offerings in fiscal 2001. Future advances will be directed by our Technology Center which combines Prototype and Pilot Build Services with the capabilities of our Advanced Materials Technology Laboratory, and is supported by our Design Engineering Group. We are well positioned to utilize our very experienced workforce with technical expertise. Our emphasis is on building the most challenging complete systems with current work for Excel Switching, ViaSat and Teradyne as examples. IEC has positioned itself as a leader of lead-free solder assembly technology through early development and technical publications. Lead-free is mandated by July 2006 for many electronic products sold in Europe. IEC's Strategy Our strategy is to cultivate strong manufacturing partnerships with established and emerging OEMs in the electronics industry. These long-term business partnerships involve the joint development of manufacturing and support strategies with OEM customers and promote customer satisfaction. In implementing this strategy, we offer our customers a full range of manufacturing solutions through flexibility in production, high quality and fast-turnaround manufacturing services and computer-aided testing. Page 5 of 79 Assembly Process We generally enter into formal agreements with our significant customers. These agreements generally provide for fixed prices for one year, absent any customer changes which impact cost of labor or material, and rolling forecasts of customer requirements. After establishing an OEM relationship, we offer our consultation services with respect to the manufacturability and testability of the product design. We often recommend design changes to reduce manufacturing costs and to improve the quality of the finished assemblies, and in some instances will produce original designs to the customer's specifications. Upon receipt, a customer's order is entered into our 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. We assign 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 us. Many products we manufacture 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. We assess the impact of such changes on the production process and take the appropriate action, such as restructuring bills of material, expediting procurement of new components and adjusting its manufacturing and testing plans. We believe that our ability to provide flexible and rapid response to customer needs in high change environment is critical to our success. Products and Services We manufacture a wide range of assemblies which are incorporated into many different products. We provide electronic manufacturing services primarily for broadband telecommunications equipment; measuring devices; medical instrumentation; imaging equipment and diagnostic test equipment. During the fiscal year ended September 30, 2003 we provided electronics manufacturing services to approximately 20 different customers, including Motorola ("Motorola"), Teradyne Diagnostic Solutions UK ("Teradyne Diagnostic"), Teradyne Test Division ("Teradyne Test"), and General Electric Transportation ("GE"). We provide our services to multiple divisions and product lines of many of our customers and typically manufacture for a number of each customer's successive product generations. In most cases, we are the sole contract manufacturer for the customer site or division, providing all services, prototype through box build and functional test. Materials Management We generally procure material only to meet specific contract requirements. In addition, our agreements with our significant customers generally provide for cancellation charges equal to the costs which are incurred by us as a result of a customer's cancellation of contracted quantities. Our internal systems provide effective controls for all materials, whether purchased by us or provided by the customer, through all stages of the manufacturing process, from receiving to final shipment. Availability of Components Substantially all of our net sales are derived from turnkey manufacturing in which we provide both materials procurement and assembly services. We are well positioned with supplier relationships and material procurement expertise to acquire needed materials. However, availability of customer-consigned parts and unforeseen shortages of components on the world market are beyond our control and could adversely affect revenue levels and operating efficiencies. Suppliers We have a Master Distribution Program in place with Arrow Electronics. This alliance has the benefit of reducing lead time on program parts, reducing the quotation process timetable, providing competitive pricing, providing some protection during periods of component allocation, providing better payment terms, reducing overhead cost, providing access to in-house stores and providing access to global resources. Page 6 of 79 Marketing and Sales During 2003, we have successfully maintained and grown sales through increases in services to existing customers. We are successfully pursuing new business through the efforts of five newly contracted manufacturing representative firms and our long-term relationship with a strong New England representative firm headquartered in Boston. In addition to our sales and marketing staff, our executives are closely involved with marketing efforts. We conduct 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. Our sales effort is supported by advertising in 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 representative covering the customer's location. In addition, referrals by existing customers are an important source of new opportunities. Our objective is to sell complex, high-mix, full systems to regional customers who require both our technical expertise and our ability to execute in a dynamic engineering change environment. These customers can be found in many diverse industries including telecommunications, medical, transportation, defense, avionics and others. Backlog Our backlog as of September 30, 2003 and September 30, 2002 was approximately $6.7 million and $8.5 million, respectively. Backlog consists of contracts or purchase orders with delivery dates scheduled within the next 12 months. Substantially all of the current backlog is expected to be shipped within our current fiscal year. Variations in the magnitude and duration of contracts received by us and customer delivery requirements may result in substantial fluctuations in backlog from period to period. Governmental Regulation Our operations are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. Management believes that our business is operated in compliance with applicable regulations promulgated by the Occupational Safety and Health Administration and the Environmental Protection Agency and corresponding state agencies which, respectively, pertain to health and safety in the work place and the use, discharge, and storage of chemicals employed in the manufacturing process. Current costs of compliance are not material to us. However, new or modified requirements, not presently anticipated, could be adopted creating additional expense for us. Employees IEC's employees numbered 182 at October 28, 2003, including 13 employees engaged in engineering, 153 in manufacturing and 16 in administrative and marketing functions. None of our employees are covered by a collective bargaining agreement. We have not experienced any work stoppages and believe that our employee relations are good. We have access to a large work force by virtue of our northeast location midway between Rochester and Syracuse, two upstate New York industrial cities. Patents and Trademarks We hold patents unrelated to electronics manufacturing services and also employ various registered trademarks. We do not believe that either patent or trademark protection is material to the operation of our business. ITEM 2. PROPERTIES - ------------------- Our administrative and manufacturing facility is located in Newark, New York and contains an aggregate of approximately 300,000 square feet. Page 7 of 79 ITEM 3. LEGAL PROCEEDINGS - -------------------------- Except as set forth below, there are no material legal proceedings pending to which IEC or any of its subsidiaries is a party or to which any of IEC's or subsidiaries' property is subject. To our knowledge, there are no material legal proceedings to which any director, officer or affiliate of IEC, or any beneficial owner of more than 5 percent (5%) of Common Stock, or any associate of any of the foregoing, is a party adverse to IEC or any of its subsidiaries. An action was commenced in United States District Court for the Southern Division of Texas against IEC and several other corporate defendants, on August 12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for exposure to lead, lead dust, chemicals and other substances used in the manufacture of products by various defendants. The essence of the complaint relates to alleged "in utero" exposure to the circulatory system of the then unborn children, resulting in alleged tissue toxicity through the mothers, causing damage to the central nervous system, brain and other organs of the fetus. The complaint alleges theories of negligence, gross negligence, strict liability, breach of warranty and fraud/negligent misrepresentation, and claims unspecified damages for pain and suffering, a variety of special damages, punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has agreed to provide a defense of the claims with a reservation of rights, but has expressly excluded any coverage for the claim for punitive damages. IEC has denied liability and the case is still in the discovery phase. A trial is tentatively scheduled for March 2004. On August 13, 2003 an action was commenced by General Electric Company ("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc. The action alleges causes of action for breach of a manufacturing services contract which had an initial value of $4.4 million, breach of express warranty, breach of implied warranty and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a component that IEC used to assemble printed circuit boards for GE that GE contends failed to function properly requiring a product recall. GE claims damages "in excess of $15,000" plus interest and attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for lack of jurisdiction and the motion is pending. The position of IEC is that the contract with GE was substantially completed and that it has meritorious defenses and a cross claim against Vishay. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ During the fourth quarter of fiscal 2003, no matters were submitted to a vote of security holders. EXECUTIVE OFFICERS OF THE REGISTRANT IEC's executive officers as of September 30, 2003, were as follows: Name Age Position W. Barry Gilbert 57 Chairman of the Board, Director and Acting Chief Executive Officer Bill R. Anderson 58 Vice President and Chief Operating Officer Brian H. Davis 49 Vice President, Chief Financial Officer and Controller W. Barry Gilbert has served as acting Chief Executive Officer since June 2002. He has been a director of IEC since February 1993, and Chairman of the Board since February 2001. He is an adjunct faculty member at the William E. Simon Graduate School of Business Administration of the University of Rochester. From 1991-1999, Mr. Gilbert was President of the Thermal Management Group of Bowthorpe Plc. of Crawley, West Sussex, England. Prior to that, he was corporate Vice President and President, Analytical Products Division of Milton Roy Company, a manufacturer of analytical instrumentation. Bill R. Anderson has served as Chief Operating Officer since June 2002. From September 2001 to June 2002, he was Vice President and General Manager, Newark Operations and from March 2001 to September 2001, he was Vice President, Supply Chain Management and Materials. 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 IEC 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 IEC. Brian H. Davis joined IEC in April 2003 as Vice President, Chief Financial Officer and Controller. Mr. Davis previously served as Vice President of Finance from 1996 - 2003 at Thermo Spectronic, a manufacturer of laboratory equipment located in Rochester, NY. Prior to that, Mr. Davis functioned in various Controller positions with Life Sciences International and Milton Roy Company. Page 8 of 79 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------- (a) Market Information. IEC's Common Stock began trading on The Over the Counter Bulletin Board ("OTCBB") under the symbol IECE.OB on December 3, 2002. Prior to that, IEC's Common Stock was traded on the Nasdaq Stock Market. The following table sets forth, for the period stated, the high and low closing sales prices for the Common Stock as reported on The Nasdaq Stock Market or the OTCBB, as applicable. Closing Sales Price Period High Low October 1, 2001 - December 31, 2001 $ 0.850 $ 0.400 January 1, 2002 - March 31, 2002 $ 0.680 $ 0.360 April 1,2002 - June 30, 2002 $ 0.570 $ 0.110 July 1, 2002 - September 30, 2002 $ 0.160 $ 0.070 October 1, 2002 - December 31, 2002 $ 0.270 $ 0.060 January 1, 2003 - March 31, 2003 $ 0.570 $ 0.070 April 1, 2003 - June 30, 2003 $ 0.980 $ 0.390 July 1, 2003 - September 30, 2003 $ 1.530 $ 0.650 The closing price of IEC's Common Stock on the OTCBB on November 19, 2003, was $1.79 per share. (b) Holders. As of November 19, 2003, there were approximately 158 holders of record of IEC's Common Stock. (c) Dividends. IEC has never paid dividends on its Common Stock. It is the current policy of the Board of Directors of IEC to retain earnings for use in our business. Certain financial covenants set forth in IEC's current loan agreement prohibit IEC from paying cash dividends. We do not plan to pay cash dividends on our Common Stock in the foreseeable future. (d) Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth information concerning IEC's equity compensation plans as of September 30, 2003. Plan Category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available for exercise of outstanding options, future issuance under outstanding options, warrants and rights equity compensation warrants and rights plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 1,310,800 $1.25 242,916 Equity compensation plans not approved by security holders - NA - Total 1,310,800 $1.25 242,916
Page 9 of 79 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA - -------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Years Ended September 30, 2003 2002 2001 2000 1999 ------------------------------------------------------------------------------- Income statement data Net sales $ 48,201 $ 39,365 $114,771 $146,359 $122,593 ------------------------------------------------------------------------------- Gross profit (loss) 4,930 $ 2,297 $ 2,942 $ 10,339 $ (4,888) ------------------------------------------------------------------------------- Operating income (loss) 2,074 $ (3,026) $(16,208) $ 2,019 $(19,172) ------------------------------------------------------------------------------- Income (loss) from continuing operations 2,413 $ (3,771) $(17,439) $ 2,411 $(18,005) ------------------------------------------------------------------------------- Income (loss) from discontinued operations 184 $ (7,208) $(11,833) $(10,442) $ (2,560) ------------------------------------------------------------------------------- Net income (loss) 2,597 $(10,979) $(29,272) $ (8,031) $(20,565) ------------------------------------------------------------------------------- Income (loss) from continuing operations per common and common equivalent share: Basic $ 0.31 $ (0.49) $ (2.28) $ 0.32 $ (2.38) Diluted $ 0.29 $ (0.49) $ (2.28) $ 0.32 $ (2.38) -------------------------------------------------------------------------------- Income (loss) from discontinued operations per common and common equivalent share: Basic $ 0.02 $ (0.94) $ (1.55) $ (1.38) $ (0.34) Diluted $ 0.02 $ (0.94) $ (1.55) $ (1.38) $ (0.34) -------------------------------------------------------------------------------- Net income (loss) per common and common equivalent share: Basic $ 0.33 $ (1.43) $ (3.83) $ (1.06) $ (2.72) Diluted $ 0.31 $ (1.43) $ (3.83) $ (1.06) $ (2.72) -------------------------------------------------------------------------------- Common and common equivalent shares Basic 7,899 7,692 7,651 7,590 7,563 Diluted 8,274 7,692 7,651 7,590 7,563 -------------------------------------------------------------------------------- Balance sheet data Working capital (deficiency) $ 1,329 $ (3,572) $ 1,163(1) $ 30,860 $ 33,424 -------------------------------------------------------------------------------- Total assets $ 10,506 $ 15,065 $ 38,127 $ 89,561 $ 93,919 -------------------------------------------------------------------------------- Long-term debt, less current maturities $ 1,390 $ 1,268 $ - $ 15,266 $ 16,547 ------------------------------------------------------------------------------- Shareholders' equity $ 3,414 $ 799 $ 11,809 $ 41,008 $ 48,845 -------------------------------------------------------------------------------
(1) All debt is recorded as current for reporting purposes. Page 10 of 79 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------- MANAGEMENT'S DISCUSSION OF OPERATIONS The information in this Management's Discussion & Analysis should be read in conjunction with the accompanying consolidated financial statements, the related Notes to Financial Statements and the Five-Year Summary of Financial Data. Forward-looking statements in this Management's Discussion and Analysis are qualified by the cautionary statement preceding Item 1 of this Form 10K. Overview - -------- We had a successful year in fiscal 2003 as we completed our restructuring and returned to profitability. We were profitable during each quarter of 2003. Long term debt has been reduced by $2.6 million since our January 14, 2003 refinancing. We took a number of important steps in 2003, including a continued emphasis on business development. During the year, we were able to add five new manufacturer's representative organizations, several new customers and win new business from existing customers. Analysis of Operations - ---------------------- Sales ----- (dollars in millions) % % For Year Ended September 30, 2003 2002 Change 2001 Change ---- ---- ------ ---- ------ Net sales $48.2 $39.4 22.3% $114.8 (66)% The increase in fiscal 2003 net sales compared to fiscal 2002 was primarily due to increased demand from our major customers. The decrease in fiscal 2002 net sales compared to fiscal year 2001 was primarily due to the loss of 4 major customers and the significant downturn in the telecommunications and industrial sectors of the U.S. economy. Gross Profit and Selling and Administrative Expenses - ---------------------------------------------------- (as a % of Net Sales) For Year Ended September 30, 2003 2002 2001 ---- ---- ---- Gross profit 10.2% 5.8% 2.6% Selling and administrative expenses 6.1% 10.7% 6.1% Gross profit as a percentage of sales was 10.2% in fiscal 2003 as compared to 5.8% in fiscal 2002. The increase of more than 4 percentage points was primarily attributable to our concerted efforts to reduce manufacturing overhead. Gross profit as a percentage of sales was 5.8% in fiscal 2002 as compared to 2.6% in fiscal 2001. The increase of more than 3 percentage points was primarily attributable to the sale of fully reserved inventory to Acterna Corporation for $1.1 million as part of an out of court settlement. In addition, the 2001 amount was considerably lower due to the charge against inventory and receivables. Page 11 of 79 Selling and administrative expenses as a percentage of sales decreased to 6.1% in fiscal 2003 compared to 10.7% in fiscal 2002. The decrease is primarily due to a decrease in the number of employees. Selling and administrative expenses as a percentage of sales increased to 10.7% in fiscal 2002 compared to 6.1% in fiscal 2001 as certain costs remained fixed with a significantly lower sales volume. Other Income and Expense - ------------------------ (dollars in millions) For Year Ended September 30, 2003 2002 2001 ---- ---- ---- Interest and financing expense $0.6 $0.9 $1.3 Other income $0.7 $0.2 $ - Interest and financing expense decreased $0.3 million to $0.6 million in fiscal 2003 from $0.9 million in fiscal 2002. This is primarily due to debt reduction that was achieved due to favorable cash flow from operations. Interest and finance expense decreased $0.4 million to $0.9 million from $1.3 million in fiscal 2001. This was also due to debt reduction. We had other income of $0.7 million in fiscal 2003. $0.6 million was related to negotiated forgiveness of accounts payable owed to various creditors and $0.1 million was related to the sale of our Alabama facility. Other income of $0.2 million in fiscal 2002 is composed of interest income received from Acterna Corporation as part of an out of court settlement. Income Taxes - ------------ (as a % of income (loss) before income taxes) For Year Ended September 30, 2003 2002 2001 ---- ---- ---- Effective tax rate (12.1)% -% (0.1)% We recorded a $260,000 tax benefit during fiscal 2003. This is due to a $250,000 adjustment against valuation allowances that had been established against our net deferred tax assets and $10,000 from the utilization of a state net operating loss carryforward. We continue to maintain a large valuation allowance against our net deferred tax assets including the net operating loss carryforward. In fiscal 2001, we recorded an income tax benefit from the receipt of a prior year state refund in the amount of $95,000. Restructuring Charge (Benefit) - ----------------------------- (dollars in millions) For Year Ended September 30, 2003 2002 2001 ---- ---- ---- ($0.1) $0.2 $ - During Fiscal 2003, we recorded a benefit from restructuring of $63,000. This was due to certain severance payments accrued in 2002 that will no longer be paid out. In June 2002, our Board of Directors approved a restructuring and reduction of workforce plan at our Newark, NY facility. In connection with this restructuring, we recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. Offsetting this charge was a $240,000 reduction in a reserve previously recorded for our Arab, Alabama facility that was no longer needed due to the sale of the facility in October 2002. Page 12 of 79 Asset Impairment Writedown - -------------------------- In assessing and measuring the impairment of long-lived assets, we apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. During 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 our business strategy, we did not believe that their future cash flows supported 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 August 1998, we initiated a plan to dispose of our Arab, Alabama facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000 for fiscal 2002. The facility was sold in October 2002 for $600,000. During April 2001, we initiated a plan to dispose of our Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million for fiscal 2002 and was reflected in discontinued operations. The facility was sold on February 28, 2003 for $875,000. Discontinued Operations - ----------------------- On June 18, 2002, we signed an Asset Purchase Agreement to sell substantially all of the assets of IEC-Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No earn-out amounts were received. Under the terms of a related agreement, IEC and IEC-Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. We recorded an after-tax loss on the sale of the business of approximately $3.1 million in fiscal 2002. The reserve balance at September 30, 2003 was $216,000. It is anticipated that all remaining charges against the accrual will be made by December 2003. On February 28, 2003, We sold its Edinburg, Texas facility for $875,000 and completed its restructuring initiative. As a result, we recorded a $184,000 restructuring benefit due to certain facility payments accrued in a prior fiscal year that will no longer be paid out. Significant Events - ------------------ A small number of customers are currently responsible for a significant portion of our net sales. One of these customers has announced its intention to begin manufacturing most of the products it currently purchases from IEC at its own facility. We believe that we will be able to retain a piece of that business. We have recently added several new customers and have received additional business from existing customers. Furthermore, we expect to add additional customers in the near future. Page 13 of 79 Liquidity and Capital Resources - ------------------------------- As reflected in the Consolidated Statements of Cash Flows for Fiscal 2003, net cash provided by operations was $4.6 million. Of this, $4.1 million was used to reduce IEC's debt. On January 14, 2003, we completed a new $7,300,000 financing agreement composed of a $5,000,000 Senior Secured Facility (the "Facility"), a $2,200,000 Secured Term Loan (the "Term Loan") and a $100,000 infusion by certain of the IEC directors. The Facility, which has a 3 year maturity, bears interest at the rate of prime plus 2%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 secured by a first mortgage lien against our Edinburg, Texas real estate which was paid in full upon the sale of the facility in February 2003. The Term Loan is secured by a general security agreement, and indirectly by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The availability under the revolver was $2.2 million on September 30, 2003. $0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively. The financing agreements contain various affirmative and negative covenants including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). We are in compliance with these covenants. In connection with the financing, we entered into agreements with certain of our trade creditors providing for extended payment terms involving an aggregate of approximately $2.0 million of past due balances. In addition, certain trade creditors agreed to discounted payment terms. Such discounts amounted to $0.6 million and were recorded in the first half of fiscal 2003. Application of Critical Accounting Policies - ------------------------------------------- Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include revenue recognition, impairment of long-lived assets, accounting for legal contingencies and accounting for income taxes. We recognize revenue in accordance with Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements." Sales are recorded when products are shipped to customers. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. We evaluate our long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies", requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in IEC's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact IEC's financial position or its results of operations. Page 14 of 79 Impact of Inflation - ------------------- The impact of inflation on our operations has been minimal due to the fact that we ares able to adjust its bids to reflect any inflationary increases in cost. New Pronouncements - ------------------ 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 adopted this standard on October 1, 2002. Under 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. The adoption of SFAS No. 143 did not have a material effect on our financial position, results of operations or cash flows. 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" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 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". We adopted this standard as of October 1, 2002 with no material effect on our financial position, results of operations or cash flows. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical Corrections (SFAS No. 145). SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows. In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. We adopted this standard as of January 1, 2003 with no material effect on our financial position, results of operations or cash flows. In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows. Page 15 of 79 In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure". SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. IEC continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003. In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." ("FIN 46"). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows. On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows. On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Statement 150"). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. We do not expect that the pronouncement will have a material impact on our financial position, results of operations or cash flows. FACTORS AFFECTING FUTURE RESULTS OUR OPERATING RESULTS MAY FLUCTUATE DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. Our annual and quarterly results may vary significantly depending on various factors, including: - adverse changes in general economic conditions - the level and timing of customer orders - the level of capacity utilization of our manufacturing facility and associated fixed costs - the composition of the costs of revenue between materials, labor and manufacturing overhead - price competition - our level of experience in manufacturing a particular product - the degree of automation used in our assembly process - the efficiencies achieved in managing inventories and fixed assets - fluctuations in materials costs and availability of materials - the timing of expenditures in anticipation of increased sales, customer product delivery requirements and shortages of components or labor. Page 16 of 79 The volume and timing of orders placed by our customers vary due to variation in demand for our customers' products, our customers' inventory management, new product introductions and manufacturing strategy changes, and consolidations among our customers. In the past, changes in customer orders have had a significant effect on our results of operations due to corresponding changes in the level of overhead absorption. Any one or a combination of these factors could adversely affect our annual and quarterly results of operations in the future. BECAUSE WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, A REDUCTION IN SALES TO ANY ONE OF OUR CUSTOMERS COULD CAUSE A SIGNIFICANT DECLINE IN OUR REVENUE. A small number of customers are currently responsible for a significant portion of our net sales. During fiscal 2003, 2002, and 2001, our five largest customers accounted for 93%, 81% and 72% of consolidated net sales, respectively. During fiscal 2003, Motorola and Teradyne accounted for 55% and 32%, respectively, of consolidated net sales. The percentage of IEC's sales to its major customers may fluctuate from period to period. We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced rapid technological change, short product life cycles, consolidation, and pricing and margin pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales. Any consolidation among our customers could further reduce the number of customers that generate a significant percentage of our revenues and exposes us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, would have a material adverse effect on our results of operations. We cannot assure you that present or future customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the amount of manufacturing services ordered from us. If they do, it could have a material adverse effect on our results of operations. In addition, we generate significant account receivables in connection with providing manufacturing services to our customers. If one or more of our customers were to become insolvent or otherwise were unable to pay for the manufacturing services provided by us, our operating results and financial condition would be adversely affected. OUR CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE. Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers' products become obsolete or fail to gain widespread commercial acceptance, our business could be materially adversely affected. WE DEPEND ON THE ELECTRONICS INDUSTRY, WHICH CONTINUALLY PRODUCES TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS WOULD HARM OUR BUSINESS. Factors affecting the electronics industry in general could seriously harm our customers and, as a result, us. Page 17 of 79 These factors include: - the inability of our customers to adapt to rapidly changing technology and evolving industry standards, which result in short product life cycles; - the inability of our customers to develop and market their products, some of which are new and untested, the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance; and - recessionary periods in our customers' markets. If any of these factors materialize or if we are unable to offer technologically advanced, cost effective, quick response manufacturing service to customers, demand for our services would decline and our business would suffer. MOST OF OUR CUSTOMERS DO NOT COMMIT TO LONG-TERM PRODUCTION SCHEDULES, WHICH MAKES IT DIFFICULT FOR US TO SCHEDULE PRODUCTION AND ACHIEVE MAXIMUM EFFICIENCY OF OUR MANUFACTURING CAPACITY. The volume and timing of sales to our customers may vary due to: - variation in demand for our customers' products - our customers' attempts to manage their inventory - electronic design changes - changes in our customers' manufacturing strategy - acquisitions of or consolidations among customers - recessionary conditions in customers' industries Due in part to these factors, most of our customers do not commit to firm production schedules for more than one quarter in advance. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, we have been required to increase staffing and other expenses in order to meet the anticipated demand of our customers. Anticipated orders from many of our customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in our customers' business needs, thereby adversely affecting our results of operations. On other occasions, our customers have required rapid increases in production, which have placed an excessive burden on our resources. Such customer order fluctuations and deferrals could have a material adverse effect on us in the future. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION. Electronics manufacturing service providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons. The success of our customers' products in the market affects our business. Cancellations, reductions or delay by a significant customer or by a group of customers could negatively impact our operating results. In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimate of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduces our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results. On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins. WE COMPETE WITH NUMEROUS PROVIDERS OF ELECTRONIC MANUFACTURING SERVICES, INCLUDING OUR CURRENT OR POTENTIAL CUSTOMERS WHO MAY DECIDE TO MANUFACTURE ALL OF THEIR PRODUCTS INTERNALLY. The electronic manufacturing services business is highly competitive. We compete against numerous domestic and foreign manufacturers with global operations as well as those who operate on a local or regional basis. Many of our competitors have international operations and some have substantially greater manufacturing, financial, research and development, and marketing resources than us. We also face potential competition from the manufacturing operations of our current and potential customers, who are continually evaluating the merits of manufacturing products internally versus the advantages of outsourcing. Page 18 of 79 INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES. Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, research and development, sales and marketing resources than we do. We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures as a result of their geographic location or the services they provide. As a result, competitors may have a competitive advantage. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. We also expect our competitors to continue to improve the performance of their current products or services, to reduce their current products or service sales prices and to introduce new products or services that may offer greater performance and improved pricing. Any of these could cause a decline in sales, loss of market acceptance of our products or services, profit margin compression, or loss of market share. IF WE DO NOT MANAGE OUR BUSINESS EFFECTIVELY, OUR PROFITABILITY COULD DECLINE. Our ability to manage our business effectively will require us to continue to implement and improve our operational, financial and management information systems; continue to develop the management skills of our managers and supervisors; and continue to train, motivate and manage our employees. Our failure to effectively do so could have a material adverse effect on our results of operations. WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR COMPONENTS THAT ARE CRITICAL TO OUR MANUFACTURING PROCESSES. A SHORTAGE OF THESE COMPONENTS OR AN INCREASE IN THEIR PRICE COULD INTERRUPT OUR OPERATIONS AND REDUCE OUR PROFITS. Substantially all of our net revenue is derived from turnkey manufacturing in which we provide materials procurement. While many of our customer contracts permit quarterly or other periodic adjustments to pricing based on decreases and increases in component prices and other factors, we typically bear the risk of component price increases that occur between any such re-pricings or, if such re-pricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, certain component price increases could adversely affect our gross profit margins. Almost all of the products we manufacture require one or more components that are available from a limited number of suppliers. Some of these components are allocated from time to time in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a particular component. In addition, at various times industry wide shortages of electronic components have occurred. Such circumstances have produced insignificant levels of short-term interruption of our operations, but could have a material adverse effect on our results of operations in the future. OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK Most of our contract manufacturing services are provided on a turnkey basis, where we purchase some or all of the materials required for designing, product assembling and manufacturing. These services involve greater resource investment and inventory risk management than consignment services, where the customer provides materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results. In our turnkey operations, we must order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. Customers' cancellation or reduction of orders can result in expenses to us. While our customer agreements typically include provisions which require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our supplies. PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US. We manufacture products to our customers' specifications which are highly complex and may, at times, contain design or manufacturing errors or failures. Despite our quality control and quality assurance efforts, defects may occur. Defects in the products we manufacture, whether caused by a design, manufacturing or component failure or error, may result in delayed shipments to customers or reduced or cancelled customer orders and may affect our business reputation. In addition, these defects may result in liability claims against us. Even if customers or component suppliers are responsible for the defects, they may be unwilling or unable to assume responsibility for any costs or payments. Page 19 of 79 WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE. The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to: - hire, retain and expand our qualified engineering and technical personnel; - maintain technological leadership; - develop and market manufacturing services that meet changing customer needs; and - successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. Although we believe that our operations provide the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment, which could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers' changing technological needs and requirements could have an adverse effect on our business. WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH ANY OF OUR KEY PERSONNEL, THE LOSS OF WHICH COULD HURT OUR OPERATIONS. Our continued success depends largely on the efforts and skills of our key managerial and technical employees. The loss of the services of certain of these key employees or an inability to attract or retain qualified employees could have a material adverse effect on us. We do not have employment agreements or non-competition agreements with our key employees. COMPLIANCE OR THE FAILURE TO COMPLY WITH CURRENT AND FUTURE ENVIRONMENTAL REGULATIONS COULD CAUSE US SIGNIFICANT EXPENSE. We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. If we fail to comply with any present and future regulations, we could be subject to future liabilities or the suspension of production. In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment, or to incur other significant expenses to comply with environmental regulations. THE AGREEMENTS GOVERNING OUR EXISTING DEBT CONTAIN VARIOUS COVENANTS THAT IMPACT UPON THE OPERATION OF OUR BUSINESS. The agreements and instruments governing our existing debt and our secured credit facility contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios including, among others, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios and minimum earnings before interest, taxes, depreciation and amortization (EBITDA) and restrict our ability to: - incur debt; - incur or maintain liens; - make acquisitions of businesses or entities; - make investments, including loans, guarantees and advances; - engage in mergers, consolidations or certain sales of assets; - engage in transactions with affiliates; and - pay dividends or engage in stock redemptions. Our secured credit facilities are secured by a general security agreement covering receivables, inventory, equipment, intangibles, investment property and deposit accounts and indirectly by a first mortgage on our Newark plant. Our ability to comply with covenants contained in our existing debt and our secured credit facility may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our failure to comply with our debt-related covenants could result in an acceleration of our indebtedness and cross-defaults under our other indebtedness, which may have a material adverse effect on our financial condition. We are currently in compliance with all of our covenants. OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS BEYOND OUR CONTROL. Our common stock is traded on the Over-the-Counter Bulletin Board The market price of our common stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including future announcements concerning us or our key customers or competitors, government regulations, litigation, changes in earnings estimates by analysts, fluctuations in quarterly operating results, or general conditions in the EMS industry. Page 20 of 79 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Quantitative and Qualitative Disclosures about Market Risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of IEC due to adverse changes in financial rates. We are exposed to market risk in the area of interest rates. One exposure is directly related to its Term Loan and Revolving Credit borrowings under the Credit Agreement, due to their variable interest rate pricing. Management believes that interest rate fluctuations will not have a material impact on IEC's results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The information required by this item is incorporated herein by reference to pages 25 through 42 of this Form 10-K and is indexed under Item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There have been no disagreements on accounting and financial disclosure matters. ITEM 9A CONTROLS AND PROCEDURES - -------------------------------- An evaluation was performed under the supervision and with the participation of the Company's management, including our acting Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K as required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our acting Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by the Annual Report on 10-K to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC rules and forms. In connection with the evaluation described above, our management, including our acting Chief Executive Officer and Chief Financial Officer, identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2003, and that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 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 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto. The information regarding Executive Officers of the Registrant is found in Part I of this report. 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 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto, except, however, the sections entitled "Performance Graph" and "Report of the Compensation Committee of the Board of Directors" are not incorporated in this report by reference. Page 21 of 79 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - ---------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- The information required by this item is presented under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders 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 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - ------------------------------------------------ The information required by this item is presented under the caption "Audit Committee Report" contained in the definitive proxy statement issued in connection with the 2004 Annual Meeting of Stockholders and is incorporated in this report by reference thereto. PART IV ITEM 15. 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...................... 27 Consolidated Balance Sheets as of September 30, 2003 and 2002.................................. 28 Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 .................... 29 Consolidated Statements of Comprehensive Income (Loss) and Shareholders' Equity for the years ended September 30, 2003, 2002 and 2001................................................ 30 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001...................... 31 Notes to Consolidated Financial Statements.................... 32 Selected Quarterly Financial Data (unaudited)................ 42 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 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 3.3 Agreement and Plan of Merger of IEC Electronics into DFT Holdings Corp. (Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.4 Certificate of Merger of IEC Electronics Corp. into DFT Holdings Corp. - New York. (Incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.5 Certificate of Ownership and Merger merging IEC Electronics Corp. into DFT Holdings Corp. - Delaware. (Incorporated by reference to Exhibit 3.5 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) Page 22 of 79 3.6 Certificate of Merger of IEC Acquisition Corp. into IEC Electronics Corp. (Incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 3.7 Certificate of Amendment of Certificate of Incorporation of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on Feb. 26, 1998 (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 27, 1998) 3.8 Certificate of Designations of the Series A Preferred Stock of IEC Electronics Corp. filed with the Secretary of State of the State of Delaware on June 3, 1998. (Incorporated by reference to Exhibit 3.8 of the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 4.1 Specimen of Certificate for Common Stock. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-56498) 4.2 Rights Agreement dated as of June 2, 1998 between IEC Electronics Corp. and ChaseMellon Shareholder Services. LLC., as Rights Agents (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 2, 1998) 10.1* Form of Indemnity Agreement. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1993) 10.2* IEC Electronics Corp. 1993 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended September 30, 1998) 10.3* Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.4* Form of Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.5* Form of Non-Employee Director Stock Option Agreement (Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8, Registration No. 33-79360) 10.6* IEC Electronics Corp. 2001 Stock Option and Incentive Plan (Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.7 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 2001). 10.8* 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). 10.9* 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). 10.10* Amendment to IEC Electronics Corp. Savings and Security Plan effective April 1, 2002 (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.11 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). 10.12 Amendment No. 1 dated as of March 30, 2000 to Loan and Security Agreement originally dated as of December 28, 1999 amount 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) 10.13 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). 10.14 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"). (Incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). Page 23 of 79 10.15 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.(Incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.16 Amendment No. 5 dated as of February 15, 2002 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") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 20, 2002). 10.17 Amendment No. 6 dated as of February 28, 2002 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") (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 6, 2002). 10.18 Amendment No. 7 dated as of March 15, 2002 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")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 21, 2002). 10.19 Amendment No. 8 dated as of April 8, 2002 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")(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 9, 2002). 10.20 Amendment Number 9 dated as of June 20, 2002 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"); Letter Modifications to Amendment Number 9 dated August 9, 2002, August 23, 2002, September 17, 2002 and September 24, 2002 (Incorporated by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.21 Amendment Number 10 dated as of October 1, 2002 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") (Incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.22 Amendment Number 11 dated as of November 13, 2002 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") (Incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.23 Amendment Number 12 dated as of January 1, 2003 to Loan and 53 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") (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). Page 24 of 79 10.24* 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.) 10.25* 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. (Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended September 30, 2001). 10.26* Severance Agreement dated June 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.27* Supplemental Severance Agreement dated December 6, 2002 between IEC Electronics Corp. and Thomas W. Lovelock. (Incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended September 30, 2002). 10.28 Loan Agreement between IEC Electronics Corp., and Keltic 43 Financial Partners, LLP, dated January 14, 2003. 10.29 Loan and Security Agreement between IEC Electronics Corp. and Suntrust Bank dated January 13, 2003. 64 10.30 Supplier agreement between IEC Electronics Corp. and Arrow CMS Distribution Group of Arrow Electronics, Inc. dated December 27, 2002 69 10.31 Amendment Number 1 to Term Note between IEC Electronics Corp. and SunTrust Bank dated September 26, 2003 73 21.1 Subsidiaries of IEC Electronics Corp. 74 23.1 Consent of Rotenberg & Co., LLP 75 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 76 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 77 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 78 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 79 *Management contract or compensatory plan or arrangement (b) Reports on Form 8-K (i) A current report on Form 8-K was filed with the Securities and Exchange Commission on July 21, 2003. It announced earnings for the quarter ended June 27, 2003 and a press release relating to the earnings was attached thereto. (ii) A current report on Form 8-K was filed with the Securities and Exchange Commission on October 29, 2003. It announced financial results for the fiscal quarter and the year ended September 30, 2003 and a press release relating to the financial results was attached thereto. Page 25 of 79 SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 21, 2003. IEC Electronics Corp. By:/s/ W. Barry Gilbert ------------------------- W. Barry Gilbert Acting Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/W. Barry Gilbert Acting Chief Executive Officer and - ---------------------- Chairman of the Board (W. Barry Gilbert) November 21, 2003 /s/Brian H. Davis Vice President, - ----------------- Chief Financial Officer (Brian H. Davis) and Controller November 21, 2003 /s/David J. Beaubien Director November 21, 2003 - -------------------- (David J. Beaubien) /s/Robert P. B. Kidd Director November 21, 2003 - ------------------- (Robert P. B. Kidd) /s/Eben S. Moulton Director November 21, 2003 - ------------------ (Eben S. Moulton) /s/Justin L. Vigdor Director November 21, 2003 - ------------------- (Justin L. Vigdor) /s/James C. Rowe Director November 21, 2003 - ------------------ (James C. Rowe) /s/Dermott O'Flanagan Director November 21, 2003 - --------------------- (Dermott O'Flanagan) Page 26 of 79 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors IEC Electronics Corp. Newark, New York We have audited the accompanying consolidated balance sheets of IEC Electronics Corp. (a Delaware corporation) and subsidiaries as of September 30, 2003 and 2002, and the related consolidated statements of operations, comprehensive income and shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IEC Electronics Corp. and subsidiaries as of September 30, 2003 and 2002 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The financial statements for the year ended September 30, 2001 were audited by other auditors who have ceased operations whose report dated November 16, 2001 (except with respect to the matter discussed in Notes 1 and 5, as to which the date was January 11, 2002), on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company's ability to continue as a going concern. /s/ Rotenberg & Co., LLP - ------------------------ Rotenberg & Co., LLP Rochester, New York October 21, 2003 Page 27 of 79 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND 2002 (in thousands)
ASSETS 2003 2002 -------------------- CURRENT ASSETS: Cash $ 793 $ - Accounts receivable 4,004 5,480 Inventories 1,633 3,412 Deferred income taxes 250 - Other current assets 329 186 Current assets-discontinued operations 121 348 ----------------------- Total current assets 7,130 9,426 ----------------------- FIXED ASSETS: Land and land improvements $ 768 768 Building and improvements 3,995 3,995 Machinery and equipment 46,702 46,501 Furniture and fixtures 5,870 5,850 ----------------------- SUB-TOTAL GROSS PROPERTY 57,335 57,114 LESS ACCUMULATED DEPRECIATION (54,161) (52,781) ----------------------- 3,174 4,333 ASSET HELD FOR SALE - 497 LONG-TERM ASSETS-DISCONTINUED OPERATIONS - 809 OTHER NON-CURRENT ASSETS 202 - ----------------------- $ 10,506 $ 15,065 =======================
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002 ------------------------- CURRENT LIABILITIES: Bank borrowings and current portion of long-term debt $ 1,277 $ 3,128 Accounts payable 2,740 6,250 Accrued payroll and related expenses 794 697 Other accrued expenses 675 1,497 Other current liabilities-discontinued operations 216 1,426 ------------------------- Total current liabilities 5,702 12,988 ------------------------- LONG TERM VENDOR PAYABLE 456 - LONG TERM DEBT - TOTAL 934 1,268 ------------------------- TOTAL LIABILITIES 7,092 14,266 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 - 8,021,960 and 7,692,076 shares, respectively 80 77 Treasury stock, 573 shares; at cost (11) (11) Additional paid-in capital 38,479 38,418 Accumulated deficit (35,042) (37,640) Accumulated other comprehensive loss- Cumulative translation adjustments (92) (45) ------------------------- Total shareholders' equity 3,414 799 -------------------------- $ 10,506 $ 15,065 ========================== The accompanying notes are an integral part of these financial statements.
Page 28 of 79 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 (in thousands, except per share and share data)
2003 2002 2001 ---------------------------------- Net sales $ 48,201 $ 39,365 $114,771 Cost of sales 43,271 37,068 111,829 --------------------------------- Gross profit 4,930 2,297 2,942 Operating expenses Selling and administrative expenses 2,919 4,209 7,049 Restructuring (benefit) charge (63) 214 - Asset impairment writedown - 900 12,101 --------------------------------- Total operating expenses 2,856 5,323 19,150 --------------------------------- Operating income (loss) 2,074 (3,026) (16,208) Interest and financing expense (642) (932) (1,331) Forgiveness of accounts payable 578 - - Other income 143 188 5 --------------------------------- Net income (loss) before income taxes 2,153 (3,771) (17,534) (Benefit from) provision for income taxes (260) - (95) --------------------------------- Income (loss) from continuing operations 2,413 (3,771) (17,439) --------------------------------- Discontinued operations: Income (loss) from operations of IEC-Mexico disposed of (net of income taxes of $0, $56, and $116 in 2003, 2002 and 2001, respectively) 184 (4,069) (11,833) Estimated (loss) on disposal of IEC-Mexico (net of income taxes of $0 in 2003, 2002 and 2001) - (3,139) - --------------------------------- 184 (7,208) (11,833) --------------------------------- Net income (loss) $ 2,597 $(10,979) $ (29,272) ================================= Net income (loss) per common and common equivalent share: Basic Income (loss) from cont. operations $ 0.31 $ (0.49) $ (2.28) Income (loss) from discont. ops. $ 0.02 $ (0.94) $ (1.55) Income (loss) available to common shareholders $ 0.33 $ (1.43) $ (3.83) Diluted Income (loss) from cont. operations $ 0.29 $ (0.49) $ (2.28) Income (loss) from discont. ops. $ 0.02 $ (0.94) $ (1.55) Income (loss) available to common shareholders $ 0.31 $ (1.43) $ (3.83) Weighted average number of common and common equivalent shares outstanding: Basic 7,898,699 7,691,503 7,650,673 =================================== Diluted 8,273,977 7,691,503 7,650,673 =================================== The accompanying notes are an integral part of these financial statements
Page 29 of 79 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 (in thousands)
Accumulated Other Additional Retained Comprehensive Total Comprehensive Common Paid-In Earnings Income Treasury Shareholders Loss Stock Capital (Deficit) (Loss) Stock Equity ---------------------------------------------------------------------------------------------- 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 Net Loss $(10,979) - - $(10,979) - - $(10,979) Other comprehensive loss, currency translation adjustments $(31) - - - $(31) - $(31) ----------------------------------------------------------------------------------------------------- Comprehensive loss $(11,010) ========== BALANCE, September 30,2002 $77 $38,418 $(37,640) $(45) $(11) $799 Shares issued under Directors and Employee Stock Plan $3 $61 - - - $64 Net Income $2,597 - - $2,598 - - $2,598 Other comprehensive loss, currency translation adjustments $(47) - - - $(47) - $(47) ---------------------------------------------------------------------------------- Comprehensive income $2,550 ========== BALANCE, September 30, 2003 $80 $38,479 $(35,042) $(92) $(11) $3,414 The accompanying notes are an integral part of these financial statements.
