UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
______________________________
Commission File No. 0-12942
PARLEX CORPORATION
Massachusetts 04-2464749
------------- ----------
(State of incorporation) (I.R.S. ID)
One Parlex Place, Methuen, Massachusetts 01844
978-685-4341
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 outstanding of the registrant's common stock as of
May 12, 2002 was 6,303,216 shares.
1
PARLEX CORPORATION
------------------
INDEX
-----
Part I - Financial Information Page
Item 1. Condensed Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets - March 31, 2002 and June 30, 2001 3
Consolidated Statements of Operations - For the Three Months
and Nine Months Ended March 31, 2002 and April 1, 2001 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended March 31, 2002 and April 1, 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II - Other Information 18
Signatures 19
Exhibit Index 20
2
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------
ASSETS March 31, 2002 June 30, 2001
<s> <c> <c>
CURRENT ASSETS:
Cash and cash equivalents $ 1,438,717 $ 3,203,990
Short-term investments - 5,533,703
Accounts receivable - net 16,578,194 17,434,115
Inventories - net 20,335,264 19,318,522
Refundable income taxes 1,176,544 2,921,145
Deferred income taxes 5,601,732 2,901,201
Other current assets 1,395,040 2,634,085
-------------------------------
Total current assets $ 46,525,491 $ 53,946,761
-------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 1,018,822 1,018,822
Buildings 22,177,980 22,109,721
Machinery and equipment 58,543,640 56,174,718
Leasehold improvements and other 7,226,065 6,806,493
Construction in progress 4,511,035 3,843,792
-------------------------------
Total 93,477,542 89,953,546
Less accumulated depreciation
and amortization (38,048,667) (34,379,848)
-------------------------------
Property, plant and
equipment - net 55,428,875 55,573,698
-------------------------------
GOODWILL - net 1,156,935 906,708
OTHER ASSETS 1,612,600 436,785
-------------------------------
TOTAL $104,723,901 $110,863,952
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of
long-term debt $ 3,703,052 $ 10,710,299
Accounts payable 11,772,207 8,330,461
Joint venture partner payable
obligations 1,356,964 -
Accrued liabilities 3,664,441 3,889,540
-------------------------------
Total current liabilities 20,496,664 22,930,300
-------------------------------
LONG-TERM DEBT 8,000,000 118,762
-------------------------------
OTHER NONCURRENT LIABILITIES 1,035,226 2,442,274
-------------------------------
MINORITY INTEREST IN
PARLEX SHANGHAI 438,567 4,021,485
-------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 651,321 651,321
Additional paid-in capital 60,897,275 60,897,275
Retained earnings 14,789,148 21,467,585
Accumulated other
comprehensive loss (546,675) (627,425)
Less treasury stock, at cost (1,037,625) (1,037,625)
-------------------------------
Total stockholders' equity 74,753,444 81,351,131
-------------------------------
TOTAL $104,723,901 $110,863,952
===============================
See notes to unaudited consolidated financial statements.
3
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
Three Months Ended Nine Months Ended
March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001
------------------------------------------------------------------
<s> <c> <c> <c> <c>
REVENUES:
Product sales $ 21,266,238 $ 24,873,679 $ 63,563,170 $ 81,396,554
License fees and royalty income 12,048 15,283 35,086 182,051
------------------------------------------------------------------
Total revenues 21,278,286 24,888,962 63,598,256 81,578,605
------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 21,285,005 24,904,023 63,175,513 74,423,899
Selling, general and administrative expenses 3,252,309 4,168,874 10,170,700 12,596,214
------------------------------------------------------------------
Total costs and expenses 24,537,314 29,072,897 73,346,213 87,020,113
------------------------------------------------------------------
OPERATING LOSS (3,259,028) (4,183,935) (9,747,957) (5,441,508)
OTHER INCOME, Net 8,879 218,178 231,368 479,313
INTEREST EXPENSE (145,755) (180,275) (455,417) (299,887)
------------------------------------------------------------------
LOSS FROM OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST (3,395,904) (4,146,032) (9,972,006) (5,262,082)
BENEFIT FROM INCOME TAXES 1,715,852 517,550 3,988,802 707,550
------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (1,680,052) (3,628,482) (5,983,204) (4,554,532)
MINORITY INTEREST 12,604 78,337 472,728 (397,019)
------------------------------------------------------------------
NET LOSS $ (1,667,448) $ (3,550,145) $ (5,510,476) $ (4,951,551)
==================================================================
BASIC LOSS PER SHARE ($0.26) ($0.56) ($0.87) ($0.79)
==================================================================
DILUTED LOSS PER SHARE ($0.26) ($0.56) ($0.87) ($0.79)
=================================================================
Weighted average shares - basic 6,303,216 6,294,818 6,303,216 6,284,503
==================================================================
