SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 0-12942
PARLEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2464749
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
145 Milk Street, Methuen, Massachusetts 01844
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 978-685-4341
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of exchange on
Title of each Class which registered
------------------- -------------------
Common Stock ($.10 par value) National Market
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of shares of the Registrant's Common Stock,
par value $.10 per share, held by non-affiliates of the Registrant at
September 1, 1998 as computed by reference to the closing price of such
stock was approximately $34,727,571.
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at September 1, 1998 was 4,640,649 shares.
Documents Incorporated By Reference
Portions of the definitive proxy statement to be filed with the
Commission within 120 days after the close of the fiscal year are
incorporated by reference into Part III of this report.
Part I
Item 1. 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 flexible interconnect
industry, includes flexible circuits, laminated cable, 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 1997 exceeded $2.5
billion. The IPC has reported that the flexible circuit industry in North
American 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 produceabilty of a
design. Once a design has been completed, the Company utilizes its
innovative materials and processes, including PALFlex, PALCoat, U-Flex,
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 1998, the Company's top customers in terms of revenues were Motorola,
Northern Telecom, Allied-Signal, AMP and Hewlett Packard.
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 20% of total revenues, while increasing overall revenues by approximately
111% through June 30, 1998. 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) Circuit Co., Ltd. ("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 has opened an interconnect finishing
facility in Empalme, Mexico which will begin to ship product in fiscal year
1999. The Company has also established logistic support capabilities in
Singapore and France.
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.
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:
* 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, 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 Specific 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 market for this
product is substantially greater than in North America. Additionally,
in May 1998, the Company established a facility in Mexico. This
branch will be performing the finishing, and, in some instances,
assembly operations to parts being manufactured at the Company's
flexible circuit and laminated cable facilities.
Current Products
The Company's current flexible interconnect 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
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 auto line 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 Automotive Displays
Single-Sided Batteries for Cell Phones
Printers
Computer Networks
Double-Sided Engine Controls
Laptop Computers
Cellular Phones
Multilayer & Rigid-Flexible Computer Networks
Telecom Switching Systems
Aircraft Displays
Automotive Transmission Systems
Laminated Cables Postage Meters
Automotive Sound Systems
Laptop Computers
Industrial Controls
Electronic Scales
Flexible/Cable Hybrid Circuits Printers
Sensors
Scanning Devices
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 $8.2 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 its 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 fiscal year 1998.
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 1998.
PALCore HP. 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 has recently applied for patents for a new cost
reduced version of PALCore which should enter production in calendar year
1999.
Joint Venture, Mexico Operations, 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), Jin Ling, Inc., 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 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.
Parlex Mexico. Parlex established a Mexican operation for use in the
finishing, assembly and testing for its flexible circuit and laminated cable
products. The leased facility is in the Maquilas Teta-Kawi Industrial Park
located in Empalme(, Sonora, Mexico. This facility allows Parlex to perform
labor intensive operations in a competitive and highly skilled labor market.
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.
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 HIS+
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 Iomega AMP
Delphi Dell Foxboro
Motorola Compaq Hewlett Packard
Siemens EMC Pitney Bowes
Texas Instruments
<CAPTION>
Military/Aerospace Telecommunications
------------------ ------------------
<S> <C>
Allied-Signal Motorola
Lockheed-Martin Northern Telecom
Textron Ericsson
General Dynamics
Raytheon
</TABLE>
In Fiscal 1998, the Company sold products to approximately 700
customers, counting divisions within certain major companies as separate
customers. In fiscal year 1996, 1997 and 1998, sales to several divisions
of Motorola comprised approximately 29%, 20% and 23%, respectively, of the
Company's total revenues. The Company's top 20 customers accounted for
approximately 66%, 69% and 66% of total revenues in fiscal 1996, 1997 and
1998, 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 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 1998, manufacturers' representative organizations accounted for
approximately 70% 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. In Fiscal 1998, the Company's US facilities were
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 a no
standard process, significant elements of production are highlighted in the
following chart:
<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 has added or is in the process of adding capacity at all
of its facilities. In the Methuen, Massachusetts facility, the Company is
adding an additional 60, 000 square feet to its current manufacturing space
of 125,000 square feet. In the Salem, New Hampshire facility, the Company's
manufacturing space has been expanded by 12,000 square feet to a total of
46,000 square feet. Parlex Shanghai has a leased facility in Shanghai,
China which has been expanded 11,000 square feet to a total of 35,000 square
feet. The Company is also well along in a major equipment acquisition
program. When the building and equipment programs are complete, the total
capacity will have increased by over 35%.
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
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 1998
<TABLE>
<CAPTION>
Supplier Items Supplied
-------- --------------
<S> <C>
Dupont Flexible Laminates
Coverlay Film
AMP Connectors
Sheldahl Flexible Laminates
Cable Insulation
Steel Heddle Copper Wire
Atotech Chemicals
</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, quote tracking and
MRP. The new system, which is scheduled to be fully implemented by January
1999, will enable the Company to make software changes more easily, allowing
faster project completion and improved customer satisfaction. The new MIS
system will be fully compliant with year 2000 requirements.
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 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 June 30, 1998 increased to $26 million from $23
million in the immediately preceding year ended June 30, 1997. 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 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
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 1998. In fiscal 1999, capital expenditures
associated with environmental compliance are estimated to be $300,000.
Employees
As of September 1, 1998, the Company employed 605 people in the United
States including 521 in production, 59 in marketing, sales, engineering, and
customer support and 25 in administration. Of the 605 employees, 558 were
direct employees of Parlex and 47 worked for interim staffing agencies.
Parlex Shanghai employs approximately 185 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.
Item 2. Properties
- ------------------
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 is in the process of
adding 60,000 square feet to this facility. See "Item 1-Business-
Manufacturing Processes."
The Company's laminated cable operations are housed in a single 46,000
square feet facility in Salem, New Hampshire, which is leased through 2007.
The Salem, New Hampshire facility is approximately nine miles from the
Methuen facility. During construction in the Methuen, Massachusetts
facility, corporate offices have been temporarily relocated to the Salem,
New Hampshire facility.
Parlex Shanghai has a leased facility in Shanghai, China of
approximately 35,000 square feet.
The Company leases a 16,000 square foot finishing facility in
Empalme(, Sonora, Mexico.
Item 3. Legal Proceedings
- -------------------------
The Company has no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
This item is inapplicable.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
(a) Price Range of Common Stock
The Company's Common Stock is listed on the Nasdaq National Market,
under the symbol "PRLX". The following table sets forth reported high
and low sale prices for the Common Stock for the periods indicated.
The information reflects the Company's declaration of a three-for-two
spilt of its Common Stock effected as a 50% stock dividend on April
27, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1998
-----------
First Quarter $24.00 $13.88
Second Quarter 31.25 11.25
Third Quarter 19.50 14.00
Fourth Quarter 21.50 12.75
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
</TABLE>
(b) Approximate Number of Holder of Common Stock
As of September 1, 1998, there were approximately 101 holders of
record of the Common Stock.
(c) Dividends
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain further 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.
Item 6. Selected Consolidated Financial Data
- --------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of income data:
Total revenues $34,926 $40,251 $47,257 $55,087 $60,275
Cost of products sold 29,150 32,946 40,308 44,137 47,304
-----------------------------------------------
Gross profit 5,776 7,305 6,949 10,950 12,971
Selling, general and
administrative expenses 4,637 4,998 5,518 7,288 8,272
-----------------------------------------------
Operating income 1,139 2,307 1,431 3,662 4,699
Income from operations
before income taxes 1,007 2,240 1,170 3,381 5,130
Net income 1,007 1,486 770 2,120 3,157
Basic income per share(1) $0.29 $0.41 $0.22 $0.59 $0.73
=============================================
Diluted income per share (1) $0.28 $0.40 $0.21 $0.57 $0.71
=============================================
Weighted average shares-basic 3,466 3,651 3,556 3,569 4,296
=============================================
Weighted average shares-diluted3,605 3,762 3,675 3,715 4,466
=============================================
<FN>
<F1> Information reflects the Company's declaration of a three-for-two
split of Common Stock effected as a 50% stock dividend on April 21,
1997.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 6,704 $ 8,466 $ 9,148 $ 9,592 $26,286
Total assets 20,845 24,517 29,662 32,234 56,181
Short-term debt, including
current portion of
long-term debt 200 200 501 1,000 432
Long-term debt, less
current portion 950 2,300 3,650 2,500 1,166
Stockholders' equity 12,880 14,667 15,455 17,788 41,591
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
Overview
The Company is a leading suppler 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 revenue from 53% in fiscal year 1992 to
20% in fiscal year 1998, while increasing overall revenues approximately
111%.