Page 30 of 79 IEC ELECTRONICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001 (in thousands)
2003 2002 2001 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,597 $ (10,979) $(29,272) Non-cash adjustments: (Income) loss from discontinued operations (184) 4,069 11,833 Loss on sale of discontinued operations - 3,139 - Depreciation and amortization 1,457 1,637 4,005 Gain on sale of fixed assets (50) (6) (4) Goodwill amortization - - 324 Issuance of directors fees in stock 8 - 87 Asset impairment writedown - 900 12,101 Changes in operating assets and liabilities: Accounts receivable 1,476 5,634 6,232 Inventories 1,779 3,434 14,511 Deferred income taxes (250) - - Other current assets (144) 31 149 Accounts payable (1,325) 1,469 (4,320) Accrued expenses (724) (1,362) (649) ------------------------------ Net cash flows from operating activities 4,640 8,092 14,997 ------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (274) (190) (3,120) Proceeds from sale of property 547 61 20 Utilization of restructuring provision for building/equipment - - (40) Proceeds from sale of discontinued operations 875 730 - ------------------------------ Net cash flows from investing activities 1,148 601 (3,140) ------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net change in drafts payable (238) (502) (639) Net payments on revolving credit facilities (4,395) (4,708) (1,884) Proceeds from borrowing 3,500 - - Principal payments on long-term debt (2,781) (4,278) (2,105) Debt issuance costs (263) - - Common stock issued under financing plan 50 - - Proceeds from exercise of stock options 6 - - ------------------------------ Net cash flows from financing activities (4,121) (9,488) (4,628) ------------------------------ Cash (used in) from discontinued operations (827) 951 (7,215) ------------------------------ Change in cash and cash equivalents 840 30 14 Effect of exchange rate changes (47) (30) (14) Cash and cash equivalents, beginning of year - - - ----------------------------- Cash and cash equivalents, end of year $ 793 $ - $ - ============================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 642 $ 1,461 $ 1,860 Income taxes, net of refunds received $ (10) $ - $ (95) Conversion of accounts payable to long-term payable $ 760 $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of accounts payable to debt $ 1,187 $ - $ - The accompanying notes are an integral part of these financial statements.
Page 31 of 79 IEC ELECTRONICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003, 2002 AND 2001 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - ----------------------------------------------------------- Business - -------- IEC Electronics Corp. ("IEC", the "Company") is an independent electronics manufacturing services ("EMS") provider of complex printed circuit board assemblies and electronic products and systems. The Company is a significant provider of high quality electronics manufacturing services with state-of-the-art manufacturing capabilities and production capacity. Utilizing computer controlled manufacturing and test machinery and equipment, the Company provides manufacturing services employing surface mount technology ("SMT") and pin-through-hole ("PTH") interconnection technologies. As an independent full-service EMS provider, the Company offers its customers a wide range of manufacturing and management services, on either a turnkey or consignment basis, including design, prototype, material procurement and control, manufacturing and test engineering support, statistical quality assurance, complete resource management and distribution. The Company's strategy is to cultivate strong manufacturing relationships with established and emerging original equipment manufacturers ("OEMs"). Consolidation - ------------- The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico"), (collectively, "IEC"). Operations in Texas and Mexico were closed in July 2002. All significant intercompany transactions and accounts have been eliminated. Revenue Recognition - ------------------- The Company recognizes revenue upon shipment of product for both turnkey and consignment contracts. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The Company's cash and cash equivalents are held and managed by institutions which follow the Company's investment policy. The fair value of the Company's financial instruments approximates carrying amounts due to the relatively short maturities and variable interest rates of the instruments, which approximate current market interest rates. Long-Lived Assets - ----------------- The Company evaluates its long-lived assets for financial impairment on a regular basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." IEC evaluates the recoverability of long-lived assets not held for sale by measuring the carrying amount of the assets against the estimated discounted future cash flows associated with them. At the time such evaluations indicate that the future discounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Previously, the Company applied the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement required that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Page 32 of 79 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 did not believe that their future cash flows supported 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 fiscal year 2002, the company wrote down the value of its Arab, Alabama facility to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $900,000. During April 2001, IEC initiated a plan to dispose of its Edinburg, Texas facility. In conjunction with this decision, the asset was written down to its estimated recoverable sales value, net of commissions. The effect of this impairment recognition totaled approximately $1.04 million in fiscal 2002. Fair Value of Financial Instruments - ----------------------------------- 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. 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. Amortization of $324,000 was charged against operations for the year ended September 30, 2001. The remaining net goodwill in the amount of $9.6 million, related to the Newark operations was written off in fiscal 2001. Earnings Per Share - ------------------ Net income (loss) per common share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per common share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per common share is calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive stock options, warrants and convertible securities. Foreign Currency Translation - ---------------------------- The assets and liabilities of the Company's foreign subsidiary are translated based on the current exchange rate at the end of the period for the balance sheet and weighted-average rate for the period for the statement of operations. Translation adjustments are recorded as a separate component of equity. Transaction gains or losses are included in operations. Page 33 of 79 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. New Pronouncements - ------------------ 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 adopted this standard on October 1, 2002. Under 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. The adoption of SFAS No. 143 did not 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" ("SFAS No. 144"). SFAS No. 144 supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 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". The Company adopted this standard as of October 1, 2002 with no material effect on its financial position, results of operations or cash flows. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,and 64, Amendment of FASB Statement No. 13, and technical corrections (SFAS No. 145). The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows. In June 2002, the Financial Accounting Standards Board issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 applies to all exit or disposal activities initiated after December 31, 2002. The Company adopted this standard as of January 1, 2003 with no material effect on its financial position, results of operations or cash flows. In November 2002, the EITF reached a consensus on issue 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows. Page 34 of 79 In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148 (SFAS 148), "Accounting for Stock Based Compensation - Transition and Disclosure." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the Statement amends the previous disclosure requirements of SFAS 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported financial results and requires these disclosures in interim financial information. The Company continues to account for stock-based employee compensation under APB Opinion 25, but has adopted the new disclosure requirements of SFAS 148 beginning in the second quarter of fiscal 2003. In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Board Interpretation No. 46 "Consolidation of Variable Interest Entities." (FIN 46). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to January 31, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. In October 2003 the FASB deferred the effective date for applying the provision of FIN 46 until the first interim or annual period ending after December 15, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows. On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). Statement 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows. On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristic of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatory redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments as of September 1, 2003. The Company does not expect that the pronouncement will have a material impact on its financial position, results of operations or cash flows. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform with the current year presentation. 2. INVENTORIES - ------------------- Inventories are stated at the lower of cost (first-in, first-out) or market. The major classifications of inventories are as follows at period end (in thousands): 2003 2002 ------- ------- Raw Materials $ 1,128 $ 2,175 Work-in-process 498 1,214 Finished goods 7 23 -------- -------- $ 1,633 $ 3,412 ======== ======== 3. PROPERTY, PLANT, AND EQUIPMENT - --------------------------------- Property, plant, and equipment are stated at cost and are depreciated over various estimated useful lives using the straight-line method. Page 35 of 79 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. Depreciation and amortization was $1.5 million, $1.8 million, and $4.0 million for the years ended September 30, 2003, 2002 and 2001, respectively. The principal depreciation and amortization lives used are as follows: Estimated Description Useful Lives - ---------------------------- ------------ Land improvements 10 years Buildings and improvements 5 to 40 years Machinery and equipment 3 to 5 years Furniture and fixtures 3 to 7 years 4. ASSET HELD FOR SALE - ---------------------- Included in asset held for sale in 2002 was land and land improvements with a net book value of approximately $114,000 and buildings and improvements with a net book value of approximately $383,000. 5. DISCONTINUED OPERATIONS - ------------------------------ On June 18, 2002, the Company signed an Asset Purchase Agreement to sell substantially all of the assets of Mexico to Electronic Product Integration Corporation (EPI) for $730,000 plus payments of an Earn-out Amount. No such Earn-out amounts were received. In addition, EPI was to pay to the Company commissions based on the net selling price of products shipped to certain former customers. No such commissions were received. Under the terms of a related agreement, the Company and Mexico were also released of all of their lease obligations to the landlord of the Mexican facility. The Company recorded an after-tax loss on the sale of the business of approximately $3.1 million. Net sales of IEC-Mexico were $0, $10.8 million, and $45.9 million for the years ended September 30, 2003, 2002 and 2001, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations. Assets and liabilities of IEC-Mexico to be disposed of consisted of the following at September 30:
2003 2002 ---------- ---------- Accounts receivable $ - $ 141,075 Other current assets 121,465 206,746 --------- ---------- Total current assets 121,465 347,821 Property, plant and equipment, net - 800,000 Other assets - 9,166 --------- ---------- Total non-current assets - 809,166 --------- ---------- Total assets $ 121,465 $1,156,987 ========== =========== Accounts payable $ - $ 668,232 Accrued payroll and related expenses - 37,044 Other accrued expenses 216,071 720,222 ---------- ----------- Total current liabilities $ 216,071 $1,425,498 ========== =========== Net assets to be disposed of $ (94,606) $ (268,511) =========== ===========
6. RESTRUCTURING - ---------------- In June 2002, the Company's Board of Directors approved a restructuring and reduction of workforce plan at its Newark, NY facility. In connection with this restructuring, the Company recorded a $448,000 charge to earnings in fiscal 2002 relating primarily to severance. All remaining charges against the accrual were made by September 30, 2003. Page 36 of 79 In August 1998, the Company announced its plan to close its underutilized Alabama facility. Due to the pending sale of the facility, a benefit of approximately $240,000 was recorded in fiscal 2002 resulting from the reversal of a previously established restructuring reserve which related to building maintenance costs. The Company recorded charges against the accrual of $85,000 in fiscal 2001. 7. LONG-TERM DEBT: - ------------------ Long-term debt consists of the following at September 30 (in thousands): 2003 2002 ------- ------- Senior debt facility $ - $ 1,976 Term loans 1,592 2,420 Vendor term notes 1,075 - Less - Current portion (1,277) (3,128) -------- ------- $ 1,390 $ 1,268 ======== ======= 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. As a result of the January 1, 2003 amendment, the expiration date of the credit agreement was January 17, 2003. As last amended, the credit agreement provided for a revolving credit facility component of $1.0 million. The interest rate on the revolving credit facility was increased at the time of the various amendments and on September 30, 2002 was prime rate plus 3.50%. The second component of the credit facility consisted of a $10 million three-year term loan with monthly principal installments based on a five-year amortization which began in April 2000. The interest rate on the term loan facility was increased at the time of the various amendments and at September 30, 2002 was prime rate plus 4.00%. At September 30, 2002, $3.6 million was outstanding, consisting of $1.1 million and $2.5 million relating to the revolving credit facility and term loan, respectively, with an additional $403,000 available under the revolving credit facility. On January 14, 2003, IEC completed a new $7,300,000 financing composed of a $5,000,000 Senior Secured Facility with Keltic Financial Partners LLP ("Keltic"), a $2,200,000 Secured Term Loan with SunTrust Bank ("SunTrust") and a $100,000 infusion by certain of the IEC directors. The Keltic Facility, which has a 3 year maturity, bears interest at the rate of prime plus 6%. It involves a revolving line of credit for up to $3,850,000 based upon advances on eligible accounts receivable and inventory, a term loan of $600,000, secured by machinery and equipment, to be amortized over a 36 month period and a term loan of $550,000 which was paid in full upon the sale of the facility in February 2003. The SunTrust Term Loan is secured by the assignment of a certain promissory note and a first mortgage on the IEC plant in Newark, New York. It is payable with interest at prime plus 1.5% in monthly installments over a period of 3 years. The prime rate at September 30, 2003 was 4.0%. $0, $467,000, and $1,125,000 were outstanding at September 30, 2003 under the revolving line of credit with Keltic, the term loan with Keltic and the SunTrust loan, respectively. The Keltic and Suntrust loan agreements contain various affirmative and negative covenants including, among other, limitations on the amount available under the revolving line of credit relative to the borrowing base, capital expenditures, fixed charge coverage ratios, and minimum earnings before interest, taxes, depreciation and amortization (EBITDA). In connection with the financing the Company entered into agreement with certain of its trade creditors providing for extended payment terms on past due balances. Aggregate debt maturities over the next five years and thereafter are as follows (in thousands): 2004 $1,277 2005 918 2006 391 2007 67 2008 14 ----------- Total $2,667 Page 37 of 79 8. INCOME TAXES: - ---------------- The provision for (benefit from) income taxes in fiscal 2003, 2002 and 2001 is summarized as follows (in thousands): 2003 2002 2001 ---- ---- ---- Current Federal $ - $ - $ - State/Other (10) - 21 Deferred Federal (188) - - State/Other (62) - - ------ ----- ----- (Benefit from) provision for income taxes, net $ (260) - 21 The components of the deferred tax asset (liability) at September 30 are as follows (in thousands): 2003 2002 2001 ---- ---- ---- Net operating loss and AMT credit carryovers $15,614 $ 14,858 $ 8,167 Asset impairment loss 1,688 1,688 - Accelerated depreciation (1,397) (1,067) (1,255) New York State investment tax credits 3,237 3,237 3,435 Compensated absences 91 119 293 Inventories 90 985 3,609 Receivables 26 151 323 Restructuring reserve 48 470 711 Other 489 666 41 ------ ------ ------ 19,886 21,107 16,354 Valuation allowance (19,636) (21,107) (16,354) ------- ------- ------- $ 250 $ - $ - ====== ======= ======= The Company has a net operating loss carryforward of $45.2 million (expiring in years through 2023). The Company has available approximately $4.9 million in New York State investment tax credits (expiring in years through 2017). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company expects the deferred tax assets, net of the valuation allowance, at September 30, 2003 to be realized as a result of the reversal of existing taxable temporary differences. The differences between the effective tax rates and the statutory federal income tax rates for fiscal years 2003, 2002 and 2001 are summarized as follows: 2003 2002 2001 ---- ---- ---- Federal Tax (Benefit) at statutory rates 34.0% (34.0)% (34.0)% Goodwill adjustments - - 1.5 Provision for state taxes, net of Federal Benefit 5.0 - - Life Insurance - - (8.5) Other 0.1 1.8 0.2 Utilization of NOL Carryforwards (39.0) - - Valuation Allowance (12.1) 33.9 39.2 ------- ------ ------- (12.1)% -% -% Page 38 of 79 9. SHAREHOLDERS' EQUITY: - ------------------------ Stock-Based Compensation Plans In December 2001, the Board of Directors authorized the 2001 Stock Option and Incentive Plan, reserving 1,500,000 shares of common stock for issuance to directors, officers, consultants or independent contractors providing services to the Company and key employees. This plan superceded a similar plan that was adopted in 1993. The option price for incentive options must be at least 100 percent of the fair market value at date of grant, or if the holder owns more than 10 percent of total common stock outstanding at the date of grant, then not less than 110 percent of the fair market value at the date of grant. The Plan was approved by shareholders in February 2002. In conjunction with the approval of this plan, no further grants will be made under the 1993 SOP and the 1993 SOP was terminated. Stock options issued under the 2001 plan terminate five years from date of grant. Generally, incentive stock options granted during the period between July 1995 through September 2003 vest in increments of 25 percent. Nonqualified stock options granted during fiscal years 1999 to 2003 vest in increments of 33 1/3 percent. Changes in the status of options under the SOP at September 30, are summarized as follows: Weighted Shares Average Under Exercise Available September 30, Option Price for Grant Exercisable ------------- ---------- -------- ---------- ----------- 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 Options authorized 1,500,000 Options terminated (246,300) Options granted 338,250 0.07 Options exercised - - Options forfeited (530,100) 2.68 ---------- 2002 870,850 2.27 1,171,250 362,283 Options granted 643,200 0.61 Options exercised (34,500) 0.17 Options forfeited (168,750) 4.26 ---------- 2003 1,310,800 242,916 649,908 The following table summarizes information about stock options outstanding as of September 30, 2003: 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 2003 Life Price 2003 Price - -------------- ---------------- ---------- --------- ---------------- --------- $ 0.070 - $ 0.090 431,500 3.947 $ 0.076 326,083 $ 0.074 $ 0.200 - $ 0.210 70,000 5.602 $ 0.206 20,000 $ 0.203 $ 0.400 85,700 6.526 $ 0.400 - $ - $ 0.520 - $ 0.730 37,000 5.420 $ 0.619 9,875 $ 0.540 $ 0.950 335,000 5.390 $ 0.950 - $ - $ 1.313 - $ 1.500 137,000 3.314 $ 1.418 112,000 $ 1.442 $ 1.625 - $ 1.875 65,500 3.969 $ 1.646 34,750 $ 1.655 $ 2.500 - $ 3.875 40,100 2.416 $ 3.637 38,200 $ 3.656 $ 6.25 86,000 0.082 $ 6.250 86,000 $ 6.250 $ 9.75 23,000 0.625 $ 9.750 23,000 $ 9.750 ------------- ------------ 1,310,800 649,908 ============= ============ Page 39 of 79 The weighted average fair value of options granted during fiscal 2003, 2002 and 2001 was $0.14, $0.05 and $0.97, respectively. The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.30 percent, 4.40 percent and 5.19 percent, for fiscal 2003, 2002 and 2001, respectively; volatility of 76.55 percent, 57.68 percent and 78.76 percent for fiscal 2003, 2002 and 2001, respectively; and expected option life of 6.5 years, 5.0 years and 6.7 years for fiscal 2003, 2002 and 2001, respectively. The dividend yield was 0 percent. Forfeitures are recognized as they occur. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation expense has been recognized for its stock-based compensation plans. Had the Company recognized compensation cost based upon the fair value at the date of grant for awards under its plans consistent with the methodology prescribed by SFAS No. 123, net income (loss) and net income (loss) per common and common equivalent share would have been as follows for years ended September 30 (in thousands, except per share data): 2003 2002 2001 ------------------- ----------------- ----------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ------ -------- ------- -------- ------- Net income (loss) $ 2,597 $ 2,539 $(10,979) $(10,940) $(29,272) $(29,503) ========= ========= ========= ========== ========= ========= Net income (loss) per common and common equivalent share: Basic $ 0.33 $ 0.32 $ (1.43) $ (1.42) $ (3.83) $ (3.86) ======== ======== ========= ========= ========= ======== Diluted $ 0.31 $ 0.29 $ (1.43) $ (1.42) $ (3.83) $ (3.86) ======== ======== ========= ========= ========= ========
