1,150,000 Shares
PARLEX CORPORATION
Common Stock
Of the 1,150,000 shares of Common Stock offered hereby, 1,000,000
shares are being sold by the Company and 150,000 shares are being sold by
the Selling Stockholders. See "Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "PRLX." On October 21, 1997, the last reported sale
price of the Common Stock was $23 3/4 per share. See "Price Range of Common
Stock."
See "Risk Factors" commencing on page 5 for a discussion of certain
factors that should be considered by prospective purchasers of the Common
Stock offered hereby.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================
Price Underwriting Proceeds Proceeds
to Discounts and to to Selling
Public Commissions (1) Company (2) Stockholders
- -----------------------------------------------------------------------------------
<PAGE> 1
<S> <C> <C> <C> <C>
Per Share $22.00 $1.26 $20.74 $20.74
Total (3) $25,300,000 $1,449,000 $20,740,000 $3,111,000
===================================================================================
<FN>
<F1> The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
<F2> Before deducting expenses payable by the Company estimated at
$325,000.
<F3> The Company and the Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 172,500 additional
shares of Common Stock solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $29,095,000, $1,666,350,
$23,851,000 and $3,577,650, respectively. See "Underwriting."
</FN>
</TABLE>
-------------------
The shares of Common Stock are offered by the several Underwriters,
subject to receipt and acceptance by them and to their right to reject any
order in whole or in part. It is expected that delivery of the shares of
Common Stock will be made at the offices of Adams, Harkness & Hill, Inc.,
Boston, Massachusetts, on or about October 27, 1997.
Adams, Harkness & Hill, Inc. Needham & Company, Inc.
The date of this Prospectus is October 22, 1997.
Parlex Corporation provides a variety of high
performance flexible interconnects for a wide
range of applications.
[Photo]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING
GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103
OF REGULATION M. SEE "UNDERWRITING."
The logo of the Company is a registered trademark of the Company.
PALFlex(R), PALCore(R) and U-Flex(R) are registered trademarks of the
Company and the Company has applied for registration of the trademark
PALCoat(TM).
<PAGE> 2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Investors should carefully consider
the risk factors related to the purchase of Common Stock of the Company. See
"Risk Factors." All information reflects a three-for-two stock split effected
as a stock dividend on April 21, 1997. The Company's fiscal year ends June
30. References to a particular fiscal year are to the fiscal year ending June
30 of that year. Unless the context indicates otherwise, all references to
"Parlex" or the "Company" refer to Parlex Corporation and its subsidiaries.
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Capitalization,"
"Description of Capital Stock" and "Underwriting."
The Company
Parlex is a leading supplier of flexible interconnects principally for
sale to the automotive, military/aerospace, computer, telecommunications and
industrial markets. The Company's product offering, which the Company
believes is the broadest of any company in the flexible interconnect industry,
includes flexible circuits, laminated cables, flexible/cable hybrid circuits
and flexible interconnect assemblies. Flexible circuits are used to provide
connections between components and electronic systems and as a substrate to
support electronic devices. Laminated cables provide connections between
electronic sub-systems and replace conventional wire harnesses.
Flexible/cable hybrid circuits combine the lower cost of laminated cable with
the technology of flexible circuits into a single cost-effective interconnect.
Flexible interconnect assemblies are formed by adding components such as
integrated circuits, connectors, resistors and capacitors to flexible circuits
or laminated cables. The advantages of flexible interconnects over
alternative technologies such as rigid printed circuits include superior
thermal qualities, reduced size and weight, and the ability to provide three-
dimensional packaging. The IPC, an international trade organization,
estimates that worldwide sales of flexible circuits in 1996 exceeded $2.5
billion. The IPC has reported that the flexible circuit industry in North
America has grown at rates between 17% and 19% in each of the past three
years.
The Company believes that its creative engineering expertise and its
ability to advance the technology of manufacturing processes and materials
allow it to provide its customers with a comprehensive range of flexible
interconnect solutions. Beginning at the design phase, the Company's design
engineers work closely with customers to ensure the produceability of a
design. Once a design has been completed, the Company utilizes its innovative
materials and processes, including PALFlex, PALCoat, U-Flex, Polyamber, Pemacs
and PALCore, to produce a flexible interconnect product that meets its
customers' performance needs and cost objectives.
The Company's objective is to be the supplier of choice for key
customers in markets where cost-effective flexible interconnects provide added
value to the customers' products. Within its targeted market segments, the
Company believes that its ability to develop strategic customer relationships
and provide a broad product offering serves as a competitive advantage. These
relationships have enabled the Company to work closely with its customers from
the design phase through production to ensure that its customers' flexible
interconnect requirements are met. In fiscal 1997, the Company's top
<PAGE> 3
customers in terms of revenues were Motorola, Texas Instruments, Northern
Telecom, Allied-Signal, Delco Electronics and Compaq Computer.
An important element of the Company's growth strategy has been
diversification among its targeted markets and expansion of its global
presence. The execution of this strategy enabled the Company to reduce its
dependence on any particular market segment and to increase its sales by
approximately 92% since fiscal 1992. In fiscal 1997, none of the Company's
target markets represented greater than 29% of the Company's total revenues.
As a result of the Company's growth in recent years, the Company has expanded
its manufacturing operations to better accommodate its customers' geographic
and cost requirements. In 1995, the Company established Parlex Shanghai, a
joint venture in China designed to serve the Asian market in flexible circuits
as well as to produce certain products more cost-effectively for North
American customers. The Company is planning to expand its manufacturing
facilities and acquire equipment to increase capacity and accommodate new
technology at all of its manufacturing locations during fiscal 1998.
The Company was incorporated in Massachusetts in 1970. The Company
maintains its principal executive offices at 145 Milk Street, Methuen,
Massachusetts 01844, and its telephone number is (978) 685-4341.
The Offering
<TABLE>
<S> <C>
Common Stock offered by:
The Company 1,000,000 shares
The Selling Stockholders 150,000 shares
Common Stock to be outstanding after the offering 4,593,310 shares (1)
Use of proceeds To expand manufacturing facilities, purchase
capital equipment, repay indebtedness and for
working capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol PRLX
<FN>
- -------------------
<F1> Based on shares outstanding at September 24, 1997. Does not include
374,724 shares issuable upon the exercise of outstanding options under
the Company's stock plans.
</FN>
</TABLE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenues $31,392 $34,926 $40,251 $47,257 $55,087
<PAGE> 4
Gross profit 4,756 5,776 7,305 6,949 10,950
Selling, general and administrative expenses 4,432 4,637 4,998 5,518 7,288
Operating income 324 1,139 2,307 1,431 3,662
Income from operations before income taxes 252 1,007 2,240 1,170 3,381
Net income 302 1,007 1,486 770 2,120
Net income per share $ 0.09 $ 0.29 $ 0.41 $ 0.21 $ 0.57
Weighted average number of common and
common equivalent shares outstanding 3,466 3,466 3,651 3,675 3,716
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-----------------------
As
Actual Adjusted (1)
-------- ------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital $ 9,592 $27,507
Total assets 32,234 49,649
Short-term debt, including current portion of long-term debt 1,000 500
Long-term debt, less current portion 2,500 --
Stockholders' equity 17,788 38,203
<FN>
- -------------------
<F1> Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
by the Company offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
</FN>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the Common Stock
offered by this Prospectus. Except for the historical information contained
herein, the discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties. When used in this
Prospectus, the words "believes," "expects," "anticipates," "intends,"
"estimates," "should," "will likely" and similar expressions are intended to
identify such forward-looking statements. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed here. Important
factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Fluctuations in Operating Results; Variability of Orders. The Company's
operating results have historically been subject to fluctuations, and the
Company expects that they will continue to fluctuate due to a variety of
factors, including the timing and volume of orders from, and shipments to,
<PAGE> 5
customers, the timing of introductions of and market acceptance of new
products and general economic trends. Typically, in the flexible interconnect
industry, a substantial portion of sales in a given quarter depends on
obtaining orders for products to be manufactured and shipped in the same
quarter in which those orders are received. Although the Company monitors its
customers' needs, it often has limited knowledge of the magnitude or timing of
future orders. As a result, the timing of revenues may be affected by the
need to ramp up to or down from volume production in response to fluctuations
in customer demand, the introduction of replacement products or the balancing
of inventory. A significant decrease in the number, magnitude or timing of
orders in any given quarter could have a material adverse effect on the
Company's business, financial condition and operating results. Because it is
difficult for the Company to readily reduce spending on certain operating
expenses, such as fixed manufacturing costs, development costs and ongoing
customer service, a reduction in sales could have a material adverse effect on
near-term profit margins. Results of operations in any period are therefore
not necessarily indicative of the results to be expected for any future
period. Due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results may be below the expectations
of public market analysts and investors. Such an event could have a material
adverse effect on the market price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Expansion of Manufacturing Capacity. The Company believes its long-term
competitive position depends in part on its ability to increase its
manufacturing capacity. The Company's business, financial condition and
operating results could be materially and adversely affected if the Company is
not able to obtain sufficient manufacturing capacity to meet increases in
demand for its products. The Company expects to use a portion of the proceeds
from this offering to fund expansion of its manufacturing capacity. The
failure of the Company to complete the expansion on schedule and within budget
could have a material adverse effect on its business, financial condition and
operating results. In addition, the Company is in the process of implementing
new operations control and accounting information systems, which may
temporarily impact the Company's operations. See "Use of Proceeds,"
"Business--Manufacturing Processes" and "--Management Information Systems."
Market and Customer Concentration. Applications for flexible
interconnects include automotive electronics, military/aerospace products,
computers and computer peripherals, telecommunications subscriber and
infrastructure equipment, as well as circuits and cables for medical and
industrial applications. Although the Company markets products for each of
these applications in order to avoid a dependency on any one sector, a
significant downturn in any of these market sectors could have a material
adverse effect on the Company's business, financial condition and operating
results. Historically, the Company has sold a substantial portion of its
flexible interconnects to a limited number of customers. In fiscal 1995, 1996
and 1997, sales to Motorola accounted for approximately 12%, 29% and 20%,
respectively, of the Company's total revenues and the Company's top 20
customers accounted for approximately 61%, 66% and 69% of the Company's total
revenues, respectively. The Company expects that a limited number of
customers will continue to account for a high percentage of its total revenues
in the foreseeable future. The loss of a significant customer or a
substantial reduction in orders by any significant customer could reduce the
Company's cash flow and have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Customers."
<PAGE> 6
Current and Future Capital Needs. The development and manufacture of
flexible interconnects is highly capital intensive. In order to remain
competitive, the Company must continue to make significant expenditures for
capital equipment, expansion of operations and research and development. The
Company expects that substantial capital will be required to expand its
manufacturing capacity and fund working capital for anticipated growth. The
need to raise capital to expand the Company's manufacturing capacity is a
significant reason for this offering. To the extent the Company's financial
resources are insufficient to fund these activities, the Company will need to
raise additional funds either through borrowings or further equity financings.
There can be no assurance that such additional capital will be available on
reasonable terms or at all. The inability of the Company to obtain adequate
additional financing on reasonable terms when needed would have a material
adverse effect on the Company's business, financial condition and operating
results. Furthermore, the Company's credit facility contains various
financial covenants predicated on the Company's present and future financial
condition. In the event the Company is no longer able to meet the covenants
contained in the credit facility, it may be required to repay the debt
incurred thereunder. See "Capitalization," "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--
Manufacturing Processes."
Foreign Operations. The Company is currently expanding its operations
globally. The Company owns a 50.1% equity interest in a joint venture in
China. Manufacturing and sales operations outside the United States are
accompanied by a number of risks inherent in international operations,
including imposition of governmental controls, compulsory licensure
requirements, compliance with a wide variety of foreign and United States
export laws, currency fluctuations, unexpected changes in trade restrictions,
tariffs and barriers, political and economic instability, longer payment
cycles typically associated with foreign sales, difficulties in administering
business overseas, labor union issues and potentially adverse tax
consequences. Although the Company's current products are designed to meet
the regulatory standards of certain foreign countries, any inability to meet
foreign regulatory approvals on a timely basis could have an adverse effect on
the Company's business, financial condition and operating results. See
"Business--Joint Venture and Strategic Relationships."