Weighted average shares - diluted 6,303,216 6,294,818 6,303,216 6,284,503
==================================================================
See notes to unaudited consolidated financial statements
4
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
Nine Months Ended
March 31, 2002 April 1, 2001
--------------------------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (5,510,476) $ (4,951,551)
------------------------------
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization of property,
plant and equipment and other assets 4,779,170 4,971,724
Minority interest (472,863) 397,019
Changes in current assets and liabilities:
Accounts receivable - net 871,753 (807,209)
Inventories (998,429) (1,293,662)
Refundable taxes 1,753,601 (2,065,277)
Other assets and deferred taxes (3,045,651) 532,524
Accounts payable and accrued liabilities 1,471,391 (532,446)
------------------------------
Net cash used for operating activities (1,151,504) (3,748,878)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Poly-Flex subsidiary 525,000 -
Acquisition of minority interest in Parlex Shanghai (3,173,283) -
Maturities (purchases) of investments available
for sale, net 5,498,950 (5,373,994)
Additions to property, plant and equipment
and other assets (4,367,584) (6,825,149)
------------------------------
Net cash used for investing activities (1,516,917) (12,199,143)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 21,121,583 18,840,000
Payment of bank loans (20,247,411) (11,088,444)
Exercise of stock options - 150,226
------------------------------
Net cash provided by financing activities 874,172 7,901,782
------------------------------
Effect of exchange rate changes on cash 28,976 (87,423)
------------------------------
Net decrease in cash and cash equivalents (1,765,273) (8,133,662)
Cash and cash equivalents, beginning of year 3,203,990 11,949,858
------------------------------
Cash and cash equivalents, end of period $ 1,438,717 $ 3,816,196
==============================
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS:
Effect of tax election on Poly-Flex acquisition $ - $ 3,197,000
==============================
Acquisition of minority interest in Parlex Shanghai $ 1,356,964 $ -
==============================
Property, plant, equipment and other asset
purchases financed under capital lease, long-term
debt and accounts payable $ 495,320 $ 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 March 31, 2002 and the results of operations and
cash flows for the three months and nine months ended March 31, 2002 and
April 1, 2001. 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 these
interim financial statements as described in our annual filing on Form 10-K
for the year ended June 30, 2001. This filing should be read in conjunction
with our annual report on Form 10-K for the year ended June 30, 2001.
2. Comprehensive Loss
------------------
Comprehensive loss for the three months and nine months ended March 31,
2002 and April 1, 2001 is as follows:
Three Months Ended Nine Months Ended
March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001
-------------- ------------- -------------- -------------
<s> <c> <c> <c> <c>
Net loss $(1,667,448) $(3,550,145) $(5,510,476) $(4,951,551)
Other comprehensive (loss) income:
Unrealized gain (loss) on short
term investments - 26,728 (34,751) 48,724
Foreign currency translation adjustments (46,815) (127,873) 115,501 (136,148)
-----------------------------------------------------------------
Total comprehensive loss $(1,714,263) $(3,651,290) $(5,429,726) $(5,038,975)
=================================================================
The accumulated other comprehensive (loss) income balance is as follows:
Unrealized gains Foreign
(losses) on Currency Trans-
Short Term Investments lation Adjustments Total
---------------------- ------------------ -----
<s> <c> <c> <c>
Beginning balance, July 1, 2001 $ 34,751 $ (662,176) $ (627,425)
Current period change (34,751) 115,501 80,750
-----------------------------------------------------
Ending balance, March 31, 2002 $ - $ (546,675) $ (546,675)
=====================================================
6
3. Recent Accounting Pronouncements
--------------------------------
Effective July 1, 2001, Parlex Corporation and subsidiaries (the "Company")
adopted the provisions of Statement on Financial Accounting Standards
No.142, "Goodwill and Other Intangible Assets"("SFAS 142"). Under the
provisions of SFAS 142, if an intangible asset is determined to have an
indefinite useful life, it shall not be amortized until its useful life is
determined to be no longer indefinite. An intangible asset that is not
subject to amortization shall be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset
might be impaired. Goodwill is not amortized but is tested for impairment,
for each reporting unit, on an annual basis and between annual tests in
certain circumstances. In accordance with the guidelines in SFAS 142, the
Company determined it has one reporting unit. Upon adoption of SFAS 142
the Company performed an impairment review and concluded that there are no
necessary adjustments.
