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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Quarter Ended April 1, 2001 Commission File 0-12942
----------------------------------- -----------------------
PARLEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2464749
------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
One Parlex Place
----------------
Methuen, Massachusetts 01844
----------------------------
(Address of principal executive offices, including zip code)
978-685-4341
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
-----------------------------------------------------------
Title of Each Class Name of exchange on which registered
------------------- ------------------------------------
Common Stock ($.10 par value) NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
None
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
----- -----
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at May 7, 2001 was 6,303,216 shares.
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1
PARLEX CORPORATION
------------------
INDEX
-----
Part I - Financial Information Page
----
Item 1. Consolidated Unaudited Financial Statements:
Consolidated Balance Sheets - April 1, 2001 and June 30, 2000 3
Consolidated Statements of Operations - For the Three Months
and Nine Months ended April 1, 2001 and March 26, 2000 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended April 1, 2001 and March 26, 2000 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
And Results of Operations 10
Part II - Other Information 17
Signatures 18
Exhibit Index 19
2
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 1, 2001 and June 30, 2000
(Unaudited)
April 1, 2001 June 30, 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,816,196 $ 11,949,858
Short-term investments 5,373,994 -
Accounts receivable - net 19,974,225 19,167,016
Inventories 22,442,322 21,148,660
Refundable income taxes 2,065,277 -
Deferred income taxes 1,079,073 1,079,073
Other current assets 2,374,408 2,781,661
------------------------------
Total current assets 57,125,495 56,126,268
------------------------------
Property, plant and equipment:
Land 1,018,822 893,865
Buildings 21,784,805 20,240,949
Machinery and equipment 55,516,689 50,457,494
Leasehold improvements and other 7,036,390 5,746,720
Construction in progress 4,044,707 5,003,002
------------------------------
Total 89,401,413 82,342,030
Less accumulated depreciation and amortization (32,821,003) (28,114,968)
------------------------------
Property, plant and equipment - net 56,580,410 54,227,062
------------------------------
Goodwill - net 1,031,705 4,447,358
Other assets 390,813 539,950
------------------------------
Total $115,128,423 $115,340,638
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,415,700 $ 657,524
Accounts payable 11,023,420 11,292,256
Accrued liabilities 4,483,637 4,599,549
------------------------------
Total current liabilities 24,922,757 16,549,329
------------------------------
Long-term debt 178,766 1,185,386
------------------------------
Other noncurrent liabilities 2,798,664 5,932,931
------------------------------
Minority interest in Parlex (Shanghai) 4,283,981 3,883,416
------------------------------
Stockholders' equity
Preferred stock - -
Common stock 651,321 648,588
Additional paid-in capital 60,825,502 60,678,009
Retained earnings 22,715,509 27,623,632
Accumulated other comprehensive income (210,452) (123,028)
Less treasury stock, at cost - 210,000 shares in 2000 and 1999 (1,037,625) (1,037,625)
------------------------------
Total stockholders' equity 82,944,255 87,789,576
------------------------------
TOTAL $115,128,423 $115,340,638
==============================
See notes to unaudited consolidated financial statements.
3
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
April 1, 2001 March 26, 2000 April 1, 2001 March 26, 2000
------------- -------------- ------------- --------------
Product sales $24,873,679 $24,716,151 $81,396,554 $68,677,279
License fees and royalty income 15,283 555,000 182,051 1,343,508
------------------------------------------------------------------
Total revenues 24,888,962 25,271,151 81,578,605 70,020,787
------------------------------------------------------------------
Costs and Expenses:
Cost of products sold 24,904,023 18,905,358 74,423,899 53,171,319
Selling, general and administrative expenses 4,168,874 3,129,444 12,596,214 8,761,719
------------------------------------------------------------------
Operating costs and expenses 29,072,897 22,034,802 87,020,113 61,933,038
------------------------------------------------------------------
Operating (loss) income (4,183,935) 3,236,349 (5,441,508) 8,087,749
Other income (expense) 218,178 (150,529) 479,313 5,224
Interest expense (180,275) (214,821) (299,887) (368,490)
------------------------------------------------------------------
(Loss) income before benefit from (provision
for) income taxes and minority interest (4,146,032) 2,870,999 (5,262,082) 7,724,483
Benefit from (provision for) income taxes 517,550 (781,987) 707,550 (2,175,000)
------------------------------------------------------------------
(Loss) income before minority interest (3,628,482) 2,089,012 (4,554,532) 5,549,483
Minority interest 78,337 (384,886) (397,019) (949,197)
------------------------------------------------------------------
Net (loss) income $(3,550,145) $ 1,704,126 $(4,951,551) $ 4,600,286
==================================================================
Basic (loss) earnings per share ($0.56) $0.35 ($0.79) $0.96
==================================================================
Diluted (loss) earnings per share ($0.56) $0.34 ($0.79) $0.94
==================================================================
Weighted average shares - basic 6,294,818 4,812,936 6,284,503 4,805,473
==================================================================
Weighted average shares - diluted 6,294,818 4,938,776 6,284,503 4,883,645
==================================================================
See notes to unaudited consolidated financial statements.