Competition. The Company's business is highly competitive. The
flexible interconnect industry is differentiated by customers, markets and
geography, with each niche having its own combination of complex packaging and
interconnect requirements. The Company experiences competition worldwide in
the flexible interconnect market from a number of foreign and domestic
providers as well as from alternative technologies such as rigid printed
circuits. Many of the Company's competitors are larger and have greater
financial resources than the Company. There can be no assurance that existing
or future competitors will not be able to duplicate the Company's strategies
or that the Company will continue to be able to compete successfully. See
"Business--Industry Overview" and "--Competition."
Limited Sources of Supply. The Company purchases raw materials, process
chemicals and various components from multiple outside sources. In fiscal
1997, the Company's largest supplier of raw materials was Dupont, from which
it purchased approximately 44% of its materials and supplies. Any
unanticipated disruption in shipments from Dupont would have a material
adverse effect on the Company's business, financial condition and operating
results. Although there exist alternate suppliers for the raw materials,
<PAGE> 7
process chemicals and various components that the Company currently purchases
from its suppliers, because of the Company's limited inventory of raw
materials and tight manufacturing cycles, any unanticipated interruption of
supply could have a short-term material adverse effect on the Company's
business, financial condition and operating results. See "Business--Materials
and Materials Management."
Intellectual Property. The Company relies on a combination of patent
and trade secret laws and non-disclosure and other contractual agreements to
protect its proprietary rights. There can be no assurance that the Company's
efforts to protect its intellectual property will be effective in preventing
misappropriation or that others may not independently develop similar
technology. In addition, litigation may be necessary to protect the Company's
proprietary rights or to defend against claims of infringement. Although no
claims have been asserted against the Company for infringement of the
proprietary rights of others, there can be no assurance that third parties
will not assert such claims in the future. If any infringement claim is
asserted, the Company may be required to obtain a license of such rights.
There can be no assurance that any such license would be available on
reasonable terms, if at all. Litigation with respect to patents and other
intellectual property matters could result in substantial costs and diversion
of management and other resources and could have a material adverse effect on
the Company's business, financial condition and operating results. See
"Business--Intellectual Property."
Technological Change. The market for the Company's products and
services is characterized by rapidly changing technology and continuing
process development. The future success of the Company's business will depend
in large part upon its ability to maintain and enhance its technological
capabilities, develop and market products and services that meet changing
customer needs and successfully anticipate or respond to technological changes
on a cost-effective and timely basis. In addition, the flexible interconnect
industry could in the future encounter competition from new technologies that
render existing interconnect technology less competitive or obsolete. There
can be no assurance that the Company will effectively respond to the
technological requirements of the changing market. Moreover, there can be no
assurance that the materials and processes that the Company is currently
developing will result in commercially viable technological processes or that
there will be commercial applications for these technologies. To the extent
that the Company determines that new technologies and equipment are required
to remain competitive, the development, acquisition and subsequent
implementation of such technologies and equipment are likely to continue to
require significant capital investment. The Company's failure to keep pace
with technological change could have a material adverse effect on its
business, financial condition and operating results.
Dependence on Key Personnel. The Company is dependent upon a number of
its key management personnel. In addition, the future success of the Company
depends on its continuing ability to attract and retain highly-qualified
technical and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of service of one or more
key individuals, or the inability to attract additional qualified personnel,
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company maintains a key person life
insurance policy in the amount of $1.0 million on each of Mr. Herbert W.
Pollack and Mr. Peter J. Murphy. See "Management."
<PAGE> 8
Environmental Regulations. The Company is subject to a variety of
environmental laws relating to the storage, discharge, handling, emission,
generation, manufacture, use and disposal of chemicals, solid and hazardous
waste and other toxic and hazardous materials used to manufacture, or
resulting from the process of manufacturing, the Company's products. The
Company cannot predict the nature, scope or effect of future legislation or
regulatory requirements to which its operations might be subject or the manner
in which existing or future laws or regulations will be administered or
interpreted, including whether they will be applied in the future to
materials, products or activities to which they have not been applied
previously. Complying with new or more stringent laws or regulations, or to
more vigorous enforcement of the current or future policies of regulatory
agencies, could require substantial expenditures by the Company and could have
a material adverse effect on its business, financial condition and operating
results. Environmental laws and regulations require the Company to maintain
and comply with a number of permits, authorizations and approvals and to
maintain and update training programs and safety data regarding materials used
in its processes. Violations of those requirements could result in financial
penalties and other enforcement actions, and could require the Company to halt
one or more portions of its operations until a violation is cured. Although
the Company works to operate in compliance with these environmental laws,
there can be no assurance that the Company will succeed in that effort at all
times. The combined costs of curing incidents of non-compliance, resolving
enforcement actions that might be initiated by government authorities or
satisfying business requirements following any period affected by the need to
take such actions could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business--
Environmental Regulations."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, are estimated to be approximately $20.4 million ($23.5 million if the
Underwriters' over-allotment option is exercised in full). The Company will
not receive any of the proceeds from the sale of shares of Common Stock
offered by the Selling Stockholders. See "Selling Stockholders."
The Company expects to use approximately $12 million of the net proceeds
to substantially expand its manufacturing facilities and purchase capital
equipment that will increase its manufacturing capacity and accommodate
various new forms of technology processes. See "Business--Manufacturing
Processes." The Company also intends to use a portion of the net proceeds to
repay all of the outstanding indebtedness under the Company's revolving credit
loan facility with Fleet National Bank (which was $3.0 million as of September
15, 1997), which was incurred for the purchase of equipment and for working
capital. As of September 15, 1997, the interest rate on loans outstanding
under the revolving credit facility was 8.5%. The revolving credit facility
matures on December 31, 1997, at which time it converts into a three-year term
loan. The balance of the net proceeds will be used for working capital and
other general corporate purposes. Pending the application of the net proceeds
as described above, the net proceeds to the Company from this offering will be
invested in short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
<PAGE> 9
The following table sets forth the reported high and low sale prices for
the Common Stock on the Nasdaq National Market, under the symbol "PRLX," for
the periods indicated:
</TABLE>
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1996
First Quarter $ 9.00 $ 6.17
Second Quarter 7.50 4.83
Third Quarter 6.67 5.00
Fourth Quarter 10.17 5.50
Fiscal 1997
First Quarter 9.67 5.33
Second Quarter 7.83 5.83
Third Quarter 16.33 6.67
Fourth Quarter 15.25 10.00
Fiscal 1998
First Quarter 24.00 13.88
Second Quarter (through October 21, 1997) 31.25 20.00
</TABLE>
On October 21, 1997 the last reported sale price for the Common Stock on
the Nasdaq National Market was $23.75 per share. As of September 24, 1997,
there were approximately 87 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain future earnings, if any, to
fund the development and growth of its business and does not anticipate paying
any cash dividends in the foreseeable future. Future cash dividends, if any,
will be determined by the Board of Directors and will be based on the
Company's earnings, capital, financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's revolving line
of credit limits the amount available for cash dividends (as of June 30, 1997,
$4.3 million was available for cash dividends). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of June 30, 1997, and as adjusted to give effect to the
application of the estimated net proceeds from the sale of the 1,000,000
shares of Common Stock offered by the Company hereby.
<PAGE> 10
<TABLE>
<CAPTION>
June 30, 1997
----------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Short-term debt, including current portion of long-term debt $ 1,000 $ 500
====================
Long-term debt, less current portion $ 2,500 $ --
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized, none
outstanding -- --
Common stock, $0.10 par value; 5,000,000 shares authorized, 3,798,750
shares issued and 4,798,750 shares issued as adjusted (1)(2) 380 480
Additional paid-in capital 3,334 23,649
Retained earnings 15,112 15,112
Less treasury stock, at cost--210,000 shares (1,038) (1,038)
--------------------
Total stockholders' equity 17,788 38,203
--------------------
Total capitalization $20,288 $38,203
====================
<FN>
- -------------------
<F1> Excludes options to purchase 291,034 shares of Common Stock under the
Company's stock plans outstanding at June 30, 1997.
<F2> The Company's stockholders voted to increase the number of authorized
shares to 10,000,000, on October 20, 1997.
</FN>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of income for each of the three years in
the period ended June 30, 1997, and with respect to the consolidated balance
sheets as of June 30, 1996 and 1997, are derived from the consolidated
financial statements that have been audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Prospectus. The
consolidated statement of income data for the years ended June 30, 1993 and
1994, and the consolidated balance sheet data as of June 30, 1993, 1994 and
1995 are derived from audited consolidated financial statements not included
herein. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes
thereto and the other financial information included in this Prospectus.
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands, except per share data)
<PAGE> 11
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenues $31,392 $34,926 $40,251 $47,257 $55,087
Cost of products sold 26,636 29,150 32,946 40,308 44,137
---------------------------------------------------
Gross profit 4,756 5,776 7,305 6,949 10,950
Selling, general and administrative expenses 4,432 4,637 4,998 5,518 7,288
---------------------------------------------------
Operating income 324 1,139 2,307 1,431 3,662
Income from operations before income taxes 252 1,007 2,240 1,170 3,381
Net income 302 1,007 1,486 770 2,120
Net income per share $ 0.09 $ 0.29 $ 0.41 $ 0.21 $ 0.57
===================================================
Weighted average number of common and
common equivalent shares outstanding 3,466 3,466 3,651 3,675 3,716
</TABLE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 5,257 $ 6,704 $ 8,466 $ 9,148 $ 9,592
Total assets 18,906 20,845 24,517 29,662 32,234
Short-term debt, including current portion of
long-term debt 875 200 200 501 1,000
Long-term debt, less current portion 500 950 2,300 3,650 2,500
Stockholders' equity 11,848 12,880 14,667 15,455 17,788
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading supplier of flexible interconnects principally
for sale to the automotive, military/aerospace, computer, telecommunications
and industrial markets. Prior to 1990, substantially all of the Company's
sales were for military/aerospace applications. Beginning in 1990, the
Company developed a business strategy of pursuing broader commercial
applications for its products. The execution of this strategy has resulted in
a reduction of revenues from the military/aerospace sector as a percentage of
the Company's total revenues from 53% in fiscal 1992 to 21% in fiscal 1997,
while increasing overall revenues approximately 92%.
The Company believes that its development of innovative materials and
processes provides it with a competitive advantage in the markets in which it
competes. During the past three years, the Company has invested over $7.3
million (or approximately 5% of total revenues) in research and development to
develop materials and enhance its manufacturing processes. The Company
includes in cost of products sold its expenditures for the development of
materials and processes.
<PAGE> 12
To better serve customers that have production facilities in Asia and to
more cost effectively manufacture certain products for worldwide distribution,
the Company formed a Chinese joint venture, Parlex (Shanghai) Circuit Co.,
Ltd. ("Parlex Shanghai"), in 1995. Parlex owns 50.1% of the equity interest
in Parlex Shanghai. Accordingly, Parlex Shanghai's results of operations,
cash flows and financial position are included in the Company's consolidated
financial statements.
Results of Operations
The following table sets forth, for the periods indicated, selected
items in the Company's statements of income as a percentage of total revenues.
The table and the discussion below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 81.9 85.3 80.1
Gross profit 18.1 14.7 19.9
Selling, general and administrative expenses 12.4 11.7 13.2
Operating income 5.7 3.0 6.6
Income from operations before income taxes 5.6 2.5 6.1
Net income 3.7% 1.6% 3.8%
</TABLE>
Results of Operations For the Past Three Fiscal Years
Total Revenues. Total revenues increased approximately 17% over the
previous year in each of fiscal 1996 and fiscal 1997, from $40.3 million to
$47.3 million to $55.1 million. 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 in each period was primarily attributable to an increase in the
volume of units shipped.
Total revenues included licensing and royalty fees of $495,000, $155,000
and $110,000 in fiscal 1995, 1996 and 1997, respectively. Although the
Company intends to continue its practice of developing materials and processes
that it can license to third parties, it does not expect that royalty revenues
will represent a significant portion of total revenues in the near term.
Cost of Products Sold. Cost of products sold in fiscal 1995, 1996 and
1997 was $32.9 million, $40.3 million and $44.1 million, respectively. As a
percentage of total revenues, cost of products sold was 81.9%, 85.3% and 80.1%
in each of fiscal 1995, 1996 and 1997, respectively. The decrease in the
percentage in fiscal 1997 was primarily the result of manufacturing yield
improvements, particularly in connection with a major automotive program for
Motorola, 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.
