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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 DECEMBER 31, 2000 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 February 1, 2001 was 6,292,825 shares.
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PARLEX CORPORATION
INDEX
PAGE
----
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and June 30, 2000 ........... 3
Consolidated Statements of Income - For the Three Months and Six Months
ended December 31, 2000 and December 26, 1999 ............................... 4
Consolidated Statements of Cash Flows - For the Six Months
Ended December 31, 2000 and December 26, 1999 ............................... 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
December 31, 2000 and June 30, 2000
(Unaudited)
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,772,296 $ 11,949,858
Short-term investments 6,604,174 -0-
Accounts receivable - net 20,374,837 19,167,016
Inventories 24,647,177 21,148,660
Refundable income taxes 1,184,161 -0-
Deferred income taxes 1,079,073 1,079,073
Other current assets 2,937,690 2,781,661
------------- -------------
Total current assets 59,599,408 56,126,268
------------- -------------
Property, plant and equipment:
Land 893,865 893,865
Buildings 20,240,949 20,240,949
Machinery and equipment 53,563,237 50,457,494
Leasehold improvements and other 5,816,578 5,746,720
Construction in progress 6,581,286 5,003,002
------------- -------------
Total 87,095,915 82,342,030
Less accumulated depreciation and
Amortization (31,277,967) (28,114,968)
------------- -------------
Property, plant and equipment - net 55,817,948 54,227,062
------------- -------------
Goodwill - net 1,123,892 4,447,358
Other assets 393,851 539,950
------------- -------------
Total $ 116,935,099 $ 115,340,638
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,117,314 $ 657,524
Accounts payable 12,006,456 11,292,256
Accrued liabilities 4,118,362 4,599,549
------------- -------------
Total current liabilities 17,242,132 16,549,329
------------- -------------
Long-term debt 6,011,391 1,185,386
------------- -------------
Other non-current liabilities 2,807,630 5,932,931
------------- -------------
Minority interest in Parlex (Shanghai) 4,360,986 3,883,416
------------- -------------
Stockholders' equity
Preferred stock -0- -0-
Common stock 649,907 648,588
Additional paid-in capital 60,744,332 60,678,009
Retained earnings 26,265,653 27,623,632
Accumulated other comprehensive income
(loss) (109,307) (123,028)
Less treasury stock, at cost (1,037,625) (1,037,625)
------------- -------------
Total Stockholders' equity $ 86,512,960 $ 87,789,576
------------- -------------
Total $ 116,935,099 $ 115,340,638
============= =============
See Notes to Unaudited Consolidated Financial Statements
3
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 26, 1999 DECEMBER 31, 2000 DECEMBER 26, 1999
----------------- ----------------- ----------------- -----------------
Product sales $26,950,569 $23,841,921 $56,522,875 $43,961,128
License fees and royalties 50,272 542,156 166,768 788,508
---------------- ---------------- ---------------- ----------------
Total revenues 27,000,841 24,384,077 56,689,643 44,749,636
---------------- ---------------- ---------------- ----------------
Costs and Expenses:
Cost of products sold 25,385,651 18,601,930 49,519,876 34,265,961
Selling, general and administrative
Expenses 4,281,421 3,061,466 8,427,340 5,632,275
---------------- ---------------- ---------------- ----------------
Operating costs and expenses 29,667,072 21,663,396 57,947,216 39,898,236
---------------- ---------------- ---------------- ----------------
Operating (loss) income (2,666,231) 2,720,681 (1,257,573) 4,851,400
Other income 131,767 143,464 261,135 155,753
Interest expense (91,993) (95,533) (119,612) (153,669)
---------------- ---------------- ---------------- ----------------
(Loss) income before benefit from (provision
for) income taxes and minority interest (2,626,457) 2,768,612 (1,116,050) 4,853,484
Benefit from (provision for) income taxes 610,814 (886,152) 190,000 (1,393,013)
---------------- ---------------- ---------------- ----------------
(Loss) income before minority interest (2,015,643) 1,882,460 (926,050) 3,460,471
Minority interest (258,007) (326,794) (475,356) (564,311)
---------------- ---------------- ---------------- ----------------
Net (loss) income ($2,273,650) $1,555,666 ($1,401,406) $2,896,160
================ ================ ================ ================
Basic (loss) earnings per share ($0.36) $0.32 ($0.22) $0.60
======= ===== ======= =====
Diluted (loss) earnings per share ($0.36) $0.32 ($0.22) $0.60
======= ===== ======= =====
Weighted average shares - basic 6,281,089 4,808,624 6,279,402 4,801,741
========= ========= ========= =========
Weighted average shares - diluted 6,281,089 4,868,972 6,279,402 4,856,080
========= ========= ========= =========
See Notes to Unaudited Consolidated Financial Statements