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
$8.0 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 its
research and development activities.
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., in 1995. The Company 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 (see Note 1 to the Consolidated Financial Statements).
In May 1998, the Company entered into an agreement to lease a facility
in Mexico to perform the finishing and, in some cases, assembly operations
to parts being manufactured at its other production facilities. The Company
anticipates that significant benefit will be realized from the performance
of these labor intensive operations in Mexico. The start-up costs did have
a negative impact on the margins in the fourth quarter ended June 30, 1998,
and an impact on margins is anticipated for the first quarter in the year
that commenced July 1, 1998.
The Company is currently involved in an expansion program. As a
result of the follow-on common stock offering completed in October 1997,
approximating $20.4 million, the Company now has sufficient resources to
expand its Methuen, Massachusetts facility by an additional 60,000 square
feet, of which 40,000 will be used for additional manufacturing capacity,
with the remaining space to be used for administrative needs. The Company
has also increased its manufacturing space at its production facilities in
Salem, New Hampshire and Shanghai, China. The Company has also invested in
equipment that will increase its manufacturing capacity, and allow for the
introduction of new technologies.
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,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 78.5% 80.1% 85.3%
Gross profit 21.5% 19.9% 14.7%
Selling, general and administrative
expenses 13.7% 13.2% 11.7%
Operating income 7.8% 6.6% 3.0%
Income from operations before income taxes 8.5% 6.1% 2.5%
Net income 5.2% 3.8% 1.6%
</TABLE>
Results of Operations for the Past Three Fiscal Years
Total Revenues
Total revenues rose to $60,275,171in fiscal year 1998, a 9% increase
from the $55,086,853 reported in fiscal 1997, while revenues rose 17% in
fiscal 1997 from the $47,257,025 reported in fiscal year 1996. Revenues
grew in each of the Company's principal product lines - flexible circuits,
laminated cable, flexible/cable hybrid circuits and flexible interconnect
assemblies. The increase in total revenues in each year was primarily
attributable to an increase in the volume of units shipped.
Total revenues included licensing and royalty fees of $226,835,
$109,710, and $155,000 in fiscal 1998, 1997 and 1996, 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 1998, 1997, and 1996 was $47.3
million, $44.1 million, and $40.3 million, respectively. As a percentage of
revenue, cost of products sold was 78.5%, 80.1%, and 85.3% in each of fiscal
1998, 1997, and 1996, respectively. The improvement in the current fiscal
year resulted from assigning production to the facility most economically
suited to manufacture a particular type of product.
The decrease in the percentage in fiscal 1997 from fiscal 1996 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal 1998, 1997, and
1996 were $8.3 million, $7.3 million, and $5.5 million, respectively. As a
percentage of total revenues, selling, general and administrative expenses
were 13.7%, 13.2%, and 11.7% in fiscal years 1998, 1997, and 1996,
respectively. The dollar increase in the past two fiscal years is
primarily attributable to the opening of field offices in Texas and San
Diego, hiring of additional sales personnel, additional commissions
associated with incremental sales, and additional costs being incurred by
the Chinese joint venture. The Company anticipates that selling, general,
and administrative expenses as a percentage of revenues will decrease as
revenues increase.
Other Income
Other income of $684,000 this year is comprised, for the most part, of
interest income ($610,000) and, to a lesser extent, the gain on the sale of
equipment, and items of a miscellaneous nature. In 1997, other income of
$156,000 was principally the result of a gain on the sale of equipment,
while the $91,000 in 1996 was comprised entirely of items of a miscellaneous
nature.
Interest Expense
Interest expense was $254,000 this year versus $436,000 in fiscal
1997. The reduction in expense is attributable to a lower level of average
borrowings under the Company's revolving credit facility. The increase in
fiscal 1997 to $436,000 from $351,000 in 1996 was principally the result of
increased borrowings to finance capital expenditures. Interest rates during
the period remained relatively constant.
Provision for Taxes
The Company's effective tax rate in fiscal 1998 was 30% versus 37% and
33% in fiscal years 1997 and 1996, respectively. This year the Company
benefited from the income generated by the Chinese joint venture, which
currently is not subject to tax. Items of a miscellaneous nature are
attributed to the increase in 1997 from 1996.
Liquidity and Capital Resources
In fiscal 1998, the Company had net income of $3.2 million, as well as
depreciation and amortization of $2.4 million, thus adding $5.6 million to
cash flow. Cash flow was reduced by $3.4 million relating to increased
working capital, resulting in a positive cash flow from operations of $2.2
million.
In October 1997, the Company completed a stock offering of 1,000,000
shares of its common stock, priced at $22.00 per share. After deducting
underwriting discounts, commissions and offering expenses paid by the
Company, the net proceeds to the Company approximated $20.4 million.
During fiscal year 1998, the Company paid off its revolver loan
balance and has spent approximately $8.5 million to expand its manufacturing
facilities and purchase capital equipment that will increase its
manufacturing capacity and accommodate various new technological processes.
It is anticipated that in fiscal 1999 an additional $9.0 million will be
expended to complete the Company's planned expansion.
The Company has a $10,000,000 unsecured revolving line of credit. As
of June 30, 1998, no monies were borrowed against this line.
The Company believes that its cash on hand, its anticipated cash flow
from operations, and the amount available under its revolving credit
facility, should be sufficient to meet its foreseeable needs.
The Company has a deferred compensation obligation that is owed to the
Chairman of the Board of Directors. Under the current arrangement, monthly
payments begin in June 1999, or the first month after the termination of
employment, whichever occurs first, and continues for no fewer than 60
months or, at the election of the employee prior to his termination of
employment, for up to 120 months. Amounts to be paid within one year are
not expected to be material.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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. SFAS No. 130 will be adopted by the Company during the first
quarter of fiscal 1999 and SFAS NO. 131 will be adopted by the Company
during the fourth quarter of fiscal 1999. These standards are not expected
to have a material effect on its consolidated financial position and results
of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 will be adopted by the Company during fiscal year
2000. This standard is not expected to have a material effect on its
consolidated financial position, results of operations and financial
statement disclosures.
Year 2000 Disclosure Statement
The Year 2000 will effect not only the Company's internal computer
systems, but also those external systems with which the Company exchanges
any date related information, its customers, suppliers, banks, insurance
companies, stockholders, etc. In order to properly assess the extent this
problem may have on its operations, the Company has and is continuing to
survey its key suppliers, service providers, and trading partners as to
their level of preparedness and the effect it will have on the Company's
operations..
The Company is confident that its enterprise system will be fully Year
2000 compliant by the first quarter of 1999. Quite apart from the Year 2000
problem, the Company is in the process of replacing its legacy computer
system with a client server system for which both the hardware and software
has been certified as Year 2000 compliant. The total cost of this project
is approximately $1,050,000 of which approximately $300,000 was expended
during fiscal 1998.
The Company is in the process of inventorying all its mission critical
manufacturing systems in order to determine any Year 2000 issues that may
exist. While the Company anticipates that some software upgrades will be
required, it does not believe that any issues exist which will prevent these
systems from operating as expected after January 1, 2000.
This inventory will be completed by the beginning of the fourth
quarter of 1998 and testing to identify needed remediation will be completed
by the end of that quarter. Any required remediation of all mission
critical systems will be completed by the end of the first quarter of 1999
and the testing necessary to validate compliance is scheduled to be
completed by mid 1999.
The Year 2000 issue does present some risk that the company's
operation may suffer disruption as a result of either a computer malfunction
or a corruption of date sensitive data. If this does occur, the Company
believes that it most likely will be due to factors external to the company.
Because of the Company's internal Year 2000 program, the Company does not
believe there is a significant risk of disruption of operations due to
malfunction of its internal systems or equipment.
CERTAIN FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS
This Report contains certain forward-looking statements that involve
risks and uncertainties. When used in this Report, the worked "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 Report should be read as
being applicable to all related forward-looking statements wherever they
appear herein. The Company's actual results could differ materially from
those discussed here. Important factors that could cause or contribute to
such differences include those 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, 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 given 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.
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 intends in the future to expand 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.
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 1996,
1997, and 1998, sales to Motorola accounted for approximately 29%, 20% and
23% respectively, of the Company's total revenues and the Company's top 20
customers accounted for approximately 66%, 69% and 66% 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.
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. 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.
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.
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.
Limited Sources of Supply. The Company purchases raw materials,
process chemicals and various components from multiple outside sources. In
fiscal 1998, the Company's largest supplier of raw materials was Dupont,
from which it purchased in excess of 40% 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,
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 operation results.