4
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
--------------------------------
April 1, 2001 March 26, 2000
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (4,951,551) $ 4,600,286
-------------------------------
Adjustments to reconcile net (loss) income to net cash
provided by (used for) operating activities:
Depreciation and amortization of property, plant and
equipment and other assets 4,971,724 3,107,973
Minority interest 397,019 949,198
Changes in current assets and liabilities:
Accounts receivable - net (807,209) (2,619,170)
Inventories (1,293,662) (5,359,771)
Refundable taxes (2,065,277) 129,790
Other assets 532,524 30,278
Accounts payable and accrued liabilities (532,446) 3,554,750
-------------------------------
Total adjustments 1,202,673 (206,952)
-------------------------------
Net cash (used for) provided by operating activities (3,748,878) 4,393,334
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Poly-Flex subsidiary - (20,240,000)
(Purchases) maturities of investments available for sale, net (5,373,994) 1,606,351
Additions to property, plant and equipment (6,825,149) (7,094,256)
-------------------------------
Net cash used for investing activities (12,199,143) (25,727,905)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 18,840,000 25,100,935
Payment of bank loans (11,088,444) (2,921,437)
Exercise of stock options 150,226 209,491
-------------------------------
Net cash provided by financing activities 7,901,782 22,388,989
-------------------------------
Effect of exchange rate changes on cash (87,423) (20,563)
-------------------------------
Net (decrease) increase in cash and cash equivalents (8,133,662) 1,033,855
Cash and cash equivalents, beginning of year 11,949,858 1,175,889
-------------------------------
Cash and cash equivalents, end of period $ 3,816,196 $ 2,209,744
===============================
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS:
Effect of tax election on Poly-Flex acquisition $ 3,197,000 $ -
===============================
Property, plant and equipment purchases financed through
accounts payable $ 210,431 $ -
===============================
See notes to unaudited consolidated financial statements.
5
PARLEX CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
----------------------------------------------------
1. Management Statement
--------------------
The financial statements as reported in Form 10-Q reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial position as of April 1, 2001 and the results of
operations and cash flows for the three months and nine months ended April
1, 2001 and March 26, 2000. All adjustments made to the interim financial
statements included all those of a normal and recurring nature.
We followed the same accounting policies in the preparation of this
interim financial statement as described in our annual filing on Form 10-K
for the year ended June 30, 2000, with the exception of the consolidation
of our 50.1% interest in Parlex (Shanghai) Circuit Co., Ltd. ("Parlex
Shanghai") and our wholly owned subsidiary, Parlex Asia Pacific Limited
("PAPL"). We previously consolidated Parlex Shanghai and PAPL on a three
month time lag. Beginning with the quarter ending December 31, 2000, we
conformed the reporting of Parlex Shanghai and PAPL with our December
quarter financial results. Accordingly, the Parlex Shanghai and PAPL net
income for the quarter ended September 26, 2000 is reported as an
adjustment to retained earnings in the amount of $46,000.
This filing should be read in conjunction with our annual report on
Form 10-K for the year ended June 30, 2000.
