SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-12942 PARLEX CORPORATION (Exact Name of Registrant As Specified in its Charter) Massachusetts 04-2464749 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 145 Milk Street, Methuen, Massachusetts 01844 (Address of principal executive offices) (Zip Code) 508-685-4341 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ The number of shares of the Registrant's Common Stock, par value $.10 per share, outstanding at October 31, 1996 was 2,372,034 shares. -1- PARLEX CORPORATION INDEX Financial Statements: Consolidated Balance Sheets - September 29, 1996 and June 30, 1996 3 Consolidated Statements of Income - For the Three Months Ended September 29, 1996 and October 1, 1995 4 Consolidated Statements of Cash Flows - For the Three Months Ended September 29, 1996 and October 1, 1995 5 Notes to Unaudited Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II - Other Information 10 Index 11 Signatures 13 -2- PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 29, 1996 AND JUNE 30, 1996 (Unaudited) September 29, 1996 June 30, 1996 ------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 98,757 $ 386,608 Accounts receivable - net 8,530,084 7,453,333 Inventories: Raw material 3,025,208 2,419,744 Work in process 4,726,388 5,333,680 Refundable income taxes - 17,794 Deferred income taxes 314,743 314,743 Other current assets 843,011 699,386 ---------------------------------- Total current assets 17,538,191 16,625,288 ---------------------------------- Property, plant and equipment: Land 468,864 468,864 Buildings 6,903,150 6,838,391 Machinery and equipment 22,608,406 22,321,826 Leasehold improvements and other 2,473,597 2,422,084 ---------------------------------- Total 32,454,017 32,051,165 Less accumulated depreciation and amortization 19,786,187 (19,396,046) ---------------------------------- Property, plant and equipment - net 12,667,830 12,655,119 ---------------------------------- Other assets 383,816 381,649 ---------------------------------- Total $30,634,942 $29,662,056 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 50,000 $ 100,000 Bank loan 500,126 400,668 Accounts payable 5,435,392 5,179,769 Income taxes payable 189,784 - Accrued liabilities 1,687,021 1,797,223 ---------------------------------- Total current liabilities 7,862,323 7,477,660 ---------------------------------- Long-term debt 4,025,000 3,650,000 ---------------------------------- Other non-current liabilities 1,864,247 1,846,260 ---------------------------------- Minority interest in Parlex (Shanghai) 1,239,515 1,232,691 ---------------------------------- Stockholders' equity Preferred stock -0- -0- Common stock 258,266 258,266 Additional paid-in capital 3,243,491 3,243,491 Retained earnings 13,179,725 12,991,313 Less treasury stock at cost (1,037,625) (1,037,625) ---------------------------------- Total Stockholders' equity 15,643,857 15,455,445 ---------------------------------- Total $30,634,942 $29,662,056 ================================== See Notes to Unaudited Consolidated Financial Statements -3- PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended September 29, 1996 and October 1, 1995 (Unaudited) September 29, 1996 October 1, 1995 --------------------------------------- Product sales $12,773,471 $11,611,410 License fees and royalties 33,658 - ----------------------------------- Total Revenues 12,807,129 11,611,410 ----------------------------------- Costs and Expenses: Cost of products sold 10,912,043 10,295,136 Selling, general and administrative expenses 1,587,315 1,252,331 ----------------------------------- Operating costs and expenses 12,499,358 11,547,467 Operating income 307,771 63,943 Other income - (Note 2) 112,395 44,452 Interest expense (104,930) (69,622) ----------------------------------- Income before income taxes 315,236 38,773 Provision for income taxes (120,000) (14,700) ----------------------------------- Income before minority interest 195,236 24,073 Minority interest (6,824) - ----------------------------------- Net income $ 188,412 $ 24,073 =================================== Net income per common share $ .08 $ .01 =================================== Weighted average number of common and common stock equivalent shares outstanding 2,454,734 2,447,328 =================================== See Notes to Unaudited Consolidated Financial Statements -4- PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended September 29, 1996 and October 1, 1995 (Unaudited) September 29, 1996 October 1, 1995 Cash Flows Provided by Operating Activities: Net income $ 188,412 $ 24,073 ---------------------------------- Adjustments to reconcile net income to net cash provided by (used for)operating activities: Depreciation and amortization 500,877 403,797 Gain on sale of equipment (100) -0- Deferred compensation 17,987 17,535 Minority interest 6,824 -0- Increase (decrease) in cash from: Accounts receivable - net (1,076,751) (658,582) Refundable income taxes 17,794 4,158 Inventories 1,828 296,202 Other current assets (143,625) (194,059) Accounts payable 255,623 1,336,967 Accrued liabilities (110,202) (666,290) Income taxes payable 189,784 - ---------------------------------- Total adjustments (339,961) 539,728 ---------------------------------- Net cash provided (used) by operating activities (151,549) 563,801 ---------------------------------- Investment Activities: Additions to property, plant and equipment 513,588 (846,157) Increase in other assets (47,272) (116,741) Proceeds from the sale of equipment 100 - ---------------------------------- Net cash used for investment activities (560,760) (962,898) ---------------------------------- Financing Activities: Loan payable - Joint Venture 99,458 - Increase in long-term debt 325,000 350,000 Exercise of stock options - 7,063 ---------------------------------- Net cash from financing activities 424,458 357,063 ---------------------------------- Net Decrease in Cash and Cash Equivalents (287,851) (42,034) Cash and Cash Equivalents at Beginning of Period 386,608 161,392 ---------------------------------- Cash and Cash Equivalents at End of Period $ 98,757 $ 119,358 ================================== 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 September 29,1996 and the results of operations and cash flows for the three months ended September 29, 1996 and October 1, 1995. All adjustments made to the interim financial statements were of a normal recurring nature. The Company followed the same accounting policies in the preparation of this interim financial statement as described in the Company's annual filing on Form 10-K for the year ended June 30, 1996 and this filing should be read in conjunction with that annual report. 