<PAGE> 13
In fiscal 1996, the increase in the cost of products sold as a
percentage of total revenues was substantially attributable to the
introduction of the Motorola program described above. Although the Company
made progress in reducing costs throughout fiscal 1996, it was not until March
1996 that the Company overcame most of the technical issues affecting yields
and costs in this program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1995, 1996 and 1997 were $5.0 million, $5.5
million and $7.3 million, respectively. As a percentage of total revenues,
selling, general and administrative expenses remained relatively constant
during the three-year period, rising slightly in fiscal 1997 to 13.2%. The
dollar increase was the result of increased expenses associated with the
hiring of additional sales personnel, increased sales commissions on the
incremental sales, additional costs associated with incentive compensation and
the inclusion of Parlex Shanghai's expenses for twelve months in fiscal 1997
versus seven months in fiscal 1996. The Company believes that it has added
sufficient sales resources to accommodate its near-term growth prospects, and
management expects that selling, general and administrative expenses will
increase at a rate less than the growth in revenues.
Other Income and Interest Expense. Other income of $88,000 and $91,000
in fiscal 1995 and 1996, respectively, was comprised entirely of items of a
miscellaneous nature. The increase in other income in fiscal 1997 to $156,000
was principally the result of a gain on the sale of equipment.
Interest expense increased from $155,000 in fiscal 1995 to $351,000 in
fiscal 1996 and $436,000 in fiscal 1997. Interest expense increased in fiscal
1996 and fiscal 1997, principally as a result of increased borrowings to
finance capital expenditures. Interest rates during the period remained
relatively constant.
Selected Quarterly Operating Results
The following tables present certain unaudited quarterly consolidated
financial information for each of the eight quarters in the two-year period
ended June 30, 1997 and selected information as a percentage of total revenues
for each period. In the opinion of the Company's management, this information
has been prepared on the same basis as the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus and includes all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial results set forth herein. Although results from
period to period may vary, the first fiscal quarter of each year is impacted
by a plant shutdown of flexible circuit operations in order to perform
maintenance operations, environmental inspections, facility modification and
equipment installation. Results of operations for any previous quarters are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997
---------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<PAGE> 14
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenues $11,611 $11,685 $11,703 $12,258 $12,807 $14,068 $13,225 $14,987
Gross profit 1,316 1,539 1,820 2,274 1,895 2,595 2,985 3,475
Operating income 64 209 349 809 308 858 1,232 1,264
Net income 24 91 196 460 188 558 643 731
Net income per share $ 0.01 $ 0.02 $ 0.05 $ 0.12 $ 0.05 $ 0.15 $ 0.17 $ 0.19
As a Percentage of Total Revenues:
Gross profit 11.3% 13.2% 15.6% 18.6% 14.8% 18.4% 22.6% 23.2%
Operating income 0.6 1.8 3.0 6.6 2.4 6.1 9.3 8.4
Net income 0.2% 0.8% 1.7% 3.8% 1.5% 4.0% 4.9% 4.9%
</TABLE>
Recent Operating Results
The Company had total revenues of $13.7 million for the quarter ended
September 28, 1997, compared to $12.8 million for the quarter ended September
29, 1996. Income from operations before income taxes was $1.3 million for
the quarter ended September 28, 1997, compared to $315,000 for the quarter
ended September 29, 1996. Net income was $728,000, or $0.19 per share, for
the quarter ended September 28, 1997, compared to $188,000, or $0.05 per
share, for the quarter ended September 29, 1996.
Liquidity and Capital Resources
In fiscal 1997, the Company generated $3.4 million in cash flow from
operations. In addition to net income of $2.1 million, depreciation and
amortization of $1.9 million as well as changes in inventories and
payables of $1.0 million added to cash flow. Cash flow was reduced, in
part, by an increase in accounts receivable of $1.6 million associated
with the Company's increased revenues.
During fiscal 1997, the Company's investing and financing activities
included an investment of $2.6 million in property, plant and equipment,
repayment of $650,000 under its revolving credit facility and payment at
maturity of $100,000 on an industrial revenue bond.
The Company has a $5 million unsecured revolving line of credit with
a bank. Borrowings under the unsecured line bear interest at the bank's
corporate base rate (8.5% at September 15, 1997), and the Company pays an
annual commitment fee of 0.5% on the average daily unused portion of the
bank's commitment. Amounts available for borrowings are reduced by
$500,000 due to the Company's guarantee of a loan made to Parlex Shanghai.
At September 15, 1997, $3.0 million was outstanding under the line of
credit and $1.4 million remained available for borrowing. On January 1,
1998, the unsecured line converts to a term loan with principal and
interest payments due monthly over a 36-month period. The agreement
establishing the line of credit has restrictive covenants, which include
restrictions on payment of cash dividends and requirements or limitations
as to tangible net worth, current ratio, working capital, debt service
ratio, capital expenditures and the ratio of total liabilities to equity.
Under these restrictive covenants, amounts available for dividends or
other distributions at June 30, 1997 approximated $4.3 million. The
Company also has a $2 million unsecured equipment financing line of credit
that expires on October 24, 1997, although amounts outstanding on that
<PAGE> 15
date may be converted to a three-year term loan. No amounts were
outstanding under the equipment line at September 15, 1997.
The Company has received a commitment letter from the bank for a $10
million unsecured revolving line of credit to replace the two existing
facilities. The Company expects this new credit facility to be in place
before the end of the second quarter in fiscal 1998.
The Company believes that its cash flow from operations, its
available line of credit, the net proceeds of this offering and other
financing alternatives available to it should be sufficient to satisfy its
operating and capital needs for the foreseeable future.
The Company has a deferred compensation obligation of approximately
$941,000 as of June 30, 1997 that is owed to the Chairman of its Board of
Directors. Under the current arrangement, monthly payments begin in June
1999, or the first month after the termination of his employment,
whichever occurs first, and continue for no fewer than 60 months or, at
the election of the Chairman prior to his termination of employment, for
up to 120 months. Amounts to be paid within one year are not expected to
be material.
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 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. The Company has not yet completed the analysis of which
operating segments, if any, it will report on. Both standards will be
adopted by the Company during the first quarter of fiscal year 1999.
BUSINESS
Parlex is a leading supplier of flexible interconnects principally
for sale to the automotive, military/aerospace, computer,
telecommunications and industrial markets. The Company's product
offering, which the Company believes is the broadest of any company in the
<PAGE> 16
flexible interconnect industry, includes flexible circuits, laminated
cables, flexible/cable hybrid circuits and flexible interconnect
assemblies. Flexible circuits, which consist of conductive copper
patterns that are laminated to flexible substrate materials such as
polyimide or polyester, are used to provide connections between components
and electronic systems and as a substrate to support electronic devices.
Laminated cables, which consist of flat or round wire laminated to a
flexible substrate material, provide connections between electronic sub-
systems and replace conventional wire harnesses. Flexible/cable hybrid
circuits combine the lower cost of laminated cable with the technology of
flexible circuits into a single cost-effective interconnect. Flexible
interconnect assemblies are formed by adding components such as integrated
circuits, connectors, resistors and capacitors to flexible circuits or
laminated cables. The advantages of flexible interconnects over
alternative technologies such as rigid printed circuits include three-
dimensional packaging and superior thermal qualities as well as reduced
size and weight. The Institute for Interconnecting and Packaging of
Electronic Circuits ("IPC"), an international trade organization,
estimates that worldwide sales of flexible circuits in 1996 exceeded $2.5
billion. The IPC has reported that the flexible circuit industry in North
America has grown at rates between 17% and 19% in each of the past three
years.
The Company believes that its creative engineering expertise and its
ability to advance the technology of manufacturing processes and materials
allow it to provide its customers with a comprehensive range of flexible
interconnect solutions. Beginning at the design phase, the Company's
design engineers work closely with its customers to ensure the
produceability of a design. Once a design has been completed, the Company
utilizes its innovative materials and processes, including PALFlex,
PALCoat, U-Flex, Polyamber, Pemacs and PALCore, to produce a flexible
interconnect product that meets its customers' performance needs and cost
objectives.
The Company's objective is to be the supplier of choice for key
customers in markets where cost-effective flexible interconnects provide
added value to the customers' products. Within its targeted market
segments, the Company believes that its ability to develop strategic
customer relationships and provide a broad product offering serves as a
competitive advantage. These relationships have enabled the Company to
work closely with its customers from the design phase through production
to ensure that its customers' flexible interconnect requirements are met.
In fiscal 1997, the Company's top customers in terms of revenues were
Motorola, Texas Instruments, Northern Telecom, Allied-Signal, Delco
Electronics and Compaq Computer.
An important element of the Company's growth strategy has been
diversification among its targeted markets. Since 1992, the Company has
reduced revenues from military/aerospace applications from approximately
53% to 21% of total revenues, while increasing overall revenues by
approximately 92% over the same period. As a result of the Company's
growth in recent years, the Company has expanded its manufacturing
operations to better accommodate its customers' geographic and cost
requirements. In 1995, the Company established Parlex Shanghai, a joint
venture in China designed to serve the Asian market with flexible circuits
as well as to produce certain products more cost-effectively for North
American customers. The Company is planning to expand its manufacturing
facilities and acquire equipment to increase capacity and accommodate new
<PAGE> 17
technology at all of its manufacturing locations during fiscal 1998. See
"Use of Proceeds."
Industry Overview
Over the past two decades electronic systems have become smaller,
lighter and more reliable, while demands for performance at lower costs
have increased dramatically. Although rigid printed circuits are a
conventional form of electronic packaging, their two-dimensional form
limits the options available to the design engineer. As the demand for
more portable electronic packaging has increased, so too has the demand
for flexible, three-dimensional circuits. In addition to the improved
packaging and performance characteristics, flexible circuits offer
superior thermal dissipation characteristics compared to rigid circuits,
making flexible circuits attractive for use in advanced, high-speed
electronics.
Flexible interconnects are used in most segments of the electronics
industry. The primary market segments that place high value on superior,
cost-effective flexible interconnect solutions include:
Automotive. Automobile manufacturers increasingly use electronics
to enhance vehicle performance and functionality, while at the same time
reducing electronic component size, weight and manufacturing and assembly
costs. Flexible circuits and laminated cables can provide cost-effective
interconnect solutions for such applications as dashboard instrumentation,
automotive entertainment systems, electronic engine control units,
steering wheel controls, power distribution, sensors and anti-lock brakes.
Providers of flexible interconnects typically work closely with the
companies that supply these electronic systems to the vehicle
manufacturers. Because automotive production cycles generally last three
to five years and designs are unlikely to change during that period, a
flexible interconnect that is designed into an automobile model or
platform provides a relatively predictable source of demand over an
extended time period.
Telecommunications. The telecommunications market has two distinct
segments: infrastructure equipment and subscriber equipment.
Infrastructure equipment consists of support electronics for the
distribution of voice and data transmission. The growth of data transfer
via the Internet has dramatically increased demand for this type of
equipment. Infrastructure equipment employs sophisticated electronics
which usually require the use of complex flexible interconnects.
Subscriber equipment consists of cellular devices including battery
assemblies. Tight packaging and the need to reduce weight have driven the
demand for flexible interconnects in this segment. Laminated cables and
single- and double-sided flexible circuits are generally used in
subscriber equipment.
Computer. The IPC has reported that the computer market represents
approximately 37% of the worldwide consumption of flexible interconnects.
Demand for flexible circuits and laminated cable in this market is driven
by short product life cycles as consumers demand increasingly powerful,
less expensive, smaller, faster and lighter equipment. Disk drives
represent the largest application for flexible circuits in this market.
Other applications include notebook displays, mass storage devices and
interconnects for peripheral equipment such as scanners, printers and
docking stations.
<PAGE> 18
Military/Aerospace. Military/aerospace electronics were at one time
the primary applications for flexible circuitry. Because of product
complexity and space restrictions, aerospace requirements often demand
multilayer rigid-flexible circuits. Typical applications are navigation
systems, flight controls, displays, communications equipment and
munitions. Although overall spending in this segment has decreased, the
Company estimates procurement of flexible interconnects will continue to
experience modest growth. The Company believes that the trend toward
"smart" military systems will continue to drive demand for flexible
interconnects in this segment.
Industrial. The industrial market, which the Company defines to
include medical electronics, encompasses many applications. Virtually any
electronic device in which tight packaging, light weight or high
reliability is a priority is a candidate for flexible interconnects.
Typical applications include electronic scales, industrial controls,
metering devices, scanners, sensors and medical monitoring equipment.
The Parlex Solution
Parlex combines creative engineering design capabilities with
innovative manufacturing processes to provide its customers with a
complete and cost-effective flexible interconnect solution. The solution
begins in the design phase, where Parlex engineers typically work closely
with customers to develop a technically superior flexible interconnect
design. Although the Company's customers generally provide the initial
engineering guidelines for a particular interconnect, the Company's design
engineers are often called upon to work in tandem with a customer's design
team to develop a solution. An important part of the Parlex solution is
ensuring the produceability of a design at an early stage--before time and
money are spent on manufacturing.