2. Comprehensive (Loss) Income
---------------------------
Comprehensive (loss) income for the three months and nine months
ended April 1, 2001 and March 26, 2000 is as follows:
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
April 1, 2001 March 26, 2000 April 1, 2001 March 26, 2000
------------- -------------- ------------- --------------
Net (loss) income $(3,550,145) $1,704,126 $(4,951,551) $4,600,286
Other comprehensive (Loss) Income:
Unrealized gain (loss) on short term investments 26,728 - 48,724 (1,886)
Cumulative translation adjustments (127,873) 513 (136,148) (18,677)
-------------------------------------------------------------------
Total comprehensive (loss) income $(3,651,290) $1,704,639 $(5,038,975) $4,579,723
===================================================================
The accumulated other comprehensive (loss) income balance is as
follows:
Unrealized gains
(losses) on Cumulative Trans-
Short Term Investments lation Adjustments Total
---------------------- ------------------ -----
Beginning balance $ - $(123,028) $(123,028)
Current period change 48,724 (136,148) (87,424)
----------------------------------------------------
Ending balance $48,724 $(259,176) $(210,452)
====================================================
6
3. Poly-Flex Acquisition
---------------------
On March 1, 2000, we acquired the businesses of Poly-Flex Circuits,
Inc. and Poly-Flex Circuits, Limited (collectively "Poly-Flex") from
Cookson Group plc and Cookson Investments, Inc. (together, "Cookson")
pursuant to a Stock Purchase Agreement (the "Agreement") dated as of
January 21, 2000.
Poly-Flex is engaged in the manufacture of polymer thick film
flexible circuits and flexible interconnect assemblies. The acquisition was
accounted for using the purchase method of accounting. The purchase price
was preliminarily allocated to the assets acquired and liabilities assumed
based on estimated fair values as of the date of acquisition. Approximately
$3.7 million representing an allocation of purchase price over the
estimated fair value of net assets acquired was recorded as goodwill, a
substantial portion of which was the result of differences in the estimated
fair value and the tax basis of the assets acquired.
On December 15, 2000, we jointly filed with Cookson a tax election
with the Internal Revenue Service to account for the transaction as an
asset acquisition for tax purposes whereby the assets acquired would be
recorded, for tax purposes, at fair value versus their carryover tax basis.
Accordingly, during the second quarter ending December 31, 2000, we
reallocated the purchase price by reducing deferred tax liabilities by
approximately $2,544,000, reducing goodwill by approximately $3,197,000,
and recording deferred tax assets of approximately $653,000. The remaining
goodwill of approximately $440,000 will continue to be amortized over a
ten-year period.
In addition, the terms of the Agreement provide that the purchase
price may be adjusted based upon the earnings of Poly-Flex for the ten
months ending December 31, 2000 and for the Combined Net Asset Value, as
defined in the Agreement. We have submitted our calculation of amounts owed
to us by Cookson of $1,250,000 as a result of Poly-Flex' financial
performance for the ten months ending December 31, 2000 being less than the
$2 million annualized contractual requirement. In addition, since adjustments
to the purchase price, as provided for in the Agreement, are subject to
dispute, we have not recorded a reduction of purchase price. Such
adjustment, if any, will be recorded upon resolution of any dispute.
The results of operations of Poly-Flex are included in the
consolidated financial statements for the three and nine months ended April
1, 2001.
4. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for
hedging activities. The adoption of SFAS No. 133 on July 1, 2000 did not
have a material impact on the consolidated financial statements.
On December 3, 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenues in financial statements filed with
the SEC. The implementation date of SAB No. 101 has been delayed until no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. We have determined that there will be no material effect
of adopting SAB No. 101 on our consolidated financial position and our
results of operations.
5. Reclassifications
-----------------
7
Certain prior period amounts have been reclassified to conform to the
current period presentation.
6. Stockholder's Equity
--------------------
On August 30, 2000, a Special Meeting of Stockholders approved an
amendment to our Restated Articles of Organization increasing the number of
authorized shares of Common Stock, par value $.10 per share, from
10,000,000 shares to 30,000,000 shares.
7. Debt Classification
-------------------
On March 1, 2000, we renegotiated our unsecured Revolving Credit
Agreement (the "Credit Agreement") (originally dated June 22, 1994) making
available up to a total of $15,000,000 through December 31, 2001. No
further advances of principal will be made under this Credit Agreement
after December 31, 2001. On January 1, 2002, the Credit Agreement converts
to a term loan with principal and interest payments due monthly over a
forty-five-month period ending on September 30, 2005. At our discretion,
borrowings under the Credit Agreement accrue interest at either a variable
rate equal to the bank's prime rate (8.0% at April 1, 2001) or a fixed rate
equal to LIBOR rate plus a margin that varies from 1.5% to 2.0%. The Credit
Agreement carries an annual commitment fee of 1/4% on the average daily
unused portion of the bank's commitment. Interest is payable monthly. As of
April 1, 2001, the unused commitment amounted to $7.3 million. The Credit
Agreement has certain restrictive covenants related to tangible net worth,
current ratio, working capital, debt service coverage ratio, and the ratio
of total liabilities to equity. As of April 1, 2001, we were in compliance
with the provisions of the Credit Agreement with the exception of the debt
service coverage ratio. As a result the amounts due under the Credit
Agreement have been classified as short term debt. We are in the process of
renegotiating the terms of the Credit Agreement and anticipate adjusting
certain financial covenants so that we maintain compliance in the future.
