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 28, 1997 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) 978-685-4341 (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, 1997, was 4,594,059 shares. PARLEX CORPORATION ------------------ INDEX ----- Part I - Financial Statements: Consolidated Balance Sheets - September 28, 1997 and June 30, 1997 3 Consolidated Statements of Income - For the Three Months Ended September 28, 1997 and September 29, 1996 4 Consolidated Statements of Cash Flows - For the Three Months Ended September 28, 1997 and September 29, 1996 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 Signatures 11 Exhibit 13 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 28, 1997 and June 30, 1997 (Unaudited) September 28, 1997 June 30, 1997 ----------------------------------- ASSETS Current assets: Cash and cash equivalents $ 99,843 $ 596,614 Accounts receivable - net 10,203,223 9,029,388 Inventories: Raw material 2,970,825 2,706,302 Work in process 4,875,073 4,556,175 Deferred income taxes 294,033 294,033 Other current assets 649,102 850,956 ------------------------------ Total current assets 19,092,099 18,033,468 ------------------------------ Property, plant and equipment: Land 468,864 468,864 Buildings 7,017,478 7,017,478 Machinery and equipment 23,409,452 22,823,785 Leasehold improvements and other 3,541,602 3,974,058 ------------------------------ Total 34,437,396 34,284,185 Less accumulated depreciation and amortization (20,447,974) (20,671,859) ------------------------------- Property, plant and equipment - net 13,989,422 13,612,326 ------------------------------ Other assets 583,862 588,098 ------------------------------ Total $33,665,383 $32,233,892 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 500,000 $ 500,000 Bank loan 599,435 500,000 Accounts payable 5,548,300 5,047,284 Accrued liabilities 1,965,678 2,150,228 Income taxes payable 365,551 244,404 ------------------------------ Total current liabilities 8,978,964 8,441,916 ------------------------------ Long-term debt 2,550,000 2,500,000 ------------------------------ Other non-current liabilities 2,007,065 1,986,924 ------------------------------ Minority interest in Parlex (Shanghai) 1,611,669 1,521,363 ------------------------------ Stockholders' equity Preferred stock -0- -0- Common stock 380,331 379,875 Additional paid-in capital 3,338,267 3,334,424 Retained earnings 15,840,049 15,111,769 Less treasury stock at cost (1,037,625) (1,037,625) Cumulative translation adjustments (3,337) (4,754) ----------------------------- Total Stockholders' equity 18,517,685 17,783,689 ------------------------------ Total $33,665,383 $32,233,892 ============================== See Notes to Unaudited Consolidated Financial Statements PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended September 28, 1997 and September 29, 1996 (Unaudited) September 28, 1997 September 29, 1996 --------------------------------------- Product sales $13,672,226 $12,773,471 License fees and royalties 44,825 33,658 -------------------------------- Total Revenues 13,717,051 12,807,129 -------------------------------- Costs and Expenses: Cost of products sold 10,538,912 10,912,043 Selling, general and administrative expenses 1,879,422 1,587,315 -------------------------------- Operating costs and expenses 12,418,334 12,499,358 -------------------------------- Operating income 1,298,717 307,771 Other income - (Note 2) 90,789 112,395 Interest expense (93,972) (104,930) -------------------------------- Income before income taxes 1,295,534 315,236 Provision for income taxes (476,950) (120,000) -------------------------------- Net income before minority interest 818,584 195,236 Minority interest (Note 3) (90,305) (6,824) -------------------------------- Net income $ 728,279 $ 188,412 ================================ Net income per common share $ .19 $ .05 ================================ Weighted average number of common and common stock equivalent shares outstanding(a) 3,802,747 3,682,101 ================================ - -------------------- <Fa> Prior year shares outstanding restated to reflect 3:2 stock split distributed in April 1997 See Notes to Unaudited Consolidated Financial Statements PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended September 28, 1997 and September 29, 1996 (Unaudited) September 28, 1997 September 29, 1996 ---------------------------------------- Cash Flows Provided by Operating Activities: Net income $ 728,279 $ 188,412 ------------------------------- Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 571,792 500,877 Gain on sale of equipment (67,572) (100) Deferred compensation 20,141 17,987 Minority interest 90,305 6,824 Increase (decrease) in cash from: Accounts receivable - net (1,173,835) (1,076,751) Refundable income taxes -0- 17,794 Inventories (583,421) 1,828 Other current assets 201,854 (143,625) Accounts payable 501,016 255,623 Accrued liabilities (184,549) (110,202) Income taxes payable 121,147 189,784 ------------------------------- Total adjustments (503,122) (339,961) ------------------------------- Net cash provided (used) by operating activities 225,157 (151,549) Investment Activities: Additions to property, plant and equipment (958,116) (513,588) (Increase) decrease in other assets 4,236 (47,272) Proceeds from the sale of equipment 76,800 100 ------------------------------- Net cash used for investment activities (877,080) (560,760) ------------------------------- Financing Activities: Loan payable - Joint Venture 99,435 99,458 Increase in long-term debt 50,000 325,000 Exercise of stock options 4,299 -0- ------------------------------- Net cash from financing activities 153,734 424,458 ------------------------------- Effect of translation rate changes on cash 1,418 -0- ------------------------------- Net Decrease in Cash and Cash Equivalents (496,771) (287,851) Cash and Cash Equivalents at Beginning of Period 596,614 386,608 ------------------------------- Cash and Cash Equivalents at End of Period $ 99,843 $ 98,757 =============================== See Notes to Unaudited Consolidated Financial Statements 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 28, 1997 and the results of operations and cash flows for the three months ended September 28, 1997, and September 29, 1996. 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, 1997, and this filing should be read in conjunction with that annual report. 2. Other Income ------------ Other income, both in the current and preceding year, was primarily attributable to gains on the sales of equipment. 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. Net Income Per Share -------------------- Net income per share is based on the weighted average number of common and dilutive common equivalent shares outstanding. 