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 and operating results.
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 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.
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, product or activities to which they have not been applied
previously. Complying with a 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
As of June 30, 1998, the Company is exposed to market risks which
include changes in U.S. and foreign interest rates and fluctuations in
exchange rates.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with purchased maturities of three months or less.
These financial instruments are subject to interest rate risk and will
decline in value if interest rates decrease. Due to the short duration of
these financial instruments, an immediate decrease in interest rates would
not have a material effect upon the Company's financial position.
The Company's outstanding bank loan bears interest at a rate of 125
basis points over the Singapore Interbank Offer Rate ("SIBOR") and is
therefore affected by changes in market interest rates. However, the
Company has the option to pay the balance in full at any time without
penalty. As a result, the Company believes that the market risk is not
material.
The Company also has a revolving credit agreement which bears interest
at the bank's corporate base rate which is also affected by changes in
market interest rates. The Company does not have any outstanding borrowings
at June 30, 1998 and has the option to repay borrowings at anytime without
penalty and therefore believes that the market risk is not material.
The remainder of the Company's long term debt bears interest at fixed
rates and are therefore not subject to market risk.
The Company has a subsidiary located in Shanghai, China. Sales are
typically denominated in the local currency (functional currency), thereby
creating exposure to changes in exchange rates. The changes in the
Chinese/U.S. exchange rate may positively or negatively impact the Company's
sales, gross margins and retained earnings. Based upon the current volume
of transactions in China and the stable nature of the exchange rate between
China and the U.S., the Company does not believe the market risk is
material.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See the Consolidated Financial Statements included in this report;
also see Note 12 to Consolidated Financial Statements.
Parlex Corporation and Subsidiaries
Consolidated Balance Sheets as of June 30, 1998
and 1997 and Consolidated Statements of Income,
Stockholders' Equity, and Cash Flows for the
Years Ended June 30, 1998, 1997 and 1996
and Independent Auditors' Report
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, 1998 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, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 1998, in conformity with generally accepted accounting principles.
August 5, 1998
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,824,233 $ 596,614
Short-term investments 6,789,469 -
Accounts receivable - less allowance for doubtful accounts
of $252,000 in 1998 and $143,000 in 1997 11,145,750 9,029,388
Inventories 9,346,657 7,262,477
Refundable income taxes 323,626 -
Deferred income taxes 372,725 294,033
Other current assets 1,706,367 850,956
----------------------------
Total current assets 35,508,827 18,033,468
============================
PROPERTY, PLANT AND EQUIPMENT:
Land 468,864 468,864
Buildings 7,724,022 7,017,478
Machinery and equipment 27,200,755 22,823,785
Leasehold improvements and other 2,270,658 2,178,499
Construction in progress 4,390,805 1,795,559
----------------------------
Total 42,055,104 34,284,185
Less accumulated depreciation and amortization (22,031,645) (20,671,859)
----------------------------
Property, plant and equipment - net 20,023,459 13,612,326
----------------------------
OTHER ASSETS 649,198 588,098
----------------------------
TOTAL $ 56,181,484 $ 32,233,892
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 121,158 $ 500,000
Bank loan 310,577 500,000
Accounts payable 6,437,169 5,047,284
Accrued liabilities 2,353,800 2,150,228
Income taxes payable - 244,404
----------------------------
Total current liabilities 9,222,704 8,441,916
----------------------------
LONG-TERM DEBT 1,165,751 2,500,000
----------------------------
OTHER NONCURRENT LIABILITIES 2,247,444 1,986,924
----------------------------
MINORITY INTEREST IN PARLEX SHANGHAI 1,954,472 1,521,362
----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value - authorized, 1,000,000
shares; none issued - -
Common stock, $.10 par value - authorized, 10,000,000
shares; issued, 4,850,649 and 3,798,750 shares in 1998
and 1997, respectively 485,065 379,875
Additional paid-in capital 23,872,745 3,334,424
Retained earnings 18,268,743 15,111,769
Unrealized gain on short-term investments 10,192 -
Cumulative translation adjustments (8,007) (4,753)
Less treasury stock, at cost - 210,000 shares in 1998 and 1997 (1,037,625) (1,037,625)
----------------------------
Total stockholders' equity 41,591,113 17,783,690
----------------------------
TOTAL $ 56,181,484 $ 32,233,892
============================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product sales $60,048,336 $54,977,143 $47,102,025
License fees and royalty income 226,835 109,710 155,000
-------------------------------------------
Total revenues 60,275,171 55,086,853 47,257,025
===========================================
COSTS AND EXPENSES:
Cost of products sold 47,304,136 44,136,738 40,307,894
Selling, general and administrative expenses 8,271,704 7,288,544 5,518,292
-------------------------------------------
Total costs and expenses 55,575,840 51,425,282 45,826,186
-------------------------------------------
OPERATING INCOME 4,699,331 3,661,571 1,430,839
OTHER INCOME, Net 683,776 155,604 90,588
INTEREST EXPENSE (253,509) (436,008) (351,125)
-------------------------------------------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 5,129,598 3,381,167 1,170,302
PROVISION FOR INCOME TAXES (1,539,514) (1,249,202) (386,961)
-------------------------------------------
INCOME BEFORE MINORITY INTEREST 3,590,084 2,131,965 783,341
MINORITY INTEREST (433,110) (11,509) (12,855)
-------------------------------------------
NET INCOME $ 3,156,974 $ 2,120,456 $ 770,486
===========================================
BASIC INCOME PER SHARE $ .73 $ .59 $ .22
===========================================
DILUTED INCOME PER SHARE $ .71 $ .57 $ .21
===========================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized
Common Stock Additional Cumulative Gain on
------------------- Paid-in Retained Treasury Translation Short-Term
Shares Amount Capital Earnings Stock Adjustments Investments Total
------ ------ ----------- -------- -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 2,579,409 $257,941 $ 3,226,316 $12,220,827 $(1,037,625) $ - $ - $14,667,459
Exercise of stock options
(pre-split basis) 3,250 325 17,175 - - - - 17,500
Translation adjusment - - - (162) - (162)
Net income - - - 770,486 - - - 770,486
-------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,582,659 258,266 3,243,491 12,991,313 (1,037,625) (162) - 15,455,283
Stock dividend 1,186,311 118,631 (118,631) - - - - -
Tax benefit arising from
the exercise of
nonqualified stock options - - 114,309 - - - - 114,309
Exercise of stock options 29,780 2,978 95,255 - - - - 98,233
Translation adjustment - - - - (4,591) - (4,591)
Net income - - - 2,120,456 - - - 2,120,456
-------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 3,798,750 379,875 3,334,424 15,111,769 (1,037,625) (4,753) - 17,783,690
Tax benefit arising from
the exercise of
nonqualified stock options - - 97,702 - - - - 97,702
Stock offering, net of
expenses 1,000,000 100,000 20,281,799 - - - - 20,381,799
Exercise of stock options 51,899 5,190 158,820 - - - - 164,010
Translation adjustment - - - - - (3,254) - (3,254)
Unrealized gain on
short-term investments - 10,192 10,192
Net income - - - 3,156,974 - - - 3,156,974
-------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 4,850,649 $485,065 $23,872,745 $18,268,743 $(1,037,625) $(8,007) $10,192 $41,591,113
=================================================================================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,156,974 $ 2,120,456 $ 770,486
------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of equipment and other assets 2,426,831 1,899,325 1,678,150
(Gain) loss on sale of equipment (68,573) (129,269) 13,652
Amortization on investments available for sale 49,761 - -
Gain on sale of investments available for sale (8,133) - -
Deferred income taxes 98,640 86,375 37,510
Deferred compensation 83,188 74,999 70,341
Minority interest 433,110 11,509 12,855
Changes in current assets and liabilities:
Accounts receivable - net (2,116,362) (1,576,055) (681,780)
Inventories (2,084,180) 490,947 (1,669,348)
Refundable income taxes (225,924) 17,794 188,875
Other current assets (855,411) (151,570) (257,520)
Accounts payable and accrued liabilities 1,593,457 220,520 1,314,166
Income taxes payable (244,404) 358,713 -
------------------------------------------
Total adjustments (918,000) 1,303,288 706,901
------------------------------------------
Net cash provided by operating activities 2,238,974 3,423,744 1,477,387
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments available for sale (27,010,059) - -
Maturities of investments available for sale 15,893,751 - -
Sales of investments available for sale 4,295,403 - -
Additions to property, plant and equipment (8,463,111) (2,619,074) (2,968,713)
Increase in other assets (86,841) (206,449) (122,146)
Proceeds from sale of equipment 77,800 164,220 10,198
------------------------------------------
Net cash used for investing activities (15,293,057) (2,661,303) (3,080,661)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common shares - net 20,381,799 - -
Proceeds from bank loan - 99,332 400,668
Payment of bank loan (189,423) - -
Capital contributions to joint venture - minority interest - - 160,322
Issuance of long-term debt 1,000,000 - -
Borrowings (payments) under revolving credit agreement (3,000,000) (650,000) 1,450,000
Payments of other long-term debt (72,020) (100,000) (200,000)
Exercise of stock options 164,010 98,233 17,500
------------------------------------------
Net cash provided by (used for) financing activities 18,284,366 (552,435) 1,828,490
------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,664) - -
------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,227,619 210,006 225,216
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 596,614 386,608 161,392
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,824,233 $ 596,614 $ 386,608
==========================================
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS:
Property and equipment contributed as capital by joint
venture partner $ - $ 277,000 $ 1,060,000
==========================================
Property, plant and equipment acquired in exchange for
accounts receivable $ - $ - $ 400,000
==========================================
Property and equipment purchased under capital lease $ 358,929 $ - $ -
==========================================
</TABLE>
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Parlex Corporation ("Parlex" or the "Company") 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, 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 foreign
operations 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.