The Credit Agreement permits us to pay cash dividends to the extent such
payment would not cause us to violate the aforementioned covenants.
8. Income Taxes
------------
Our effective tax rate is impacted by the proportion of our estimated
annual income being earned in foreign tax jurisdictions which generally
have lower tax rates than our domestic tax jurisdictions. Our China joint
venture, Parlex Shanghai, is eligible for a 50% reduction in the statutory
income tax rate of 15% through December 31, 2001.
9. Stock Options
-------------
On November 28, 2000, our Board of Directors approved a proposal to
offer employees a choice to cancel certain stock options granted to them in
February and March of 2000 in exchange for new options to purchase 75% of
the original number of shares of stock. The new options will be granted six
months and one day from the date the old options are cancelled. The
exercise price of the new options will be the market price on the grant
date.
The exchange offer was not available to members of the Board of
Directors or executive officers.
The original options, for approximately 45,000 shares, were granted
in February and March of 2000 under our 1989 Employees' Stock Option Plan
and have exercise prices ranging from $35.375 to $36.00. Due to the decline
in the market price of our common stock, the Board of Directors determined
that these options were no longer adequate to provide satisfactory
incentive for the retentive value needed in today's employment market. All
eligible employees have accepted the offer to forfeit their original
options.
8
Employees who accept the offer must accept the offer with respect to
all covered options. In order to receive the new options, the employees
must remain employed until the new grant date. In addition, the new options
will have extended vesting requirements in order to increase their
retentive value to the corporation.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
information included in this Quarterly Report on Form 10-Q and with
"Factors That May Affect Future Results" set forth on page 16. The
following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from the
results contemplated by these forward-looking statements as a result of
many factors, including those discussed below and elsewhere in this
Quarterly Report on Form 10-Q.
Overview
- --------
We are a leading supplier of flexible interconnects principally for
sale to the automotive, telecommunications and networking, diversified
electronics, aerospace and computer markets. We believe that our
development of innovative materials and processes provides us with a
competitive advantage in the markets in which we compete. During the past
three fiscal years, we have invested approximately $33.2 million in
property and equipment and approximately $11.1 million in research and
development to develop materials and enhance our manufacturing processes.
We believe that these expenditures will help us to meet customer demand for
our products, and enable us to continue to be a technological leader in the
flexible interconnect industry. Our research and development expenses are
included in our cost of products sold.
Recent Acquisitions
- -------------------
On March 1, 2000, we acquired the businesses of Poly-Flex Circuits,
Inc. and Poly-Flex Circuits, Limited (collectively "Poly-Flex") from
Cookson Group plc and Cookson Investments, Inc. (together, "Cookson")
pursuant to a Stock Purchase Agreement (the "Agreement") dated as of
January 21, 2000.
Poly-Flex is engaged in the manufacture of polymer thick film
flexible circuits and flexible interconnect assemblies. The acquisition was
accounted for using the purchase method of accounting. The purchase price
was preliminarily allocated to the assets acquired and liabilities assumed
based on estimated fair values as of the date of acquisition. Approximately
$3.7 million representing an allocation of purchase price over the
estimated fair value of net assets acquired was recorded as goodwill, a
substantial portion of which was the result of differences in the estimated
fair value and the tax basis of the assets acquired.
On December 15, 2000, we jointly filed with Cookson a tax election
with the Internal Revenue Service to account for the transaction as an
asset acquisition for tax purposes whereby the assets acquired would be
recorded, for tax purposes, at fair value versus their carryover tax basis.
Accordingly, during the second quarter ending December 31, 2000, we
reallocated the purchase price by reducing deferred tax liabilities by
approximately $2,544,000, reducing goodwill by approximately $3,197,000,
and recording deferred tax assets of approximately $653,000. The remaining
goodwill of approximately $440,000 will continue to be amortized over a
ten-year period.