Once the design is completed, the Company applies its experience
with innovative materials and manufacturing processes to produce a
flexible interconnect solution that meets the customer's needs and cost
objectives. The Company has developed materials and processes that
provide its customers improved performance at a lower cost. Over the past
several years the Company has gained substantial experience in introducing
programs for high-volume products, and it believes this expertise is a key
factor in its ability to provide its customers with cost-effective
flexible interconnect solutions.
The Company believes manufacturers with the capability to supply a
broad range of products with a diverse mix of performance characteristics
and with a global presence will capture additional market share in the
flexible interconnect industry. The Company is one of a limited number of
independent manufacturers that offers a range of flexible interconnect
solutions from design concept through high-volume production. By offering
its broad range of products and services, the Company can provide design
and manufacturing solutions for its customers while reducing its
customers' time-to-market and product development costs.
Strategy
The Company's objective is to be the flexible interconnect supplier
of choice for key customers in its target markets. The Company's strategy
to achieve this objective includes the following key elements:
<PAGE> 19
* Develop Innovative Processes and Materials. The Company
believes that its ability to develop innovative materials and
processes enhances the opportunity for growth within its targeted
markets. The Company intends to continue to focus its development
efforts on proprietary flexible materials and processes that have a
broad range of applications. These materials and processes enable
the Company to produce cost-effective flexible interconnects, at
reduced cycle time, that are reliable and improve its customers'
product performance. The Company's PALFlex, PALCoat, Polyamber, U-
Flex and PALCore technologies are examples of materials and
manufacturing processes that have resulted from the Company's focus
on innovation.
* Develop Strategic Relationships with Target Customers. The
Company seeks to develop strategic relationships with key customers
in targeted industries. As a value-added strategic partner with its
customers, the Company works with a customer's technology roadmap to
design and develop cost-effective flexible interconnect solutions.
The Company believes that these relationships are most effective
where the Company is providing a significant portion of a customer's
flexible interconnect requirements. Through these strategic
relationships, the Company achieves greater visibility into the
customer's entire range of flexible interconnect requirements.
* Diversify Customer Base across Specified Markets. The Company
seeks to serve a variety of markets to help mitigate the effects of
economic cycles in any one industry. The Company's business units
are aligned to specific market segments in order to better
understand and service customers within particular industries. In
addition, the Company believes its diversification among the major
segments provides greater insight into emerging technological
requirements. For example, the Company has applied its knowledge of
shielding requirements in the computer industry to gain a
competitive advantage in the telecommunications market.
* Offer the Broadest Range of Products in the Flexible
Interconnect Industry. The Company intends to continue to provide a
broad product offering that allows it to service virtually all of
its customers' flexible interconnect requirements. Parlex is not
aware of any other company in the flexible interconnect industry
that offers a broader range of products. The Company's product line
includes flexible and rigid-flexible circuits from one to 24 layers,
laminated cables, flexible/cable hybrid circuits and flexible
interconnect assemblies. The Company uses a variety of materials in
its products, including adhesiveless and adhesive-based polyimide as
well as polyester.
* Expand Global Presence. The Company believes that flexible
interconnect customers will increasingly require service on a global
basis. To address these requirements, the Company has continued to
expand its global presence in emerging markets and throughout the
world. For example, the Company established a joint venture company
in China as a base for its operations in that region and to serve
the emerging market in China. The Company has also developed, and
plans to continue to develop, strategic relationships and alliances
that it believes are necessary for the success of its international
business. The Company is also exploring the formation of a joint
venture to produce laminated cables in Asia where it believes the
<PAGE> 20
market for this product is substantially greater than in North
America. See "--Joint Venture and Strategic Relationships."
Current Products
The Company's current products include flexible circuits, laminated
cables, flexible/cable hybrid circuits and flexible interconnect
assemblies. The products are produced to customers' application-specific
requirements and are designed by the Company, the customer or jointly.
Lead times for the design and manufacture of the Company's products
generally range from one week for some products to three months for more
sophisticated products.
Flexible Circuits
Flexible circuits, which consist of conductive copper patterns that
are laminated to flexible substrate materials such as polyimide or
polyester, are used to provide connections between electronic components
and as a substrate to support these electronic devices. The circuits are
manufactured by passing base materials through multiple processes such as
drilling, photo imaging, etching, copper plating and finishing. Flexible
circuits can be produced in single or multiple layers. The Company
produces a wide range of flexible circuits including:
* Single-Sided Flexible Circuits have a conductive pattern only
on one side and are commonly used for cellular phones, batteries for
portable electronics and dashboard displays. Parlex has converted
many double-sided flexible circuits to single-sided by incorporating
its HSI+ (high speed interconnect) screening technology that
incorporates superior shielding qualities and eliminates a separate
shield layer. The Company manufactures single-sided circuitry in
both the United States and at Parlex Shanghai, where substantially
all of the production to date has been single-sided.
* Double-Sided Flexible Circuits have conductive patterns on both
sides which are interconnected by a drilled and copper-plated hole.
The Company's double-sided circuits are used primarily in the
automotive market. Other applications include high definition
displays, instrumentation products and digital data converters.
* Multilayer and Rigid-Flexible Circuits consist of layers of
circuitry that are stacked and laminated. These circuits are used
where the complexity of the electronic design demands multiple
layers of flexible circuitry. If some of the layers are rigid board
material, the product becomes a rigid-flexible circuit. Multilayer
and rigid-flexible circuits are common in military applications for
flight computers, multipurpose displays and flight control systems.
In commercial applications, these products are used on high speed
telephone distribution equipment, computer networking electronics
and patient monitoring devices. The Company has manufactured these
circuits with up to 40 layers in prototype programs and 24 layers in
production.
Laminated Cables
<PAGE> 21
The Company manufactures laminated cables in an efficient roll
process proprietary to Parlex. Substantially all of the laminated cable
that the Company produces uses flat wire. Approximately 70% of the
laminated cable that the Company produces is insulated with polyester
material allowing for maximum flexibility while the remainder is insulated
with polyimide material for its enhanced performance at elevated
temperatures. The Company's laminated cables are capable of handling both
power (high current) and signal (low current) levels.
Improving the process by which laminated cable is manufactured can
increase functionality and lower the cost of production. To this end, the
Company has developed U-Flex, a technique that forms conductors into a
u-shape, followed by an injection molding process which provides the
function of a connector. This technique improves electrical performance
and eliminates the need for a separate costly connector. The Company has
also developed Pemacs shielding, which adds a specially designed silver
ink to laminated cable to meet stringent electronic shielding requirements
without compromising flexibility. The Company's Autoline cable process
incorporates pushpins into the laminated cable to provide for automatic
alignment to a printed circuit board for subsequent soldering.
Flexible/Cable Hybrid Circuits
In many cases, although a laminated cable is capable of carrying the
necessary signals, etched circuitry is required for termination. For
these applications the Company manufactures flexible/cable hybrid
circuits, which take advantage of the lower cost of laminated cables and
the technology of flexible circuits by combining them into a single
interconnect. Flexible/cable hybrid circuits are currently used in
switching stations, postage metering devices and electronic scales. On
some products, Parlex adds its HSI+ process to the flexible/cable hybrid
circuit to provide signal clarity and shielding to the cable and the
flexible circuit.
Flexible Interconnect Assemblies
Both flexible circuits and laminated cables can be converted into an
electronic assembly by adding electronic components. This process can be
as simple as adding a connector or as complex as assembling and soldering
many components such as capacitors, resistors and integrated circuits. In
some cases, the Company subcontracts with electronic manufacturing service
companies for component placement and attachment.
The following table describes applications in which the Company's
products are used:
<TABLE>
<CAPTION>
Product Applications
------- ------------
<S> <C>
Flexible Circuits
Single-Sided Batteries for Cell Phones
VCRs
Computer Networks
<PAGE> 22
Double-Sided Engine Controls
Laptop Computers
Cellular Phones
Multilayer and Rigid-Flexible Computer Networks
Telecom Switching Stations
Aircraft Displays
Portable Medical Monitors
Laminated Cables
Standard Postage Meters
U-Flex Automotive Sound Systems
ZIF Laptop Computers
Pemacs Industrial Controls
Autoline Automotive Sound Systems
Flexible/Cable Hybrid Circuits Printers
Electronic Scales
Switching Stations
Flexible Interconnect Assemblies Aircraft Identification Systems
Sensors
Scanning Devices
Batteries for Portable Products
Disk Drives
Night Vision Systems
</TABLE>
New Product Development
An important part of the Company's strategy is development of new
materials, processes and products. During the past three fiscal years,
the Company has invested an aggregate of $7.3 million in research and
development. The Company believes that its commitment to innovation is
evidenced by the fact that it has developed new materials for use in its
products even though it is not considered a materials supplier. The
Company has developed the following new products:
PALFlex. The Company has developed an adhesiveless polyimide-based
material, PALFlex (Parlex Adhesiveless Laminate for Flex). PALFlex is
both a material and a manufacturing process that the Company believes is
an enabling technology that provides superior performance at a lower cost
than with traditional copper-clad materials. PALFlex provides additional
cost benefits by allowing the Company to combine certain material
manufacturing steps with circuit manufacturing, eliminating several major
process steps including conventional drilling, plasma etching, copper
deposition and copper plating. PALFlex has been developed for high volume
automotive applications but could potentially be used across a number of
product lines. Because PALFlex is produced in roll form and the copper
thickness can be controlled to tight tolerances, the Company believes that
PALFlex may serve as the foundation for the Company's development of
products to serve the emerging fine line, micro-via market. The Company
shipped its first product incorporating the current version of PALFlex in
September 1997.
<PAGE> 23
PALCoat. Working closely with Coates ASI, a materials manufacturer,
and Teledyne HALCO, an equipment manufacturer, the Company developed
PALCoat, a new material for coating the outside of the circuit. PALCoat
has been designed to provide the electrical and physical characteristics
required for a new generation of products but at a substantially lower
cost than what is commercially available. PALCoat is in production
validation testing with two of the Company's automotive customers, and the
Company currently expects to begin production in November 1997.
Polyamber. Parlex has worked closely with a materials manufacturer
to develop an alternative dielectric to polyimide and polyester. The
Company recognized that polyimide is too expensive to compete with
alternative materials when the performance of polyimide is not required,
and that less expensive polyester has limited soldering capability and is
unsuitable in extreme cold. The Company's solution was to develop
Polyamber, a polyethylene napthalate, made to look like polyimide, as a
lower cost alternative to polyimide but with better thermal
characteristics than polyester. The Company believes that Polyamber may
be a cost-effective solution in applications such as cellular battery
products and industrial controllers. The first product incorporating
Polyamber was shipped in September 1997.
PALCore. The Company developed PALCore as a low-cost multilayer
flexible material to minimize the difference between the cost of materials
used in flexible circuits and those used in conventional rigid circuits.
The Company has licensed PALCore to Allied-Signal and Polyclad Laminates
for thin core rigid board applications, which are products that the
Company does not produce. Parlex receives a royalty in connection with
sales by the licensees. The Company first shipped product in low volumes
using PALCore in fiscal 1996.
Joint Venture and Strategic Relationships
Parlex Shanghai Joint Venture. In 1995 the Company established a
joint venture company in China, Parlex Shanghai, to manufacture and sell
flexible circuits. The participants in Parlex Shanghai are the Company
(50.1% equity), the Shanghai 20th Radio Factory, a Chinese printed circuit
board company (40.0% equity), and Mascon, Inc., a Massachusetts-based
international marketing and manufacturing company (9.9% equity). The
Company established Parlex Shanghai to better serve customers and
potential customers that have manufacturing facilities in Asia and to more
cost effectively manufacture certain products for worldwide distribution.
Parlex Shanghai commenced operations in September 1995 and serves
customers both in North America and Asia. Parlex Shanghai's largest
China-based customer is a General Motors Chinese joint venture and its
largest United States-based customer is Thomas & Betts. In addition to
serving customers in Asia, Parlex Shanghai provides the Company with a
competitive production capability for lower technology products to serve
the Company's customers in other parts of the world.