Other intangible assets, which is a component of other assets on the
condensed consolidated balance sheets, as of March 31, 2002, are as
follows:
Other
Intangible
Assets
----------
<s> <c>
Land use rights $1,144,835
Other intangible assets 109,787
Less: Accumulated amortization (66,788)
----------
Other intangible assets, net $1,187,834
The Company has reassessed the useful lives of other intangible assets and
determined the useful lives are appropriate in determining amortization
expense. Amortization expense for the quarter ended March 31, 2002 was
$7,867. The estimated amortization expense for each of the fiscal years
subsequent to June 30, 2001 is as follows:
Amortization Expense
--------------------
<s> <c>
For year ended June 30, 2002 $ 20,267
For year ended June 30, 2003 29,510
For year ended June 30, 2004 25,821
For year ended June 30, 2005 25,821
For year ended June 30, 2006 25,821
Thereafter 1,060,594
----------
$1,187,834
==========
The effect of adoption of SFAS 142 on net income and earnings per share is
as follows:
7
Three Months Ended Nine Months Ended
March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001
-------------- ------------- -------------- -------------
<s> <c> <c> <c> <c>
Reported net loss $(1,667,448) $(3,550,145) $(5,510,476) $(4,951,551)
Goodwill amortization (net of tax) - 37,876 - 236,596
-----------------------------------------------------------------
Adjusted net loss (1,667,448) (3,512,269) (5,510,476) (4,714,955)
Adjusted basic loss per share $ (0.26) $ (0.56) $ (0.87) $ (0.75)
=================================================================
Adjusted diluted loss per share $ (0.26) $ (0.56) $ (0.87) $ (0.75)
=================================================================
4. Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform to the
current period presentation.
5. Stock Options
-------------
On December 4, 2001 the stockholders approved the adoption of the 2001
Employees' Stock Option Plan (the "2001 Plan"). A total of 600,000 shares
of common stock (subject to adjustment for capital changes) in the
aggregate may be issued under the 2001 Plan.
6. Long-Term Debt
--------------
We executed the Second Amendment to our Loan Agreement (the "Credit
Agreement") (originally dated March 1, 2000) on April 16, 2002. The
agreement provides our bank with a secured interest in all of our assets
with exception to our real estate. We may borrow up to a total of
$15,000,000 which is currently based on a borrowing base of eligible
accounts receivable and marketable securities. No further advances of
principal will be made under this Credit Agreement after December 30, 2003.
At our discretion, borrowings under the Credit Agreement accrue interest at
either a variable rate equal to the bank's prime rate (4.75% at March 31,
2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to
2.25%. The Credit Agreement carries an annual commitment fee that varies
from 1/4% to 1/2% on the average daily unused portion of the bank's
commitment. Interest is payable monthly. As of March 31, 2002, the unused
commitment amounted to $6.9 million. The Credit Agreement has certain
restrictive covenants related to current ratio, tangible net worth, total
liabilities to tangible net worth, interest coverage ratio, debt service
coverage ratio and income and capital expenditure targets. As of March 31,
2002, we were in compliance with the provisions of the Credit Agreement.
The Credit Agreement permits us to pay cash dividends to the extent such
payment would not cause us to violate the aforementioned covenants. As of
March 31, 2002 we have, as provided for under our Credit Agreement,
converted $8 million of our Credit Agreement borrowings into six LIBOR
contracts with maturities between two and five months. The LIBOR plus
margin for these contracts varies between 4.12% and 4.36%.
7. Income Taxes
------------
Income taxes are recorded for this interim period based upon an estimated
annual effective tax rate. Our effective tax rate is impacted by the
proportion of our estimated annual income being earned in domestic versus
foreign tax jurisdictions and the generation of tax credits.
8
8. Acquisition
-----------
In 1995, we formed a joint venture, Parlex (Shanghai) Circuit Co. Ltd.
("Parlex Shanghai"). At its formation, we had a 50.1% controlling interest
and as such have been consolidating Parlex Shanghai's financial results
within our financial statements with minority interest recorded to reflect
our partners' 49.9% interest.