In addition, the terms of the Agreement provide that the purchase
price may be adjusted based upon the earnings of Poly-Flex for the ten
months ending December 31, 2000 and for the Combined Net Asset Value, as
defined in the Agreement. We have submitted our calculation of amounts owed
to us by Cookson of $1,250,000 as a result of Poly-Flex' financial
performance for the ten months ending December 31, 2000 being less than the
$2 million annualized contractual requirement. In addition, since
adjustments to the purchase price, as provided for in the Agreement, are
subject to dispute, we have not recorded a reduction of purchase price.
Such adjustment, if any, will be recorded upon resolution of any dispute.
10
The results of operations of Poly-Flex are included in the
consolidated financial statements for the three and nine months ended April
1, 2001.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, selected
items in our statements of income as a percentage of total revenue. You
should read the table and the discussion below in conjunction with our
Consolidated Financial Statements and the Notes thereto.
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
April 1, 2001 March 26, 2000 April 1, 2001 March 26, 2000
------------- -------------- ------------- --------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 100.1% 74.8% 91.2% 75.9%
-------------------------------------------------------------
Gross Profit -0.1% 25.2% 8.8% 24.1%
Selling, general and administrative expenses 16.7% 12.4% 15.4% 12.5%
-------------------------------------------------------------
Operating (loss) income -16.8% 12.8% -6.6% 11.6%
Income (loss) from operations before benefit from
(provision for) income taxes and minority interest -16.7% 11.4% -6.5% 11.0%
Net (loss) income -14.3% 6.7% -6.1% 6.6%
=============================================================
Three Months Ended April 1, 2001 Compared to Three Months Ended March 26, 2000
- ------------------------------------------------------------------------------
Total Revenues. Our total revenues were $24.9 million for the three
months ended April 1, 2001 compared to $25.3 million for the three months
ended March 26, 2000. We recorded increases in revenue from product sales
from all of our manufacturing operations with the exception of our Methuen,
Massachusetts, Parlex Shanghai and PAPL operations.
The Methuen operation experienced a reduction in product sales of
$4.8 million or 37% for the three months ended April 1, 2001 compared to
the same period in 2000. The decrease in product sales at the Methuen
facility was due primarily to a decrease in purchases from customers in the
telecommunications industry as a result of excess inventory held by these
customers. While sales to these customers are expected to increase, there
is no assurance that sales will not fluctuate in the future nor are we able
to predict the time frame within which there will be renewed sales due to
the economic uncertainty in the telecommunications industry. The Parlex
Shanghai and PAPL operations experienced a reduction in product sales of
$861,000 for the three months ended April 1, 2001 compared to the same period
in 2000 due to a decline in demand for our computer and telecommunications
related products. The decline in product sales from the Methuen, Parlex
Shanghai and PAPL operations was offset by the inclusion of revenues of
$5.9 million from our Poly-Flex operation, acquired in March 2000, and
increased sales from our other operations.
Total revenues included licensing and royalty fees of $15,283 for the
three months ended April 1, 2001 compared to $555,000 for the same period
in 2000. The $555,000 generated from licensing and royalty fees for the
quarter ending March 26, 2000 was related to our $1.3 million patent
assignment agreement with Polyclad Laminates, Inc. The final installment of
the Polyclad agreement was recognized in the quarter ended October 1, 2000.
11
Cost of Products Sold. Cost of products sold were $24.9 million, or
100% of total revenues, for the three months ended April 1, 2001, compared
to $18.9 million, or 75% of total revenues for the comparable period in the
prior year.
The quarter ending April 1, 2001 includes a $1.7 million charge for
severance and inventory reserves associated with the slowdown in the
technology markets. In addition, the Methuen operation experienced unfavorable
manufacturing variances of $3.6 million or 14% of total revenues as
compared to the same period last year. The manufacturing variances are due
to excess manufacturing capacity associated with a 37% decrease in product
sales for the three months ending April 1, 2001. To counteract the excess
manufacturing capacity, we have initiated actions to reduce personnel and
other manufacturing expenses. Although these cost reduction measures are
expected to reduce the percentage of costs of products sold for the Methuen
operation, a return to profitability is predicated upon operational
performance, a favorable product mix and increased shipments. The increase
in the cost of products sold in 2001 also includes costs incurred from our
Poly-Flex operation, which was acquired in March 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4.2 million, or 17% of total revenues, for
the three months ended April 1, 2001, and $3.1 million or 12% of total
revenues for the comparable period in the prior year. The growth in
selling, general and administrative expenses was primarily due to the
inclusion of the Poly-Flex operation, which was $758,000 for the three
months ending April 1, 2001 and a charge of $400,000 for severance and bad
debt allowance associated with the slowdown in our technology markets. To
compensate for the increase in expenses, we have initiated actions to reduce
personnel and other selling, general and administrative expenses.