4
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 26, 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income ($ 1,401,406) $ 2,896,160
------------ ------------
Adjustments to reconcile net income (loss) to
cash (used for) provided by operating activities:
Depreciation and amortization of property, plant
and equipment and other assets 3,382,265 2,051,704
Minority interest 475,356 564,313
Changes in current assets and liabilities:
Accounts receivable - net (1,207,821) (4,783,552)
Inventories (3,498,517) (3,199,000)
Refundable taxes (1,184,161) 129,790
Other assets (25,060) (683,023)
Accounts payable and accrued liabilities (329,606) 3,436,110
------------ ------------
Total adjustments: (2,387,544) (2,483,658)
------------ ------------
Net cash (used for) provided by operating activities: (3,788,950) 412,502
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) maturities of investments available for sale, net (6,604,174) 1,606,351
Additions to property, plant and equipment (4,057,287) (4,101,119)
Purchase of Poly-Flex subsidiary (94,309) --
------------ ------------
Net cash used for investment activities (10,755,770) (2,494,768)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 11,235,000 1,500,000
Payment of bank loans (5,949,205) (354,329)
Exercise of stock options 67,642 111,706
------------ ------------
Net cash provided by financing activities 5,353,437 1,257,377
------------ ------------
Effect of exchange rate changes on cash 13,721 (21,076)
------------ ------------
Net decrease in cash and cash equivalents (9,177,562) (845,965)
Cash and cash equivalents, beginning of year 11,949,858 1,175,889
------------ ------------
Cash and cash equivalents, end of period $ 2,772,296 $ 329,924
============ ============
SUPPLEMENTARY DISCLOSURE OF FINANCING AND INVESTING
NONCASH TRANSACTIONS:
Effect of tax election on Poly-Flex acquisition $ 3,197,000
============ ============
Property, plant and equipment purchases financed through
accounts payable $ 634,318 $ 319,025
============ ============
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 December 31, 2000 and the results of operations and
cash flows for the three months and six months ended December 31, 2000 and
December 26, 1999. All adjustments made to the interim financial statements were
of a normal 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 the annual report.
2. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income for the three months and six months ended
December 31, 2000 and December 26, 1999 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 26, 1999 DECEMBER 31, 2000 DECEMBER 26, 1999
----------------- ----------------- ----------------- -----------------
Net (Loss) Income ($2,273,650) $ 1,555,666 ($1,401,406) $ 2,896,160
Other Comprehensive (Loss) Income:
Unrealized (loss) on
short term investments 29,552 21,996 (1,886)
Cumulative translation adjustments 52,262 324 (8,275) (19,190)
----------- ----------- ----------- -----------
Total Comprehensive (Loss) Income ($2,191,836) $ 1,555,990 ($1,387,685) $ 2,875,084
=========== =========== =========== ===========
The accumulated other comprehensive (loss) income balance is as follows:
UNREALIZED GAINS
(LOSSES) ON CUMULATIVE TRANS-
SHORT TERM INVESTMENTS LATION ADJUSTMENTS TOTAL
---------------------- ------------------ -----
Beginning Balance -0- ($123,028) ($123,028)
Current Period Change 21,996 (8,275) 13,721
--------- --------- ---------
Ending Balance $ 21,996 ($131,303) ($109,307)
========= ========= =========
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 six months ended December 31, 2000.
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
are currently evaluating, and have not determined the effect, if any, that SAB
No. 101 will have on the our consolidated financial position and our results of
operations.
7
5. RECLASSIFICATIONS
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 (9.5% at December 31, 2000) 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. At December 31, 2000, the unused
commitment amounted to $9.2 million. The Credit Agreement has restrictive
covenants related to tangible net worth, current ratio, working capital, debt
service ratio, and the ratio of total liabilities to equity. As of December 31,
2000, we were in compliance with all of our restrictive covenants. The Credit
Agreement permits us to pay cash dividends to the extent such payment would not
cause us to violate the aforementioned covenants. There are no requirements
under the Credit Agreement for repayments, therefore we have classified the
outstanding debt on the Credit Agreement as long-term debt in our consolidated
financials at December 31, 2000.
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 will not be available to members of the Board of
Directors or executive officers.
8
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 to enhance shareholder
value or the retentive value needed in today's employment market.