On October 22, 2001, we entered into an agreement (the "Agreement") to
purchase Shanghai Jinling Co., Ltd.'s ("Jinling") 40% joint venture
interest in Parlex Shanghai, bringing our controlling interest to 90.1%.
The Agreement requires us to pay Jinling the sum of $2.2 million. As of
March 31, 2002, the outstanding balance owed to Jinling is $1,140,000.
The acquisition of Jinling's 40% interest in Parlex Shanghai will be
accounted for as a business combination under the purchase method of
accounting.
Prior to the acquisition, a distribution of retained earnings was declared
based upon the joint venture partners' proportional share of Parlex
Shanghai's registered capital as of December 30, 2000. Jinling's
distribution approximated $2.3 million and is payable in cash. As of March
31, 2002, the outstanding balance is approximately $217,000.
A preliminary allocation of purchase price has been made to the assets
acquired based on their estimated fair market value at the date of
acquisition resulting in goodwill of approximately $250,000. Such amount
is subject to change based upon the final allocation of purchase price.
We signed a memorandum of understanding with Gul Technologies Singapore
Ltd. ("Gul") to enter into a joint venture with us relative to our Asian
operations and are currently finalizing the terms of the definitive joint
venture agreement. Further, we have an agreement, subject to approval by
our Board of Directors, to purchase the remaining 9.9% in Parlex Shanghai.
9. Other Intangible Assets -Land Use Rights
----------------------------------------
In December 2001, Parlex (Shanghai) Interconnect Products Co., Ltd.
("Parlex Interconnect"), our second tier subsidiary, purchased land use
rights for a parcel of land located in the People's Republic of China. The
purchase of the land use rights will allow us to expand our operations
within China.
The purchase price of the land use rights was approximately $1.1 million of
which $347,000 has been paid as of March 31, 2002. The rights have been
capitalized as intangible assets and will be amortized over their 50 year
life.
9
10. Inventories
-----------
Inventories of raw materials are stated at the lower of cost, first-in,
first-out or market. Work in process and finished goods are valued as a
percentage of completed cost, not in excess of net realizable value. Work
in process and finished goods inventory associated with programs cancelled
by customers are reserved as obsolete. Inventories consisted of:
March 31, 2002 June 30, 2001
-------------- -------------
<s> <c> <c>
Raw materials $ 7,399,370 $ 6,766,359
Work in process 8,936,641 8,861,718
Finished goods 3,999,253 3,690,445
----------------------------
Total $20,335,264 $19,318,522
============================
11. Revenue Recognition Policy
--------------------------
Revenue on product sales is recognized when persuasive evidence of an
agreement exists, the price is fixed and determinable, delivery has
occurred and there is reasonable assurance of collection of the sales
proceeds. We generally obtain written purchase authorizations from our
customers for a specified amount of product, at a specified price and
consider delivery to have occurred at the time of shipment. License fees
and royalty income are recognized when earned.
10
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 17. 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.
Our significant accounting policies are more fully described in Note 1 to
our consolidated financial statements in our Annual Report of Form 10-K for
the year ended June 30, 2001. However, certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of operations and require the application of significant judgement
by our management which subjects them to an inherent degree of uncertainty.
In applying its accounting policies, our management uses its best judgement
to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical experience,
terms of existing contracts, our observance of trends in the industry,
information provided by our customers, information available from other
outside sources, and on various other factors that we believe to be
appropriate under the circumstances. We believe that the critical
accounting policies discussed below involve more complex management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset, liability, revenue and expense
amounts.
Critical Accounting Policies
- ----------------------------
Revenue recognition and accounts receivable. We recognize revenue when
persuasive evidence of an agreement exists, the price is fixed and
determinable, delivery has occurred and there is reasonable assurance of
collection of the sales proceeds. We generally obtain written purchase
authorizations from our customers for a specified amount of product, at a
specified price and consider delivery to have occurred at the time of
shipment. License fees and royalty income are recognized when earned. We
have demonstrated the ability to make reasonable and reliable estimates of
product returns in accordance with SFAS No. 48 and of allowances for
doubtful accounts based on significant historical experience.