2. Other Income In the current quarter, other income is comprised of a gain on the sale of equipment as well as items of miscellaneous nature. In the preceding year, only items of a sundry nature were included under this caption. 3. Joint Venture In May 1995, the Company entered into an agreement to establish a limited liability company in the form of a joint venture in the People's Republic of China. The Company owns 50.1% of the joint venture. The joint venture manufactures flexible printed circuits and commenced operations in September 1995. The Company reports the financial results of this venture on a three month time lag. 4. New Accounting Standards In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company adopted SFAS No. 121 in the first quarter of 1997. This statement had no effect on the consolidated financial position and results of operations of the Company. -6- In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock- Based Compensation," which will be effective for the Company beginning July 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognized compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and directors, and will disclose the required pro forma effect on net income and net income per share in its June 30, 1997 consolidated financial statements. -7- Management's Discussion and Analysis of Financial Condition and Results of Operations Operations Total revenues in the first quarter of the current fiscal year were $12,807,129, an increase of 10% over the sales of $11,611,410 reported in the comparable quarter last year. Revenues were generated primarily from product sales, while some was derived from licensing and royalty fees. The increase in sales is a result of the Company's continuing effort to broaden its commercial base by developing products that provide unique solutions to the requirements of the markets it is attempting to serve. In September 1995, Parlex (Shanghai) Circuit Co., Ltd., the Chinese joint venture, commenced operations (see Note 3 to Consolidated Financial Statements). The sales from this venture, while not significant, also contributed to the increase over the previous year. The cost of sales as a percentage of revenue was 85% and 89% for the first quarter this year and last year, respectively. Last year, the cost of sales was impacted by a large multi-year contract in the Flexible Circuit Products Division, involving new technology, new equipment, the use of very thin materials with special handling requirements, and some incurred costs associated with learning curve issues. These technical problems have since been resolved. Selling, general, and administrative expenses as a percentage of revenue was 12% in the current quarter versus 11% last year. The slight increase was associated with additional selling expenses due to increased sales efforts. Interest expense was $104,930 this quarter as compared to $69,622 last year. To facilitate its growth, the Company borrowed monies for the purchase of equipment, its investment in the Chinese joint venture, and to finance its additional working capital requirements. Other income this quarter of $112,395 included the gain on the sale of some equipment as well as items of miscellaneous nature. In the preceding year, only items of a sundry nature comprised the total of $44,452. The above factors resulted in income before income taxes of $315,236 in the first quarter this year versus $38,773 for the comparable period last year. The Company's effective tax rate was 38% for the current quarter this year as well as last year. After providing for taxes and recognizing the minority interest in the Chinese joint venture, the Company's net income was $188,412 this quarter versus $24,073 last year. -8- Liquidity and Capital Resources Since the Company is anticipating continuous growth, additional borrowings may be necessary to finance further working capital needs as well as additional capital expenditures. In December 1995, the Company negotiated a $5,000,000 unsecured line of credit under its revolving credit facility that expires December 31, 1997. At September 29, 1996, the unused commitment amounted to $975,000. In October 1996, the Company received an additional unsecured line of credit of $2,000,000 to be used exclusively for the purchase of capital equipment. The Company may borrow monies up to $2,000,000 under a revolving credit facility through October 1997. In October 1997, the line converts to a term loan arrangement. The two lines of credit, together with anticipated positive cash flow from operations, should be adequate to satisfy the Company's foreseeable needs. Deferred compensation payments cannot presently be determined. Amounts, if any, which may be paid within one year are not material and should have little impact upon the Company's cash position. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 This report contains certain forward-looking statements. The Company's actual results of operations may differ significantly from those contemplated by such forward-looking statements as a result of various factors beyond its control, including, but not limited to, economic conditions in the electronics industry, particularly in the principal industry sectors served by the Company, changes in customer requirements and in the volume of sales to principal customers, competition and technological change. -9- PART II - OTHER INFORMATION Items 1-5 THESE ITEMS ARE INAPPLICABLE Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 11 - Statement regarding computation of per share earnings. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 29, 1996. -10- 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 /s/ HERBERT W. POLLACK Herbert W. Pollack Chairman of the Board /s/ STEVEN M. MILLSTEIN Steven M. Millstein Vice President of Finance November 14, 1996 Date -11- EXHIBIT INDEX PAGE 11. Statement regarding computation of per share earnings 13 -12-