Because the SFAS No. 123 method of accounting had not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Treasury Stock The treasury balance is 573 shares with a book value of $11,000. 10. MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS: - --------------------------------------------------- Financial instruments which potentially subject the Company to concentrations of a significant credit risk consist primarily of cash, cash equivalents, and trade accounts receivable. The Company has concentrations of credit risk due to sales to its major customers. The Company's revenues are derived primarily from sales to customers in the industrial and telecommunications industries and are concentrated among specific companies. For the fiscal year ended September 30, 2003, two customers accounted for 55 percent and 32 percent of the Company's net sales. For the fiscal year ended September 30, 2002, two customers accounted for 44 percent and 23 percent of the Company's net sales. For the fiscal year ended September 30, 2001, four customers accounted for 18 percent, 17 percent, 15 percent and 14 percent of the Company's net sales. At September 30, 2003, amounts due from two customers represented 34 percent and 32 percent of trade accounts receivable. At September 30, 2002, amounts due from three customers represented 34 percent, 26 percent and 20 percent of trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial positions and generally does not require collateral. Page 40 of 79 11. COMMITMENTS AND CONTINGENCIES: - ---------------------------------- Lease Commitments Effective March 28, 2001, the Company exercised a five-year lease agreement with a five-year renewal option at the Reynosa facility. In June 2002, in conjunction with the sale of IEC-Mexico, IEC and IEC-Mexico were released of all their lease obligations related to the Mexican facility. Rental expense for the Mexico facility was $0, $54,000, and $465,000 for fiscal 2003, 2002 and 2001, respectively. These amounts are included in discontinued operations. As of September 30, 2003, the Company was obligated under non-cancelable operating leases, primarily for manufacturing and office equipment. These leases generally contain rental options and provisions for payment of the lease for executory costs (taxes, maintenance and insurance). Rental expenses on equipment were $187,000, $352,000, and $178,000 for fiscal 2003, 2002 and 2001, respectively. Litigation - ---------- An action was commenced in United States District Court for the Southern Division of Texas against IEC and several other corporate defendants, on August 12,2002. The plaintiffs allege a "toxic tort" action against the defendants, for exposure to lead, lead dust, chemicals and other substances used in the manufacture of products by various defendants. The essence of the complaint relates to alleged "in utero" exposure to the circulatory system of the then unborn children, resulting in alleged tissue toxicity through the mothers, causing damage to the central nervous system, brain and other organs of the fetus. The complaint alleges theories of negligence, gross negligence, strict liability, breach of warranty and fraud/negligent misrepresentation, and claims unspecified damages for pain and suffering, a variety of special damages, punitive damages and attorneys' fees. Royal & Sunalliance Insurance Company has agreed to provide a defense of the claims with a reservation of rights, but has expressly excluded any coverage for the claim for punitive damages. The Company has denied liability and the case is still in the discovery phase. A trial is tentatively scheduled for March 2004. On August 13, 2003 an action was commenced by General Electric Company ("GE"), in the state of Connecticut against IEC and Vishay Intertechnology, Inc. The action alleges causes of action for breach of a manufacturing services contract which had an initial value of $4.4 million, breach of express warranty, breach of implied warranty and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a component that IEC used to assemble printed circuit boards for GE that GE contends failed to function properly requiring a product recall. GE claims damages "in excess of $15,000" plus interest and attorneys' fees. IEC has made a motion to dismiss the action in Connecticut for lack of jurisdiction and the motion is pending. The position of the Company is that the contract with GE was substantially completed and that it has meritorious defenses and a cross claim against Vishay. 12. RETIREMENT PLAN: - -------------------- The Company has a retirement savings plan, established pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. This plan is for the exclusive benefit of its eligible employees and beneficiaries. Eligible employees may elect to contribute a portion of their compensation each year to the plan. Effective June 1, 1998, The Board of Directors approved a change in the employer match from 33 percent of the amount contributed by participant to 100 percent of the first 3 percent of employee contributions, and 50 percent of the next 3 percent of employee contributions. The match is discretionary and was suspended indefinitely as of October 1, 2001. There was no matching contribution made for fiscal 2002 or 2003. The matching Company contribution was approximately $608,000 for the year ended September 30, 2001. 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 2003, 2002, or 2001. Page 41 of 79 13. SUBSEQUENT EVENTS: - ---------------------- There have been no material subsequent events. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- ---------- (in thousands, except per share data) YEAR ENDED SEPTEMBER 30,2003: Net sales $ 9,601 $15,469 $14,030 $ 9,101 Gross profit 989 1,246 1,808 886 Net income from continuing operations 443 542 853 575 Net income from discontinued IEC-Mexico operations - 184 - - Net income 443 726 853 575 Earnings per share from: Continuing operations Basic 0.06 0.07 0.11 0.07 Diluted 0.06 0.07 0.10 0.07 Discontinued IEC-Mexico operations Basic - 0.02 - - Diluted - 0.02 - - ------ ------ ------ ------ Net income Basic $ 0.06 $ 0.09 $ 0.11 $ 0.07 ====== ====== ====== ====== Diluted $ 0.06 $ 0.09 $ 0.10 $ 0.07 ====== ====== ====== ====== YEAR ENDED SEPTEMBER 30,2002: Net sales $11,209 $13,478 $ 6,038 $ 8,640 Gross profit (loss) 379 (269) 416 1,771 Net (loss) income from continuing operations (1,073) (2,394) (1,697) 1,393(1) Net (loss) income from discontinued IEC-Mexico operations (1,089) (1,436) (5,171) 488(2) Net (loss) income (2,162) (3,830) (6,868) 1,881 Basic and diluted EPS Continuing operations (0.14) (0.31) (0.22) 0.18 Discontinued IEC-Mexico operations (0.14) (0.19) (0.67) 0.06 ------ ------ ------ ------ Net (loss) income $ (0.28) $ (0.50) $ (0.89) $ 0.24 ====== ====== ====== ====== (1) Included in this amount for the fourth quarter is the $1.1 million received from Acterna Corporation as discussed in Management's Discussion and Analysis in Item 7. (2) Included in this amount for the fourth quarter is the $1.3 million reversal of the estimate to dispose of IEC-Mexico offset by the $1.0 million write down of the Texas facility as discussed in Management's Discussion and Analysis in Item 7. Page 42 of 79 EX-10.28 3 ex1028for0310k.txt IEC AND KELTIC AGREEMENT Exhibit 10.28 LOAN AGREEMENT between IEC ELECTRONICS CORP. and KELTIC FINANCIAL PARTNERS, LP Dated: January 14, 2003 LOAN AGREEMENT This LOAN AGREEMENT is made this 14th day of January, 2003 between IEC ELECTRONICS CORP. ("Borrower"), a corporation organized and existing pursuant to the laws of the State of Delaware having an address at 105 Norton Street, Newark, New York 14513, and KELTIC FINANCIAL PARTNERS, LP ("Lender"), a Delaware limited partnership, with a place of business at 555 Theodore Fremd Avenue, Suite C-207, Rye, New York 10580 (the "Agreement"). W I T N E S S E T H: WHEREAS, Borrower has requested that Lender extend a $3,850,000 and 00/100 revolving credit facility and two term loans, one in the amount of $600,000, and a second in the amount of $550,000, the proceeds of which will be used to repay existing indebtedness and to provide Borrower with working capital support. WHEREAS, Lender is willing to extend such revolving credit facility and term loans on the terms and subject to the conditions set forth in this Agreement. AGREEMENT 1. DEFINITIONS - As used herein, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): 1.1. "Account Debtor" - shall mean any Person who is or may become obligated under or on account of any Receivable. 1.2. "Advance" - shall mean any loan or advance made by Lender in connection with the Revolving Loan. 1.3. "Affiliate" - with respect to a Person, shall mean any other Person: (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person; (ii) which beneficially owns or holds 5% or more of any class of the voting stock or other equity interest in such Person; or (iii) 5% or more of the voting stock or other equity interest of which is beneficially owned or held by such Person. For purposes hereof, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock or other equity interests, by contract or otherwise. 1.4. "Authenticate" - shall mean to sign or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present interest of the authenticating person to identify the person and adopt or accept a Record. 1.5. "Banking Day" - shall mean any day on which commercial banks are not authorized or required to close in New York State. 1.6. "Banking Accounts" - as defined in Section 5.24 of this Agreement. 1.7. "Borrower" - shall mean IEC Electronics Corp. 1.8. "Borrowing Base Certificate" - shall mean a borrowing base certificate substantially in the form of Exhibit E attached hereto. 1.9. "Capital Expenditure" - shall mean, as determined in accordance with GAAP, the dollar amount of gross expenditures (including obligations under capital leases) made or incurred for fixed assets, real property, plant and equipment, and all renewals, improvements and replacements thereto (but not repairs thereof) during any period. 1.10. "Carry Forward Amount" - shall mean, as of the end of any fiscal quarter, the amount equal to 50% of the dollar amount (not including any other Carry Forward Amount), if any, that caused the Fixed Coverage Ratio as of the end of the immediately preceding fiscal quarter to exceed 1.00 to 1.00. 1.11. "Code" - shall mean the Internal Revenue Code of the United States. 1.12. "Collateral" - shall mean all of the Property and interests in Property described in the General Security Agreement, and all other personal property of Borrower and interests of Borrower in personal property that now or hereafter secures the payment and performance of any of the Obligations pursuant to any of the Loan Documents or otherwise including, without limitation, any proceeds and insurance proceeds of the foregoing. Page 1 of 21 Page 43 of 79 1.13. "Contract Year" - shall mean, during the term of the Loans, each consecutive twelve (12) month period commencing on the date hereof and, in each case, ending on the date which is one day prior to the applicable anniversary date hereof. 1.14. "Default" - shall mean an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default, whether or not Lender has declared an Event of Default to have occurred. 1.15. "EBITDA" - shall mean Borrower's total income before interest expense, taxes, depreciation and amortization, all determined on a consolidated basis and calculated in accordance with GAAP. 1.16. "Eligible Inventory" - shall mean Inventory which has been identified and described to Lender's reasonable satisfaction, is represented by Borrower (by its acceptance of Revolving Loans thereon) as meeting all of the following criteria on the date of any Revolving Loan based thereon and thereafter while any Obligation is outstanding, and is in all other respects acceptable to Lender: (a) Borrower is the sole owner of the Inventory; none of the Inventory is being held or shipped by Borrower on a consignment or approval basis; Borrower has not sold, assigned or otherwise transferred all or any portion thereof; and none of the Inventory is subject to any claim, lien or security interest. (b) If any of the Inventory is represented or covered by any document of title, instrument or chattel paper, Borrower is the sole owner of all such documents, instruments and chattel paper, all thereof are in the possession of Borrower, none thereof has been sold, assigned or otherwise transferred, and none thereof is subject to any claim, lien or security interest; and (c) The Inventory shall consist of saleable non-obsolete, commodity type raw materials that are earmarked for specific orders, is not Arrow Inventory and is not excess as shown on the Borrower's Excess Stock Report, and finished goods, manufactured or acquired by Borrower in the ordinary course of Borrower's business, as conducted on the date hereof, subject to its contract or sole possession and located in compliance with Section 5.15 of this Agreement or at locations for which landlord or bailee waivers in form and substance acceptable to Lender have been executed and delivered by such landlord or bailee to Lender. "Arrow Inventory" means any Inventory purchased from Arrow Electronics, Inc., or its Affiliates. 1.17. "Eligible Receivables" - shall mean and include only Receivables of Borrower, the records and accounts of which are located in compliance with Section 5.14 of this Agreement, are acceptable to Lender in Lender's reasonable discretion, arise out of sales in the ordinary course of Borrower's business, made by Borrower to a Person which is not an Affiliate of Borrower nor an employee of Borrower nor controlled by an Affiliate of Borrower, which are not in dispute and which do not then violate any warranty with respect to Eligible Receivables set forth in the General Security Agreement. No Receivable shall be an Eligible Receivable if more than 90 days (except in the case of Motorola Inc., 60 days) have passed since the original invoice date and the Inventory covered by such Receivable were shipped to the customer on or prior to the invoice date, or the services described in such invoice were provided on or prior to the invoice date. Lender may treat any Receivable as ineligible if: (a) any warranty contained in this Agreement or in the General Security Agreement with respect to Eligible Receivables or any warranty with respect to such Receivable contained in this Agreement or in the General Security Agreement has been breached; or (b) the Account Debtor or any Affiliate of the Account Debtor has disputed liability, or made any claim with respect to such Receivable or with respect to any other Receivable due from such customer or Account Debtor to Borrower; provided, however, only such portion of the Receivable which is disputed or subject to a claim shall be treated as ineligible unless Lender reasonably determines in its discretion that there is a material risk of nonpayment (or Lender is unable to assess the risk of nonpayment) of the entire Receivable or any other Receivable pending resolution of such dispute or claim, in which case Lender may treat the entire Receivable or such other Receivable as ineligible; or (c) the Account Debtor or any Affiliate of the Account Debtor has filed a case for bankruptcy or reorganization under the Bankruptcy Code, or if any case under the Bankruptcy Code has been filed against the Account Debtor or any Affiliate of the Account Debtor, or if the Account Debtor or any Affiliate of the Account Debtor has assigned for the benefit of creditors, or if the Account Debtor or any Affiliate of the Account Debtor has failed, suspended business operations, become insolvent, or had or suffered a receiver or a trustee to be appointed for all or a significant portion of its assets or affairs; or (d) if the Account Debtor is also a supplier to or creditor of Borrower or if the Account Debtor has or asserts any right of offset with respect to any Receivable or asserts any claim or counterclaim against Borrower with respect to any Page 2 of 21 Page 44 of 79 Receivable or otherwise; or (e) the sale is to an Account Debtor outside the United States or Canada, unless the sale is on letter of credit, acceptance or other terms acceptable to Lender; or (f) 50% or more of the Receivables of any Account Debtor and its Affiliates is ineligible, then all the Receivables of such Account Debtor and its Affiliates may be deemed ineligible by Lender under this Agreement; or (g) the total unpaid Receivables of the Account Debtor for such Receivable and its Affiliates exceeds the Concentration Cap for such Account Debtor, to the extent of such excess. "Concentration Cap" means for (a) Motorola , Inc., 50% for the six month period immediately following the date of this Agreement, and thereafter 30%, of the net amount of all Receivables; (b) for Teradyne, Inc., 30% (determined without including the Receivables of Teradyne UK) of the net amount of all Receivables ; and (c) for any other Account Debtor, 15% of the net amount of all Receivables. The higher Concentration Caps are provided for Motorola, Inc. and Teradyne, Inc. subject to the conditions that (x) Borrower shall monitor closely their respective financial condition, (y) Borrower shall provide Lender periodic updates with respect to their respective financial condition and (c) should there be any material deterioration in their respective financial condition, Lender may lower the applicable Concentra tion Cap percentage and may require Borrower to take other steps to mitigate collection risks. The foregoing conditions do not limit any other provision of this Agreement providing a basis for determining that a Receivable is an ineligible Receivable or otherwise providing Lender rights. (h) it relates to a sale of goods or services to the United States of America, or any agency or department thereof, unless Borrower assigns its right to payment of such Receivable to Lender, in form and substance satisfactory to Lender, so as to comply with the Assignment of Claims Act of 1940, as amended; or (i) it relates to sale of goods or services to a state or local governmental authority or an agent or department thereof; or (j) it relates to intercompany sales, employee sales or any Receivable due from an Affiliate of Borrower; or (k) it consists of a sale to an Account Debtor on consignment, bill and hold, guaranteed sale, sale or return, sale on approval, payment plan, scheduled installment plan, extended payment terms or any other repurchase or return basis; or (l) the Account Debtor is located in a state in which Borrower is deemed to be doing business under the laws of such state and which denies creditors access to its courts in the absence of qualifications to transact business in such state or of the filing of any reports with such state, unless Borrower has qualified as a foreign corporation authorized to do business in such state or has filed all required reports; or (m) the Receivable is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (n) the Receivable arises from a sale of goods or services to an individual who is purchasing such goods primarily for personal, family or household purposes; or (o) if Lender believes, in its reasonable discretion, that collection of such Receivable is insecure or that such Receivable may not be paid by reason of the Account Debtor's financial inability to pay. 1.18. "Environment" - shall mean any water or water vapor, any land surface or subsurface, air, fish, wildlife, biota and all other natural resources. 1.19. "Environmental Laws" - shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the Environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of "hazardous substances" and the rules, regulations, policies, guidelines, interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. 1.20. "ERISA" - shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.21. "Events of Default" - shall have the meaning set forth in Article 12 of this Agreement. Page 3 of 21 Page 45 of 79 1.22. "Excess Cash Flow" - shall mean, with respect to a Fiscal Year, EBITDA for such Fiscal year, less (a) the portion of capital expenditures for such Fiscal Year Paid in Cash during such Fiscal Year, (b) regularly scheduled principal and interest payments on term debt, (including subordinated notes held by trade creditors) Paid in Cash during such Fiscal Year, (c) taxes Paid in Cash during such Fiscal Year and (d) non-cash credits included in calculating EBITDA. The phrase "Paid in Cash" in the foregoing definition means paid with cash from operations, not from (x) the proceeds of sale of any asset, other than inventory in the ordinary course of business, or (y) any loan, capitalized obligation or lease, other than the Revolving Loan, and determined on a cash basis without regard to whether or not the expense was accrued during such Fiscal Year. 1.23. "First Contract Year" - means the period from the date of this Agreement to but not including January 15, 2004. 1.24. "Fiscal Year" - shall mean with respect to any Person, a year of 365 or 366 days, as the case may be, ending on the last day of September 30 in any calendar year. 1.25. "Fixed Charge Coverage Ratio" - shall mean, with respect to a fiscal quarter, the ratio of EBITDA for such fiscal quarter, plus beginning with the quarter ending September 30, 2003, the Carry Forward Amount for such fiscal quarter, over the sum of (i) interest and fees on Indebtedness, (ii) principal on any loans, (iii) principal on any other indebtedness, (iv) capital expenditures, (v) taxes, (vi) cash dividends, and (vii) distributions paid on subordinated debt or equity, in each case paid or payable during such fiscal quarter. 1.26. "GAAP" - shall mean generally accepted accounting principles consistently applied and maintained throughout the period indicated and consistent with the prior financial practice of Borrower, except for changes mandated by the Financial Accounting Standards Board or any similar accounting authority of comparable standing. Whenever any accounting term is used herein which is not otherwise defined, it shall be interpreted in accordance with GAAP. 1.27. "General Security Agreement" - shall mean the general security agreement dated the date hereof executed and delivered by Borrower to Lender. 1.28. "Governmental Rules" - shall have the meaning given to such term in Section 5.25 of this Agreement. 1.29. "Indebtedness" - shall mean and include all obligations for borrowed money of any kind or nature, including funded debt and unfunded liabilities, contingent obligations under guaranties or letters of credit, and all obligations for the acquisition or use of any fixed asset, including capitalized leases, or improvements which are payable over a period longer than one year, regardless of the term thereof or the Person or Persons to whom the same is payable. 1.30. "Initial Success Fee"- shall mean $250,000, or if the Texas Real Property is sold on or before February 28, 2003, $200,000. 1.31. "Inventory" - shall have the meaning given to such term in the General Security Agreement. 1.32. "Loan Documents" - shall mean this Agreement, the General Security Agreement, and all other documents and instruments to be delivered by Borrower or any other Person under this Agreement or in connection with the Loans or any other Indebtedness or Obligations of Borrower to Lender, as the same may be amended, modified or supplemented from time to time. 1.33. "Loan Interest Rate" - shall mean, the per annum interest rate equal to the prime rate published in the "Money Rates" column of The Wall Street Journal from time to time or, in the event that The Wall Street Journal is not available at any time, such rate published in another publication as determined by Lender, plus 200 basis points. 1.34. "Loans" - shall mean the loans and advances made by Lender under this Agreement, including all Advances and the Term Loans. 1.35. "Lockbox" - shall mean the account established by Borrower pursuant to the lockbox agreement among Borrower, Lender and a financial institution with which Borrower maintains a depository account into which the proceeds of all Collateral are to be deposited. Page 4 of 21 Page 46 of 79 1.36. "Material Adverse Effect" - shall mean any effect, as determined by Lender in its discretion, that could reasonably be expected to be materially adverse to (a) the business, assets, operations, prospects or condition, financial or otherwise, of Borrower or any guarantor(s), if any taken as a whole; (b) Borrower's or any guarantor's, if any, ability to pay or perform the Obligations in accordance with their terms; (c) the value, collectability or salability of the Collateral or the perfection or priority of Lender's liens; (d) the validity or enforceability of this Agreement or any of the Loan Documents; or (e) the practical realization of the benefits, rights and remedies inuring to Lender under this Agreement or under the Loan Documents. 1.37. "Maximum Facility" - shall mean $3,850,000. 1.38. "Net Proceeds of Sale" - shall mean the gross purchase price of the Texas Real Property less the direct expenses of sale of the Texas Real Property. 1.39. "Obligations" - shall mean and include all loans (including the Loans), advances, debts, liabilities, obligations, covenants and duties owing by Borrower to Lender or any Affiliate of Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under this Agreement, the other Loan Documents or under any other agreement or by operation of law, whether or not for the payment of money, whether arising by reason of an extension of credit, opening, guaranteeing or confirming of a letter of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by purchase or assignment), absolute or contingent, due or to become due, now due or hereafter arising and howsoever acquired including, without limitation, all interest, charges, expenses, commitment, facility, collateral management or other fees, attorneys' fees and expenses, consulting fees and expenses and any other sum chargeable to Borrower under this Agreement, the other Loan Documents or any other agreement with Lender. 1.40. "Notice of Borrowing" - shall mean a borrowing request in a Record substantially in the form of Exhibit D attached hereto. 1.41. "Person" - shall mean an individual, partnership, limited liability company, limited liability partnership, corporation, joint venture, joint stock company, land trust, business trust or unincorporated organization, or a government or agency or political subdivision thereof. 1.42. "Plan" - shall mean an employee benefit plan or other plan now or hereafter maintained for employees of Borrower or any subsidiary of Borrower and covered by Title IV of ERISA. 1.43. "Property" - shall have the meaning given such term in the General Security Agreement. 1.44. "Receivables" - shall have the meaning given to such term in the General Security Agreement. 1.45. "Reconciliation Report" - shall mean a report in form satisfactory to Lender, reconciling Borrower's month-end Receivable agings, payable agings and Inventory listings to Borrower's monthly financial statements, and including bank reconciliations. 1.46. "Record" - shall mean information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. If Lender so specifies with respect to a particular type of Record, that type of Record shall be signed or otherwise authenticated by Borrowers. 1.47. "Remainder Success Fee" - shall mean 50% of the dollar amount equal to the excess of (a) the Net Proceeds of Sale over (b) $800,000. 1.48. "Reportable Event" - shall have the meaning assigned to that term in Title IV of ERISA. 1.49. "Revolving Loan" - shall mean the Advances to be made by Lender to Borrower pursuant to Section 2.1 of this Agreement, and all interest thereon and all fees, costs and expenses payable by Borrower in connection therewith. 1.50. "Revolving Note" - shall mean, the promissory note substantially in the form annexed hereto as Exhibit A, to be given by Borrower to Lender to evidence the Revolving Loan. 1.51. "Second Contract Year" - means the period from January __, 2004 Agreement to but not including January __, 2005. Page 5 of 21 Page 47 of 79 1.52. "Solvent" - shall mean when used with respect to Borrower, that Borrower, after giving effect to this Agreement and the concurrent closing of a $2.3 million term loan from Suntrust Bank, (i) will be able to pay all of its Indebtedness as such Indebtedness matures, and (ii) will have sufficient working capital to carry on its then existing business. 1.53. "Term Loans" - shall mean collectively the term loans made by Lender pursuant to the terms of this Agreement as forth in Section 2.2 below. 1.54. "Termination Date" - shall mean the earlier of the date which is 3 years from the date hereof, or the date on which Lender terminates this Agreement pursuant to Section 12.1 of this Agreement. 