Inventories. We value our inventory at the lower of the actual cost to
purchase and/or manufacture the inventory or the current estimated market
value of the inventory. We regularly review our inventory and record a
provision for excess or obsolete inventory based primarily on our estimate
of expected future product demand. Our estimates of future product demand
may differ from actual demand and, as such our estimate of the provision
required for excess and obsolete inventory may change, which we would
record in the period such determination was made.
Income Taxes. We determine if our deferred tax assets and liabilities are
realizable on an ongoing basis by assessing our valuation allowance and by
adjusting the amount of such allowance, as necessary. In the determination
of the valuation allowance, we have considered future taxable income and
the feasibility of tax planning initiatives. Should we determine that it
is more likely than not that we will realize certain of our deferred tax
assets for which, we previously provided a valuation allowance, an
adjustment would be required to reduce the existing valuation allowance.
Conversely, if we determine that we would not be able to realize our
recorded net deferred tax asset, an adjustment to increase the valuation
allowance would be charged to our results of operations in the period such
conclusion was reached. In addition, we operate within multiple taxing
jurisdictions and are subject to audit in these jurisdictions. These
audits can involve complex issues, which may require an extended period of
time for resolution. Although we believe that adequate consideration has
been made for such issues, there
11
is the possibility that the ultimate resolution of such issues could have
an adverse effect on the results of our operations.
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 $31.9 million in property and equipment and
approximately $14.9 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.
We formed a Chinese joint venture, Parlex Shanghai, in 1995 to better serve
our customers that have production facilities in Asia and to more cost
effectively manufacture products for worldwide distribution. Effective
October 22, 2001, we purchased the 40% share of Parlex Shanghai held by one
of our joint venture partners, increasing our equity interest in Parlex
Shanghai to 90.1%. Parlex Shanghai's results of operations, cash flows and
financial position are included in our consolidated financial statements.
We are in the process of transferring the production of our automotive
related products utilizing our PalFlex (r) technology from our Methuen,
Massachusetts facility to Parlex Interconnect, a wholly owned subsidiary of
Parlex Asia Pacific Limited, which is located in China. We signed a
memorandum of understanding with Gul to enter into a joint venture with us
relative to our Asian operations and are currently finalizing the terms of
the definitive joint venture agreement. Further, we have an agreement,
subject to approval by our Board of Directors, to purchase the remaining
9.9% interest in Parlex Shanghai.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, selected items
in our statements of operations 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
March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001
-------------- ------------- -------------- ------------
<s> <c> <c> <c> <c>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 100.0 % 100.1 % 99.3 % 91.2 %
----------------------------------------------------------
Gross Profit 0.0 % (0.1)% 0.7 % 8.8 %
Selling, general and administrative expenses 15.3 % 16.7 % 16.0 % 15.4 %
----------------------------------------------------------
Operating loss (15.3)% (16.8)% (15.3)% (6.6)%
Loss from operations before benefit from
income taxes and minority interest (16.0)% (16.7)% (15.7)% (6.5)%
---------------------------------------------------------
Net loss (7.8)% (14.3)% (8.7)% (6.1)%
==========================================================
12
Three Months Ended March 31, 2002 Compared to
- ---------------------------------------------
Three Months Ended April 1, 2001
- --------------------------------
Total Revenues. Our total revenues were $21.3 million for the three months
ended March 31, 2002 compared to $24.9 million for the three months ended
April 1, 2001, representing a decrease of $3.6 million, or 14%.
Reductions in revenues are attributable to the general decline in customer
demand within the global electronics industry and a general downturn of the
U.S. economy. We experienced significant reductions in revenues from our
customers in the telecommunications and networking, and computer peripheral
markets, which affected all of our manufacturing operations. While sales
are expected to increase, we are not able to predict the time frame within
which there will be renewed sales due to the economic uncertainty in these
markets, and there is no assurance that sales will not fluctuate
significantly in the future.
Cost of Products Sold. Cost of products sold were $21.3 million, or 100%
of total revenues, for the three months ended March 31, 2002, compared to
$24.9 million, or 100% of total revenues for the comparable period in the
prior year.