Other Income, Interest Expense, and Benefit from (Provision for)
Income Taxes. Other income in the current quarter of $218,000 consisted of
interest income from our short-term investments and $110,000 received
relative to the settlement of legal claims associated with our Methuen
building addition. As of April 1, 2001 we had short-term investments of
$5.4 million. Other expense for the comparable period in the prior year was
$151,000.
Interest expense was $180,000 for the three months ended April 1,
2001, compared to $215,000 for the comparable period in the prior year. The
interest expense for both periods represents interest incurred on our short
and long-term borrowings for working capital needs and interest expense
associated with deferred compensation.
Our loss before benefit from income taxes and for the minority
interest in our Chinese joint venture, Parlex Shanghai, was $4.1 million
for the three months ended April 1, 2001, compared to income of $2.9
million for the comparable period in the prior year. We own 50.1% of the
equity interest in Parlex Shanghai and, accordingly, include Parlex
Shanghai's results of operations, cash flows and financial position in our
consolidated financial statements.
Our effective tax rate was approximately 13% in the three months
ended April 1, 2001, compared to a 27% effective tax rate for the
comparable period in the prior year. The decrease in the effective tax rate
resulted from losses in our domestic tax jurisdictions and a greater
proportion of our estimated annual income being earned in foreign tax
jurisdictions which generally have lower tax rates than our domestic tax
jurisdictions.
Our loss after benefit from income taxes and for the minority
interest in Parlex Shanghai was $3.6 million for the three months ended
April 1, 2001, compared to income of $1.7 million for the three months
ended March 26, 2000.
12
Nine months ended April 1, 2001 Compared to Nine months ended March 26, 2000
- ----------------------------------------------------------------------------
Total Revenues. Our total revenues were $81.6 million for the nine
months ended April 1, 2001, an increase of $12 million or 17% from $70.0
million for the nine months ended March 26, 2000. We recorded increases in
revenue from product sales across all manufacturing locations with the
exception of our Methuen, Massachusetts operation.
The Methuen operation experienced a reduction in product sales of
$10.4 million or 27% for the nine months ended April 1, 2001 compared to
the same period in 2000. The decrease in product sales at the Methuen
facility was due primarily to a decrease in purchases from customers in the
telecommunications industry as a result of excess inventory held by these
customers. While sales to these customers are expected to increase, there is
no assurance that sales will not fluctuate in the future nor are we able to
predict the time frame within which there will be renewed sales due to
economic uncertainty in the telecommunications industry. The decline in
product sales from the Methuen operation was offset by the inclusion of
revenues of $17.1 million from our Poly-Flex operation, acquired in March
2000, and increased sales from our other operations.
Total revenues included licensing and royalty fees of $182,000 for
the nine months ended April 1, 2001, of which $105,000 was the recognition
of the final installment of our patent assignment agreement with Polyclad
Laminates, Inc. Total revenues for the nine months ending March 26, 2000
included licensing and royalty fees of $1,344,000 from Polyclad Laminates,
Inc.
Cost of Products Sold. Cost of products sold were $74.4 million, or
91% of total revenues, for the nine months ended April 1, 2001, compared to
$53.2 million, or 76% of total revenues for the comparable period in the
prior year.
The nine months ending April 1, 2000 includes a $1.7 million charge
for severance and other reserves associated with the slowdown in our
technology markets. In addition, the Methuen operation experienced
unfavorable manufacturing variances of $7.8 million or 10% of total
revenues as compared to the same period last year. The manufacturing
variances are due to excess manufacturing capacity associated with a 27%
decrease in product sales for the nine months ending April 1, 2001. To
counteract the excess manufacturing capacity, we have initiated actions to
reduce personnel and other manufacturing expenses. Although these cost
reduction measures are expected to reduce the percentage of costs of
products sold for the Methuen operation, a return to profitability is
predicated upon operational performance, a favorable product mix and
increased shipments. The increase in the cost of products sold in 2001 also
includes costs incurred from our Poly-Flex operation which was acquired in
March 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.6 million, or 15% of total revenues, for
the nine months ended April 1, 2001, and $8.8 million for the comparable
period in the prior year, or 13% of total revenues for that period. The
growth in selling, general and administrative expenses was primarily due to
the inclusion of the Poly-Flex operation, which was $2.5 million for the
nine months ending April 1, 2001 and a charge of $400,000 for severance and
bad debt allowance associated with the slowdown in our technology markets.