Samsung Agreement. In September 1994, the Company entered into a
five-year manufacturing and sales agreement with Samsung Electro-Mechanics
Co., Ltd. of Korea ("Samsung") whereby Samsung was granted the exclusive
right to manufacture flexible multilayer and rigid-flexible products in
Korea using the Company's PALCore technology. Under the terms of the
agreement, Samsung may only sell PALCore products to the Company,
customers designated by the Company or to pre-existing Samsung customers
approved by the Company.
<PAGE> 24
Pucka Agreements. In 1996 the Company granted Pucka Industrial Co.,
Ltd. of Taiwan ("Pucka") a five-year exclusive, area specific license to
design, manufacture and sell flexible circuits using the Parlex HSI+
shielding process in Taiwan and, with the prior approval of the Company,
other territories. During the term of the agreement and for a period of
three years thereafter, Pucka may not sell, manufacture or distribute any
flexible circuit technology product which competes with the Company's
products using the Company's HSI+ shielding processes. Under a separate
agreement, the Company appointed Pucka as its sole and exclusive
distributor and independent sales representative for laminated cable in
Taiwan and, with prior approval of the Company, other territories.
Customers
The Company's customers are a diverse group of original equipment
manufacturers that serve a variety of industries. A list of
representative customers appears below:
<TABLE>
<CAPTION>
Automotive Computer Industrial
---------- -------- ----------
<S> <C> <C>
Delco AMP Foxboro
Delphi Compaq Hewlett Packard
Motorola EMC Pitney Bowes
Siemens Thomas & Betts Texas Instruments
<CAPTION>
Military/Aerospace Telecommunications
------------------ ------------------
<S> <C>
Allied-Signal Motorola
Lockheed Northern Telecom
Raytheon
Textron
</TABLE>
In fiscal 1997, the Company sold products to approximately 700
customers, counting divisions within certain major companies as separate
customers. In fiscal 1995, 1996 and 1997, sales to several divisions of
Motorola comprised approximately 12%, 29% and 20%, respectively, of the
Company's total revenues. The Company's top 20 customers accounted for
approximately 61%, 66% and 69% of total revenues in fiscal 1995, 1996 and
1997, respectively.
Sales and Customer Service
The Company has organized its sales and customer service into
business units that are tied to the following specific industry segments:
automotive, military/aerospace, telecommunications, computer and
industrial. The Company believes that this organizational structure
<PAGE> 25
allows its business unit managers to increase their focus on a specific
industry and develop targeted customers within those industries. Business
unit managers are assigned customer service representatives to support
their customers' day-to-day requirements. The business unit managers draw
upon the expertise of the Company's engineering staff as an integral part
of the sales process. In the United States, business unit managers
coordinate the efforts of a network of 19 independent manufacturers'
representative organizations. In fiscal 1997, manufacturers'
representative organizations accounted for approximately 60% of total
revenues.
The sales process involves extensive work with the customer's design
engineers and the Company's design and engineering staff. The business
unit manager then works closely with the Company's applications engineers
to prepare a feasibility study to assess the cost of producing the
interconnect solution to the customer's specifications. The process can
often involve multiple design and manufacturing iterations to assure that
the product can be produced to specifications at the lowest possible cost.
The business unit manager leads the Company's effort to become the
preferred supplier with target customers. The manager's ability to
understand the quality, cost, delivery, technology and service objectives
of target customers is critical to the Company's goal of achieving the
highest level of customer satisfaction. In order to develop strategic
relationships with target customers, the Company has participated in joint
training, engineering seminars, manufacturing intern programs and as
members of customers' problem solving teams. The Company often has access
to a customer's materials resource planning schedule, which allows the
Company to better forecast the customer's near- and mid-term requirements.
The Company has direct sales and customer support offices in Austin,
Texas and San Diego, California. The Company uses these offices to
provide applications engineering, logistical support and coordination of
activities between the customer and the Company. The Company has entered
into agreements with distribution companies in Singapore and in France to
provide forward stocking and inventory coordination for regional
customers. These relationships obviate the requirement to establish a
local presence, while providing the customer with service comparable to
that of a local provider.
Under the terms of the Chinese joint venture agreement, Parlex
Shanghai has agreed that it will sell its products outside China only
through the Company and Mascon. In turn, the Company has agreed that it
will sell flexible circuits in China only through the joint venture.
Manufacturing Processes
The Company's manufacturing processes are designed to accommodate
high throughput, as well as to minimize cost and maximize yield. All of
the Company's manufacturing facilities are certified to the international
standard ISO 9002. The Company is in the process of having its facilities
certified to the automotive standard QS 9002.
The manufacturing process varies a great deal from product to
product. While the production of laminated cable is a "dry" process
incorporating virtually no chemical treatment, a multilayer flexible
circuit is processed through a dozen or more chemical operations.
Although there is no standard process, significant elements of production
are highlighted in the following chart:
<PAGE> 26
<TABLE>
<CAPTION>
"Dry" "Wet" Laminated
Flexible Circuit Flexible Circuit Cable
Processes Processes Processes
---------------- ---------------- ---------
<S> <C> <C>
Drilling Copper deposition Lamination
Automated optical inspection Carbon coating Slitting
Lamination Chemical cleaning Conductor forming
Electrical testing Developing Injection molding
Routing Etching Shielding
Die cutting Solder leveling Laser skiving
Assembly Gold plating Assembly
</TABLE>
The Company's computer aided manufacturing system takes the
customer's design and programs the various steps that will be required to
manufacture the particular product. The product then follows the
appropriate production flow until finally released for shipment by the
quality organization.
The Company believes that its substantial capital investment and its
manufacturing expertise in a number of specialized areas have contributed
to its position as an industry leader. A substantial amount of the
Company's production equipment is unique to its processes and
technologies. Examples include cable laminators, roll plating, roll
etching, precision cable slitters and automatic punching equipment.
The Company is planning to add capacity at all of its facilities.
In the Methuen, Massachusetts facility, the Company plans to add an
additional 35,000 square feet to its current manufacturing space of
125,000 square feet. In the Salem, New Hampshire facility, the Company's
manufacturing space will be expanded by 12,000 square feet to a total of
46,000 square feet. Parlex Shanghai has a leased facility in Shanghai,
China of approximately 24,000 square feet and intends to expand or move to
a larger facility in order to support growth. The Company also plans to
acquire equipment including additional PALFlex roll process lines for
automotive and potential fine line micro via applications, and to build
related clean rooms, fine line imaging and roll develop-etch-strip and
inspection lines. At its laminated cable facility, the Company plans to
add two lamination lines as well as additional injection molding and
finishing equipment.
Materials and Materials Management
The Company aggressively attempts to control the cost of purchased
materials and the level of inventories. The Company believes it benefits
from long-term relationships with its suppliers. The Company's goal is to
attain a competitive price from suppliers and foster a shared vision
towards advancing technology.
The Company purchases raw circuit materials, process chemicals and
various components from multiple outside sources. The Company often makes
<PAGE> 27
long-term purchasing commitments with key suppliers for specific customer
programs. These suppliers commit to provide cooperative engineering as
required and in some cases to maintain a local inventory in order to
provide shorter lead times and reduced inventory levels for the Company.
In many cases the Company's customers approve, and often specify, sources
of supply. The Company relies on key suppliers for certain raw materials.
Top Five Suppliers in Fiscal 1997
<TABLE>
<CAPTION>
Supplier Items Supplied
-------- --------------
<S> <C>
Dupont Flexible Laminates
Coverlay Film
AMP Connectors
Sheldahl Flexible Laminates
Cable Insulation
Steel Heddle Copper Wire
JAE Connectors
</TABLE>
The Company qualifies its suppliers through a vendor rating system
which limits the number of suppliers to those that can provide the Company
with the best total value and quality. The Company monitors each
supplier's quality, delivery, service and technology to insure that the
Company will receive materials that meet its objectives.
Management Information Systems
The Company presently has a mainframe-based information system that
allows for integration of manufacturing, accounting, sales, material
management and engineering data. The Company recently entered into a
contract with a systems integrator to develop a client/server system that
will enhance the timeliness and quality of information concerning the
Company's operations. This system is designed to automate the Company's
activity-based cost system and provide automatic quoting and quote
tracking. The new system, which is scheduled to be fully implemented by
July 1998, will enable the Company to make software changes more easily,
allowing faster project completion and improved customer satisfaction.
Competition
The Company's business is highly competitive. The Company competes
against other manufacturers of flexible interconnects as well as against
manufacturers of rigid printed circuits. Competitive factors among
flexible circuit and laminated cable suppliers are price, product quality,
technological capability and service. The Company believes that it
competes favorably with respect to these competitive factors, but believes
that its competitive strength is in its ability to apply technology to
reduce cost. The Company competes against rigid board products on the
basis of product versatility, although price can also be a competitive
<PAGE> 28
factor if the difference between the cost of a rigid circuit and a
flexible circuit becomes too great. The principal competitors for
flexible circuits are Sheldahl (automotive), AdFlex (telecommunications),
M-Flex (computer) and Flex Circuits, Inc. (aerospace). For laminated
cable, the principal competitors are AMP and Fujikura Ltd. (a Japanese
company).
Backlog
The Company's backlog consists of orders for which a written
purchase order has been received. In situations where the order requires
an engineering effort, it will be included in backlog even though a
delivery schedule will not be finalized until this phase is completed. On
some major multi-year contracts, such as with Motorola, the customer's
forecast for a 13-week period is added to backlog at the end of each
quarter. The Company's standard purchase orders are cancelable, but
require the payment of certain costs upon cancellation. A certain portion
of the Company's backlog may be subject to cancellation without
significant penalty. The Company's backlog as of October 16, 1997 was
approximately $24.6 million. Due to the timing of orders, delivery
intervals, product mix and the possibility of customer changes in delivery
schedules, the Company's backlog at any particular date may not be
indicative of actual sales for any succeeding period.
Intellectual Property
The Company has acquired patents and it seeks patents on new
products and processes where it believes patents would be appropriate to
protect the Company's interests. Although the Company believes that
patents are an important part of its competitive position, it does not
believe that any single patent or group of patents is critical to its
success. Due to the rapid technological change in its business, the
success of its business depends more on its design creativity and
manufacturing expertise than on patents and other intellectual property.
The Company owns 17 patents issued in the United States and has applied
for corresponding patents with certain relevant foreign patent offices.
Federal trademark registrations have been obtained for PALFlex, PALCore
and U-Flex and the Company has applied for registration of PALCoat. The
Company also relies on internal security measures and on confidentiality
agreements for protection of trade secrets and proprietary know-how.
There can be no assurance the Company's efforts to protect its
intellectual property will be effective to prevent misappropriation or
that others may not independently develop similar technology.
Under the terms of the Chinese joint venture agreement, the Company
transferred certain technology to Parlex Shanghai and has agreed to
provide it with additional technology and expertise as the joint venture's
capabilities and markets develop. Certain technology, including PALFlex,
is excluded from the arrangement.
Environmental Regulations
Flexible circuit manufacturing requires the use of metals and
chemicals. Water used in the manufacturing process must be treated to
remove metal particles and other contaminants before it can be discharged
into the municipal sanitary sewer system. The Company operates and
<PAGE> 29
maintains water effluent treatment systems and uses approved laboratory
testing procedures to monitor the effectiveness of those systems at its
Methuen, Massachusetts facility. The Company operates those treatment
systems under effluent discharge permits issued by a number of
governmental authorities. Air emissions resulting from the Company's
manufacturing processes are regulated by permits issued to the Company by
government authorities. These permits must be renewed periodically and
are subject to revocation in the event of violations of environmental
laws. The Company believes that the waste treatment equipment at its
facility is currently in compliance with the requirements of environmental
laws in all material respects and that its air emissions are within the
limits established in the relevant permit. However, there can be no
assurance that violations will not occur in the future. The Company is
also subject to other environmental laws including those relating to the
storage, use and disposal of chemicals, solid waste and other hazardous
materials, as well as to work place health and safety and indoor air
quality emissions. Furthermore, environmental laws could become more
stringent or might apply to additional aspects of the Company's operations
over time, and the costs of complying with such laws could be substantial.
Compliance with state and federal laws did not have a material impact on
the Company's capital expenditures, earnings or competitive position in
fiscal 1997, nor is it expected to have a material impact in fiscal 1998.
Employees
As of September 13, 1997, the Company employed 573 people in the
United States including 482 in production, 71 in marketing, sales,
engineering, and customer support and 20 in administration. Of the 573
employees, 474 were direct employees of Parlex and 99 worked for interim
staffing agencies. As of September 13, 1997, Parlex Shanghai employed
approximately 121 people. The United States employees of Parlex are not
represented by a collective bargaining unit and the Company believes its
relations with its workforce are good.