1.55. "Termination Notice" - as defined in Section 3.6 of this Agreement. 1.56. "Texas Real Property" - shall mean the real property of Borrower located in Edinburgh, Texas. 1.57. "Third Contract Year" - shall mean the period from January 15, 2005 Agreement to but not including January 15, 2006. 1.58. "Total Facility" - shall mean $5,000,000. 1.59. "UCC" - means the Uniform Commercial Code as in effect from time to time. 2. THE LOANS. 2.1. Advances of the Revolving Loan.- Subject to the terms and conditions of this Agreement and relying upon the representations and warranties set forth in this Agreement, for so long as no Default or Event of Default exists, Lender shall lend to Borrower on its request, a sum ("Borrowing Capacity") equal to the lesser of: (a) the Maximum Facility, or (b) the sum of (i) up 85 % of the net face amount of Borrower's Eligible Receivables and (ii) the lesser of $750,000 or 25% of the Value of Borrower's Eligible Inventory, but the amount computed under this clause (ii) shall in no event exceed 40% of the sum of the amounts computed pursuant to clause 2.1(b). Value shall mean the lesser of cost or the fair market value of such Inventory. Within the limits of the Borrowing Capacity, and subject to the limitations set forth in this Agreement, Borrower may borrow, repay and reborrow Advances. 2.2. Term Loans.- Lender shall make a loan to the Borrower on the date hereof in the amount of $600,000 ("Equipment Loan"). The Equipment Loan shall be payable in accordance with the terms of a term note attached hereto as Exhibit B-1. Lender shall also make a loan to Borrower on the date hereof in the amount of $550,000 ("Real Estate Loan"). The Real Estate Loan shall be payable in accordance with the terms of a term note attached hereto as Exhibit B-2. 2.3. Overline. - Borrower acknowledges that Lender has advised Borrower that Lender does not intend to permit Borrower to receive Advances at any time in an outstanding principal amount exceeding either the Borrowing Capacity or the Maximum Facility; however, it is agreed that should the outstanding principal balance of Advances exceed either then, all such Obligations shall (a) constitute Obligations under this Agreement, (b) be entitled to the benefit of all security and protection under this Agreement and the other Loan Documents, (c) be secured by the Collateral and (d) be payable immediately without notice or demand by Lender. 2.4. Reserves. - The Borrowing Capacity shall be subject to such reserves as Lender shall deem necessary and proper in Lender's discretion. Reserves may be established by Lender from time to time in such manner (including reduction of the advance rates set forth in Subsection 2.1(b) above) and for such reasons as Lender may determine from time to time in Lender's reasonable discretion. In addition, Lender may establish a reserve against the Borrowing Capacity to mitigate risk if there is a material deterioration in the ratio of the net auction value of Borrower's equipment to the balance of the Equipment Loan (as defined in Section 2.2 hereof), as determined based on an updated appraisal obtained by Lender. Payments, deposits, guaranties or indemnifications made by Lender under any reimbursement agreement, guaranty or similar instrument made in respect of any such instrument may be treated by Lender as Advances to Borrower under this Agreement. Page 6 of 21 Page 48 of 79 2.5. Manner of Borrowing. - (a) Revolving Loan. Each Advance shall be requested in an Authenticated Record sent via facsimile or electronic transmission including, without limitation, via e-mail by a Notice of Borrowing executed by an authorized officer of Borrower, not later than 12:00 p.m. Eastern Time on any Banking Day on which an Advance is requested. Provided that Borrower shall have satisfied all conditions precedent set forth in this Agreement, including the reaffirmation of the representations and warranties and covenants as required under Article 10 of this Agreement, and Borrower shall have sufficient Borrowing Capacity to permit an Advance under this Agreement in accordance with Section 2.1 of this Agreement, Lender shall make the Advance to Borrower in the amount requested in the Record by Borrower in immediately available funds for credit to any account of Borrower (other than a payroll account) at a bank in the United States of America as Borrower may specify (provided, however, that Borrower shall pay Lender its usual and customary fees for such transfer). Lender shall not be responsible for any failure of any amount so transferred to be credited to any such account, unless such failure is due to Lender's gross negligence or willful misconduct. (b) Term Loans. The Term Loans shall be advanced in a single advance on the date of this Agreement. 2.6. Evidence of Borrower's Obligations. - Borrower's obligation to pay the principal of, and interest on, the Advances made to Borrower shall be evidenced by the Revolving Note executed by Borrower and delivered to Lender. 2.7. Payments. - All payments with respect to the Obligations shall either be charged by Lender to Borrower's account, charged as an Advance or made by Borrower to Lender in U.S. currency and without any defense, offset or counterclaim of any kind, at 555 Theodore Fremd Avenue, Suite C-207, Rye, New York 10580, or to such other address as Lender shall specify, by 12:00 noon New York, New York time on the date when due. Whenever any payment to be made shall otherwise be due on a day that is not a Banking Day, such payment shall be made on the next succeeding Banking Day and such extension of time shall be included in computing interest in connection with any such payment. Lender may make an Advance to reimburse itself for any payments on the Obligations (including fees and expenses payable by Borrower), which are not paid when due, without notice or demand to Borrower. Any delay or failure by Lender submitting any invoice for such interest or fee or in the making of an Advance against the Re volving Loan shall not discharge or relieve Borrower of its obligation to make such interest or fee payment. 2.8. Collections/Balance/Statements/etc. (a) Collection and Remittance. (i) Borrower covenants and agrees to open a Lockbox over which Lender shall have the sole power of withdrawal. (ii) All proceeds of Collateral whether cash, checks, drafts, notes, acceptances or other forms of payment, if received by Borrower, shall be received by Borrower in trust for Lender, and Borrower agrees to deliver or cause to be delivered, such payments forthwith, in the identical form in which received, to Lender or to the Lockbox, as Lender shall require from time to time. (iii) Collected funds in the Lockbox shall be swept daily and the proceeds deposited to an account of Lender or Borrower as Lender shall elect. (b) Determination of balance of Loans. In determining the outstanding balance of the Loans, (i) available funds received from the Lockbox in the Lender's account at Fleet Bank, Account Name: Keltic Financial Partners, LP; Account No. 9428395446, ABA #011 900 571 (or such other account as Lender may direct from time to time), before 2 p.m. Eastern Time of a Banking Day will be applied on that Banking Day, and if after 2:00 p.m., on the next Banking Day, as follows: (A) First, to unpaid interest, (B) second to unpaid fees and expenses; (C) third to the outstanding principal balance of the Revolving Loan, and (D) fourth to all other Obligations then due and payable in such order as Lender shall elect; (ii) any other form of funds received by Lender will be credited on the Banking Day when Lender has received notification that such funds are collected and available to Lender if before 2 p.m. (Eastern Time), and thereafter on the following Banking Day; (iii) all credits shall be condition al upon final payment to Lender in cash or solvent credits of the items giving rise to them and, if any item is not so paid, the amount of any credit given for it shall be charged to the balance of the Loans whether or not the item is returned; and (iv) for the purpose of computing interest on the Loans and other Obligations, interest shall continue to accrue on the amount of any payment applied to Borrower's Loans by Lender, during the First Contract Year, for a period of 3 Banking Days after the date so credited, during the Second Contract Year, for a period 2 Banking Days after the date so credited, and during the Third Contract Year, for a period of 1 Banking Day after the date so credited 2.9. Payment on Termination Date. - Notwithstanding anything herein to the contrary, the entire outstanding principal balance of the Loans, plus all accrued and unpaid interest thereon and all fees and other amounts payable under this Agreement and the Loan Documents, shall be due and payable in full, on the Termination Date. Page 7 of 21 Page 49 of 79 3. LENDER'S COMPENSATION. 3.1. Interest on Loans. - Borrower shall pay interest monthly, in arrears, on the first day of each month, commencing January 1, 2003 on the average daily unpaid principal amount of the Revolving Loan, and on the principal balance of the Term Loans, at a fluctuating rate which is equal to the Loan Interest Rate. Notwithstanding the foregoing, on and after the occurrence of a Default or Event of Default, Borrower shall pay interest on the Loans at a rate which is 3.5% per annum above the Loan Interest Rate; provided, however, in no event shall any interest to be paid under this Agreement or under any Loan Document exceed the maximum rate permitted by law. 3.2. Commitment and Closing Fee. - Borrower shall have paid to Lender on or before the date of this Agreement $95,500 as a commitment and closing fee, and shall pay to Lender on the date 6 months following the date of this Agreement an additional closing and commitment fee of $25,000. 3.3. Facility Fee. - Borrower shall pay to Lender monthly, in arrears, on the first day of each month a facility fee in an amount equal to 1 % per annum of the Total Facility, which facility fee is deemed earned in full for each year on the date hereof and on each anniversary hereof. 3.4. Collateral Management Fee. - Borrower shall pay to Lender monthly, in arrears, on the first day of each month, a collateral management fee in an amount of $1,500. 3.5. Field Examination Fees. - Borrower shall promptly reimburse Lender for all costs and expenses associated with periodic field examinations and fixed asset appraisals performed by Lender and its agents, as deemed necessary by Lender; provided, however, the cost of field examinations for which Borrower is responsible shall not exceed in any one year $12,000 so long as an Event of Default has not occurred. 3.6. Liquidated Damages. - If Borrower prepays the principal of the Revolving Loan to Borrower (other than from time to time from working capital) or if the outstanding Obligations become due prior to the Termination Date because of a payment default or other material default by Borrower, Borrower shall pay to Lender at the time of such prepayment, liquidated damages in an amount equal to: (a) 5% of the Total Facility less $550,000 ("Adjusted Total Facility") if the prepayment is made during the First Contract Year; (b) 4% of the Adjusted Total Facility if the prepayment is made during the Second Contract Year; and (c) 2% of the Adjusted Total Facility if the prepayment is made during the Third Contract Year. Borrower shall give Lender at least ninety (90) days' advance written notice ("Termination Notice") of Borrower's election to terminate the availability of Revolving Loans under this Agreement prior to the Termination Date. The Termination Notice shall be irrevocable and shall specify the effective date of such termination, which effective date shall not be less than ninety (90) days after the giving of the Termination Notice and shall be in no event later than the Termination Date. After the Termination Date, Lender shall have no obligation to make any Advance(s) to Borrower. 3.7. Success Fee. - (a) Lender has earned and is entitled to the Initial Success Fee on the date of this Agreement. Borrower's obligation to pay the Initial Success Fee shall be evidenced by a promissory note in form of Exhibit C ("Success Note"). The Success Note shall provide for interest on the unpaid principal amount of the Initial Success Fee at a rate per annum of 5%, and for payment of principal and accrued interest in installments as follows: (i) at the time Borrower's annual financial statements and compliance certificate are delivered to Lender for fiscal year ending September 30, 2003, but in any event on or before December 31, 2003 , the lesser of (A) Excess Cash Flow for the Borrower's Fiscal Year ending September 30, 2003 and (B) 1/3 of the Initial Success Fee; plus all accrued and unpaid interest; (ii) at the time Borrower's annual financial statements and compliance certificate are delivered to Lender for fiscal year ending September 30, 2004, but in any event on or before December 31, 2004, the lesser of (A) Excess Cash Flow for the Borrower's Fiscal Year ending September 30, 2004 and (B) 2/3 of the Initial Success Fee (less the amount of any installment paid to Lender pursuant to Section 3.7 (i)), plus all accrued and unpaid interest; and (iii) on the Termination Date or early termination of the Facility by Borrower under Section 3.6 above, the unpaid balance of the Initial Success Fee, plus any accrued and unpaid interest. (b) Borrower shall pay to Lender the Remainder Success Fee upon sale of the Texas Real Property, but no Remainder Success Fee shall be payable if the Texas Real Property is sold on or before February 28, 2003. Page 8 of 21 Page 50 of 79 3.8. Computation of Interest and Fees. - All interest and fees under this Agreement shall be computed on the basis of a year consisting of three hundred sixty (360) days for the number of days actually elapsed. 4. APPLICATION OF PROCEEDS. - The proceeds of the Advances shall be used solely by Borrower to repay existing indebtedness incurred by Borrower, or for working capital needed in the normal operation of Borrower's business. 5. INDUCING REPRESENTATIONS. - In order to induce Lender to make the Loans, Borrower makes the following representations and warranties to Lender: 5.1. Organization and Qualifications. - Borrower is a corporation duly organized and existing under the laws of the State of Delaware. Borrower's tax identification number is 13-3458955 and its organizational identification number is 2158409 (not issued in New York State). Borrower is qualified to do business in every jurisdiction where the nature of its business requires it to be so qualified. 5.2. Name and Address. - During the preceding five (5) years, Borrower has not been known by nor has used any other name whether corporate, fictitious or otherwise, except as set forth on Schedule 5.2 attached hereto. Borrower's office is at the address set forth above. 5.3. Structure. - Borrower has no subsidiaries or Affiliates, except as set forth on Schedule 5.3 attached hereto, and the subsidiaries which are disclosed are inactive and conduct no business. 5.4. Legally Enforceable Agreement. - The execution, delivery and performance of this Agreement, each and all of the other Loan Documents and each and all other instruments and documents to be delivered by Borrower or its Affiliates under this Agreement and the creation of all liens and security interests provided for herein are within Borrower's corporate power, have been duly authorized by all necessary or proper corporate action (including the consent of shareholders where required), are not in contravention of any agreement or indenture to which Borrower is a party or by which it is bound, or of the Certificate of Incorporation or By-Laws of Borrower, and are not in contravention of any provision of law and the same do not require the consent or approval of any governmental body, agency, authority or any other Person which has not been obtained and a copy thereof furnished to Lender. 5.5. Solvent Financial Condition. - Borrower is Solvent. 5.6. Financial Statements. - The internally prepared financial statements of Borrower for and as of the fiscal year ending September 30, 2002 and the internally prepared interim financial statements for the two-month period ending and as of November 30, 2002, copies of which have been delivered to Lender, fairly present Borrower's and its consolidated subsidiaries' financial condition and results of operations as relevant and as of such dates and there have been no changes since such dates. Except as disclosed on Schedule 5.6, Borrower and its consolidated subsidiaries have no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments, or unrealized or unanticipated losses from any unfavorable commitments which were not disclosed in such financial statements or the notes thereto. 5.7. Joint Ventures. - Borrower is not engaged in any joint venture or partnership with any other Person. 5.8. Real Estate. - Attached hereto as Schedule 5.8 is a list showing all real property owned or leased by Borrower, and if leased, the correct name and address of the landlord and the date and term of the applicable lease. 5.9. Patents, Trademarks, Copyrights and Licenses. - Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without, to the best of its knowledge, any conflict with the rights of others. All such patents, trademarks, service marks, trade names, copyrights, licenses and other similar rights are listed on Schedule 5.9 attached hereto, if any. Page 9 of 21 Page 51 of 79 5.10. Intentionally Omitted. 5.11. Investment Company Act: Federal Reserve Board Regulations. - Borrower is not an "investment company", or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. ss.ss. 80(a)(1), et seq.). The making of the Loans under this Agreement by Lender, the application of the proceeds and repayment thereof by Borrower and the performance of the transactions contemplated by this Agreement will not violate any provision of such Act, or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. Borrower does not own any margin security as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System and the proceeds of the Loans made pursuant to this Agreement will be used only for the purposes contemplated under this Agreement. None of the proceeds will be used, directly or indirectly, for the purpose of purcH a sing or carrying any margin security or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry margin security or for any other purpose which might constitute any of the Loans under this Agreement a "purpose credit" within the meaning of said Regulation U or Regulations T or X of the Federal Reserve Board. Borrower will not take, or permit any agent acting on its behalf to take, any action which might cause this Agreement or any document or instrument delivered pursuant hereto to violate any regulation of the Federal Reserve Board. 5.12. Tax Returns. - Borrower and the guarantor(s), if any, have filed all tax returns (Federal, state or local) required to be filed and paid all taxes shown thereon to be due including interest and penalties or has provided adequate reserves therefor. No assessments have been made against Borrower or any guarantor(s), if any, by any taxing authority nor has any penalty or deficiency been made by any such authority. To the best of Borrower's knowledge, no Federal income tax return of Borrower or any guarantor, if any, is presently being examined by the Internal Revenue Service nor are the results of any prior examination by the Internal Revenue Service or any State or local tax authority being contested by Borrower or any guarantor, if any. 5.13. Litigation. - Except as disclosed in Schedule 5.13, no action or proceeding is now pending or, to the knowledge of Borrower, is threatened against Borrower or any guarantor, if any, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of the Federal or state government or of any municipal government or any agency or subdivision thereof, or before any arbitrator or panel of arbitrators, and neither Borrower nor any guarantor, if any, has accepted liability for any such action or proceeding. There is no proceeding pending before any governmental agency (Federal, state or local) and, to the best of Borrower's knowledge, no investigation has been commenced before any such governmental agency the effect of which, if adversely decided, would or could, have a Material Adverse Effect. 5.14. Receivables Locations. - Annexed hereto as Schedule 5.14 is a list showing all places at which Borrower maintains, or will maintain, records relating to Receivables. 5.15. Inventory Locations. - Annexed hereto as Schedule 5.15 is a list showing all places where Borrower maintains, or will maintain, Inventory. Such list indicates whether the premises are owned or leased by Borrower or whether the premises are the premises of a warehouseman or other third party, and if owned by a third party, the name and address of such third party. Page 10 of 21 Page 52 of 79 5.16. Equipment List and Locations. - Annexed hereto as Schedule 5.16 is a list showing all of Borrower's equipment, and describing the places where the same is located. Such list indicates whether such premises are owned or leased by Borrower or whether the premises are the premises of another third party, and if leased, the name and address of such third party. 5.17. Title/ Liens. - Borrower has good and marketable title to the Collateral as sole owner thereof. There are no existing liens on any Property of Borrower, except for liens in favor of Lender and liens described in Schedule 5.17. Except as set forth on Schedule 5.17, none of the Collateral is subject to any prohibition against encumbering, pledging, hypothecating or assigning the same or requires notice or consent in connection therewith. 5.18. Existing Indebtedness. - Borrower has no existing Indebtedness except the Indebtedness described in Schedule 5.18. 5.19. ERISA Matters. - The Borrower has no Plans, has no liability to the Pension Benefit Guaranty Corporation and has not engaged in any transaction which would subject Borrower to tax, penalty or liability for prohibited transactions imposed by ERISA or the Code. 5.20. O.S.H.A. - To the best of Borrower's knowledge, Borrower, its facilities, business, leaseholds, equipment and other property are in compliance in all material respects with the provisions of the federal Occupational Safety and Health Act and all rules and regulations thereunder and all similar state and local Governmental Rules. There are no outstanding citations, notices or orders of non-compliance issued to Borrower or relating to its facilities, business, leaseholds, equipment or other property under any such Governmental Rules. 5.21. Environmental Matters. - Except as disclosed in Schedule 5.21, in the Phase I and Phase II environmental site assessments relating to 105 Norton Street, Newark, New York and in a Phase I environmental site assessment relating to 1920 Southeast Industrial Drive, Edinburg, Texas, true, complete and correct copies of which has been delivered to Lender, and to the best of its knowledge, (a) No Property owned or used by Borrower is or has been used for the generation, manufacture, refining, transportation, treatment, storage, handling or disposal of any "hazardous substances" or "hazardous wastes"; (b) Borrower is in material compliance with all applicable Environmental Laws; (c) there has been no contamination or release of hazardous substances at, upon, under or within any Property owned or leased by Borrower, and there has been no contamination (as defined in any applicable Environmental Law) or release of hazardous substances (as defined in any applicable Environmental Law) on any other Property that has migrated or threatens to migrate to any Property owned or leased by Borrower; (d) there are not now and never have been above-ground or underground storage tanks at any Property owned or leased by Borrower; (e) there are no transformers, capacitors or other items of Equipment containing polychlorinated biphenyls at levels in excess of 49 parts per million, violativ e of any applicable Environmental Law, at any Property owned or leased by Borrower; (f) no hazardous substances are present at any Property owned or leased by Borrower, nor will any hazardous substances be present upon any such Property or in the operation thereof by Borrower; (g) all permits and authorizations required under Environmental Laws for all operations of Borrower have been duly issued and are in full force and effect, including but not limited to those for air emissions, water discharges and treatment, storage tanks and the generation, treatment, storage and disposal of hazardous substances; (h) there are no pending or threatened environmental claims against Borrower or any Property owned or leased by Borrower; and there is no condition or occurrence on any Property owned or leased by Borrower that could be anticipated (1) to form the basis of an environmental claim against Borrower or its properties or (2) to cause any Property owned or leased by Borrower to be subject to any restrictions on its ownership, occupancy or transferability under any Environmental Law; (i) no portion of any Property owned or leased by Borrower contains asbestos-containing material that is or threatens to become friable; (j)] the representations and warranties set forth in this Section 5.21 shall survive repayment of the Obligations and the termination of this Agreement and the other Loan Documents. 5.22. Labor Disputes. - There are no pending or, to Borrower's knowledge, threatened labor disputes which could have a Material Adverse Effect. Page 11 of 21 Page 53 of 79 5.23. Intellectual Property. - Borrower is the owner of or possesses the right to use all necessary patents, trademarks, service marks, copyrights and other intellectual property necessary or useful in the operation of its business, in each case free of any claims or infringements. 