To compensate for the increase in expenses, we have initiated actions to
reduce personnel and other selling, general and administrative expenses.
Other Income, Interest Expense, and Benefit from (Provision for)
Income Taxes. Other income of $479,000 for the nine months ended April 1,
2001 was comprised of interest income from our short-term investments and
$110,000 received relative to the settlement of legal claims associated
with our Methuen building addition. As of April 1, 2001, we had short-term
investments of $5.4 million.
13
Interest expense was $300,000 for the nine months ended April 1,
2001, compared to $368,000 for the comparable period in the prior year. The
interest expense for both periods represents interest incurred on our short
and long-term borrowings for working capital needs and interest expense
associated with deferred compensation.
Our loss before benefit from income taxes and the minority interest
in our Chinese joint venture, Parlex Shanghai, was $5.3 million for the
nine months ended April 1, 2001, compared to income of $7.7 million for the
nine months ended March 26, 2000. We own 50.1% of the equity interest in
Parlex Shanghai and, accordingly, include Parlex Shanghai's results of
operations, cash flows and financial position in our consolidated financial
statements.
Our effective tax rate was approximately 13% in the nine months ended
April 1, 2001, compared to a 28% effective tax rate for the comparable
period in the prior year. The decrease in the effective tax rate resulted
from losses in our domestic tax jurisdictions and a greater proportion of
our estimated annual income being earned in foreign tax jurisdictions, which
generally have lower tax rates than our domestic tax jurisdictions.
Our loss after provision for income taxes and for the minority
interest in Parlex Shanghai was $4.9 million for the nine months ended
April 1, 2001, compared to income of $4.6 million for the nine months ended
March 26, 2000.
Liquidity and Capital Resources
- -------------------------------
As of April 1, 2001, we had approximately $9.2 million in cash and
short-term investments.
Net cash used in operations during the nine months ended April 1,
2001 was $3.7 million. This cash was used to support our working capital
requirements including the purchase of inventory and receivables associated
with sales growth at our Poly-Flex, Laminated Cable and China operations.
Cash used in investing activities was $12.2 million for the nine months ended
April 1, 2001. These funds were used to purchase $5.4 million of higher-
yielding investment grade corporate and United States Government debt
securities and $6.8 million of capital equipment and other expenditures.
Cash provided by financing activities was $7.9 million for the nine months
ended April 1, 2001 and represented the net borrowings and repayments of
our bank debt and cash received through the exercise of stock options.
On March 1, 2000, we renegotiated our unsecured Revolving Credit
Agreement (the "Credit Agreement") (originally dated June 22, 1994) making
available up to a total of $15,000,000 through December 31, 2001. No
further advances of principal will be made under this Credit Agreement
after December 31, 2001. On January 1, 2002, the Credit Agreement converts
to a term loan with principal and interest payments due monthly over a
forty-five-month period ending on September 30, 2005. At our discretion,
borrowings under the Credit Agreement accrue interest at either a variable
rate equal to the bank's prime rate (8.0% at April 1, 2001) or a fixed rate
equal to LIBOR rate plus a margin that varies from 1.5% to 2.0%. The Credit
Agreement carries an annual commitment fee of 1/4% on the average daily
unused portion of the bank's commitment. Interest is payable monthly. As of
April 1, 2001, the unused commitment amounted to $7.3 million. The Credit
Agreement has certain restrictive covenants related to tangible net worth,
current ratio, working capital, debt service ratio, and the ratio of total
liabilities to equity. As of April 1, 2001, we were in compliance with the
provisions of the Credit Agreement with the exception of the debt service
ratio. As a result the amounts due under the Credit Agreement have been
classified as short term debt. In view of our strong long term working
relationship with our bank and the current market conditions, we are in the
process of renegotiating the terms of the Credit Agreement and anticipate
adjusting certain financial covenants so that we maintain compliance in the
future. The Credit Agreement permits us to pay cash dividends to the extent
such payment would not cause us to violate the aforementioned covenants.