Facilities
The Company's executive offices and its product and process
development and primary flexible circuit manufacturing facilities are
located in a single 125,000 square feet facility in Methuen, Massachusetts
which the Company owns subject to no encumbrances. The facility currently
operates three shifts, six days a week. The Company plans to add
approximately 35,000 square feet to this facility. See "--Manufacturing
Processes."
The Company's laminated cable operations are housed in a single
34,000 square feet facility in Salem, New Hampshire, leased through 2007.
The Company intends to expand the facility to approximately 46,000 square
feet during fiscal 1998. The Salem, New Hampshire facility is
approximately nine miles from the Methuen facility.
Parlex Shanghai has a leased facility in Shanghai, China of
approximately 24,000 square feet. The Company is currently considering a
larger facility in order to support growth.
The Company is investigating the establishment of a small finishing
facility in Mexico and a laminated cable facility in Taiwan. No
commitments have been made with respect to these facilities.
<PAGE> 30
Legal Proceedings
From time to time the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business.
The Company is not currently involved in any such legal proceedings.
MANAGEMENT
Executive Officers, Key Employees and Directors
The Company's executive officers, key employees and directors are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <S>
Herbert W. Pollack 70 Chairman of the Board of Directors and Treasurer
Peter J. Murphy 48 President, Chief Executive Officer and Director
Alfred R. Calvetti 54 Vice President and General Manager--Laminated Cable
Products
Jill Pollack Kutchin 45 Vice President--Corporate Affairs and Clerk
Steven M. Millstein 53 Vice President--Finance
Darryl J. McKenney 35 Vice President--Flexible Circuit Operations
Lester Pollack 64 Director
Benjamin M. Rabinovici 75 Director
M. Joel Kosheff 59 Director
Sheldon Buckler 66 Director
Richard W. Hale 59 Director
</TABLE>
Herbert W. Pollack has served as Chairman of the Board and Treasurer
of the Company since it was founded in 1970. He was President of the
Company from 1970 to 1995, and Chief Executive Officer of the Company from
1970 to June 1997. Mr. Pollack is the brother of Lester Pollack and the
father of Jill Pollack Kutchin. Mr. Pollack is a Director of Watson
Technologies, Inc.
Peter J. Murphy has been President of the Company since July 1,
1995, and on July 1, 1997, was elected to the office of Chief Executive
Officer. He was Chief Operating Officer and Executive Vice President from
May 1994 to July 1995 and Vice President and General Manager of Flexible
Circuit Products from February 1993 to May 1994. Mr. Murphy initially
served as Assistant to the President from December 1992 to February 1993.
From 1988 to 1992, he was President of Teledyne Electro-Mechanisms, a
<PAGE> 31
manufacturer of flexible circuits. Mr. Murphy is a Director of Nashua
Corporation. He has been a Director of the Company since 1994.
Alfred R. Calvetti joined the Company in July 1971 and has served in
a variety of technical and managerial positions. From December 1988 to
February 1993, he was Divisional Vice President and General Manager of
Laminated Cable Products. In February 1993, he became a Corporate Vice
President and General Manager of Laminated Cable Products.
Jill Pollack Kutchin joined the Company in January 1977 and served
as Manager--Marketing Administration until December 1983, when she became
Vice President--Corporate Affairs. Since November 1980, she has also been
Clerk of the Company. Ms. Kutchin is the daughter of Herbert W. Pollack.
Steven M. Millstein joined the Company in March 1977, serving
initially as Controller and from February 1979 to February 1988 as Vice
President--Controller. In February 1988, he became Vice President--
Finance.
Darryl J. McKenney joined the Company in February 1993 as Director
of Engineering, Flexible Circuit Products. In March 1995, Mr. McKenney
became Director of Operations of Flexible Circuit Products and was
appointed Vice President of Flexible Circuit Operations in April 1997.
Prior to joining the Company, he was Vice President--Engineering for
Teledyne-Electro Mechanisms.
Lester Pollack is a managing director of Centre Partners Management
LLC and has been Senior Managing Director of Corporate Advisors, L.P.
since 1988, Managing Director of Lazard Freres & Co. LLC since 1986 and
Chief Executive Officer of Centre Partners L.P. since 1986. He is also a
Director of Firearms Training Systems, Inc., Sphere Drake Holdings, Ltd.,
SunAmerica, Inc., LaSalle Re Holdings Limited and Tidewater Inc. Lester
Pollack is the brother of Herbert W. Pollack. He has been a Director of
the Company since 1970.
Benjamin M. Rabinovici was President of Tympanium Corporation, a
manufacturer of electronic products, from 1980 to 1996. He has been a
Director of the Company since 1970.
M. Joel Kosheff has been Principal of M.J. Kosheff Associates, a
financial consulting firm, since January 1989. He has been a Director of
the Company since 1989.
Sheldon Buckler has been Chairman of the Board of Commonwealth
Energy System Services since May 1995. He was employed by Polaroid
Corporation from 1964 until his retirement as Vice Chairman of the Board
of Directors in 1994. Dr. Buckler is a Director of Aseco Corporation,
Cerion Technology Corporation, Nashua Corporation and Spectrum Information
Technologies Corporation. He has been a Director of the Company since
February 1995.
Richard W. Hale has been President and Chief Executive Officer of
Watson Technologies, Inc., a manufacturer of electronic products, since
1996. In addition, he has been Chairman and Chief Executive Officer of
Hale Industries, Inc. since 1993. Prior to that time, he was Vice
President and Chief Operating Officer and a member of the Board of
Directors of M/A-Com, Inc. He has been a Director of the Company since
February 1995.
<PAGE> 32
SELLING STOCKHOLDERS
The following table sets forth, to the knowledge of the Company, the
beneficial ownership of the Common Stock of the Company, as of September
24, 1997, of the Selling Stockholders and the number of shares being sold.
<TABLE>
<CAPTION>
Shares Shares to be
Beneficially Owned Beneficially Owned
Prior to Offering Number of After Offering (1)
------------------ Shares Being ------------------
Name Number Percent Offered Number Percent
- ---- ------ ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C>
Herbert W. Pollack (2) 943,889 26.3% 75,000 793,889 17.1%
(Chairman of the Board of Directors,
Treasurer)
Sandra Pollack 307,600 8.6% 75,000 232,600 5.1%
- --------------------
<FN>
<F1> Assumes no exercise of the Underwriters' over-allotment option. If
the Underwriters' over-allotment is exercised in full, Mr. and Mrs.
Pollack's beneficial ownership after the offering would be 771,389 and
221,350 shares or 16.6% and 4.8%, respectively.
<F2> Includes 307,600 shares owned by Mr. Pollack's wife, Sandra
Pollack, in which he disclaims beneficial ownership.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
The description of the capital stock below is qualified in its
entirety by reference to the Company's Restated Articles of Organization
(the "Articles") and By-Laws (the "By-Laws").
Authorized and Outstanding Capital Stock
Upon the closing of this offering, the authorized capital stock of
the Company will consist of 10,000,000 shares of Common Stock, par value
$0.10 per share, and 1,000,000 shares of Preferred Stock, par value $1.00
per share. On September 24, 1997, there were 3,593,310 shares of Common
Stock issued and outstanding and no shares of Preferred Stock issued and
outstanding.
Common Stock
Holders of Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Therefore, holders of a majority of the Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election at any annual or special meeting of
stockholders.
Holders of Common Stock are entitled to receive ratably (based on
the number of shares of Common Stock that they hold) such dividends, if
<PAGE> 33
any, as may be declared by the Board of Directors out of funds legally
available therefor. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive their pro
rata portion of the net assets of the Company available after the payment
of all creditors and liquidation preferences, if any. Holders of Common
Stock have no preemptive, subscription, conversion or redemption rights.
The outstanding shares of Common Stock are, and the shares offered by the
Company in this offering will be, when issued and fully paid for, validly
issued, fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority, without further
stockholder action, to issue Preferred Stock in one or more classes or
series and, within the limitations established by law, to fix the voting
power, dividend rate, redemption rights or privileges, rights on
liquidation or dissolution, conversion rights and privileges, sinking or
purchase fund rights, or other preferences, privileges and restrictions,
of such class or series.
The voting and other rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the right of holders of any
Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing flexibility for important corporate
purposes, could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has
no present plans to issue any shares of Preferred Stock.
Certain Articles Provisions
Pursuant to the Articles, the Board consists of seven Directors.
The Company is subject to the provisions of Chapter 156B, Section 50A, of
the Massachusetts General Laws ("Section 50A"), which along with the
Articles automatically divides the board of directors into three classes
which are elected for staggered terms of three years each. Pursuant to
Section 50A and the Articles, directors can be removed only for cause by
the affirmative vote of the holders of a majority of the voting power of
the then outstanding shares of capital stock of the Company generally
entitled to vote in the election of directors voting together as a single
class. Although Section 50A allows a corporation to elect not to have its
provisions apply, the Company has not so elected.
Massachusetts Anti-Takeover Laws
The Company is subject to the provisions of Chapter 110F of the
Massachusetts General Laws, the Business Combination Statute ("Chapter
110F"). Under Chapter 110F, a Massachusetts corporation with more than
200 stockholders of record may not engage in a "business combination" with
an "interested stockholder" for a period of three years after the date of
the transaction in which the person becomes an interested stockholder,
unless (i) the interested stockholder obtains the approval of the Board of
Directors prior to becoming an interested stockholder, (ii) the interested
stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the
corporation) at the time it becomes an interested stockholder or (iii) the
business combination is approved by both the Board of Directors and the
holders of two-thirds of the outstanding voting stock of the corporation
<PAGE> 34
(excluding shares held by the interested stockholder). An "interested
stockholder" is a person who, together with affiliates and associates,
owns (or at any time within the prior three years did own) 5% or more of
the outstanding voting stock of the corporation. A "business combination"
includes a merger, a stock or asset sale, and other transactions resulting
in a financial benefit to the interested stockholder.
The Company is subject to the provisions of Chapter 110D of the
Massachusetts General Laws, ("Chapter 110D"), which provides that any
person or entity that acquires 20% or more of the Company's outstanding
voting stock (except in certain transactions) may not vote such stock
unless the other stockholders of the Company so authorize. Chapter 110D
specifically excludes situations where any person acquires the triggering
20% ownership "solely by virtue of a revocable proxy conferring the right
to vote." The Board of Directors may amend the By-Laws at any time to
prospectively exclude the Company from the application of this statute.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock of the Company
is Boston Equiserve.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement,
the Company and the Selling Stockholders have agreed to sell to each of
the Underwriters named below, and each of Adams, Harkness & Hill, Inc. and
Needham & Company, Inc. has severally agreed to purchase from the Company
and the Selling Stockholders, the respective numbers of shares of Common
Stock set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
Number of Shares
Underwriter of Common Stock
- ----------- ----------------
<S> <C>
Adams, Harkness & Hill, Inc. 575,000
Needham & Company, Inc. 575,000
---------
Total 1,150,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover
page of this Prospectus, and in part to certain securities dealers at such
price less a concession not in excess of $0.70 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 per share to certain brokers and dealers. After the
<PAGE> 35
shares of Common Stock are released for sale to the public, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
The Company and the Selling Stockholders have granted the
Underwriters an option exercisable for 30 days after the date of this
Prospectus to purchase up to an aggregate of 172,500 additional shares of
Common Stock to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 1,150,000 shares of
Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments in connection with the sale of the 1,150,000
shares of Common Stock offered hereby.
The Company has agreed not to offer, sell, contract to sell, or
otherwise dispose of any shares of Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of
Adams, Harkness & Hill, Inc., except for the shares of Common Stock
offered hereby and except that the Company may issue securities pursuant
to the Company's stock plans. In addition, the Company's officers and
directors and the Selling Stockholders, for a period of 90 days after the
date of this Prospectus, have agreed with the Underwriters not to offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge, or
grant any rights with respect to any shares of Common Stock owned
beneficially by them, subject to certain limited exceptions, other than as
a bona fide gift to a person or entity who or which agrees in writing to
be bound by the foregoing restrictions, without the prior written consent
of Adams, Harkness & Hill, Inc.