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
increased 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
10
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 six months ended December 31, 2000.
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 94.0% 76.3% 87.4% 76.6%
----- ----- ----- -----
Gross profit 6.0% 23.7% 12.6% 23.4%
Selling, general and administrative expenses 15.9% 12.5% 14.8% 12.6%
----- ----- ----- -----
Operating (loss) income (9.9%) 11.2% (2.2%) 10.8%
Income (loss) from operations before benefit from (provision for)
income taxes and minority interest (9.7%) 11.4% (2.0%) 10.8%
Net (loss) income (8.4%) 6.4% (2.5%) 6.5%
===== ===== ===== =====
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 26, 1999
TOTAL REVENUES. Our total revenues were $27.0 million in the three months
ended December 31, 2000, an increase of $2.6 million or 11% from $24.4 million
in the three months ended December 26, 1999. We recorded increases in revenue
from product sales from all of our manufacturing operations with the exception
of our Methuen, Massachusetts operation.
The Methuen operation experienced a reduction in product sales of $5.5
million or 38% for the three months ended December 31, 2000 compared to the same
period in 1999. The decrease in product sales at the Methuen facility was due
primarily to a decrease in purchases by the operation's two largest customers.
The reduction in purchases is the result of excess inventory held by these
customers. Sales to these customers are expected to increase by the end of the
third quarter. The decline in product sales from the Methuen operation was
offset by the inclusion of revenues of $5.7 million from our Poly-Flex
operation, acquired in March 2000, and increased sales from our other locations
and operations including Parlex Shanghai, PAPL and Laminated Cable.
Total revenues included licensing and royalty fees of $50,000 for the
three months ended December 31, 2000 compared to $542,000 for the same period in
1999. The $542,000 generated from licensing and royalty fees for the quarter
ending December 26, 1999 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 $25.4 million, or 94%
of total revenues, for the three months ended December 31, 2000, compared to
$18.6 million, or 76% of total revenues for the comparable period in the prior
year.
The Methuen operation experienced unfavorable manufacturing variances of
$3.7 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 38% decrease in product sales for the three months ending December 31,
2000. To counteract the excess manufacturing capacity, we have initiated
reductions in 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 cost of products sold also includes costs from our Poly-Flex
operation, acquired in March 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4.3 million, or 16% of total revenues, for the
three months ended December 31, 2000, and $3.1 million or 13% of total revenues
for the comparable period in the prior year. The percentage growth in selling,
general and administrative expenses was primarily due to the inclusion of the
Poly-Flex operation, which accounted for $893,000 of the increase for the three
months ending December 31, 2000. To compensate for the increase in expenses, we
have initiated reductions in personnel and other selling, general and
administrative expenses at our Methuen corporate offices.
OTHER INCOME, INTEREST EXPENSE, AND BENEFIT FROM (PROVISION FOR) INCOME
TAXES. Other income in the current quarter of $132,000 consisted of interest
income from our short-term investments. As of December 31, 2000 we had
short-term investments of $6.6 million. Other income for the comparable period
in the prior year was $143,000.
Interest expense was $92,000 for the three months ended December 31,
2000, compared to $96,000 for the comparable period in the prior year. The
interest expense for both periods represents interest incurred on our short-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 $2.6 million for the three
months ended December 31, 2000, compared to income of $2.8 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 23% in the three months ended
December 31, 2000, compared to a 32% effective tax rate for the comparable
period in the prior year. The decrease in the effective tax rate resulted from 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 $2.3 million for the three months ended December 31, 2000,
compared to income of $1.6 million for the three months ended December 26, 1999.
12
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED
DECEMBER 26, 1999
TOTAL REVENUES. Our total revenues were $56.7 million in the six months
ended December 31, 2000, an increase of $12 million or 27% from $44.7 million in
the six months ended December 26, 1999. 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 $5.7
million or 21% for the six months ended December 31, 2000 compared to the same
period in 1999. The decrease in product sales at the Methuen facility was due
primarily to a decrease in purchases by the operation's two largest customers.
The reduction in purchases is a result of excess inventory held by these
customers. Sales to these customers are expected to increase by the end of the
third quarter. The decline in product sales from the Methuen operation was
offset by the inclusion of revenues of $11.2 million from our Poly-Flex
operation, acquired in March 2000, and increased sales from our other locations
and operations including Parlex Shanghai, PAPL and Laminated Cable.