5.24. Location of Banking and Securities Accounts. - Annexed hereto as Schedule 5.24 hereto sets forth a complete and accurate list of all deposit, checking and other bank accounts, all securities and other accounts maintained with any broker dealer and all other similar accounts maintained by Borrower (collectively, "Bank Accounts"), together with a description thereof. 5.25. Compliance With Laws. - Except as disclosed on Schedule 5.25, to the best of Borrower's knowledge, Borrower is in compliance with all Federal, state and local governmental rules, ordinances and regulations ("Governmental Rules") applicable to its ownership or use of properties or the conduct of its business. 5.26. No Other Violations. - Except as disclosed on Schedule 5.26, Borrower is not in violation of any term of its Certificate of Incorporation or By-laws and no event or condition has occurred or is continuing which constitutes or results in (or would constitute or result in, with the giving of notice, lapse of time or other condition) (a) a breach of, or a default under, any agreement, undertaking or instrument to which Borrower is a party or by which it or any of its Property may be affected, or (b) the imposition of any lien on any Property of Borrower. 5.27. Survival of Representations and Warranties. - Borrower covenants, warrants and represents to Lender that all representations and warranties of Borrower contained in this Agreement or in any other Loan Documents shall be true at the time of Borrower's execution of this Agreement and the other Loan Documents, and Lender's right to bring an action for breach of any such representation or warranty or to exercise any remedy under this Agreement based upon the breach of such representation or warranty shall survive the execution, delivery and acceptance hereof by Lender and the closing of the transactions described herein or related hereto until the Obligations are finally and irrevocably paid in full. 6. FINANCIAL STATEMENTS AND INFORMATION; CERTAIN NOTICES TO LENDER. - So long as Borrower shall have any Obligations to Lender under this Agreement, Borrower shall deliver to Lender, or shall cause to be delivered to Lender: 6.1. Borrowing Base Certificate. - Weekly (on or before Tuesday of each week as of the preceding week end), and monthly (within two (2) days after the end of each month) and contemporaneously with each request for an Advance, a satisfactorily completed and executed Borrowing Base Certificate in the form attached as Exhibit E hereto. Page 12 of 21 Page 54 of 79 6.2. Monthly Reports. - Within twenty (20) days after the end of each month, an accounts receivable aging, accounts payable aging, an inventory listing, a collateral update certificate, and a Reconciliation Report of Borrower for such month, all in form satisfactory to Lender, prepared by Borrower and if Lender so requests, customer statements, sales journals, cash receipts journals and detailed sales credit reports. 6.3. Annual Financial Statements. - Within ninety (90) days after the close of each Fiscal Year of Borrower, a copy of a unqualified audited annual financial statements of Borrower prepared by an independent certified public accountant consisting of a balance sheet, statements of operations and retained earnings and accompanying footnotes, statements of cash flow, reasonably acceptable to Lender. 6.4. Monthly Financial Statements. - Within thirty (30) days after the end of each month of Borrower, financial statements consisting of a balance sheet, statements of operations and retained earnings and statements of cash flow, prepared by management of Borrower in accordance with GAAP, together with a compliance certificate in the form attached as Exhibit F hereto. 6.5. Projections. - Within thirty (30) days prior to the end of each Fiscal Year of Borrower, monthly financial projections for the next fiscal year in form satisfactory to Lender. 6.6. Customer Lists. - Semiannually, a list of all of Borrower's customers and vendors, including the addresses, and telephone and facsimile numbers of such customers and vendors which lists shall be delivered within thirty (30) days of the end of the second fiscal quarter of each Fiscal Year and each Fiscal Year end. 6.7. Insurance. - Annually, within thirty (30) days of the renewal date of such insurance policy, evidence of insurance in form and content satisfactory to Lender and otherwise in compliance with Section 8.6 of this Agreement, together with the original insurance policy. 6.8. Notice of Event of Default and Adverse Business Developments. - Immediately after becoming aware of the existence of a Default or an Event of Default or after becoming aware of any developments or other information which is likely to materially, adversely affect Borrower's properties, business, prospects, profits or condition (financial or otherwise) or its ability to perform its obligation under this Agreement or any other Loan Documents, including, without limitation, the following: (a) any material dispute that may arise between Borrower and any governmental regulatory body or law enforcement authority, including any action relating to any tax liability of Borrower or guarantor if any; (b) any labor controversy resulting in or threatening to result in a strike or work stoppage against Borrower; (c) any proposal by any public authority to acquire the assets or business of Borrower; (d) the location of any Collateral other than at Borrower's place of business or as permitted under this Agreement; (e) any proposed or actual change of Borrower's name, identity, state of organization or corporate structure; or (f) any other matter which has resulted or may result in a Material Adverse Effect. (g) In each case, Borrower will provide Lender with telephonic notice followed by notice in a Record specifying and describing the nature of such Default, Event of Default or development or information, and such anticipated effect. 6.9. Other Information. - Such other information respecting the financial condition of Borrower or any guarantor, if any, or any Property of Borrower in which Lender may have a lien as Lender may, from time to time, request. Borrower authorizes Lender to communicate directly with Borrower's independent certified public accountants and authorizes those accountants to disclose to Lender any and all financial statements and other information of any kind that they may have with respect to Borrower and its business and financial and other affairs. Lender shall treat information so obtained as confidential. On or before the date of this Agreement, Borrower shall deliver to Lender a letter addressed to such accountants instructing them to comply with the provisions of this Section 6.9, which letter shall be acknowledged by such accountants. Page 13 of 21 Page 55 of 79 7. ACCOUNTING. - Lender may account monthly to Borrower. Each and every account shall be deemed final, binding and conclusive upon Borrower in all respects, as to all matters reflected therein, unless Borrower, within forty-five (45) days after the date the account was rendered, delivers to Lender notice in a Record of any objections which Borrower may have to any such account and in that event only those items expressly objected to in such notice shall be deemed to be disputed by Borrower. If Borrower disputes the correctness of any statement, Borrower's notice shall specify in detail the particulars of its basis for contending that such statement is incorrect. 8. AFFIRMATIVE COVENANTS. - Borrower represents and warrants that, so long as it shall have any Obligations to Lender under this Agreement, Borrower will: 8.1. Business and Existence. - Preserve and maintain Borrower's separate existence and rights, privileges and franchises. 8.2. Trade Names. - Transact business in Borrower's own name and invoice all of Borrower's receivables in Borrower's own name. 8.3. Transactions with Affiliates. - Whenever Borrower engages in transactions with any of Borrower's Affiliates, conduct the same on an arms-length basis or other basis more favorable to Borrower. 8.4. Taxes. - Pay and discharge all taxes, assessments, government charges and levies imposed upon Borrower, Borrower's income or Borrower's profits or upon any Property belonging to Borrower prior to the date on which penalties attach thereto, except where the same may be contested in good faith by appropriate proceedings being diligently conducted. 8.5. Compliance with Laws. - Comply with all Governmental Rules applicable to Borrower including, without limitation, all laws and regulations regarding the collection, payment and deposit of employees' income, unemployment and Social Security taxes. 8.6. Maintain Properties: Insurance. - Safeguard and protect all Property used in the conduct of Borrower's business and keep all of Borrower's Property insured with insurance companies licensed to do business in the states where the Property is located against loss or damage by fire or other risk under extended coverage endorsement and against theft, burglary, and pilferage together with such other hazards as Lender may from time to time request, in amounts reasonably satisfactory to Lender. Borrower shall deliver the policy or policies of such insurance or certificates of insurance to Lender containing endorsements in form satisfactory to Lender naming Lender as lender loss payee and additional insured and providing that the insurance shall not be canceled, amended or terminated except upon thirty (30) days' prior written notice to Lender. All insurance proceeds received by Lender shall be retained by Lender for application to the payment of such the Revolving Loan, and then to such other Obligations then due and payable, as Lender may determine in Lender's discretion. Borrower shall promptly notify Lender of any event or occurrence causing a loss or decline in the value of Property insured or the existence of an event justifying a claim under any insurance and the estimated amount thereof. 8.7. Business Records. - Keep adequate records and books of account with respect to Borrower's business activities in which proper entries are made in accordance with sound bookkeeping practices reflecting all financial transactions of Borrower; and Borrower shall maintain all of its Bank Accounts as set forth on Schedule 5.24 of this Agreement. 8.8. Litigation. - Give Lender prompt notice of any suit at law or in equity against Borrower involving a claim for damages, money or property valued in excess of $100,000, except where the same is fully covered by insurance and the insurer has accepted liability therefor in writing. Page 14 of 21 Page 56 of 79 8.9. Damage or Destruction of Collateral. - Maintain or cause to be maintained the Collateral and all its Properties in reasonably good condition and repair at all times, preserve the Collateral and all its other Properties from loss, damage, or destruction of any nature whatsoever and provide Lender with prompt notice in a Record of any destruction or substantial damage to any Collateral subject to Lender's security interest and of the occurrence of any condition or event which has caused, or may cause, loss or depreciation in the value of any Collateral. 8.10. Name Change. - Provide Lender with not fewer than thirty (30) days notice in an Authenticated Record prior to any proposed change of name or the creation of any subsidiary. 8.11. Access to Books and Records. - Provide Lender with such reports and with such access to Borrower's books and records and permit Lender to copy and inspect such reports and books and records all as Lender deems necessary or desirable to enable Lender to monitor the credit facilities extended hereby. Lender may examine and inspect the Inventory, equipment or other Collateral and may examine, inspect and copy all books and records with respect thereto at any time during Borrower's normal business hours. Borrower shall maintain full, accurate and complete records respecting Inventory, including a perpetual inventory, and all other Collateral at all times. Borrower will pay all costs to be paid on taxes, assessments, governmental charges or private encumbrances levied, assessed, imposed or payable upon or with respect to the Inventory, equipment or other Collateral or any part thereof. 8.12. Solvent. - Continue to be Solvent. 8.13. Compliance With Environmental Laws. - Comply with all applicable Environmental Laws. 8.14. Compliance with ERISA and other Employment Laws. - Comply with all applicable provisions of ERISA and the Internal Revenue Code of 1986, as amended, and any other applicable laws, rules or regulations relating to the compensation of employees and funding of employee pension plans. 8.15. Proceeds of Collateral. - Forthwith upon receipt, pay to Lender the proceeds of all Collateral, whereupon such proceeds shall be applied to the Obligations in such order and manner as shall be determined in the discretion of Lender. 8.16. Delivery of Documents. - Notify Lender if any proceeds of Receivables shall include, or any of the Receivables shall be evidenced by, notes, trade acceptances or instruments or documents, or if any Inventory is covered by documents of title or chattel paper, whether or not negotiable, and if required by Lender, immediately deliver them to Lender appropriately endorsed. Borrower waives protest regardless of the form of the endorsement. If Borrower fails to endorse any instrument or document, Lender is authorized to endorse it on Borrower's behalf. 9. NEGATIVE COVENANTS. - So long as Borrower shall have any Obligation to Lender under this Agreement and unless Lender has first consented thereto in an Authenticated Record, Borrower shall not: 9.1. Indebtedness. - Create, incur, assume or suffer to exist, voluntarily or involuntarily, any Indebtedness, except (i) Obligations to Lender, (ii) trade debt incurred in the ordinary course of Borrower's business; (iii) purchase money financing and equipment leases not to exceed $100,000 in any Fiscal Year; and (iv) Indebtedness described on Schedule 5.18. 9.2. Mergers; Consolidations; Acquisitions. - (Enter into any merger, consolidation, reorganization or recapitalization with any other Person; take any steps in contemplation of dissolution or liquidation; conduct any part of its business through any corporate subsidiary, unincorporated association or other Person; acquire the stock or assets of any Person, whether by merger, consolidation, purchase of stock or otherwise; or acquire all or any substantial part of the properties of any Person) provided, however, that Lender shall not unreasonably withhold its consent to any merger, consolidation or acquisition. 9.3. Sale or Disposition. - Sell or dispose of all or any Properties or grant any Person an option to acquire any such Property; provided, however, that the foregoing shall not prohibit sales of Inventory in the ordinary course of Borrower's business and provided, further, however, Lender shall not unreasonably withhold its consent to any such other sale or disposition. 9.4. Defaults. - Permit any landlord, mortgagee, trustee under deed of trust or lienholder to declare a default under any lease, mortgage, deed of trust or lien on real estate owned or leased by Borrower, which default remains uncured after any stated cure period or for a period in excess of thirty (30) days from its occurrence, whichever is less, unless such default is being contested by Borrower in good faith by appropriate proceedings being diligently conducted. Page 15 of 21 Page 57 of 79 9.5. Limitations on Liens. - Suffer any lien, encumbrance, mortgage or security interest on any of its property, except such liens as appear on Schedule 5.17 attached hereto, if any. 9.6. Dividends and Distributions. - Pay any cash dividends, make any capital distribution in cash or other Property or return of capital, or purchase or redeem any of its stock or other securities, or retire any of its stock, or take any action which would have an effect equivalent to any of the foregoing. 9.7. Borrower's Name and Offices. - Transfer Borrower's chief executive office or change its organizational name or office where it maintains its records (including computer printouts and programs) with respect to Receivables or any other Collateral, except with Lender's prior consent in an Authenticated Record. 9.8. Fiscal Year. - Change its Fiscal Year. 9.9. Change of Control/Management. - Allow, without the prior written consent of Lender, not to be unreasonably withheld, a change in the ownership structure of Borrower, or have a Chairman other than W. Barry Gilbert or a Controller other than Kevin Monacelli. 9.10. Guaranties; Contingent Liabilities. - Assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in its ordinary course of business as currently conducted. 9.11. Removal of Collateral. - Remove, or cause or permit to be removed, any of the Collateral or other Property from the premises where such Collateral or Property is currently located and as set forth on Schedule 5.14, 5.15 or 5.16 of this Agreement, except for sales of Inventory in the ordinary course of business. 9.12. Transfer of Notes or Accounts. - Sell, assign, transfer, discount or otherwise dispose of any Receivables or any promissory note or other instrument payable to it with or without recourse. 9.13. Settlements. Compromise, - settle or adjust any claim relating to any of the Collateral, except for claims against insurers following casualty, and any compromise or settlement for $10,000 in any one case or $50,000 for all such compromises and settlements in the aggregate. 9.14. Change of Business. - Cause or permit a material change in the nature of its business as conducted on the date of this Agreement. 9.15. Change of Accounting Practices. - Change its present accounting principles or practices in any respect, except, upon notice to Lender in a Record, as may be required by changes in GAAP. 9.16. Inconsistent Agreement. - Enter into any agreement containing any provision which would be violated by the performance of Borrower's Obligations or other obligations under this Agreement or any other Loan Document. 9.17. Loan or Advances. - Make any loans or advances to any Person, except for loans and advances not exceeding $25,000 in the aggregate, and in no event shall Borrower make any advance or transfer any asset to any of Borrower's subsidiaries or Affiliates. 9.18. Investments. - Make any investment in any Person including, without limitation, in any Affiliates or form any Affiliates or subsidiaries not existing on the date hereof. 9.19. Fixed Charge Coverage Ratio. - Permit Borrower's Fixed Charge Coverage Ratio for the fiscal quarter ending June 30, 2003 and each fiscal quarter thereafter to be less than 1.00 to 1.00. 9.20. Capital Expenditures. - Make or agree to make Capital Expenditures in an amount which exceeds $500,000 for each fiscal year, beginning with fiscal year ending September 30, 2003. 9.21. EBITDA. - Permit Borrower's EBITDA to be less than $450,000 for each fiscal quarter, calculated for each quarter on an individual, non-cumulative basis, beginning with the fiscal quarter ending March 31, 2003. 9.22. Vendor Settlements. - Fail to provide Lender on or before February 28, 2003 with written, final documentation of all vendor settlements shown as "accepted" on the Trade Summary and back-up schedule delivered by Borrower to Lender, which documentation shall evidence settlements consistent with the terms represented by Borrower to have been accepted by such vendors in such Trade Summary, back-up schedule or other supporting documentation provided by Borrower to Lender on or before the date of this Agreement. Page 16 of 21 Page 58 of 79 10. CONDITIONS TO ADVANCES. 10.1. Lender's Right to Take Certain Actions. - Lender's obligation to make any Advance is subject to the condition that, as of the date of the Advance, no Default or Event of Default shall have occurred and be continuing and that the matters set forth in Section 5 of this Agreement and the representations and covenants set forth in the other Loan Documents continue to be true and complete. Borrower's acceptance of each Advance under this Agreement shall constitute a confirmation, as of the date of the Advance, of the matters set forth in Section 5 of this Agreement, of the representations and covenants set forth in the other Loan Documents, and that no Default or Event of Default then exists. If requested by Lender, Borrower shall further confirm such matters by delivery of a Record dated the day of the Advance and signed by an authorized officer of Borrower. 11. TERM. - Unless sooner terminated by Lender pursuant to the terms of this Agreement, the period during which the Revolving Loan shall be available shall initially be a period commencing on the date hereof and concluding on the Termination Date. 12. EVENTS OF DEFAULT. 12.1. Defaults. - Upon the happening of any of the following events (individually, an "Event of Default;" collectively, "Events of Default"): (a) if Borrower shall fail to make any payment when due on any Obligation under this Agreement or any other Loan Document; or (b) if Borrower shall fail to comply with any term, condition, covenant, warranty or representation contained in Articles 6 or 9 of this Agreement; or (c) if Borrower shall fail to comply with any term, condition, covenant or warranty of or in this Agreement other than in Articles 6 or 9 of this Agreement, and such failure continues for a period in excess of ten (10) days after notice thereof is given by Lender to Borrower; or (d) if Borrower shall fail to comply with any term, condition, covenant, warranty or representation contained in any of the other Loan Documents or any other agreement between Lender and Borrower (not otherwise constituting an Event of Default) and such failure continues for a period in excess of 10 days after notice given by Lender to Borrower; or (e) if Borrower shall cease to be Solvent, make an assignment for the benefit of its creditors, call a meeting of its creditors to obtain any general financial accommodation, suspend business or if any case under any provision of the Bankruptcy Code including provisions for reorganizations, shall be commenced by or against Borrower or if a receiver, trustee or equivalent officer shall be appointed for all or any of the Properties of Borrower; or (f) if any statement or representation contained in any financial statement or certificate delivered by Borrower to Lender shall be false, in any respect, when made; or (g) if any federal or state tax lien is filed of record against Borrower or any guarantor(s), if any, and is not bonded or discharged within ten (10) days of filing; or (h) if Borrower's independent public accountants shall refuse to deliver any financial statement required by this Agreement; or (i) if a judgment for more than $50,000 shall be entered against Borrower in any action or proceeding and shall not be stayed, vacated, bonded, paid or discharged within ten (10) days of entry, except a judgment where the claim is fully covered by insurance and the insurance company has accepted liability therefore in writing; or (j) if any obligation of Borrower in respect of any Indebtedness (other than Indebtedness to Lender) shall be declared to be or shall become due and payable prior to its stated maturity or such obligation shall not be paid as and when the same becomes due and payable; or there shall occur any event or condition which constitutes an event of default under any mortgage, indenture, instrument, agreement or evidence of Indebtedness relating to any obligation of Borrower in respect of any such Indebtedness the effect of which is to permit the holder or the holders of such mortgage, indenture, instrument, agreement or evidence of Indebtedness, or a trustee, agent or other representative on behalf of such holder or holders, to cause the Indebtedness evidenced thereby to become due prior to its stated maturity; or (k) Intentionally omitted. (l) upon the occurrence and continuance of any Material Adverse Effect, which in the sole and absolute opinion of Lender, impairs Lender's security, increases Lender's risks; or impairs Borrower's ability to perform under this Agreement or under the other Loan Documents; or (m) upon the happening of any of the events described in Subsections 12.1 (d), (e), (f), (g), (h), (i) or (j) with respect to any guarantor, if any, or if any such guarantor purports to terminate its guaranty or upon the death of a guarantor, if any, that is a natural person, if any. Then, and in any such event, Lender may terminate this Agreement without prior notice or demand to Borrower or may demand payment in full of all Obligations (whether otherwise then payable on demand or not) without terminating this Agreement and shall, in any event, be under no further responsibility to extend any credit or afford any financial accommodation to Borrower, whether under this Agreement or otherwise. 12.2. Obligations Immediately Due. - Upon the Termination Date for any reason, all of Borrower's Obligations to Lender including, but not limited to, the Loans shall immediately become due and payable without further notice or demand. Page 17 of 21 Page 59 of 79 12.3. Continuation of Security Interests. - Notwithstanding any termination, until all Obligations of Borrower shall have been fully paid and satisfied, Lender shall retain all security in and title to all existing and future Receivables, General Intangibles, Inventory, Equipment, Fixtures, Investment Property, and other Collateral held by Lender under the General Security Agreement or under any other Loan Document and Borrower shall continue to assign Receivables and consign Inventory to Lender and continue to turn over all proceeds of Collateral to Lender. 