Cash and Cash Equivalents - Cash and cash equivalents include short-
term highly liquid investments purchased with remaining maturities of
three months or less.
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:
1998 1997
---- ----
Raw materials $3,413,657 $2,706,302
Work in process 5,933,000 4,556,175
-----------------------------
Total $9,346,657 $7,262,477
=============================
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 $3,123,000, $2,717,000 and $2,380,000 for
the years ended June 30, 1998, 1997 and 1996, 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.
Income Per Share - The Company has adopted the provisions of SFAS No.
128, "Earnings Per Share," which became effective in the second
quarter of fiscal 1998. Under the provisions of SFAS No. 128, basic
income per share is calculated on the weighted-average number of
common shares outstanding. Diluted income per share is calculated on
the weighted-average number of common shares and common share
equivalents resulting from options outstanding. All prior period
amounts have been restated to reflect the adoption of SFAS No. 128.
Both basic and diluted income per share give retroactive effect to the
three-for-two stock split in 1997.
A reconciliation between shares used for computation of basic and
dilutive income per share is as follows:
1998 1997 1996
---- ---- ----
Shares of basic computation 4,295,706 3,569,052 3,556,458
Effect of dilutive stock options 169,821 145,987 118,272
---------------------------------------
Shares for dilutive computation 4,465,527 3,715,039 3,674,730
=======================================
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.
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 because of
the relative consistency of interest rates since its issuance.
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 Accounting Principles Board
("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 8.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board ("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. SFAS No. 130 will be adopted by
the Company during the first quarter of fiscal 1999 and SFAS No. 131
will be adopted by the Company during the fourth quarter of fiscal
1999. These standards are not expected to have a material effect on
its consolidated financial position and results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities. SFAS No. 133 will be adopted by the
Company during fiscal year 2000. This standard is not expected to
have a material effect on its consolidated financial position, results
of operations and financial statement disclosures.
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 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. CASH AND SHORT-TERM INVESTMENTS
A summary of the Company's investments available for sale by major
security type at June 30, 1998 was as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Security Type Cost Gains Losses Value
------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Corporate Debt Securities $12,150,064 $23,588 $(12,892) $12,160,760
U.S. Government Obligations 500,034 - (504) 499,530
--------------------------------------------------------
$12,650,098 $23,588 $(13,396) $12,660,290
========================================================
</TABLE>
The fair value of debt securities at June 30, 1998, by contractual
maturity, was as follows:
Due in one year or less (including
approximately $5,800,000 classified
as cash equivalents) $10,943,337
1,716,953
-----------
Due in one to five years $12,660,290
===========
4. ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of:
1998 1997
---- ----
Payroll and related expenses $1,489,205 $1,421,872
Accrued health insurance 202,353 256,916
Other 662,242 471,440
--------------------------
Total $2,353,800 $2,150,228
==========================
5. INDEBTEDNESS
The Company's China joint venture has a short-term bank loan bearing
interest at 1.25% over the Singapore Interbank Offer Rate ("SIBOR").
Long-term debt at June 30 consisted of:
1998 1997
---- ----
Revolving Credit Agreement $ - $3,000,000
Capital lease obligations 286,909 -
China joint venture bank note 1,000,000 -
--------------------------
Total long-term debt 1,286,909 3,000,000
Less current portion 121,158 500,000
--------------------------
Long-term debt - net $1,165,751 $2,500,000
==========================
On November 12, 1997, the Company renegotiated its unsecured Revolving
Credit Agreement (the "Agreement") (originally dated June 22, 1994)
making available up to a total of $10,000,000 through September 30,
2000. On October 1, 2000, the Agreement converts to a term loan with
principal and interest payments due monthly over a sixty-month period
to September 30, 2005. Borrowings under the Agreement are at the
bank's corporate base rate (8.5% at June 30, 1998), and carry an
annual commitment fee of 1/4% on the average daily unused portion of
the bank's commitment. Interest is payable monthly. At June 30,
1998, there was no outstanding debt and the unused commitment amounted
to $10,000,000.
The Agreement has restrictive covenants related to tangible net worth,
current ratio, working capital, debt service ratio, and the ratio of
total liabilities to equity.
During fiscal 1998 the Company's China joint venture entered into a
long-term bank loan agreement for $1,000,000, bearing interest at
9.45%. The loan is payable in installments through 2002.
The maturities for long-term debt at June 30, 1998 are as follows:
1999 $ 121,158
2000 312,326
2001 447,677
2002 405,748
----------
$1,286,909
==========
Interest paid during the years ended June 30, 1998, 1997 and 1996 was
approximately $115,000, $394,000 and, $251,000, respectively.
6. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at June 30 consisted of:
1998 1997
---- ----
Deferred income taxes (Note 7) $1,223,121 $1,045,789
Deferred compensation 1,024,323 941,135
--------------------------
$2,247,444 $1,986,924
==========================
The timing of deferred compensation payments cannot presently be
determined. Amounts, if any, which may be paid within one year are
not material.
7. INCOME TAXES
The provision for income taxes consisted of:
1998 1997 1996
---- ---- ----
Current:
State $ (172,771) $ (157,115) $ (57,943)
Federal (1,268,103) (1,005,712) (291,508)
Deferred (98,640) (86,375) (37,510)
---------------------------------------------
Total $(1,539,514) $(1,249,202) $(386,961)
=============================================
A reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate 34 % 34 % 34 %
State income taxes, net of federal tax benefit 2 3 3
Foreign income - not subject to taxation (5) - -
Foreign Sales Corporation (1) (1) (1)
Tax credits (1) (1) -
Other 1 2 (3)
----------------------
Effective income tax rate 30 % 37 % 33 %
======================
Deferred income tax assets and liabilities at June 30 are attributable
to the following:
1998 1997
---- ----
Deferred tax liabilities:
Depreciation $1,597,409 $1,421,917
Prepaid expenses 29,918 29,807
--------------------------
1,627,327 1,451,724
--------------------------
Deferred tax assets:
Inventories 63,730 44,084
Allowance for doubtful accounts 63,341 46,760
Accruals 110,148 126,398
Self-insurance 79,836 101,831
Deferred compensation 409,404 376,128
Tax credit carryforwards 50,472 4,767
--------------------------
776,931 699,968
--------------------------
Net deferred tax liability $ 850,396 $ 751,756
==========================
Deferred taxes have not been recorded on undistributed earnings of the
China Joint Venture (approximately $460,000) because such amounts are
considered permanently invested.
Income tax payments of approximately $1,557,000, $751,500 and $445,000
were made in 1998, 1997 and 1996, respectively.
8. STOCKHOLDERS' EQUITY
The Board of Directors is authorized to establish one or more series
of preferred stock and to fix and determine the number and conditions
of preferred shares, including dividend rates, redemption and/or
conversion provisions, if any, preference and voting rights. At June
30, 1998, the Board of Directors has not authorized any series of
preferred stock.
In October 1997, the Company sold 1,000,000 shares of its common stock
in an underwritten public offering. Proceeds to the Company totaled
$20.4 million, net of expenses associated with the offering. The
proceeds are being used to expand manufacturing facilities and
purchase capital equipment. A portion of the proceeds was also used
to repay all the outstanding indebtedness under the Company's
Revolving Credit Agreement.