We experienced unfavorable manufacturing variances of $5 million or 23% of
total revenues for the three months ended March 31, 2002. This was due to
excess manufacturing capacity associated with a 14% decrease in revenues
for this period compared to the three months ended April 1, 2001. In
addition, for the quarter ending March 31, 2002 cost of products sold
includes a $41,000 charge for severance costs associated with a reduction
in workforce. To counteract the excess manufacturing capacity, we have
implemented a plan to further reduce manufacturing expenses and consolidate
or relocate lower margin products to our lower cost operations in China and
Mexico. Although these cost reduction measures are expected to improve our
gross margins, a return to profitability is predicated upon operational
performance, a favorable product mix and increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.3 million, or 15% of total revenues, for
the three months ended March 31, 2002, and $4.2 million or 17% of total
revenues for the same period in the prior year representing a decrease of
$900,000, or 21%. The decrease in selling, general and administrative
expenses is attributable to lower costs arising from a reduction in
personnel and lower commission expense. The three months ended March 31,
2002 includes a $32,000 charge for severance costs associated with a
reduction in work force and the three months ended April 1, 2001 included a
$400,000 charge for bad debt allowance and employee severance costs
resulting from the slowdown in our technology markets.
Other Income, Interest Expense, and Benefit from Income Taxes. Other
income was $9,000 for the three months ended March 31, 2002, compared to
$218,000 for the three months ended April 1, 2001. Other income for the
period ended March 31, 2002 consisted primarily of gains on the sale of
equipment compared to $110,000 received for the three months ended April 1,
2001 for the settlement of legal claims associated with our Methuen
building addition and interest income earned on our short-term investments.
Interest expense was $146,000 for the three months ended March 31, 2002,
compared to $180,000 for the comparable period in the prior year. The
decrease in interest expense is due primarily to the change in the average
interest rate for the period ending March 31, 2002 compared to the period
ended April 1, 2001. The average interest rates were 4.36% and 8.63% for
the quarter ending March 31, 2002 and April 1, 2001, respectively. The
outstanding balances on our revolving credit line were $8 million and $7.7
million at the quarter ending March 31, 2002 and April 1, 2001,
respectively.
Our loss before benefit from income taxes and for the minority interest in
our Chinese joint venture, Parlex Shanghai, was $3.4 million for the three
months ended March 31, 2002, compared to a loss of $4.1 million for the
comparable period in the prior year. We include Parlex Shanghai's results
of operations, cash flows and financial position in our consolidated
financial statements.
13
Our effective tax rate was approximately 51% in the three months ended
March 31, 2002 and 12% for the comparable period in the prior year. Income
taxes are recorded for this interim period based upon an estimated annual
effective tax rate. Our effective tax rate is impacted by the proportion
of our estimated annual income being earned in domestic versus foreign tax
jurisdictions and the generation of tax credits. Accordingly, changes to
our estimated annual effective tax rate are recorded in the period of that
change.
Nine Months Ended March 31, 2002 Compared to
- --------------------------------------------
Nine Months Ended April 1, 2001
- -------------------------------
Total Revenues. Our total revenues were $63.6 million for the nine months
ended March 31, 2002 compared to $81.6 million for the nine months ended
April 1, 2001, representing a decrease of $18 million, or 22%.
Reductions in revenues are attributable to the general decline in customer
demand within the global electronics industry and a general downturn of the
U.S. economy. We experienced significant reductions in revenues from our
customers in the telecommunications and networking, and computer peripheral
markets, which affected all of our manufacturing operations. While sales
are expected to increase, we are not able to predict the time frame within
which there will be renewed sales due to the economic uncertainty in these
markets, and there is no assurance that sales will not fluctuate
significantly in the future.
Licensing and royalty fees. Licensing and royalty fees were $35,000 for
the nine months ended March 31, 2002 compared to $182,000 for the same
period in 2001. The nine month period ending April 1, 2001, included the
receipt of the final installment payment under the terms of our patent
assignment agreement with Polyclad Laminates, Inc. Although we intend to
continue developing materials and processes that we can license to third
parties, we do not expect that licensing and royalty revenues will
represent a significant portion of total revenues in the near future.
Cost of Products Sold. Cost of products sold were $63.2 million, or 99% of
total revenues, for the nine months ended March 31, 2002, compared to $74.4
million, or 91% of total revenues for the comparable period in the prior
year.