13. REMEDIES OF LENDER. - Upon the occurrence of any Event of Default or upon any termination of this Agreement, then Lender shall have, in addition to all of its other rights under this Agreement all of the rights and remedies provided in the General Security Agreement. 14. GENERAL PROVISIONS. 14.1. Rights Cumulative. - Lender's rights and remedies under this Agreement shall be cumulative and non-exclusive of any other rights or remedies which Lender may have under any other agreement or instrument, by operation of law or otherwise. 14.2. Successors and Assigns. - This Agreement is entered into for the benefit of the parties hereto and their successors and assigns. It shall be binding upon and shall inure to the benefit of the parties, their successors and assigns. Lender shall have the right, without the necessity of any further consent or authorization by Borrower, to sell, assign, securitize or grant participation in all, or a portion of, Lender's interest in the Loans, to other financial institutions of the Lender's choice and on such terms as are acceptable to Lender in its discretion. 14.3. Notice. - Wherever this Agreement provides for notice to any party (except as expressly provided to the contrary), it shall be given by messenger, facsimile, certified U.S. mail with return receipt requested, or nationally recognized overnight courier with receipt requested, effective when either received or receipt rejected by the party to whom addressed, and shall be addressed as follows, or to such other address as the party affected may hereafter designate: If to Lender: Keltic Financial Partners, LP Attn: John P. Reilly, Managing Partner 555 Theodore Fremd Avenue, Suite C-207 Rye, New York 10580 Fax: (914) 921-1154 With a copy to: Hodgson Russ LLP Attn: Victoria J. Saxon One M&T Plaza, Suite 2000 Buffalo, New York 14203 Fax: (716) 849-0349 If to Borrower: IEC Electronics Corp. Attn: W. Barry Gilbert 105 Norton Street Newark, New York, NY 14513 Fax: (315) 331-4430 With a copy to: Boylan, Brown, Code, Vigdor & Wilson, LLP Attn: Justin L. Vigdor 2400 Chase Square Rochester, New York 14604 Fax: (585) 232-3528 14.4. Strict Performance. - The failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of any Default or Event of Default by Borrower under this Agreement or any other Loan Document shall not suspend, waive or affect any other Default or Event of Default by Borrower under this Agreement or any other Loan Document, whether the same is prior or subsequent thereto and whether of the same or a different type. 14.5. Waiver. - Borrower waives presentment, protest, notice of dishonor and notice of protest upon any instrument on which it may be liable to Lender as maker, endorser, guarantor or otherwise. 14.6. Construction of Agreement. - The parties hereto agree that the terms and language of this Agreement were the result of negotiations between the parties, and, as a result, there shall be no prescription that any ambiguities in this Agreement shall be resolved against either party. Any controversy over the construction of this Agreement shall be decided mutually without regard to events of authorship or negotiation. Page 18 of 21 Page 60 of 79 14.7. Expenses. If, at any time or times prior or subsequent to the date hereof, regardless of whether or not a Default or an Event of Default then exists or any of the transactions contemplated under this Agreement are concluded, Lender employs counsel for advice or other representation, or incurs legal expenses, or consulting fees and expenses, or other costs or out-of-pocket expenses in connection with: (A) the negotiation and preparation of this Agreement or any other Loan Document, or any amendment of or modification of this Agreement or any other Loan Document; (B) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (C) periodic audits and appraisals performed by Lender; (D) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any other Loan Document or Borrower's affairs; (E) the perfect ion of any lien on the Collateral; (F) any attempt to enforce any rights or remedies of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any other Loan Document including, without limitation, the Account Debtors; or (G) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then, in any such event, the actual attorneys' fees and expenses arising from such services and all expenses, costs, charges and other fees of such counsel of Lender or relating to any of the events or actions described in this Section 14.7 shall be payable by Borrower to Lender, and shall be additional Obligations under this Agreement secured by the Collateral. Additionally, if any taxes (excluding taxes imposed upon or measured by the net income of Lender, but including any intangibles tax, stamp tax or recording tax) shall be payable on account of the execution or delivery of this Agreement, or the execution, delivery, issuance or recording of any other Loan Document, or the creation of any of the Obligations under this Agreement, by reason of any existing or hereafter enacted federal or state statute, Borrower will pay (or will promptly reimburse Lender for the payment of) all such taxes including, but not limited to, any interest and penalties thereon, and will indemnify, defend and hold Lender harmless from and against any liability in connection therewith. Borrower shall also reimburse Lender for all other expenses incurred by Lender in connection with the transactions contemplated under this Agreement or the other Loan Documents, including, without limitation, fees in connection with any bank account, the Lockbox, wire charges, automatic clearing house fees and other similar costs and expenses. 14.8. Reimbursements Charged to Revolving Loan. - With respect to any amount advanced by Lender and required to be reimbursed by Borrower pursuant to the foregoing provisions of Section 14.7, it is hereby agreed that Lender may charge any such amount to Borrowers' Revolving Loan on the dates such reimbursement is made. Borrower's obligations under Section 14.7 shall survive termination of the other provisions of this Agreement. 14.9. Waiver of Right to Jury Trial. - Borrower and Lender recognize that in matters related to the Loan and this Agreement, and as it may be subsequently modified and/or amended, any such party may be entitled to a trial in which matters of fact are determined by a jury (as opposed to a trial in which such matters are determined by a federal or state judge). By execution of this Agreement, Lender and Borrower will give up their respective right to a trial by jury. Borrower and Lender each hereby expressly acknowledged that this waiver is entered into to avoid delays, minimize trial expenses, and streamline the legal proceedings in order to accomplish a quick resolution of claims arising under or in connection with the Note and this Agreement. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, BORROWER AND LENDER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT BORROWER OR LENDER MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION, DIRECTLY OR INDIRECTLY, AT ANY TIME ARISING OUT OF, UNDER, OR IN CONNECTION WITH THE LOAN, THIS AGREEMENT, OR ANY TRANSACTION CONTEMPLATED THEREBY OR HEREBY, BEFORE OR AFTER MATURITY. CERTIFICATIONS. BORROWER HEREBY CERTIFIES THAT NEITHER ANY REPRESENTATIVE NOR AGENT OF LENDER NOR LENDER'S COUNSEL HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. BORROWER ACKNOWLEDGES THAT LENDER HAS BEEN INDUCED TO ENTER INTO THE TRANSACTION BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATION HEREIN. Page 19 of 21 Page 61 of 79 14.10. Indemnification by Borrower/Waiver of Claims. - Except in the case of Lender's willful misconduct or gross negligence, Borrower hereby covenants and agrees to indemnify, defend (with counsel selected by Lender) and hold harmless Lender and its officers, partners, employees, consultants and agents from and against any and all claims, damages, liabilities, costs and expenses (including, without limitation, the actual fees and expenses of counsel) which may be incurred by or asserted against Lender or any such other Person in connection with: (a) any investigation, action or proceeding arising out of or in any way relating to this Agreement, any of the Loans, any of the other Loan Documents, any other agreement relating to any of the Obligations, any of the Collateral, or any act or omission relating to any of the foregoing; or (b) any taxes, liabilities, claims or damages relating to the Collateral or Lender's liens thereon; or (c) the correctness, validity or genuineness of any instrument or document that may be released or endorsed to Borrower by Lender (which shall automatically be deemed to be without recourse to Lender in any event), or the existence, character, quantity, quality, condition, value or delivery of any goods purporting to be represented by any such documents; or (d) any broker's commission, finder's fee or similar charge or fee in connection with the Loans and the transactions contemplated in this Agreement. 14.11. Savings Clause for Indemnification. - To the extent that the undertaking to indemnify, pay and hold harmless set forth in Section 14.10 above may be unenforceable because it is violative of any law or public policy, Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all matters referred to under Section 14.10. 14.12. Waiver. - To the extent permitted by applicable law, no claim may be made by Borrower or any other Person against Lender or any of its Affiliates, partners, officers, employees, agents, attorneys or consultants for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract, tort or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or the other Loan Documents or any act, omission or event occurring in connection therewith; and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Neither Lender nor any of its Affiliates, partners, officers, employees, agents, attorneys or consultants shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the transactions contemplated hereby, except for its or their own gross negligence or willful misconduct. 14.13. Entire Agreement; Amendments; Lender's Consent. - This Agreement (including the Exhibits and Schedules thereto) and the other Loan Documents supersede, with respect to their subject matter, all prior and contemporaneous agreements, understandings, inducements or conditions between the respective parties, whether express or implied, oral or written. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a Record Authenticated by Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 14.14. Cross Default; Cross Collateral. - Borrower hereby agrees that (a) all other agreements between Borrower and Lender are hereby amended so that a Default or an Event of Default under this Agreement is a default under all such other agreements and a default under any one of the other agreements is a Default or an Event of Default under this Agreement, and (b) the Collateral under this Agreement secures the Obligations now or hereafter outstanding under all other agreements between Borrower and Lender and the Collateral pledged under any other agreement with Lender secures the Obligations under this Agreement. 14.15. Execution in Counterparts. - This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Page 20 of 21 Page 62 of 79 14.16. Severability of Provisions. - Any provision of this Agreement or any of the other Loan Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or the other Loan Documents or affecting the validity or enforceability of such provision in any other jurisdiction. 14.17. Table of Contents; Headings. - The table of contents and headings preceding the text of this Agreement are inserted solely for convenience of reference and shall not constitute a part of this Agreement or affect its meaning, construction or effect. 14.18. Exhibits and Schedules. - All of the Exhibits and Schedules to this Agreement are hereby incorporated by reference herein and made a part hereof. 15. GOVERNING LAW; CONSENT TO JURISDICTION. A. THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW YORK, AND MADE BY LENDER AND ACCEPTED BY BORROWER IN THE STATE OF NEW YORK, AND THE PROCEEDS OF THE SECURED REVOLVING NOTE DELIVERED PURSUANT THERETO WERE DISBURSED FROM THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREIN, AND IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS AND SECURITY INTERESTS CREATED PURSUANT HERETO AND PURSUANT TO THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE IN WHICH THE APPLICABLE INDIVIDUAL PROPER TY IS LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE VALIDITY AND THE ENFORCEABILITY OF ALL LOAN DOCUMENTS AND ALL OF THE INDEBTEDNESS OR OBLIGATIONS ARISING HEREUNDER OR THEREUNDER. TO THE FULLEST EXTENT PERMITTED BY LAW, LENDER AND BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVE ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE SECURED REVOLVING NOTE, AND THIS AGREEMENT AND THE SECURED REVOLVING NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. B. ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR BORROWER, ANY GUARANTOR OR OTHER PARTY TO THIS TRANSACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED IN THE SOLE OPTION OF LENDER IN ANY FEDERAL OR STATE COURT LOCATED IN WESTCHESTER COUNTY, NEW YORK, PURSUANT TO ss. 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND LENDER AND BORROWER WAIVE ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND LENDER AND BORROWER HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. BORROWER WAIVES PERSONAL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING AND CONSENTS TO THE MAKING OF SERVICE OF PROCESS IN EACH SUCH SUIT, ACTION AND OTHER PROCEEDING (1) BY REGISTERED MAIL TO THE LAST ADDRESS OF BORROWER SHOWN IN THE RECORDS OF LENDER RELATING TO THIS AGREEMENT MAINTAINED BY LENDER WITH SUCH SERVICE OF PROCESS TO BE DEEMED COMPLETE FIVE DAYS AFTER THE MAILING THERE OF, OR (2) AS OTHERWISE PERMITTED BY LAW. BORROWER REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS CONSENT TO JURISDICTION PROVISION WITH ITS LEGAL COUNSEL, AND HAS MADE THIS WAIVER KNOWINGLY AND VOLUNTARILY. [Remainder of this Page Intentionally Left Blank] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers thereunto duly authorized on the day and year first above written. KELTIC FINANCIAL PARTNERS, LP By: KELTIC FINANCIAL SERVICES LLC, its general partner By: ------------------------- Name: John P. Reilly Title: Managing Partner IEC ELECTRONICS CORP. By: ------------------------ Name: W. Barry Gilbert Title: Chairman Page 21 of 21 Page 63 of 79 EX-10.29 4 ex1029for0310k.txt IEC AND SUNTRUST AGREEMENT Exhibit 10.29 SUNTRUST BANK LOAN PROGRAM BORROWER LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), dated January 13, 2003, is made by and between IEC Electronics Corp., whose principal place of business is at 105 Norton Street, Newark, NY 14513 (herein called the "Borrower") and SUNTRUST BANK, a Georgia banking corporation with offices at 303 Peachtree Street, Atlanta, Georgia 30308, Attn: Mail Center 1923 (herein called the "Bank"). WITNESSETH: WHEREAS. the Borrower desires to establish a loan for business purposes; WHEREAS, in order to finance the 1oan for business purposes, the Borrower has requested that the Bank agree to extend to the Borrower a loan in the principal amount of $2,300,000.00. and the Bank is willing to make such loan subject to the terms and conditions hereof; and NOW, THEREFORE, for and in consideration of the premises and agreements contained herein and other good and valuable consideration, the sufficiency of which is hereby Acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Terms. The Bank agree: to make a loan to the Borrower on January 13,2003, (the "Closing Date") in the principal amount of $2,200,000.00 (the "Loan"), which Loan shall be evidenced by a promissory note, dated as of the Closing Date, executed and delivered by the Borrower, payable to the order of the Bank, in substantially the form of Exhibit A attached hereto (the "Note") and shall be subject to all terms and conditions set forth in the Note, all of which terms and conditions are incorporated herein by reference. 2. Collateral. To secure the payment and performance of Term Loan Commitment, the Loan, the Note, and any other indebtedness, obligation or liability of the Borrower to the Bank, now or hereafter existing or arising, including, without limitation, all increases and extensions of Term Loan Commitment, the Loan and the Note, (collectively, the "Obligations"), the Borrower grants to the Bank a security interest in all of its right, title and interest in and to its accounts, chattel paper, documents, equipment, general intangibles, inventory and instruments, including, 1, without limitation, all proceeds, accessions, benefits, substitutions and replacements of and 10 any of the foregoing (as such terms are defined in Article 9 of the Uniform Commercial Code as in effect in the State of Georgia, collectivity. the "Collateral"). The Borrower hereby appoints the Bank as its attorney-in-fact to do all acts and things which the Bank may deem necessary or desirable to perfect and continue to perfect the security interest created by this Agreement and to protect the Collateral. The security interests created by this Agreement are intended to attach (i) to existing Collateral when the Borrower signs this Agreement, and (ii) to Collateral subsequently acquired by the Borrower, immediately upon the Borrower acquiring any rights in such Collateral. The parties do not intend to postpone the attachment of any security interest Created by this Agreement Page 1 of 5 Page 64 of 79 3. Representations. The Borrower represents and warrants that: (i) it owns the Collateral free and clear of all liens and security interests except the security interest granted to Keltic Financial Partners LP and to the Bank. (ii) this Agreement and the Notes have been duly authorized, executed and delivered by the Borrower and constitute the legal, valid and binding agreements of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' right generally, (iii) the execution, delivery and performance by the Borrower of this Agreement and Notes. (A) have been duly authorized by all requisite corporate action and, if required, shareholder action, (B) does not require the consent or approval of any governmental authority. and (C) will not (1) violate (a) any provision of law, statute, rule or regulation or the Borrower's articles of incorporation or any other organizational document, (b) any order of any court or any rule, regulation or order of any other agency or government binding upon the Borrower, or (c) any provision of any indenture, agreement or other instrument to which the Borrower is a party or by which the Borrower's properties or assets; are or may be bound! or (2) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause 3(iii)(C)(1)(c) above, (iv) to default or Event of Default has occurred which is continuing, (v) the Borrower has available on the Closing Dare a minimum unused committed credit facility of $1,000,000.00 from Keltic Financial Partners LP, 2nd (vi) no part of the proceeds of the Loan will be used for "purchasing" or "carrying" any "margin stock within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Fcdera1 Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the regulations of such Board of Governors. If requested by the Bank, the Borrower will furnish to the Bank a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. 4. Covenants. So long as the Obligations are outstanding) the Borrower covenants and agrees that (a) it will promptly notify the Bank in writing of any change in its address from that set forth below or any change in its name or corporate organization; (b) it will pay and perform all of the: Obligations according to their terms; (c) it will defend its title to the Collateral against all persons and against all claims and demands whatsoever; (d) it will not, without the Bank's prior written consent, sell) assign, lease, pledge, transfer or dispose of any of the Collateral; (e) it will furnish to the Bank: Page 2 of 5 Page 65 of 79 (1) within 20 days after the end of each calendar quarter an unaudited balance sheet and income statement accurately reflecting the financial transactions and status of the Borrower as of the end of such quarter and on a year-to-date basis, on a consolidated basis, prepared in accordance with generally accepted accounting procedures; (1) within 90 days after the end of each fiscal year an audited balance sheet and income statement of the Borrower as of the end of such year, compiled by such firm of independent public accountants as may be designated by the Borrower and be satisfactory to the Bank as prepared in accordance with generally accepted accounting procedures; (2) concurrently with the delivery of the financial statements referred to in Sections 4(e)(i) and 4(e)(ii), a certificate of the chief executive officer, the chairman of the board, the president, the chief financial officer, the chief accounting officer, any executive Or senior vice president or the treasurer of the Borrower substantially in the form of Exhibit C; and (iv) within 60 days after the end of each fiscal year, a business plan (including balance sheet, income statement and cash flow statement) of the Borrower for the current fiscal year. (1) it shall maintain and operate its business in such a manner to insure that it is in compliance with Section S and Section 9 of that certain Loan Agreemet1t dated as of 12/28/02 by and between Borrower and IEC Electronics Corp. and Keltic financial Partners LP. 5. Event of Default: An. "Event of Default" shall occur if: (i) the Borrower fails to pay when due any amount owing hereunder within five (5) business days after such amount becomes due. (ii) any representation or warranty made or deemed made by the Borrower herein or which is Contained in any certificate, document or financial or other statement furnished by it at any time finder or in connection with this Agreement shall be false or misleading in any material respect as of the date made or deemed to have been made, (iii) the Borrower fails to comply with the covenants set forth in Section 4(c), 4(f), (iv) the Borrower fails to perform or observe any other covenant made by the Borrower pursuant to this Agreement and which failure is not cured within thirty (30) days after the earlier of (i) the Borrower's actual knowledge thereof or (ii) I notice to the Borrower, (v) that certain supply agreement by and between Borrower and Arrow Electronics Inc. (the "Supplier") (the "Supply Agreement") is terminated regardless of whether such termination occurs "for cause" or "without cause" as defined therein or the occurrence of a material default occurs thereunder, (vi) the Borrower shall make or take any action to cause the appointment of a receiver of all or any part of the Borrower's property, an assignment for the benefit of creditors of the Borrower, a calling of a meeting of creditors of the Borrower, the commencement of any proceeding under any bankruptcy, insolvency or debtor relief laws by or against the Borrower or any guarantor or surety for the Borrower, (vii) the Borrower dies, dissolves, terminates its existence, becomes insolvent or its business fails, (viii) the Borrower is a corporation or partnership and the persons owning the voting control of the Borrower on the date hereof cease to own such voting control, (ix) the value of the Collateral is reduced, due- to the fault of the Borrower, in a manner that imperils satisfaction of the Borrower's obligations under this Agreement Or the Note or (x) any lien, levy, attachment or assessment is placed on any Collateral, and the claim is not fully discharged and satisfied within 30 days of such filing of recordation. (xi) (i) the Borrower is in default in the payment of any principal of or premium or make-whole amount or interest on any debt of the Borrower that is outstanding in an aggregate principal amount of at least $100,000.00 beyond any period of grace provided with respect thereto, or the Borrower is in default in the performance of or compliance with any term of any evidence of any debt of the Borrower in an aggregate outstanding principal amount of at least $100,000.00 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such debt has become, or has been declared (or one or more persons are entitled to declare such debt to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (xii) the Borrower fails to pay Arrow Electronics, Inc.'s invoices, so that the average days to pay from the date of invoice. is not greater than 45 days from 1/2/03 to 1/2/06, measured at the close of each fiscal month by Arrow Electronics, Inc. Page 3 of 5 Page 66 of 79 6. Remedies Upon Event of Default. If an Event of Default (other than an Event of Default described in Section 5(vi) above) shall occur and be continuing the obligation of the Bank to make additional advances hereunder shall terminate, and the Bank may declare the Note, with secured interest thereon, and all obligations of the Borrower under this Agreement to be immediately due and payable. If an Event of Default described in Section 5(vi) above shall occur and be continuing the obligation of the Bank to make an additional advance hereunder shall terminate automatically, and the Note and all accrued interest hereon, and all other obligations of the Borrower under this Agreement shall automatically become immediately due: and payable. In addition, if an Event of Default has occurred and is continuing; the Bank (i) may exercise any other rights or remedies available to it under this Agreement, the Note. any other document executed by the Borrower in connection with this Agreement Or as otherwise provided by law, (ii) shall have all of the rights and remedies with respect to the Collateral of a secured party under Article 9 of the Uniform Commercial Code as in effect in the State of Georgia (the "UCC") (whether or not the UCC is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted and (iii) may, upon 10 Business Days' prior notice to the Borrower of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Bank, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Bank deems best, and for cash or for credit or for future delivery (without thereby assuming any credit risk), at public or private sales; without demand of performance or notice of intention to effect any such disposition or of the time or place thereof (except such notice as is required above or by applicable statute and cannot be waived). 