In connection with the offering, the Underwriters may purchase and
sell the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions, "passive" market making
(discussed below) and purchases to cover syndicate short positions created
in connection with the offering. Stabilizing transactions consist of
certain bids or purchases made for the purpose of preventing or retarding
a decline in the market price of the Common Stock. Syndicate short
positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company
in the offering. The Underwriters also may impose a penalty bid, whereby
the syndicate may reclaim selling concessions allowed to syndicate members
or other broker-dealers in respect of the Common Stock sold in the
offering for their account if the syndicate repurchases the shares in
stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Common Stock, which
may be higher than the price that might otherwise prevail in the open
market. These activities, if commenced, may be discontinued at any time.
These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Underwriters have advised the Company that the Underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
<PAGE> 36
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the
Common Stock during the "cooling off" period immediately preceding the
commencement of sales in the offering. The Commission has, however,
adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an Underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering
and that its net purchases on any one trading day not exceed prescribed
limits. Pursuant to these exemptions, certain Underwriters, selling group
members (if any), or their respective affiliates may engage in passive
market making in the Common Stock during the cooling off period.
The Company and the Selling Stockholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered hereby is being
passed upon for the Company by Ropes & Gray, Boston, Massachusetts and
Kutchin & Rufo, P.C., Boston, Massachusetts. Edward D. Kutchin is a
shareholder in the professional corporation of Kutchin & Rufo, P.C. and
beneficially owns 36,315 shares of Common Stock in the Company. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Parlex Corporation and
subsidiaries as of June 30, 1996 and 1997 and for each of the three years
in the period ended June 30, 1997 included and incorporated by reference
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is included and incorporated by
reference herein, and have been so included and incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information statements filed by the
Company may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission Regional Offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, 7th Floor, New York, New York 10048. Copies of such materials may
also be obtained upon written request from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web Site at
http://www.sec.gov which contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is
traded on the Nasdaq National Market. Reports and other information
concerning the Company may be inspected at the National Association of
<PAGE> 37
Securities Dealers, Inc. 1801 K Street, N.W., 8th Floor, Washington, D.C.
20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement
on Form S-2 (herein, together with all amendments and exhibits, referred
to as the "Registration Statement") under the Securities Act with respect
to the shares of its Common Stock being offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules
and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document are not
necessarily complete; with respect to each contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is
made to such exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its
entirety by such reference. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
2. All other reports filed by the Company pursuant to Section
13(a) or 15(d) of the Exchange Act subsequent to the date of the
original filing of the registration statement of which this
Prospectus is a part and prior to the time at which the Registration
Statement is declared effective.
The Company will provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon
the written or oral request of any such person, a copy of any or all of
the documents which are incorporated herein by reference, other than
exhibits to such information (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be
directed to the Company, 145 Milk Street, Methuen, Massachusetts 01844,
Attention: Investor Relations Office, telephone (978) 685-4341.
Any statement contained in a document or a portion thereof which is
incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently
filed document or portion thereof which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement.
Any statement so modified shall not be deemed to constitute a part of this
Prospectus except as so modified, and any statement so superseded shall
not be deemed to constitute part of this Prospectus.
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997......... F-3
Consolidated Statements of Income for the years ended
June 30, 1995, 1996 and 1997.................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1995, 1996 and 1997.............................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997.................................... F-6
Notes to Consolidated Financial Statements....................... F-7
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors
of Parlex Corporation:
We have audited the accompanying consolidated balance sheets of Parlex
Corporation and its Subsidiaries as of June 30, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Parlex Corporation and its
Subsidiaries at June 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
August 5, 1997
Boston, Massachusetts
<PAGE> 39
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 386,608 $ 596,614
Accounts receivable--less allowance for
doubtful accounts of $80,000 in 1996
and $143,400 in 1997 7,453,333 9,029,388
Inventories 7,753,424 7,262,477
Refundable income taxes 17,794 --
Deferred income taxes 314,743 294,033
Other current assets 699,386 850,956
----------------------------
Total current assets 16,625,288 18,033,468
----------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 468,864 468,864
Buildings 6,838,391 7,017,478
Machinery and equipment 22,321,826 22,823,785
Leasehold improvements and other 2,422,084 3,974,058
----------------------------
Total 32,051,165 34,284,185
Less accumulated depreciation and
amortization (19,396,046) (20,671,859)
----------------------------
Property, plant and equipment--net 12,655,119 13,612,326
----------------------------
OTHER ASSETS 381,649 588,098
----------------------------
TOTAL $ 29,662,056 $ 32,233,892
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 100,000 $ 500,000
Bank loan 400,668 500,000
Accounts payable 5,179,769 5,047,284
Accrued liabilities 1,797,223 2,150,228
Income taxes payable -- 244,404
----------------------------
Total current liabilities 7,477,660 8,441,916
----------------------------
LONG-TERM DEBT 3,650,000 2,500,000
----------------------------
OTHER NONCURRENT LIABILITIES 1,846,260 1,986,924
----------------------------
MINORITY INTEREST IN PARLEX SHANGHAI 1,232,691 1,516,609
----------------------------
<PAGE> 40
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value--authorized
1,000,000 shares; none issued
Common stock, $.10 par value--authorized,
5,000,000 shares; issued, 2,582,659 and
3,798,750 shares in 1996 and 1997,
respectively 258,266 379,875
Additional paid-in capital 3,243,491 3,334,424
Retained earnings 12,991,313 15,111,769
Less treasury stock, at cost--210,000 shares
in 1996 and 1997 (1,037,625) (1,037,625)
----------------------------
Total stockholders' equity 15,455,445 17,788,443
----------------------------
TOTAL $ 29,662,056 $ 32,233,892
============================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product sales $39,756,799 $47,102,025 $54,977,143
License fees and royalty income 494,500 155,000 109,710
-----------------------------------------
Total revenues 40,251,299 47,257,025 55,086,853
-----------------------------------------
COSTS AND EXPENSES:
Cost of products sold 32,946,050 40,307,894 44,136,738
Selling, general and administrative expenses 4,998,262 5,518,292 7,288,544
-----------------------------------------
Total costs and expenses 37,944,312 45,826,186 51,425,282
-----------------------------------------
OPERATING INCOME 2,306,987 1,430,839 3,661,571
OTHER INCOME, Net 88,288 90,588 155,604
INTEREST EXPENSE (154,974) (351,125) (436,008)
-----------------------------------------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 2,240,301 1,170,302 3,381,167
<PAGE> 41
PROVISION FOR INCOME TAXES (754,413) (386,961) (1,249,202)
-----------------------------------------
INCOME BEFORE MINORITY INTEREST 1,485,888 783,341 2,131,965
MINORITY INTEREST -- 12,855 11,509
-----------------------------------------
NET INCOME $ 1,485,888 $ 770,486 $ 2,120,456
=========================================
NET INCOME PER SHARE $ .41 $ .21 $ .57
=========================================
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 3,651,052 3,674,730 3,716,080
=========================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1994 2,521,859 $252,186 $2,930,620 $10,734,939 $(1,037,625)
Tax benefit arising from the
exercise of nonqualified stock
options -- -- 70,220 -- --
Issuance of stock (pre-split
basis) 57,550 5,755 225,476 -- --
Net income -- -- -- 1,485,888 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1995 2,579,409 257,941 3,226,316 12,220,827 (1,037,625)
Issuance of stock (pre-split
basis) 3,250 325 17,175 -- --
Net income -- -- -- 770,486 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,582,659 258,266 3,243,491 12,991,313 (1,037,625)
<PAGE> 42
Stock dividend 1,186,311 118,631 (118,631) -- --
Tax benefit arising from the
exercise of nonqualified stock
options -- -- 114,309 -- --
Issuance of stock 29,780 2,978 95,255 -- --
Net income -- -- -- 2,120,456 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1997 3,798,750 $379,875 $3,334,424 $15,111,769 $(1,037,625)
==============================================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,485,888 $ 770,486 $ 2,120,456
----------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,438,974 1,678,150 1,899,325
(Gain) loss on sale of equipment (500) 13,652 (129,269)
Deferred income taxes 75,006 37,510 86,375
Deferred compensation 64,015 70,341 74,999
Minority interest -- 12,855 11,509
Changes in current assets and liabilities:
Accounts receivable--net (1,009,837) (681,780) (1,576,055)
Inventories (897,710) (1,669,348) 490,947
Refundable income taxes (206,669) 188,875 17,794
Other current assets (140,501) (257,520) (151,570)
Accounts payable and accrued liabilities 811,262 1,314,166 220,520
Income taxes payable (292,721) -- 358,713
----------------------------------------
Total adjustments (158,681) 706,901 1,303,288
----------------------------------------
Net cash provided by operating activities 1,327,207 1,477,387 3,423,744
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,851,360) (2,968,713) (2,619,074)
Increase in other assets (90,234) (122,146) (206,449)
Proceeds from sale of equipment 500 10,198 164,220
----------------------------------------
Net cash used for investing activities (2,941,094) (3,080,661) (2,661,303)
----------------------------------------
<PAGE> 43
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loan -- 400,668 99,332
Capital contributions to joint venture--minority interest -- 160,322 --
Borrowings (payments) under revolving credit agreement 1,550,000 1,450,000 (650,000)
Payments of other long-term debt (200,000) (200,000) (100,000)
Exercise of stock options 231,231 17,500 98,233
----------------------------------------
Net cash provided by (used for) financing activities 1,581,231 1,828,490 (552,435)
----------------------------------------
NET INCREASE (DECREASE) IN CASH (32,656) 225,216 210,006
CASH, BEGINNING OF YEAR 194,048 161,392 386,608
----------------------------------------
CASH, END OF YEAR $ 161,392 $ 386,608 $ 596,614
=========================================
SUPPLEMENTARY DISCLOSURE OF NONCASH
TRANSACTIONS:
Property and equipment contributed as capital by
joint venture partner $ -- $1,060,000 $ 277,000
=========================================
Property, plant and equipment acquired in exchange
for accounts receivable $ -- $ 400,000 $ --
=========================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business--Parlex Corporation is a world leader in the design and
manufacture of flexible interconnect products. Parlex produces custom
flexible circuits and laminated cables utilizing proprietary processes
and patented technologies which are designed to satisfy the unique
requirements of a wide range of customers. Parlex provides its products
and engineering services to a variety of markets including automotive,
computer, military-aerospace, telecommunications, industrial control,
medical and consumer.
Basis of Consolidation--The consolidated financial statements include
the accounts of Parlex Corporation (the "Company"), its wholly owned
subsidiaries and its 50.1% investment in Parlex (Shanghai) Circuit Co.,
Ltd. (see Note 2) whose fiscal year end is March 31. This entity is
consolidated on a three-month time lag. Intercompany transactions have
been eliminated.
Foreign Currency Translation--The functional currency of the foreign
operation is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated into
United States dollars using current exchange rates at the balance sheet
date. Results of operations are translated at average exchange rates
prevailing during each period. Translation adjustments were not
<PAGE> 44
material at June 30, 1996 and 1997 and were included in minority
interest.
Inventories--Inventories of raw materials are stated at the lower of
first-in, first-out cost or market. Work in process represents costs
accumulated under a job-cost accounting system less the estimated cost
of shipments to date, in the aggregate not in excess of net realizable
value. At June 30, inventories consisted of:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Raw materials $2,419,744 $2,706,302
Work in process 5,333,680 4,556,175
------------------------
Total $7,753,424 $7,262,477
========================
</TABLE>
Property, Plant and Equipment--Property, plant and equipment are stated
at cost and are depreciated using the straight-line method over their
estimated useful lives: buildings--40 years; machinery and equipment--
5-15 years; and leasehold improvements over the terms of the leases.
Revenue Recognition--Product sales are recognized upon shipment.
License fees and royalty income are recognized when earned and as
related costs are incurred.
Research and Development--Research and development costs are expensed as
incurred and amounted to $2,215,000, $2,380,000 and $2,717,000 for the
years ended June 30, 1995, 1996 and 1997, respectively. These amounts
are reflected in the Company's cost of products sold.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." This statement requires an asset and
liability approach to accounting for income taxes based upon the future
expected values of the related assets and liabilities. Deferred income
taxes are provided for items which are recognized in different years for
tax and financial reporting purposes.
Net Income Per Share--Net income per share has been computed based on
the weighted average number of common shares and common share
equivalents outstanding during the year.
Use of Estimates--The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the balance sheet
dates. Estimates include reserves for accounts receivable, useful lives
of properties, accrued liabilities including health insurance claims,
and deferred income taxes. Actual results could differ from those
estimates.
<PAGE> 45
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. The carrying amounts of cash,
accounts receivable, accounts payable and accrued expenses approximate
fair value because of their short-term nature. The carrying amounts of
the Company's debt instruments approximate fair value.