We experienced unfavorable manufacturing variances of $14 million or 22% of
total revenues for the nine months ended March 31, 2002. This was due to
excess manufacturing capacity associated with a 22% decrease in revenues
for this period compared to the nine months ended April 1, 2001. In
addition, the nine months ended March 31, 2002 includes a $180,000 charge
for severance costs associated with a reduction in workforce. To
counteract the excess manufacturing capacity, we have implemented a plan to
further reduce manufacturing expenses and consolidate or relocate lower
margin products to our lower cost operations in China and Mexico. Although
these cost reduction measures are expected to improve our gross margins, a
return to profitability is predicated upon operational performance, a
favorable product mix and increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $10.2 million, or 16% of total revenues, for
the nine months ended March 31, 2002, and $12.6 million or 15% of total
revenues for the same period in the prior year representing a decrease of
$2.4 million, or 19%. The decrease in selling, general and administrative
expenses is attributable to lower costs arising from a reduction in
personnel and lower commission expense. The nine months ended April 1,
2001 included a $400,000 charge for bad debt allowance and employee
severance costs associated with the slowdown in our technology markets.
Other Income, Interest Expense, and Benefit from Income Taxes. Other income
was $231,000 for the nine months ended March 31, 2002, compared to $479,000
for the nine months ended April 1, 2001. Other income consists primarily
of interest income earned on our short-term investments, and the decrease
is associated with lower investment balances.
14
Interest expense was $455,000 for the nine months ended March 31, 2002,
compared to $300,000 for the comparable period in the prior year. The
increase in interest expense is due to the increased amount of average
borrowings required to finance working capital and capital expenditure
needs. The average daily loan balance on our revolving credit line was
$7.7 million and $3.0 million for the nine month period ended March 31,
2002 and April 1, 2001, respectively.
Our loss before benefit from income taxes and for the minority interest in
our Chinese joint venture, Parlex Shanghai, was $10 million for the nine
months ended March 31, 2002, compared to a loss of $5.3 million for the
comparable period in the prior year. We include Parlex Shanghai's results
of operations, cash flows and financial position in our consolidated
financial statements.
Our effective tax rate was approximately 40% in the nine months ended March
31, 2002 compared to an effective tax rate of 13% for the comparable period
in the prior year. The increase in the effective tax rate resulted from
net operating losses in higher tax jurisdictions and an increased amount of
available tax credits.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2002, we had approximately $1.4 million in cash and cash
equivalents.
Net cash used by operations during the nine months ended March 31, 2002 was
$1.2 million. Operating losses of $5.5 million adjusted for minority
interest, depreciation and amortization used $1.2 million of operating
cash. This was offset by $53,000 generated from a reduction in our working
capital requirements including collection of $1.8 million of refundable
taxes.
Net cash used by investing activities was $1.5 million for the nine months
ended March 31, 2002. These funds were used to purchase $4.4 million of
capital equipment and other assets, and acquire our joint venture partner's
40% minority interest in Parlex Shanghai for $3.2 million. Cash generated
from investing activities included the sale of higher-yielding investment
grade corporate and United States Government debt securities of $5.5
million and $525,000 received from Cookson Group plc as final settlement
related to our 2000 acquisition of the Poly-Flex business. Cash provided by
financing activities was $874,000 for the nine months ended March 31, 2002
which represents the net borrowings and repayments on our bank debt.
We executed the Second Amendment to our Loan Agreement (the "Credit
Agreement") (originally dated March 1, 2000) on April 16, 2002. The
agreement provides our bank with a secured interest in all of our assets
with exception to our real estate. We may borrow up to a total of
$15,000,000 which is currently based on a borrowing base of eligible
accounts receivable and marketable securities. No further advances of
principal will be made under this Credit Agreement after December 30, 2003.
At our discretion, borrowings under the Credit Agreement accrue interest at
either a variable rate equal to the bank's prime rate (4.75% at March 31,
2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to
2.25%. The Credit Agreement carries an annual commitment fee of 1/4% to
1/2% on the average daily unused portion of the bank's commitment. Interest
is payable monthly. As of March 31, 2002, the unused commitment amounted
to $6.9 million. The Credit Agreement has certain restrictive covenants
related to current ratio, tangible net worth, total liabilities to tangible
net worth, interest coverage ratio, debt service coverage ratio and income
and capital expenditure targets. As of March 31, 2002, we were in
compliance with the provisions of the Credit Agreement. The Credit
Agreement permits us to pay cash dividends to the extent such payment would
not cause us to violate the aforementioned covenants.
As of March 31, 2002 we have, as provided for under our Credit Agreement,
converted $8 million of our Credit Agreement borrowings into six LIBOR
contracts with maturities between two and five months. The LIBOR plus
margin for these contracts varies between 4.12% and 4.36%.