7. Release of Information. The Borrower authorizes the Bank to release such information about the Borrower and the Loan, the Note, or the Collateral as the Bank deems necessary or appropriate, including, without limitation, any financial information regarding the Borrower as the Bank may possess. The Bank may assign the Loan, the Note and the Collateral therefor to any other person, at any time, whether or not there has occurred an Event Default. 8. Miscellaneous. No amendment or waiver of any provision of this Agreement or the Note shall be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA. In case any provision in or obligation under this Agreement or the Note shall be invalid, illegal or unenforceable, in whole or in part, in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement shall bind and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns; provided, however, that the Borrower may not assign its rights or Obligations under this Agreement or the Note. The Borrower acknowledges that the Bank may assign its rights and obligations under this Agreement and the Note to any other party, without notice to or consent from the Borrower. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Bank or the holder of the Note would otherwise have, This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 9. Notices. All notices and communications provided for hereunder shall be in writing, delivered by hand or sent by first-class, registered or certified mail, postage prepaid, to the addresses set forth on the signature pages hereto. Either party may change its address for notice purposes by giving written notice to the other party in the manner specified above. Any notice given by U.S. mail shall be deemed received on the third business day following deposit in the U.S. mail addressed as set forth above. Page 4 of 5 Page 67 of 79 10. Relations with Arrow Electronics, Inc. and its Affiliates. The Borrower understands and acknowledges that in making the loan evidenced by this Agreement and the Note to Borrower, the Bank is relying on certain agreements with, and the credit support of, Arrow Electronics, Inc. (the "Sponsor") and its affiliates (the "Related Agreements"). The Sponsor or one of its affiliates has induced the Bank to make this loan in connection therewith. The Bank may release to the Sponsor and its affiliates such information about the Borrower and the loan evidenced hereby as the Bank deems necessary or appropriate, including, without limitation, any financial information regarding the Borrower as the Bank may possess. The Bank may also condition its agreement to any waiver, modification or amendment with respect to this Agreement or the Note on obtaining the Sponsor's or its affiliates' prior written consent Upon the occurrence of any Event of Default hereunder or under the Note or event which with notice or lapse of lime or both may become an Event of Default, the Bank may, without incurring any liability to the Borrower, notify the Sponsor or its affiliates of such Event of Default before notifying you. The Bank shall not have any liability to the Borrower as a result of any action taken or not taken by the Bank with respect to the loan evidenced by this Agreement and the Note on the instructions of the Sponsor or its affiliates. The Bank may assign the Note to the Sponsor or any other person, at any time, whether or not there has occurred an Event of Default under this Agreement or the Note. 11. Closing Fee: Expenses of Loan Closing. The Borrower has agreed to pay a closing fee to the Bank in the amount of 1.00% of the principal amount of the Term Loan or $22,000.00 (the "Closing Fee") and a $300.00 loan fee to cover the Bank's administrative costs in funding the loan. The Borrower agrees that the closing fee is a valid administrative cost and not a charge for the use of money. The Borrower agrees that the Bank may deduct such closing fee from the proceeds hereof. In addition, the Borrower shall reimburse the Bank for any out-of-pocket expenses incurred by the Bank in connection with the loan evidenced hereby, including without limitation, any documentary stamp tax or other taxes levied or charged in connection with this transaction, any taxes assessed in connection with the filing of the Financing Statements and any Uniform Commercial Code search or other related costs or expenses incurred by the Bank. IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of the day and year first above written. Address for Notices: IEC Electronics Corp. 105 Norton Street Newark, NY 14513 /s/W. Barry Gilbert - ------------------- W. Barry Gilbert Chairman SunTrust Bank 303 Peachtree St., N.E. Atlanta. Gcorgia 30308 Attention: Center No. 1923 /s/SUNTRUST BANK - ---------------- By: Name: Title: Page 5 of 5 Page 68 of 79 EX-10.30 5 ex1030for0310k.txt IEC AND ARROW ELECTRONICS AGREEMENT Exhibit 10.30 SUPPLIER AGREEMENT This Supplier Agreement is entered into as of December 27. 2002, by IEC Electronics' Corp. with its principal place of business at Newark, NY, and the Arrow CMS Distribution Group of Arrow Electronics, Inc. ("Arrow CMS") with its principal place of business at 25 Hub Drive, Melville, New York 11747.3509. The Customer and Arrow CMS hereby agree as follows: 1. PRINCIPAL BUSINESS TERMS 1.1 Loan and Security Agreement. Arrow CMS has developed a financing program for certain of its customers with the participation of Suntrust Bank, Atlanta (the "Bank"). Pursuant to such financing program, Arrow CMS has induced the Bank to provide Customer with a loan. The terms and conditions of such loan are set forth in a Loan and Security Agreement, as well as other related documents (collectively, the "Loan Agreement"), between Customer and the Bank. Customer understands and agrees that the effectiveness of such Loan Agreement, and the closing of the loan are conditioned upon Customer's agreement to the terms and conditions set forth in, and its execution of, this Supplier Agreement. 1.2 Customer's Requirements. Arrow CMS agrees to sell to Customer and Customer agrees to buy from Arrow CMS all of Customer's requirements for the products for which Arrow CMS is, or may become during the term hereof, an authorized distributor, other than products which Customer purchases from another source at the express direction of its customer ("Customer's Requirements"). Customer shall prepare and submit to Arrow CMS, at the end of each calendar quarter, a certificate signed by, Customer's President certifying Customer's compliance with this Section 1.2. Customer shall provide Arrow a detailed breakdown of any material requirement offered by a supplier on the approved vendor list for which Arrow is an authorized distributor, and customer desires to place the order with a supplier other than Arrow, prior to Purchase Order commitment. Arrow shall respond within 24 hours of receipt and will either agree to meet the terms proposed or approve the Purchase Order placement with the proposed supplier. Customer shall submit a monthly report detailing all material dollars spent for Arrow CMS franchised parts to be provided by not later than the first Friday following the end of the monthly period. The report is to include; component cost, quantity, PO date and supplier confirming delivery date for all transactions occurring during the preceding month. 1.3 Minimum Sales. Arrow CMS and Customer estimate that Customer's Requirements will equal at least $6.8 million annually. Therefore, in addition to the foregoing covenant regarding Customer's Requirements, Customer covenants and agrees to make, for each period listed below; the following minimum level of purchases from Arrow CMS, such purchases to be made by any of Customer's locations, facilities or divisions worldwide. Any invoice not paid within its terms, as reflected in Arrow CMS's records, will not be included for purposes of achieving the applicable minimum level of sales. The following amounts' are "Net Sales Billed", which means sales net of returns and discounts, as reflected in Arrow CMS' internal records. Minimum Level of Net Sales Billed ("Minimum Sales"): For the 1st Quarter ending 3/28/03 $1,500,000 For the 2nd Quarter ending 6/27/03 $1,500,000 For the 3rd Quarter ending 9/26/03 $1,800,000 For the 4th Quarter ending 12/26/03 $2,000,000 Should Customer exceed its Minimum Sales in any given quarter, such excess may be carried forward for up to three quarters for purposes of meeting Minimum Sales in those quarters. Customer and Arrow agree to redefine 2004 minimum sales levels no later than the end of Quarter 4 2003 and 2005 minimum sales (degree) levels no later than the end of Quarter 4 2004. Customer purchases exceeding the specified minimums, for any given quarter, shall not be governed by this Supplier Agreement. Page 1 of 4 Page 69 of 79 1.4 Usual Business Relationship. It is not the intention of this Supplier Agreement or of the financing program to modify the way in which Customer and Arrow CMS have customarily done business. Except as expressly set forth herein, the normal business relationship between Customer and Arrow CMS shall continue substantially unchanged with respect to pricing, delivery, payment terms, product availability and the like. Except as expressly set forth herein the terms and conditions under which purchases and sales have usually been transacted between Arrow CMS and Customer shall continue to govern purchases by Customer from Arrow CMS during the term of this Supplier Agreement. 1.5 Credit Limits. In the event that Arrow impose a credit limitation upon the customer which limits the customer's purchases to a specific dollar amount outstanding and the customer has purchase requirements exceeding this credit limit, then provided that Customer is not in default of any payment obligation to Arrow, Customer may purchase from any other source at the discretion of the Customer. Such purchases are not governed by this supplier agreement. 2. TERM This Supplier Agreement shall begin as of the date first above written and shall expire On December 27, 2005 unless extended in accordance with the terms of this Supplier Agreement Any right of Customer to pre-pay the loan Or to terminate the Loan Agreement shall not affect this Supplier agreement. 3. CUSTOMER'S COVENANTS, WARRANTIES AND REPRESENTATIONS Customer hereby represen1s, warrants and covenants to Arrow CMS that it has the right and power to enter into this Supplier Agreement and the Loan Agreement and that any required consents to this Supplier Agreement or to the Loan Agreement have been obtained, that neither the execution and delivery of the Supplier Agreement nor of the Loan Agreement will result in a breach by Customer or constitute a default by Customer under any agreement, instrument, or order to which it is a party or by which it is bound, and that this Supplier Agreement, the Loan Agreement and all other instruments required by either to be executed and delivered are, or when delivered will be, legal and binding instruments enforceable in accordance with their terms. The representations and warranties made herein shall survive the execution and delivery of the Supplier Agreement and the Loan Agreement. 4. DEFAULT AND REMEDIES 4.1 Customer's Default. Customer's failure to achieve Minimum Sales during any period, as measured at the end of such period, throughout the term of this Agreement shall be an event (degree) of default. An event of default shall also occur if Customer shall breach any other term, warranty, representation or covenant of this Supplier Agreement, or if Customer shall be in default of any loan document evidencing a loan in excess of $500,000 including, without limitation, any loan document entered into with Keltic Financial Partners, LP, or if Customer shall become bankrupt, insolvent, or take steps leading to its cessation as a going concern, and any such default shall Continue beyond thirty (30) days after notice to Customer specifying the nature of the default. Any default under the Loan Agreement constitutes a default under this Supplier Agreement. Upon the occurrence of any event of default, or any event which with notice or the passage of time, or both, may become an event of default, Arrow CMS may, without incurring any liability to Customer, notify the Bank of such event of default before notifying' Customer. Arrow CMS shall not have any liability to Customer as a result of any action taken or not taken by the Bank, 01;' by Arrow CMS. with respect to the loan evidenced by the Loan Agreement. 4.2 Arrow CMS's Remedies. Upon Customer's default, Arrow CMS may exercise any or all of the following remedies, which are cumulative and not exclusive of any rights or remedies which Arrow CMS or the Bank, or any successor of either, would otherwise have 'under any applicable agreement or other document, at law, or in equity: (i) Notify the Bank of Customer's default, and of the resulting default under the Loan Agreement, thereby enabling the Bank to raise the interest 1"ate to the default rate of interest,' and/or to declare the loan, the note and all accrued interest thereon, and all other obligations of Customer under the Loan Agreement, immediately due and payable; (ii) Should the default be with respect to achievement of Minimum Sales for any period, add the amount of the period's shortfall to the Minimum Sales for the next period or periods; (iii) Should the default be with respect to achievement of Minimum Sales for any period, extend the term of this Supplier Agreement by one (1) calendar quarter for each period for which Minimum Sales are not achieved; (iv) Modify Customer's credit limit Or payment terms with Arrow CMS; and/or (v) Cease or limit the supply of products from Arrow CMS to Customer. Page 2 of 4 Page 70 of 79 5. AUDIT During the term of this Agreement and for one (1) year thereafter, after the close of each calendar quarter and upon reasonable advance notice to Customer; Arrow CMS (or such auditors as .Arrow CMS may select) shall have the rig1'\t to examine, copy or make extracts from any and all books and records of Customer and conduct other audit procedures relating to Customer's performance under this Agreement, or regarding any matter affecting the subject matter of this Agreement. Any such examination shall be conducted at Customer's offices during normal business hours. Except that Customer shall not be required to disclose information expressly protected by confidentiality agreements with other parties. 6. CONFIDENTIALITY It is understood and agreed that the existence and terms of this Supplier Agreement, and of the Loan Agreement, are confidential, and no news release, advertisement or public announcement; or denial or confirmation of the same, concerning any part of the subject matter of this Supplier Agreement or of the Loan Agreement shall be made by either party hereto without the prior written consent of the other party in each instance. Each party agrees not to disclose the existence or terms of this Supplier Agreement, or of the Loan Agreement, to anyone in its organization other than those with a need to know, and only provided that any such individual shall be bound by a similar obligation of confidentiality. Further, the parties hereto acknowledge that, during the term 'hereof, they may become aware of confidential, secret or proprietary information pertaining to the other party and its operations (including, without limitation, information with respect to bidding, pricing, suppliers and customers, or lists thereof, research, development and engineering, and internal operations, inventory control, data processing, technical data, and other procedures and systems) and that disclosure of such information would materially and adversely affect the affected party. Each party hereto agrees to maintain such confidentiality and secrecy and not to disclose any such information to any person, firm or other entity, or to utilize the same in any manner or form, except as may be expressly required or permitted by the terms and conditions of this Supplier Agreement. Notwithstanding anything to the contrary, the confidentiality provisions set forth in this Section 6 shall survive any expiration or termination of this Agreement. 7. MISCELLANEOUS 7.1.1 Governing Law; Dispute Resolution. This Supplier Agreement shall in all respects be governed by and construed in accordance with the laws of the State of Georgia, excluding that body of laws known as conflict of laws. The prevailing party in any legal action or proceeding to enforce this Supplier Agreement shall be entitled to recover from the non-prevailing party its reasonable attorneys' fees, and related costs and disbursements, incurred in connection with such proceeding or the enforcement of this Supplier Agreement. Both parties agree to waive trial by jury. 7.2 Force Majeure. Nonperformance under this Supplier Agreement will be excused, and neither party will bear any resulting liability to the other, to the extent that such performance is rendered commercially impracticable or delayed by an act of God or any other cause beyond the reasonable control of the nonperforming party. 7.3 Relationship of Parties. The parties are and shall be independent contractors to one another, and nothing herein shall be deemed to cause this Supplier Agreement to create an agency, partnership, joint venture or any other relationship between the parties. 7.4 Binding Effect; Assignability. This Supplier Agreement shall be binding upon, and shall inure to the benefit of, the parties> Successors and assigns. Notwithstanding the foregoing, Customer may not assign, delegate or otherwise transfer any of its rights or obligations under this Supplier Agreement without Arrow CMS's prior written approval in each instance, which may be withheld in Arrow CMS's absolute discretion.- Customer shall not sell all Or substantially all of its assets that relate to the business to which this Supplier Agreement is included, unless the purchaser thereof assumes all of Customer's rights and obligations under this Supplier Agreement. Page 3 of 4 Page 71 of 79 7.5 Notices. Notices or other communications under this Supplier Agreement shall be in writing and shall be effective whether delivered personally or by overnight courier, or mailed, postage prepaid, by certified or registered mail to each party at the address set forth below (or to such other address as either party may from time to time provide the other): Arrow Electronics, Inc. Arrow CMS Distribution Group 35 Upton Drive Wilmington, MA 01887 Attention: Kevin D. Wholey With a copy to: Joseph Sabia Arrow Electronics, Inc. 25 Hub Drive Melville, NY 11747 Attention: David 1. Corcoran, Vice President, Credit And a copy to: Arrow Electronics, Inc. 25 Hub Drive Melville, NY 11747 Attention: Glenn Moore, Manager, Contracts & Proposals 7.6 Entire Agreement: Amendment; Severability; and Waiver. This Supplier Agreement represents the entire agreement between the parties concerning the subject matter hereof, and may not be modified except in a writing signed by both parties. This Supplier Agreement supersede~ .all proposals Or quotatio11S, oral or written, and all negotiations, conversations, or discussions between or among the parties relating to the subject matter of this Supplier Agreement. Any waiver of any provision of this Supplier Agreement must be in writing and signed by the party alleged to have waived such provision, and any single waiver shall not operate to waive subsequent Or other defaults. The unenforceability of any provision of this Supplier Agreement shall not affect the remaining provisions or any portion~ thereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplier Agreement to be executed by their duly authorized representatives as of the day and year' first above written. IEC ELECTRONICS CORP. By: /s/W. Barry Gilbert ------------------- Name: W. Barry Gilbert Title: Chairman ARROW ELECTRONICS, INC. Arrow CMS Distribution Group By: Name: Title: Page 4 of 4 Page 72 of 79 EX-10.31 6 ex1031for0310k.txt AMEND. TO TERM NOTE Exhibit 10.31 AMENDMENT NUMBER ONE Amendment Number One to that certain Term Note dated January 13, 2003 (the "Note") by and between IEC Electronics Corp., a Delaware corporation (the "Borrower) and SunTrust Bank (the "Bank"), a Georgia banking corporation. W I T N E S S E T H WHEREAS, the Parties entered into the Note as aforesaid; and WHEREAS, the Parties now desire to amend the Note in certain respects; NOW, THEREFORE, it is agreed as follows: Payments of Principal and Interest. Number 2 of the Term Note is hereby amended by deleting Number 2 in its entirety and inserting the following Number 2 in lieu thereof: 2. Payments of Principal and Interest. Commencing February 10, 2003 this note shall be repaid in eight (8) consecutive monthly installments of principal in the amount of $100,000 plus accrued interest followed by a principal payment of $275,000.02 due on September 26, 2003, then followed by twenty seven (27) consecutive monthly installments of principal in the amount of $41,666.66 plus accrued interest with all unpaid principal and accrued interest due and payable on January 10, 2006 (the "Maturity Date"), unless sooner accelerated in accordance with the terms hereof. Interest shall be calculated on the outstanding principal balance of this Note, and shall be due and payable in arrears; provided that, in the event of any change in the Prime Rate occurring on or after the date when the Holder mails an invoice for the monthly payment amount to the Borrower, any such change in the interest payment shall be reflected as an adjustment in the next monthly invoice sent to the Maker and shall not be deemed to be due and payable until that date. IN WITNESS WHEREOF, the parties have executed the Amendment Number One this 26th day of September 2003. Borrower: IEC Electronics Corp. By: Name: W. Barry Gilbert, Chairman Title: CFO SunTrust Bank By: Name: Title: Page 1 of 1 Page 73 of 79 EX-21.1 7 ex211for0310k.txt SUBSIDIARIES OF IEC ELECTRONICS EXHIBIT 21.1 Subsidiaries of IEC Electronics Corp. IEC Electronicos de Mexico, S. De R.L. De C.V., wholly-owned by IEC Electronics Corp. IEC Electronics Foreign Sales Corporation, a Barbados corporation, wholly-owned by IEC Electronics Corp. Page 1 of 1 Page 74 of 79 EX-23 8 ex231for0310k.txt CONSENT OF INDEPENDENT ACCOUNTANT Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 File Nos. 33-63816, 33-79360, 333-4634, 333-84471 and 333-103847. /s/ Rotenberg and Co., LLP -------------------------- Rotenberg and Co., LLP Rochester, New York November 21, 2003 Page 1 of 1 Page 75 of 79 EX-31.1 9 ex311for0310k.txt CERT. REQ UNDER SECTION 302 OF SARBANES-OXLEY Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, W. Barry Gilbert, certify that: 1. I have reviewed this annual report on Form 10-K of IEC Electronics Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15 d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and, c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 21, 2003 /s/ W. Barry Gilbert -------------------- W. Barry Gilbert Chairman and Acting Chief Executive Officer Page 1 of 1 Page 76 of 79 EX-31.2 10 ex312for0310k.txt CERT. REQ UNDER SECTION 302 OF SARBANES-OXLEY Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Brian H. Davis, certify that: 1. I have reviewed this annual report on Form 10-K of IEC Electronics Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15 d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and, c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 21, 2003 /s/ Brian H. Davis -------------------- Brian H. Davis Vice President, Chief Financial Officer and Controller Page 1 of 1 Page 77 of 79 EX-32.1 11 ex321for0310k.txt CERT. REQUIRED UNDER SECTIONS-OXLEY ACT OF 2002 Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 In conjunction with the annual report of IEC Electronics Corp., (the "Company") on Form 10-K for the fiscal year ended September 30, 2003 as filed with Securities and Exchange Commission on the day hereof (the "Report"), I, W. Barry Gilbert, acting Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1.) The report fully complies with the requirement of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2.) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 21, 2003 /s/W. Barry Gilbert ------------------- W. Barry Gilbert Chairman and Acting Chief Executive Officer Page 1 of 1 Page 78 of 79 EX-32.2 12 ex322for0310k.txt CERT. REQUIRED UNDER SECTIONS-OXLEY ACT OF 2002 Exhibit 32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 In conjunction with the annual report of IEC Electronics Corp., (the "Company") on Form 10-K for the fiscal year ended September 30, 2003 as filed with Securities and Exchange Commission on the day hereof (the "Report"), I, Brian H. Davis, Chief Financial Officer and Controller of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1.) The report fully complies with the requirement of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2.) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 21, 2003 /s/Brian H. Davis ----------------- Brian H. Davis Chief Financial Officer and Vice President Page 1 of 1 Page 79 of 79 -----END PRIVACY-ENHANCED MESSAGE-----