Long-Lived Assets--During 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 121 establishes 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.
This statement had no effect on the consolidated financial position and
results of operations of the Company.
Stock-Based Compensation--During 1997, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options
and other equity instruments issued to employees and nonemployee
directors. The Company continues to account for stock-based
compensation in accordance with APB Opinion No. 25, using the intrinsic
value method. The difference between accounting for stock-based
compensation under APB Opinion No. 25 and SFAS No. 123 is disclosed in
Note 7.
New 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 potential common stock. 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. The implementation of
these standards is not expected to have a material effect on its
consolidated financial position and results of operations.
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 way
that 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 1999 and are not expected to have a material
effect on its consolidated financial position and results of operations.
2. 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
<PAGE> 46
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.
3. ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Payroll and related expenses $1,279,112 $1,421,872
Accrued health insurance 222,170 256,916
Other 295,941 471,440
------------------------
Total $1,797,223 $2,150,228
========================
</TABLE>
4. INDEBTEDNESS
The Company's China joint venture has a short-term bank loan bearing
interest at 1.25% over Singapore Interbank Offer Rate ("SIBOR"). This
is guaranteed by the Company.
Long-term debt at June 30 consisted of:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revolving Credit Agreement $3,650,000 $3,000,000
Industrial Revenue Development Bond 100,000 --
------------------------
Total long-term debt 3,750,000 3,000,000
Less current portion 100,000 500,000
------------------------
Long-term debt - net $3,650,000 $2,500,000
========================
</TABLE>
During 1997, the Company repaid its Industrial Revenue Development Bond
which it had with a bank. The bond carried a varying interest rate
which annually approximated 65% of prime.
On December 18, 1995, the Company renegotiated its unsecured Revolving
Credit Agreement (the "Agreement") (originally dated June 22, 1994)
making available up to a total of $5,000,000 through December 31, 1997.
On January 1, 1998, the Agreement converts to a term loan with principal
<PAGE> 47
and interest payments due monthly over a thirty-six-month period to
December 31, 2000. Accordingly, the outstanding balance at June 30,
1997 is presented as long-term except for the current portion of
$500,000 payable during fiscal 1998. Borrowings under the Agreement are
at the bank's corporate base rate (8.50% at June 30, 1997), and carry an
annual commitment fee of 1/2% on the average daily unused portion of the
bank's commitment. Interest is payable monthly. At June 30, 1997, the
unused commitment amounted to $1,500,000.
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. Advances made pursuant to the line will be due and payable
in full on October 24, 1997 unless the Company elects to convert the
principal balance of the line into a term loan payable in 36 monthly
installments commencing November 1, 1997. The line bears interest at
prime. As of June 30, 1997, the unused commitment amounts to
$2,000,000.
The Agreement has restrictive covenants, which include restrictions on
payment of cash dividends and requirements as to tangible net worth,
current ratio, working capital, debt service ratio, capital expenditures
limitation and the ratio of total liabilities to equity. Under the most
restrictive covenants, amounts available for dividends or other
distributions at June 30, 1997 approximated $4,303,000.
Interest paid during the years ended June 30, 1995, 1996 and 1997 was
approximately $97,000, $251,000 and $394,000, respectively.
5. Other Noncurrent Liabilities
Other noncurrent liabilities at June 30 consisted of:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred income taxes (Note 6) $ 980,124 $1,045,789
Deferred compensation 866,136 941,135
------------------------
$1,846,260 $1,986,924
========================
</TABLE>
The timing of deferred compensation payments cannot presently be
determined. Amounts, if any, which may be paid within one year are not
material.
6. INCOME TAXES
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<PAGE> 48
<S> <C> <C> <C>
Current:
State $ (78,567) $ (57,943) $ (157,115)
Federal (600,840) (291,508) (1,005,712)
Deferred (75,006) (37,510) (86,375)
---------------------------------------
Total $(754,413) $(386,961) $(1,249,202)
=======================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34 % 34 % 34 %
State income taxes, net of federal tax benefit 4 3 3
Foreign Sales Corporation -- (1) (1)
Tax credits (4) -- (1)
Other -- (3) 2
------------------
Effective income tax rate 34 % 33 % 37 %
==================
</TABLE>
Deferred income tax assets and liabilities at June 30 are attributable
to the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation $1,326,252 $1,421,917
Prepaid expenses -- 29,807
------------------------
1,326,252 1,451,724
------------------------
Deferred tax assets:
Inventories 36,281 44,084
Allowance for doubtful accounts 31,991 46,760
Accruals 114,584 126,398
Self-insurance 87,920 101,831
Deferred compensation 346,128 376,128
State net operating loss and credit carryforwards 43,967 4,767
------------------------
660,871 699,968
------------------------
<PAGE> 49
Net deferred tax liability $ 665,381 $ 751,756
========================
</TABLE>
Income tax payments of approximately $1,162,000, $445,000 and $751,500
were made in 1995, 1996 and 1997, respectively.
7. STOCKHOLDERS' EQUITY
On February 25, 1997, the Board of Directors approved a three-for-two
common stock split in the form of a stock dividend. Distribution of the
dividend was made on April 21, 1997 to shareholders of record at the
close of business on March 18, 1997. Per share amounts for all years
have been restated to reflect the stock split. The following
information with respect to the Company's option plans has also been
restated to reflect the stock split.
The Company has incentive and nonqualified stock option plans covering
officers, key employees and directors who are not otherwise employees.
The options are generally exercisable commencing one year from the date
of grant and typically expire in either five or ten years, depending on
the plan. The option price for the incentive stock options and for the
directors' plan is fair market value at the date of grant. Nonqualified
stock options are granted at fair market value or at a price determined
by the Board of Directors, depending on the plan. In certain cases, the
Company may, at the option of the Board of Directors, reimburse the
employees for the tax cost associated with their options.
Effective August 20, 1996 the Company established the 1996 Outside
Directors' Stock Option Plan (the "1996 Plan"). The 1996 Plan provides
for the automatic grant of 1,500 options annually to each member of the
Board of Directors that is not an employee of the Company.
Discretionary grants of up to 2,250 options annually per director may
also be made at the discretion of the Board of Directors. All grants
are made at the market value of the stock on the date of the grant and
there are 150,000 shares available for grant under the 1996 Plan, of
which 7,500 were granted during the year.
At June 30, 1997, there were 388,128 shares reserved for future grants
for all of the above-mentioned plans.
The following is a summary of activity for all of the Company's stock
option plans:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise
Under Price Per Shares
Option Share Exercisable
------ --------- -----------
<S> <C> <C> <C>
July 1, 1994 357,639 $3.43 109,949
=======
<PAGE> 50
Granted 38,250 8.26
Surrendered (18,750) 2.68
Exercised (86,325) 2.89
------------------
June 30, 1995 290,814 4.32 94,872
=======
Granted 39,750 5.84
Surrendered (9,375) 3.59
Exercised (4,875) 2.77
------------------
June 30, 1996 316,314 4.56 148,778
=======
Granted 10,500 6.67
Surrendered (6,000) 3.30
Exercised (29,780) 4.70
------------------
June 30, 1997 291,034 $4.77 191,085
=================================
</TABLE>
The following table sets forth information regarding options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
-------- ----------- ------------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 2.17 1,500 0.1 $ 2.17 1,500 $ 2.17
2.67 62,721 1.3 2.67 62,721 2.67
4.00 15,000 1.6 4.00 11,250 4.00
4.17 53,375 1.9 4.17 36,681 4.17
4.59 75,000 1.9 4.59 56,250 4.59
5.67 22,500 7.2 5.67 9,750 5.67
5.84 35,438 3.7 5.84 6,933 5.84
6.67 10,500 7.7 6.67 -- 6.67
12.35 15,000 7.6 12.35 6,000 12.35
-----------------------------------------------------------
291,034 2.9 $ 4.77 191,085 $ 4.17
===========================================================
</TABLE>
As described in Note 1, the Company uses the intrinsic value method in
accordance with APB No. 25 to measure compensation expense associated
with grants of stock options to employees. Had the Company used the
<PAGE> 51
fair value method to measure compensation, the Company's net income and
net income per share for the years ended June 30, 1997 and 1996 would
have been $2,029,904 or $.55 per share in 1997, and $752,847 or $0.21
per share in 1996.
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions in 1997 and 1996: an expected life of 2.5
years, expected volatility of 143%, a dividend yield of 0%, and a risk-
free interest rate of 6.2%. The weighted average fair value of options
granted in 1997 and 1996 was $5.71 and $4.43, respectively.
The option pricing model was designed to value readily tradable stock
options with relatively short lives. The options granted to employees
are not tradable and have contractual lives of ten years. However,
management believes that the assumptions used and the model applies to
value the awards yields a reasonable estimate of the fair value of the
grants made under the circumstances.
8. SEGMENT AND MAJOR CUSTOMER
The Company operates within a single segment of the electronics industry
as a specialist in the interconnection and packaging of electronic
equipment with its product lines of flexible printed circuits, laminated
cable, and related assemblies.
Sales to several divisions of one customer represented 12%, 29% and 20%
of total revenues, in 1995, 1996 and 1997, respectively.
9. RENTAL COMMITMENTS
The Company leases certain property and equipment under agreements
generally with initial terms from three to five years with renewal
options. Rental expense for each of the years ended June 30, 1995, 1996
and 1997 approximated $153,000, $153,000 and $285,000, respectively.
Future payments under noncancelable operating leases are:
<TABLE>
<S> <C>
1998 $344,000
1999 344,000
2000 297,000
2001 213,000
2002 192,000
</TABLE>
10. BENEFIT PLANS
The Company has a qualified profit-sharing retirement plan to provide
benefits to eligible employees. Annual contributions to the plan are at
the discretion of the Board of Directors and are discretionary in
amounts. No contributions were made to the plan for the years ended
June 30, 1995, 1996 and 1997.
During fiscal 1995, the Company adopted a 401(k) Savings Plan (the
"Plan") covering all employees of the Company that have six consecutive
months of service and have attained the age of twenty-one. Matching
employer contributions can be made to the Plan at the discretion of the
<PAGE> 52
Board of Directors. No matching contributions were made to the Plan for
the years ended June 30, 1995, 1996 and 1997.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (in thousands except
per share amounts):
<TABLE>
First Second Third Fourth
----- ------ ----- ------
1997 Quarters
<S> <C> <C> <C> <C>
Revenues $12,807 $14,068 $13,225 $14,987
Gross profit 1,895 2,595 2,985 3,475
Net income 188 558 643 731
Net income per share .05 .15 .17 .19
1996 Quarters
Revenues $11,611 $11,685 $11,703 $12,258
Gross profit 1,316 1,539 1,820 2,274
Net income 24 91 196 460
Net income per share .01 .02 .05 .12
</TABLE>
All per share amounts have been restated to give effect to the three-
for-two stock dividend (see Note 7).
Parlex advances the technology of flexible interconnects
through innovative development projects.
[Photo]
PALFlex(R) is an enabling technology that reduces manufacturing costs and
enhances performance.
[Photo] [Photo]
High density laminated cables are a PALCore(R) is a cost-effective,
cost-effective solution for proprietary material used in the
automotive entertainment systems. production of multi-layer circuits.
=================================== ====================================
No person has been authorized
in connection with the offering
made hereby to give any information
or to make any representation not
contained in this Prospectus and, if 1,150,000 Shares
given or made, such information or
representation must not be relied
<PAGE> 53
upon as having been authorized by
the Company, any Selling Stockholder
or any Underwriter. This Prospectus
does not constitute an offer to sell
or a solicitation of any offer to buy PARLEX CORPORATION
any of the securities offered hereby
to any person or by anyone in any
jurisdiction in which it is unlawful
to make such offer or solicitation.
Neither the delivery of this Prospectus
nor any sale made hereunder shall, Common Stock
under any circumstances, create any
implication that the information
contained herein is correct as of any
date subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 8
Price Range of Common Stock 8 ----------
Dividend Policy 9 PROSPECTUS
Capitalization 9 ----------
Selected Consolidated Financial
Data 10
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11
Business 15
Management 27
Selling Stockholders 28
Description of Capital Stock 29 Adams, Harkness & Hill, Inc.
Underwriting 31
Validity of Common Stock 32 Needham & Company, Inc.
Experts 32
Available Information 32
Additional Information 33
Incorporation of Certain
Information by Reference 33
Index to Consolidated Financial
Statements F-1
------------------- October 22, 1997
=================================== ====================================