15
As of March 31, 2002, we owed Jinling a balance of $1,140,000 for the
purchase of its minority interest in Parlex Shanghai and a balance of
$217,000 on its distribution of retained earnings based upon Jinling's
proportional share of Parlex Shanghai's registered capital as of December
30, 2000. Interest accrues, on these unpaid balances, as of March 31, 2002
at .03% per day, if these balances are not paid by May 15, 2002. Although
we anticipate finalizing the terms of a joint venture agreement with Gul
Technologies Singapore Ltd., ("Gul"), the terms of which would require Gul
to purchase an interest in certain of our existing subsidiaries for cash,
our ability to fund future capital needs and research and development would
be adversely affected if the joint venture agreement is not completed.
We believe that our cash on hand, our anticipated cash flow from
operations, and the amounts to be made available under our domestic and
foreign financing agreements should be sufficient to meet our anticipated
needs for at least the next 12 months.
Recent Accounting Pronouncements
- --------------------------------
Effective July 1, 2001, we adopted the provisions of Statement on Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142). Under the provisions of SFAS 142, if an intangible asset is
determined to have an indefinite useful life, it shall not be amortized
until its useful life is determined to be no longer indefinite. An
intangible asset that is not subject to amortization shall be tested for
impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Goodwill is not
amortized but is tested for impairment, for each reporting unit, on an
annual basis and between annual tests in certain circumstances. In
accordance with the guidelines in SFAS 142, we determined we have one
reporting unit. Upon adoption of SFAS 142 we performed an impairment
review and concluded that there were no necessary adjustments.
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.
We maintain a portion of our cash and cash equivalents in financial
instruments with maturities of one month. 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. As of March 31, 2002, we had no funds
invested in these financial instruments.
We also have a revolving credit line, at our lender's prime rate or LIBOR
plus a margin that varies from 1.5% to 2.25%. Both the prime rate and
LIBOR are affected by changes in market interest rates. As of March 31,
2002, we owe approximately $8 million under the terms of the Credit
Agreement. We have the option to repay borrowings at anytime without
penalty, other than breakage fees in the case of prepayment of LIBOR
borrowings. We believe that a 10% change in interest rates would not have
a significant impact upon our financial position or results of operations.
The remainder of our long-term debt bears interest at fixed rates and is
therefore not subject to market risk.
A substantial, and growing, portion of our business is conducted in Asia
and the United Kingdom. Therefore our future results could be affected by
fluctuations in the dollar's value against other currencies, specifically
the Chinese Renminbi, in the case of Parlex Shanghai and Parlex
Interconnect, and the British Sterling, in the case of Poly-Flex Circuits
Limited. The effect of foreign currency fluctuations on long term assets
for the period ended
16
March 31, 2002 was an increase of $116,000 and the cumulative historical
effect, since 1995, was a decrease of $547,000, as reflected in our
Consolidated Balance Sheets as accumulated other comprehensive loss.
Although exchange rates between the dollar and the Renminbi have remained
stable, exchange rates between the dollar and the British Sterling have
fluctuated significantly in recent years. We do not believe that the
effect of foreign currency fluctuation is material to our results of
operations as the expenses related to our foreign currency revenues are
recorded in the same currency. However, the value of assets recorded on
our Consolidated Balance Sheets may be materially impacted by foreign
currency translation, as well as the translated amounts of revenues and
expenses. Nonetheless, we do not plan to modify our business practices.
We have relied primarily upon financing activities to fund our United
States and Chinese operations. In the event that we are required to fund
these operations or cash needs with funds generated in the United Kingdom,
currency rate fluctuations in the future could have a significant impact.
However, at the present time, we do not anticipate altering our business
plans and practices to compensate for future currency fluctuations.
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 including, but not limited to, recent terrorist attacks and
other important factors disclosed previously, including our failure to
enter into a definitive joint venture with Gul relative to our Asian
operations, and from time to time in other filings we have made with the
U.S. Securities and Exchange Commission.
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PART II - OTHER INFORMATION
---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index to this report.
(b) Reports on Form 8-K - We did not file a report on Form 8-K
during the quarter ended March 31, 2002.
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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 14, 2002
--------------
Date
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
----------------------
10-W Second Amendment dated April 16, 2002 to Loan Agreement dated
as of March 1, 2000 between Parlex Corporation and Fleet
National Bank (filed as Exhibit 10-S to Form 8-K dated March
15, 2000 and filed with the Securities and Exchange Commission
on March 15, 2000.
20