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 who 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, 1998, there were 293,693 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:
Weighted-
Average
Shares Exercise
Under Price Per Shares
Option Share Exercisable
------ --------- -----------
July 1, 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
Granted 95,750 18.50
Surrendered (1,315) 5.13
Exercised (51,899) 3.16
---------------------
June 30, 1998 333,570 $ 8.96 199,375
====================================
The following table sets forth information regarding options
outstanding at June 30, 1998:
Options Outstanding Options Exercisable
----------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
- -------- ----------- ------------ -------- ------ ---------
$ 2.67 22,500 1.2 $ 2.67 22,500 $ 2.67
4.00 15,000 0.6 4.00 15,000 4.00
4.17 48,814 0.9 4.17 48,626 4.17
4.59 75,000 0.9 4.59 75,000 4.59
5.67 22,500 1.2 5.67 13,500 5.67
5.84 29,256 2.7 5.84 11,249 5.84
6.67 9,750 7.0 6.67 7,500 6.67
12.35 15,000 7.6 12.35 6,000 12.35
15.50 7,500 9.4 15.50 - -
18.75 88,250 4.1 18.75 - -
-------------------------------------------------------------
333,570 2.6 $ 8.96 199,375 $ 4.68
=============================================================
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
fair value method to measure compensation, the Company's net income
and diluted income per share would have been $2,944,591 or $.66 per
share in 1998, $2,029,904 or $.55 per share in 1997 and $752,847 or
$.20 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. Key assumptions used to
apply this pricing model are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average risk-free interest rate 5.2% 6.2% 6.2%
Expected life of option grants 2.5 years 2.5 years 2.5 years
Expected volatility of underlying stock 72% 143% 143%
Expected dividend rate None None None
</TABLE>
The weighted-average fair value of options granted in 1998, 1997 and
1996 was $8.34, $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 applied to
value the awards yields a reasonable estimate of the fair value of the
grants made under the circumstances.
9. 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, 1998, 1997 and 1996.
During fiscal 1995, the Company adopted a 401(k) Savings Plan (the
"Plan") covering all employees of the Company who 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 Board of Directors. The Company contributed $90,000 to the Plan
for the year ended June 30, 1998. No matching contributions were made
to the Plan for the years ended June 30, 1997 and 1996.
10. COMMITMENTS AND CONTINGENCIES
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, 1998,
1997 and 1996 approximated $263,000, $285,000 and $153,000,
respectively. Future payments under noncancelable operating leases
are:
1999 $361,000
2000 298,000
2001 213,000
2002 192,000
2003 192,000
From time to time, the Company is subject to various legal proceedings
and claims, either asserted or unasserted, which arise in the ordinary
course of business. While the outcome of these claims cannot be
predicted with certainty, management is not aware of any current legal
matters that will have a material adverse effect on the Company's
consolidated financial position or results of operations.
11. BUSINESS SEGMENT, MAJOR CUSTOMER AND INTERNATIONAL OPERATIONS
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 23%, 20% and
29% and of total revenues in 1998, 1997 and 1996, respectively.
Summarized information relating to international operations is as
follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States $48,521,351 $48,434,315 $43,662,143
China 5,192,052 2,309,103 1,218,795
Export sales from United States 8,445,678 5,533,199 2,376,087
Intercompany sales (1,883,910) (1,189,764) -
---------------------------------------------
Total revenues from unaffiliated
customers $60,275,171 $55,086,853 $47,257,025
=============================================
Operating income:
United States $ 3,617,537 $ 3,502,468 $ 1,412,422
China 923,687 61,403 40,723
Eliminations 158,107 97,700 (22,306)
---------------------------------------------
Total operating income $ 4,699,331 $ 3,661,571 $ 1,430,839
=============================================
Identifiable assets:
United States $52,924,162 $29,879,581 $28,929,914
China 5,945,297 4,137,596 2,789,430
Eliminations (2,687,975) (1,783,285) (2,057,288)
---------------------------------------------
Total identifiable assets $56,181,484 $32,233,892 $29,662,056
=============================================
</TABLE>
The increase in identifiable assets in the United States during fiscal
1998 was primarily the result of the public offering of stock in
October 1997 (see Note 8).
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (in thousands
except per share amounts):
First Second Third Fourth
----- ------ ----- ------
1998 Quarters
Revenues $13,717 $14,184 $14,296 $18,078
Gross profit 3,178 2,869 3,027 3,897
Net income 728 587 823 1,019
Net income per share:
Basic .19 .14 .18 .22
Diluted .18 .13 .17 .21
1997 Quarters
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:
Basic .06 .16 .18 .20
Diluted .05 .15 .17 .19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
- -------------------------------------------------------------------
This item is inapplicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required by the Item is incorporated by reference from
the information under the captions "Election of Directors", "Board of
Directors Meetings and Committees of the Board", "Executive Officers" and
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement to be filed with the Commission within
120 days of June 30, 1998.
Item 11. Executive Compensation
- --------------------------------
The information required by the Item is incorporated by reference from
the information under the captions "Compensation of Executive Officers" and
"Board of Directors Meetings and Committees of the Board", in the Company's
definitive proxy statement to be filed with the Commission within 120 days
from June 30, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference
from the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy
statement to be filed with the Commission within 120 days from June 30,
1998.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
This Item is not applicable.
Part IV
Item 14. Exhibits, Financial (a) Documents filed as a part of this
Statement Schedules Form 10-K.
And Reports on 1. Financial Statements.
Form 8-K. The Financial Statements
in the accompanying table of
contents to Consolidated
Financial Statements are
filed as a part of this
Form 10-K.
2. Financial Statement Schedules.
Schedules are omitted because of
the absence of conditions under
which they are required or
because the required information
is included in the Consolidated
the absence of conditions under
which they are required or
because the required information
Financial Statements or notes
thereto.
3. Exhibits.
The exhibits listed below are
either filed herewith or, if not
filed, are incorporated by
reference from the filings noted
in parathenses.
(3)(A) Restated Articles of Organization
as amended, (dated August 2,
1983); (filed as Exhibits 3-A and
3-B to the Company's Registration
Statement on Form S-1, file No.
2-85588, and incorporated herein
by reference).
(3)(B) Articles of Amendment to Restated
Articles of Organization, dated
December 1, 1987; (filed as
Exhibit 10-Q to Form 10-K for the
fiscal year ended June 30, 1988).
(3)(C) By-laws; (filed as Exhibit 3-C to
the Company's Registration
Statement on Form S-1, file No.
2-85588, and incorporated herein
by reference).
(3)(D) Articles of Amendment to Restated
Articles of Organization,dated
October 21, 1997; (filed as
Exhibit 3-D to Form 10-Q for the
quarter ended December 28, 1997).
(10)(A) 1985 Employees' Nonqualified
Stock Option Plan dated December
2, 1985*; (filed as Exhibit 10-L
to Form 10-K for the fiscal year
ended June 30, 1986).
(10)(B) Employment Agreement between
Parlex Corporation and Mr.
Herbert W. Pollack, dated May 1,
1986;* (filed as Exhibit 10-M to
Form 10-K for the fiscal year
ended June 30, 1986).
(10)(C) 1989 Outside Directors' Stock
Option Plan;* (filed as Exhibit
10-Z to Form 10-K for the fiscal
year ended June 30, 1991).
(10)(D) 1989 Employees' Stock Option
Plan*; (filed as Exhibit 10-AA to
Form 10-K for the fiscal year
ended June 30, 1991).
(10)(E) Chinese Joint Venture Contract,
Articles of Association, and
Agreement of Technology License
and Technical Service May 29,
1995; (filed as Exhibit 10-AH to
Form 10-K for the fiscal year
ended June 30, 1995).
Confidential treatment has been
granted for portions of this
exhibit.
(10)(F) Manufacturing and Sales Agreement
between Samsung Electro-Mechanics
Co., Ltd. and Parlex Corporation
dated September 29, 1994; (filed
as Exhibit 10-AK to Form 10-K for
the fiscal year ended June 30,
1995). Confidential treatment
has been granted for portions of
this exhibit.
(10)(G) Employment Agreement between
Parlex Corporation and Peter J.
Murphy dated June 26, 1996*;
(filed as Exhibit 10-AM to
Form 10-K for the fiscal year
ended June 30, 1996).
(10)(H) License Agreement between Parlex
Corporation and Polyclad
Laminates, Inc., effective June
1, 1996; (filed as Exhibit 10-AN
to Form 10-K for the fiscal year
ended June 30, 1996).
Confidential treatment has been
granted for portions of this
exhibit.