14
On May 4, 2001 we elected, as provided for under our Revolving Credit
Agreement, to convert $7 million of our revolver borrowings into three
LIBOR contracts with maturities of two, three and six months. The LIBOR
interest rate plus margin for these contracts varies between 5.75% and
5.867%.
In June 2000, we sold 1,452,500 shares of our common stock in a
public offering. Our proceeds were approximately $35.9 million, net of
expenses associated with the offering. We used a portion of the proceeds to
repay the outstanding indebtedness under our revolving credit agreement and
retire a $15 million term loan associated with the acquisition of Poly-
Flex. The remaining balance is being used for general corporate purposes,
including working capital.
We believe that our cash on hand, our short term investments, our
anticipated cash flow from operations, and the amounts to be made available
under our Credit Agreement should be sufficient to meet our anticipated needs
for at least the next 12 months.
Recent Accounting Pronouncements
- --------------------------------
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for
hedging activities. Our adoption of SFAS No. 133 on July 1, 2000 did not
have a material impact on the consolidated financial statements.
On December 3, 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenues in financial statements filed with
the SEC. The implementation date of SAB No. 101 has been delayed until no
later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. We have determined that there will be no material effect
of adopting SAB No. 101 on our consolidated financial position and our
results of operations.
Market Risk
- -----------
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. We are exposed to market
risk related to changes in interest rates and foreign currency exchange
rates. We do not use derivative financial instruments for speculative or
trading purposes.
As of April 1, 2001, we maintained a portion of our cash and cash
equivalents in financial instruments with varying maturities up to 18
months. These financial instruments are subject to interest rate risk and
will change in value if interest rates fluctuate. Due to the short duration
of these financial instruments, an immediate decrease in interest rates
would not have a material adverse effect upon our financial position.
We also have a revolving credit line, at our lender's prime rate or
LIBOR plus a margin that varies from 1.5% to 2.0%. Both the prime and LIBOR
rates are affected by changes in market interest rates. As of April 1,
2001, we owe approximately $7.7 million. We have the option to repay
borrowings at anytime without penalty, other than breakage fees in the case
of prepayment of LIBOR rate borrowings, and therefore believe that our
market risk is not material.
The remainder of our long-term debt bears interest at fixed rates and
is therefore not subject to market risk.
15
Sales of Parlex Shanghai and Poly-Flex Circuits Limited are often
denominated in their local currency, which is each company's functional
currency. This creates exposure to changes in exchange rates. The changes
in the Chinese/U.S. and U.K./U.S. exchange rates may positively or
negatively impact our sales, gross margins and retained earnings. Based
upon the current volume of transactions in China and the United Kingdom and
the stable nature of the exchange rate between China and the U.S. and the
United Kingdom and the U.S., we do not believe the market risk is material.
We do not engage in regular hedging activities to minimize the impact of
foreign currency fluctuations. Parlex Shanghai had net assets as of April
1, 2001 of approximately $8.6 million. Poly-Flex Circuits Limited had net
assets as of April 1, 2001 of approximately $7.0 million. We believe that a
10% change in exchange rates would not have a significant impact upon
Parlex Shanghai's or Poly-Flex Circuits Limited's financial position,
results of operation or outstanding debt. As of April 1, 2001, Parlex
Shanghai had outstanding debt of $1,491,000 and Poly-Flex Circuits Limited
had no outstanding debt.
Factors That May Affect Future Results
- --------------------------------------
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" as defined under the federal securities laws. Our actual
results of operations may differ significantly from those contemplated by
such forward-looking statements as a result of various risk factors beyond
our control, including, but not limited to, economic conditions in the
electronics industry, particularly in the principal industry sectors we
serve, changes in customer requirements and in the volume of sales to
principal customers, competition and technological change, and other one-
time events and other important factors disclosed previously and from time
to time in other filings we have made with the U.S. Securities and Exchange
Commission.
16
PART II - OTHER INFORMATION
---------------------------
Item 1 - 5. These items are not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K - We did not file a report on Form 8-K
during the quarter ended April 1, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PARLEX CORPORATION
------------------
By: /s/ Peter J. Murphy
--------------------------------
Peter J. Murphy
President and Chief Executive
Officer
By: /s/ Robert A. Rieth
--------------------------------
Robert A. Rieth
Senior Vice President & CFO
(Principal Accounting and
Financial Officer)
May 16, 2001
------------
Date
18
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
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11 Statement Regarding Computation of Per Share Earnings 20
19