5. Recent Accounting Pronouncements -------------------------------- In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information About Capital Structure." SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or common stock equivalents. SFAS No. 129 establishes standards for disclosing information about an entity's capital structure and applies to all entities. The Company will adopt both SFAS Nos. 128 and 129 in the second quarter of fiscal 1998 as required by those standards. The implementation of SFAS No. 128 will not have a material effect on previously reported earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the manner in which public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Both standards will be adopted by the Company during the first quarter of fiscal year 1999. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - --------------------- Total revenues in the first quarter of the current fiscal year were $13,717,051, an increase of 7% over the revenues of $12,807,129 reported in the comparable quarter last year. Revenues were generated primarily from product sales, while some was derived from licensing and royalty fees. Revenues grew in each of the Company's principal product lines - flexible circuits, laminated cables, flexible/cable hybrid circuits and flexible interconnect assemblies. The increase in total revenues was primarily attributable to an increase in the volume of units shipped. The cost of products sold was $10,538,912 or 77% of revenue versus $10,912,043 this year or 85% of revenue last year. The decrease in the percentage this quarter was primarily the result of manufacturing yield improvements, while general productivity gains and increased absorption of overhead also contributed to the reduction. These improvements were made possible by enhancements to the manufacturing process, the acquisition of additional production equipment and cost savings on materials and supplies. Selling, general, and administrative expenses as a percentage of revenue were 14% in the current quarter versus 12% in the comparable quarter last year. The increase was associated principally with additional selling expenses due to increased sales efforts. Other income of $90,789 this quarter and $112,395 for the comparable quarter last year was primarily associated with the gain on the sale of equipment. Interest expense was $93,972 this quarter as compared to $104,930 last year. The slight reduction was due to a lower level of average borrowings. Interest expense should decrease significantly as a result of the Company's additional stock offering in the latter part of October 1997 (see Liquidity and Capital Resources). Income before income taxes increased 310% to $1,295,534 in the first quarter this year as compared to $315,236 last year. This improvement was due to the factors described above. The Company's effective tax rate was 37% for the current quarter versus 38% last year. After providing for taxes and recognizing the minority interest in the Chinese joint venture, the Company's net income was $728,279 this quarter and $188,412 in the first quarter last year. Recent Accounting Pronouncements - -------------------------------- In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which will be effective during the Company's second quarter of fiscal 1998. SFAS No. 128 will require the Company to restate all previously reported earnings per share information to conform with the new pronouncement's requirements. The adoption of SFAS 128 will not have a material effect upon reported earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," SFAS No. 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the manner in which public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Both standards will be adopted by the Company during the first quarter of fiscal year 1999. Liquidity and Capital Resources - ------------------------------- In October 1997, the Company completed a stock offering of 1,150,000 shares of its common stock, of which 1,000,000 shares were issued by the Company and 150,000 were sold by selling shareholders. The shares were priced at $22.00 per share. After deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the net proceeds exceeded $20,000,000. Since the offering, the Company has paid off its revolver loan balance of $3,200,000 ($3,050,000 at June 30, 1997) and plans to spend approximately $12,000,000 over the next two years to expand its manufacturing facilities and purchase capital equipment that will increase its manufacturing capacity and accommodate various new technology processes. The remaining portion of the proceeds will be used for general corporate purposes. Additionally, the Company has received a commitment from the bank for a $10,000,000 unsecured revolving line of credit to replace its existing $5,000,000 revolving credit facility. The monies that are expected to be generated from operating activities, together with the proceeds from the offering and the amount available under its revolving credit facility, should be sufficient to meet the Company's foreseeable needs. The Company has a deferred compensation obligation that is owed to an employee. Under the current arrangement, monthly payments begin in June 1999, or the first month after the termination of employment, whichever occurs first, and continues for no fewer than 60 months or, at the election of the employee prior to his termination of employment, for up to 120 months. Amounts to be paid within one year are not expected to be material. "Safe Harbor" Statement Under the Private Securities Litigation - --------------------------------------------------------------- Reform Act of 1995 - ------------------- This Report contains certain forward-looking statements that involve risks and uncertainities. 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. PART II - OTHER INFORMATION --------------------------- Items 1-5 THESE ITEMS ARE INAPPLICABLE Item 6 Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits - See Exhibit Index (b) The Company filed no reports on Form 8-K during the quarter for which this report is filed. 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 ------------------ --------------------------- Peter J. Murphy President /s/ Steven M. Millstein --------------------------- Steven M. Millstein Vice President of Finance (Principal Accounting and Financial Officer) 				 November 12, 1997 --------------------------- Date EXHIBIT INDEX Exhibit Description - ------- ----------- 11. Statement regarding computation of per share earnings; filed herewith.