(10)(I) Agreement between Parlex
Corporation and Allied Signal
Laminate Systems, Inc., effective
May 5, 1995; (filed as Exhibit
10-AO to Form 10-K for the fiscal
year ended June 30, 1996).
Confidential treatment has
been granted for portions of this
exhibit.
(10)(J) License Agreement between Parlex
Corporation and Pucka Industrial
Co., Ltd., effective July 1,
1996; (filed as Exhibit 10-AP to
Form 10-K for the fiscal year
ended June 30, 1996).
Confidential treatment has been
granted for portions of this
exhibit.
(10)(K) Agreement of Lease between PVP-
Salem Associates, L.P. and Parlex
Corporation dated August 12,
1997; (filed as Exhibit 10-L to
Form 10-K for the fiscal year
ended June 30, 1997).
(10)(L) Employment Agreement between
Parlex Corporation and Herbert W.
Pollack dated July 1, 1997*;
(filed as Exhibit 10-M to Form
10-K for the fiscal year ended
June 30, 1997).
(10)(M) Patent Assignment Agreement
between Parlex Corporation and
Polyonics, Inc. dated June 16,
1997; (filed as Exhibit 10-N to
Form 10-K for the fiscal year
ended June 30, 1997).
(10)(N) 1996 Outside Directors' Stock
Option Plan*; (filed as Exhibit
10-O to Form 10-K for the fiscal
year ended June 30, 1997).
(10)(O) Shelter Service Agreement between
Parlex Corporation and Offshore
International Inc. dated March 6,
1998; filed herewith.
(10)(P) Commercial Loan Agreement dated
November 12, 1997; filed
herewith.
(11) Computation of Income per share;
filed herewith. Subsidiaries of
the Registrant; filed herewith.
(23) Independent Auditors' Consent;
filed herewith
(24) Power of Attorney; filed
herewith.
(27) Financial Data Schedule; filed
herewith.
___________________
*Denotes management contract or compensatory plan or arrangement.
(B) Reports on Form 8-K
The Company filed no reports
on Form 8-K with the Securities
and Exchange Commission
during the quarter ended
June 30, 1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Parlex Corporation
*/s/ Herbert W. Pollack
- -----------------------------------------------------
Herbert W. Pollack, Chairman
Date: September 29, 1998
-----------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
*/s/ Steven M. Millstein
- -----------------------------------------------------
Steven M. Millstein, Principal Accounting and
Financial Officer
Date: September 29, 1998
- -----------------------------------------------------
*/s/ Sheldon A. Buckler
- -----------------------------------------------------
Sheldon A. Buckler, Director
*/s/ Richard W. Hale
- -----------------------------------------------------
Richard W. Hale, Director
*/s/ M. Joel Kosheff
- -----------------------------------------------------
M. Joel Kosheff, Director
*/s/ Peter J. Murphy
- -----------------------------------------------------
Peter J. Murphy, Director and Chief Executive Officer
*/s/ Lester Pollack
- -----------------------------------------------------
Lester Pollack, Director
*/s/ Benjamin M. Rabinovici
- -----------------------------------------------------
Benjamin M. Rabinovici, Director
*/s/ Steven M. Millstein
- -----------------------------------------------------
* by Steven M. Millstein, Attorney-in-Fact
Date: September 29, 1998
-----------------------------------------------
As of the date of submission of this filing, no annual report or proxy
material with respect to the fiscal year ended June 30, 1998 has been sent
to the security holders. Such annual report and proxy material will be
submitted to the Commission at the time it is furnished to the security
holders.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10-O Shelter Plan Service Agreement between Parlex 45
Corporation and Offshore International, Inc.
dated March 6, 1998.
10-P Commercial Loan Agreement dated November 12, 1997. 63
11 Statement Regarding Computation of Per Share Earnings 77
21 Subsidiaries of the Registrant 78
23 Independent Auditors' Consent 79
24 Powers of Attorney 80
27 Financial Data Schedule 81
</TABLE>
OFFSHORE INTERNATIONAL, INC.
Business With The World Through Mexico
- ---------------------------------------------------------------------------
777 E. MacArthur Circle, #1 Tucson, AZ 85714
Ph 520-889-0022/ Fax 520-573-9316
S H E L T E R P L A N
SERVICE AGREEMENT
This AGREEMENT entered into by and between Parlex Corporation a
corporation organized and existing under the laws of the State of
Massachusetts having offices at 145 Milk St., Methuen, MA 01844 hereinafter
referred to as CLIENT, and OFFSHORE INTERNATIONAL, INC., a corporation
organized and existing under the laws of the State of Arizona, hereinafter
referred to as OFFSHORE.
RECITALS:
OFFSHORE has an existing established contractual relationship with
Maquilas Teta Kawi S.A. de C.V., a Mexican corporation, for the furnishing
of manufacturing space, labor, and services in Guaymas/Empalme, Sonora,
Mexico, and has sufficient receiving warehouse space in Tucson, Arizona, for
consolidation of shipments.
CLIENT is desirous of using OFFSHORE'S services in connection with the
manufacture of CLIENT'S products, all on the terms and conditions set forth
herein.
AGREEMENTS:
ARTICLE I - MANUFACTURING AND WAREHOUSE SPACE
A. Within ten (10) days after the execution of this agreement, CLIENT
will deliver to OFFSHORE a complete list of CLIENT'S requirements for the
Mexican Facility and all other requirements for CLIENT'S manufacturing
operation. OFFSHORE will undertake the necessary steps to provide
facilities in Mexico and the United States that meet CLIENT'S requirements,
and will provide all necessary coordination between the Mexican contractors
and CLIENT.
B. CLIENT will provide OFFSHORE a written description of all CLIENT'S
equipment to be used in its manufacturing process in Mexico, together with
an explanation of all electrical requirements, not later than 30 days prior
to the date scheduled for installation of electrical utilities at the
Mexican Facility, as agreed to by the parties.
C. OFFSHORE will make available to CLIENT, for its use in carrying
out the manufacturing process in Mexico pursuant to this Agreement, a
Mexican Facility that consists of approximately 15,000* square feet of
manufacturing space for a period of twelve (12) months commencing May 1,
1998. At OFFSHORE'S options, and with sixty days notice, CLIENT agrees to
move into new manufacturing space of no less than 15,000 square feet, which
OFFSHORE shall make available in its new Guaymas/Empalme facility, estimated
to be completed in late 1998. In addition, OFFSHORE agrees to make
available to CLIENT dock space that is sufficient for CLIENT'S receiving and
shipping requirements. A compressor room, a chemical room, and a trash
area, if any, are included in the manufacturing facility. In addition, a
portion of the patio associated with the CLIENT'S space, if any, will be
part of the CLIENT'S facility.
___________________
* Exact amount to be determined by OFFSHORE and CLIENT.
D. OFFSHORE will provide an office for the CLIENT'S on-site manager
within the Manufacturing Facility.
E. Thirty (30) days prior to the scheduled date for commencement of
its operations at the Mexican Facility pursuant to this Agreement, CLIENT
may install in the Manufacturing Facility, its tools, machines, other
equipment that is necessary or appropriate for its manufacturing process,
and may stock the material, parts, and other property required in CLIENT'S
manufacturing operations.
F. OFFSHORE will also make available for CLIENT up to 1000 square
feet of shipping and receiving space at a facility in Tucson, Arizona.
Warehouse space or office space may be negotiated separately.
G. OFFSHORE will provide fire, casualty and such other insurance that
it deems necessary or appropriate for the building that will be the site of
CLIENT'S manufacturing operations in Mexico (the "Mexican Facility").
CLIENT will obtain and maintain any and all insurance that it deems
necessary or appropriate for its material and equipment, whether located in
the Mexican Facility or elsewhere. Upon CLIENT'S written request, OFFSHORE
will acquire, through qualified brokers and at CLIENT'S expense, Mexican
insurance covering CLIENT'S material and equipment.
ARTICLE II - SERVICES, REPAIR AND MAINTENANCE
A. In addition to the foregoing, OFFSHORE agrees that the following
items will be provided at the Mexican Facility during the term of this
Agreement: Lighting, electric power for light assembly equipment, power
tools, machines, and appliances; toilet rooms; water and adequate supplies
for toilet rooms; heating and cooling as appropriate.
B. OFFSHORE will furnish one (1) private telephone line and two (2)
extensions in the Mexican Facility. CLIENT agrees to reimburse OFFSHORE its
actual cost for any additional private lines installed at CLIENT'S request.
C. OFFSHORE will keep the Mexican Facility in good repair at all
times, it being expressly understood and agreed that all maintenance and
repairs of the premises will be the responsibility of OFFSHORE. However,
the cleaning of the production area within the Mexican Facility will be the
responsibility of CLIENT.