Total revenues included licensing and royalty fees of $167,000 for the
six months ended December 31, 2000, of which $105,000 was the recognition of the
final installment of our patent assignment agreement with Polyclad Laminates,
Inc. Total revenues for the six months ending December 26, 1999 included
licensing and royalty fees of $789,000 from Polyclad Laminates, Inc.
COST OF PRODUCTS SOLD. Cost of products sold were $49.5 million, or 87%
of total revenues, for the six months ended December 31, 2000, compared to $34.3
million, or 77% of total revenues for the comparable period in the prior year.
The Methuen operation experienced unfavorable manufacturing variances of
$4.2 million or 7% of total revenues as compared to the same period last year.
The manufacturing variances are due to excess manufacturing capacity associated
with a 21% decrease in product sales for the six months ending December 31,
2000. To counteract the excess manufacturing capacity, we have initiated
reductions in 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 cost of products sold also includes costs from our Poly-Flex
operation, acquired in March 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $8.4 million, or 15% of total revenues, for the six
months ended December 31, 2000, and $5.6 million for the comparable period in
the prior year, or 13% of total revenues for that period. The percentage growth
in selling, general and administrative expenses was primarily due to the
inclusion of the Poly-Flex operation which accounted for $1.8 million of the
increase for the six months ending December 31, 2000. To compensate for the
increase in expenses, we have initiated reductions in personnel and other
selling, general and administrative expenses at our Methuen corporate offices.
OTHER INCOME, INTEREST EXPENSE, AND BENEFIT FROM (PROVISION FOR) INCOME
TAXES. Other income of $261,000 for the six months ended December 31, 2000 was
comprised of interest income from our short-term investments. As of December 31,
2000, we had short-term investments of $6.6 million.
Interest expense was $120,000 for the six months ended December 31, 2000,
compared to $154,000 for the comparable period in the prior year. The interest
expense for both periods represents interest incurred
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on our short-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 $1.1 million for the six months
ended December 31, 2000, compared to income of $4.9 million for the six months
ended December 26, 1999. 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 17% in the six months ended
December 31, 2000, compared to a 29% effective tax rate for the comparable
period in the prior year. The decrease in the effective tax rate resulted from 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 $1.4 million for the six months ended December 31, 2000,
compared to income of $2.9 million for the six months ended December 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had approximately $9.4 million in cash and
short-term investments.
Net cash used in operations during the six months ended December 31, 2000
was $3.8 million. This cash was used to support our working capital requirements
including receivables associated with sales growth at our Poly-Flex and China
operations. Cash used in investing activities was $10.8 million for the six
months ended December 31, 2000. These funds were used to purchase $6.6 million
of higher-yielding investment grade corporate and United States Government debt
securities and $4.1 million of capital equipment and other expenditures. Cash
provided by financing activities was $5.4 million for the six months ended
December 31, 2000 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 (9.5% at December 31, 2000) 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. At December 31, 2000, the unused
commitment amounted to $9.2 million. The Credit Agreement has restrictive
covenants related to tangible net worth, current ratio, working capital, debt
service ratio, and the ratio of total liabilities to equity. As of December 31,
2000, we were in compliance with all of our restrictive covenants. The Credit
Agreement permits us to pay cash dividends to the extent such payment would not
cause us to violate the aforementioned covenants.
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.
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We believe that our cash on hand, our anticipated cash flow from
operations, and the amount 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
are currently evaluating, and have not determined the effect, if any, that SAB
No. 101 may have 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 December 31, 2000, 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 are exposed to market risks, which include changes in U.S. and foreign
interest rates and fluctuations in exchange rates.
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. We owed approximately $5.8 million
as of December 31, 2000. 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.
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
15
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 December 31, 2000 of
approximately $8.8 million. Poly-Flex Circuits Limited had net assets as of
December 31, 2000 of approximately $6.8 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 December 31, 2000, Parlex Shanghai had outstanding debt
of $841,000 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.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on November 28,
2000. There was no solicitation in opposition to management's
nominees as listed in our proxy statement and all such nominees
were elected as Class III directors for a three-year term.
(b) At the Annual Meeting, stockholders elected the following Class
III directors whose terms expire in 2003:
AUTHORITY
NAME FOR WITHHELD
---- --- --------
Herbert W. Pollack 5,636,664 50,300
Sheldon Buckler 5,636,664 50,300
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 six months ended December 31, 2000.
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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. Reith
-------------------------------------
Robert A. Rieth
Senior Vice President & CFO
(Principal Accounting and Financial Officer)
FEBRUARY 20, 2001
-----------------
Date
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
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11 Statement Regarding Computation of Per Share Earnings 20
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