ARTICLE III - LABOR
A. OFFSHORE agrees to provide for CLIENT'S screening, acceptance, and
training, the personnel necessary to conduct CLIENT'S manufacturing
operations under this Agreement. The personnel are and shall remain
employees of OFFSHORE and are not in any sense employees of CLIENT.
B. CLIENT will have the right to select from the potential workers
provided by OFFSHORE, those who meet CLIENT'S minimum requirements. The
labor force will include production line workers, material handlers, group
leaders, and inspectors. In addition to the foregoing labor force, which
will be paid on an hourly basis, OFFSHORE will provide CLIENT with a pool of
workers from whom CLIENT can select such salaried personnel as CLIENT may
deem necessary for the better implementation of this Agreement.
Once CLIENT has accepted the workers, hourly or salaried, furnished by
OFFSHORE, CLIENT will have full authority and responsibility to train,
supervise, retain, and dismiss these workers. CLIENT represents, warrants
and agrees that CLIENT has sole responsibility and authority for assuring
that the manufacturing process and the products manufactured meet CLIENT'S
standards for product quality.
C. Since the workload hereunder may not be at a continuous and steady
rate, it may become necessary from time to time to fluctuate the total work
force utilized in CLIENT'S operations at the Mexican Facility. Accordingly,
OFFSHORE agrees to use its best efforts to assist the CLIENT, when requested
by CLIENT, in reducing the work force in order to minimize the labor charges
to CLIENT hereunder.
D. The labor rates paid by OFFSHORE to the Mexican workers are based
on Mexican Labor Laws (as described in Exhibit "A" attached hereto) and
include Social Security, taxes, and all other benefits prescribed by Mexican
Law. It is agreed that any increase in such wage caused by an act of the
Government of Mexico, or resulting from a collective bargaining agreement
between Offshore and the Union, or by direction of the CLIENT, will be paid
by CLIENT to OFFSHORE.
E. OFFSHORE warrants that in providing CLIENT with personnel for the
performance of this Agreement, it will in all respects conform to the laws,
rules, regulations, and orders of appropriate Mexican governmental
authorities.
ARTICLE IV - SHIPPING, CUSTOMS AND PERMITS
A. United States' Customs and Duties. CLIENT will retain title to
all of its materials, products, machinery, and equipment used in connection
with its operations hereunder. Therefore, for U.S. Customs purposes, CLIENT
will be the importer and exporter of record and will be responsible for all
U.S. tariffs, duties, bonds, and U.S. Customs broker's charges.
B. Mexican Customs and Duties. OFFSHORE will assist CLIENT in
arranging with Mexican officials the passage of CLIENT'S goods and equipment
to and from Mexico. CLIENT understands and agrees that, in order for
OFFSHORE to be able to fulfill its obligations under this subparagraph,
CLIENT must supply OFFSHORE, on a timely basis, with all pertinent
information, including, without limitation, complete descriptions, make,
model and serial numbers, weights, costs, and country of origin, in order
for OFFSHORE to process the shipments and obtain the necessary permits on
behalf of CLIENT. CLIENT will pay, promptly when due, all Mexican Customs
tariffs, duties, bonds, and Mexican Customs broker's charges. CLIENT hereby
acknowledges that it takes approximately thirty (30) days to obtain the
initial Mexican permits once the application process is commenced. Special
permits needed to meet CLIENT'S specific requirements may take a longer
period of time.
C. Administrative Services. OFFSHORE will provide necessary
administrative services to effect shipment of material to and from
Guaymas/Empalme, Sonora, Mexico.
D. Reimbursable Expenses. All freight charges, customs and brokerage
fees, tariffs, duties, other payments to the government of Mexico, and other
costs and expenses incurred by OFFSHORE in the performance of its duties
under this Agreement, are incurred for the account of CLIENT. CLIENT will
reimburse OFFSHORE for all amounts so paid for its account in accordance
with Article VI, subparagraph A.
ARTICLE V - FEES AND COSTS
A. CLIENT agrees to pay the following fees during the term of this
Agreement:
(i) Facilities Fee. A fee (the "Facilities Fee") of $.42 sq.
ft. for each month of CLIENT'S use of the Mexican Facility. The
Facilities Fee will be billed in the first weekly billing of the
month. In addition, OFFSHORE shall include in its first weekly bill
of the month an amount equal to 15% of the Facilities Fee. This
amount shall cover OFFSHORE'S obligation to Maquilas Teta Kawi to
advance Mexico's value added tax (IVA) on the space. OFFSHORE shall
credit CLIENT for the IVA paid on the Mexican facilities within 15
days of receiving reimbursement from the Mexican government. Credit
will be given to CLIENT at the peso/US dollar exchange rate that
applies on the date the IVA is credited to Maquilas Teta Kawi.
(ii) Shelter Plan Fee. CLIENT agrees to pay OFFSHORE a weekly
fee for its services hereunder (the "Shelter Plan Fee"), which will be
calculated as follows:
(1) By multiplying 1) the number of actual hours paid
during the week by CLIENT in its manufacturing process, by 2)
the applicable hourly rate set forth in the following schedule:
Offshore Shelter Plan Fee Schedule
per worker Hour *
No. of Employees Shelter Plan Fee
---------------- ----------------
1- 24 2.30
25- 49 2.05
50- 74 1.85
75- 99 1.65
100-124 1.50
125-149 1.40
150-199 1.35
200-299 1.25
300-400 1.10
___________________
* CLIENT agrees that the rate to be used to determine the weekly Shelter
Plan Fee will be the rate applicable to the highest number of workers
employed in connection with the manufacture of CLIENT'S products
during any single day of the week for which payment is being
calculated. In calculating the Shelter Plan Fee, salaried personnel
shall be deemed to work 48 hours per week. In no event shall the
Shelter Plan Fee be less than $2,300.00 per week. The Shelter Plan Fee
shall commence once CLIENT has accepted the workers, hourly or
salaried, furnished by OFFSHORE, or by May 15th, 1998, whichever is
earlier.
B. Reimbursable Costs. CLIENT further agrees to reimburse OFFSHORE
for the following costs and charges incurred by OFFSHORE in connection with
this Agreement in accordance with the procedures described in Article VI
hereof:
(i) All payments made by OFFSHORE, for CLIENT'S account, for
the performance of this Agreement. CLIENT understands and agrees that
the payments for workers comprises wages, taxes, and personnel costs.
An example of the composition of these payments is set forth on
Exhibit "A" attached hereto. The actual amount of the payments (the
"Weekly Compensation Amount") will be computed weekly, and the
corresponding amount to be reimbursed to OFFSHORE will be based on the
U.S. dollar-Mexican peso exchange rate at which OFFSHORE purchased
pesos from a major Mexican and/or U.S. financial institution for the
applicable week.
CLIENT further agrees to reimburse OFFSHORE for any overtime hours
authorized by CLIENT at the overtime premium paid by OFFSHORE for CLIENT'S
account. This does not apply to salaried personnel. Overtime payments will
be calculated by the sum of (1) the applicable Shelter Plan Fee, and (2) the
wages and fringe benefits multiplied by 2 for double time (or multiplied by
3 for triple time).
Double time Example for the 201-300 worker range:
$1.30 + .733 + .733 = $2.766
Triple time Example for the 201-300 worker range:
$1.30 + .733 + .733 + .733 = $3.499
(ii) All costs incurred by OFFSHORE in connection with services
provided at CLIENT'S written request that are not otherwise referred
to herein. CLIENT'S request for additional services must be made in
writing on CLIENT'S "Purchase Requisition" form and must be signed by
CLIENT'S representative.
(iii) The cost of electrical power consumed by CLIENT in the
Mexican facility. OFFSHORE (at CLIENT'S cost) shall coordinate the
installation of an electrical meter for the facility.
(iv) All other payments made by OFFSHORE, for CLIENT'S account,
in the performance of this Agreement.
C. Worker Termination Costs. CLIENT will have the sole
responsibility to pay any and all costs associated with the severance or
termination of any and all workers, including production line workers,
material handlers, group leaders and inspectors, supervisory workers,
monthly salaried administrative, technical workers and confidential workers
hired at the request of the CLIENT. CLIENT will reimburse OFFSHORE for any
and all costs that OFFSHORE incurs in connection with the severance or
termination of any workers.
CLIENT hereby agrees to post a bond, letter of credit, or cash deposit
in favor of OFFSHORE in the amount of $50,000.00 to secure the payment of
the termination fee. Said bond, letter of credit, or cash deposit shall be
drawn upon in the event the CLIENT does not meet its obligation under this
paragraph C. The form and terms of the bond and letter or credit shall be
approved by OFFSHORE prior to the contracting of workers in Mexico. The
initial amount of $50,000.00 assumes a work force of 100 people. If CLIENT
shall contract more than 100 people, then CLIENT agrees to adjust upward the
amount in a like ratio.
D. Unless otherwise specifically stated herein, all monetary units
referred to herein are U.S. Dollars. All amounts payable to OFFSHORE
hereunder are to be paid in U.S. Dollars.
ARTICLE VI - INVOICES AND PAYMENT
A. OFFSHORE will submit invoices for amounts that it is owed under
this Agreement to CLIENT on a weekly basis, except for the monthly
Facilities Fee, which shall be included in the first weekly billing of the
month.
B. Each invoice will contain the following information:
(i) The total number of basic, non-overtime hours worked during
the relevant week;
(ii) The total overtime hours and the associated overtime
premium cost; and
(iii) A summary of costs incurred by OFFSHORE for the CLIENT'S
account pursuant hereto, including, but not limited to, a) freight for
moving CLIENT'S materials, equipment, and finished products across the
border; b) Mexican brokerage charges; and c) supplies.
C. Each invoice will be accompanied by paid receipts or third party
invoices for costs incurred by OFFSHORE for CLIENT'S account pursuant to
this Agreement and for which OFFSHORE is seeking reimbursement.
Additionally, with respect to costs incurred by OFFSHORE in Mexico (other
than freight and customs charges), the invoice will be accompanied by a
document signed by CLIENT'S on-site representative, whose signature will
conclusively signify the accuracy of (i) the number of basic and overtime
hours worked during the relevant work week, (ii) the number of workers
utilized during the relevant period, and (iii) the costs incurred in Mexico
(other than freight and customs charges) for which reimbursement is sought
in the invoice. The approval of such Mexican costs, as evidenced by the
signature of CLIENT'S on-site representative, will constitute the binding
agreement of CLIENT to reimburse OFFSHORE for the such approved Mexican
costs.
D. CLIENT hereby agrees to pay OFFSHORE the amount of each such
invoice within 10 days after the date of such invoice. If any portion of
the invoice is disputed by CLIENT, CLIENT agrees that it will pay the
undisputed portion of the invoice as if there were no such dispute about the
remainder of the invoiced amount.
ARTICLE VII - TERM AND TERMINATION
A. The term of this Agreement is for a period of one (1) year
commencing on the Contract Start Date.
B. This Agreement may be terminated by CLIENT at any time during the
first year of the term of this Agreement by giving OFFSHORE ninety (90) days
written notice of its intention to terminate. At the time of giving such
notice, CLIENT will pay OFFSHORE a termination fee equal to the immediately
preceding 90-day billing for the Shelter Plan Fee and the Facilities Fee
under Article V hereof. The parties agree that OFFSHORE will suffer damages
as a result of CLIENT'S early termination of this Agreement, and that such
damages will be difficult to accurately quantify. The termination fee is
intended to approximate the damages to be suffered by OFFSHORE as a result
of such termination and not as a penalty. CLIENT acknowledges that
termination of this agreement, whether during the first or subsequent years,
will give rise to certain termination and severance expenses relating to the
workers Offshore has employed at the request of the CLIENT. Such expenses
are the sole responsibility of the CLIENT, as stated in ARTICLE V, Section
C of this agreement. These expenses are in addition to any termination fee
owed by the CLIENT to Offshore as a result of the termination of this
agreement. Offshore will attempt to minimize severance expenses by any
means available including using it's best efforts to place client's
employee's in other facilities with other Offshore client companies.
ARTICLE VIII - OPTION TO RENEW
A. As long as there has not theretofore occurred an event of default
hereunder, CLIENT may renew this Agreement for four separate, additional
periods of one (1) year each. CLIENT may exercise its right to renew this
Agreement for the next succeeding year by giving OFFSHORE written notice of
its intention no fewer than one hundred twenty (120) days prior to the then
scheduled expiration of the Agreement.
B. Within ten (10) business days after receipt of CLIENT'S notice of
its intention to renew this Agreement, OFFSHORE will notify CLIENT of the
Shelter Plan Fee that will be applicable during the renewal term. The rate
modification will be determined in accordance with the procedure set forth
herein and will equal the percentage increase (or decrease), if any, in the
cost of living for the preceding year based upon the United States Consumer
Price Index - All Items - U.S. City Average, All Urban Consumers issued by
the Bureau of Labor Statistics of the United States Department of Labor (the
base year and price for said Index is 1967 equals 100). In the event the
Index ceases to be published, the most comparable substitute shall be used
thereafter as selected by the mutual agreement of the parties.
This Agreement may not be terminated by CLIENT during any renewal term
of this Agreement without the consent of OFFSHORE.
ARTICLE IX - PRODUCT LIABILITY
CLIENT hereby indemnifies, and agrees to protect, defend and hold
OFFSHORE harmless against all demands, obligations, claims, costs, expenses,
judgments, awards and liabilities of any nature, claimed or asserted by any
person, and against all losses in any way suffered, incurred, or paid or
that may be suffered, incurred, or paid by OFFSHORE as a result of, or in
any way arising out of, or consequential to the design, manufacture, use,
delivery, consumption, or integration into other products of any of CLIENT'S
products, whether such demands, obligations, claims, liabilities, or losses
arise in the context of products liability or otherwise.
ARTICLE X - LAWS, RULES AND REGULATIONS
OFFSHORE and Maquilas Teta Kawi S.A. de C.V. will comply with all the
laws, rules, and regulations of governmental authorities of Mexico. Nothing
contained herein shall constitute a representation by OFFSHORE of favorable
tax treatment of CLIENT'S activities by the Government of Mexico.
ARTICLE XI - APPLICABLE LAW
This Agreement will be interpreted and construed in accordance with,
and will be governed by, the laws of the State of Arizona.
ARTICLE XII - OWNERSHIP; BAILMENT
All right, title, and interest to materials, products, machinery,
tools, and equipment used in connection with CLIENT'S manufacturing process
at the Mexican Facility will remain at all times the property of CLIENT. If
and to the extent that OFFSHORE takes possession of any such materials,
products, machinery, tools, or equipment, it does so as bailee on behalf of
CLIENT. At no time will OFFSHORE be deemed to have any ownership interest
in such property.
ARTICLE XIII - SUBCONTRACT
Without in any way relieving it of any obligation or duty otherwise
undertaken hereunder, OFFSHORE will have the right to enter into a
subcontract with Maquilas Teta Kawi S.A. de C.V., a Mexican corporation, to
provide services hereunder in Mexico.
ARTICLE XIV - CONFIDENTIAL INFORMATION
The parties acknowledge and agree that the performance of this
Agreement by either of them, or of any subcontractor of either of them, will
not entail the disclosure, whether voluntarily or involuntarily, by either
party to the other of any trade secrets or any proprietary or confidential
information. In the event that at any time during the term of this
Agreement either party proposes to disclose to the other party, or to
utilize in connection with its operations under this Agreement, any such
trade secret or proprietary or confidential information, the disclosing
party will promptly notify the other party prior to making such disclosure
or utilization. The parties agree that, promptly after the receipt of such
notice, they will negotiate an amendment hereto providing for safeguarding
such trade secret or proprietary or confidential information.
ARTICLE XV - ARBITRATION
Any controversy arising between the parties or any person claiming
under either of them relating to this Agreement or the performance or breach
of any provisions hereof will be settled by arbitration in Pima County,
Arizona, in accordance with the governing rules of the American Arbitration
Association; provided, however, the parties will be entitled to pursue all
the discovery that would be available to them under, and in accordance with
the rules, applicable to actions in the Superior Court of Pima County,
Arizona.
Each party will be entitled to, and promptly after receipt of notice
of the filing of an arbitration claim, will appoint a person to act as
arbitrator from a panel of qualified arbitrators of the American Arbitration
Association. The two selected arbitrators will promptly appoint a third
arbitrator.
Judgment may be entered by any court of competent jurisdiction upon
any award or decree made by the arbitrators. The prevailing party in any
such matter will be entitled to recover its costs and expenses, including
attorneys' fees, from the non-prevailing party.
Nothing contained in this Article XV will limit the right of any party
to exercise self help remedies or to obtain any provisional or ancillary
remedies, including, but not limited to, injunctive relief or appointment of
a receiver, from a court of competent jurisdiction.
ARTICLE XVI - TIMING; SECURITY
A. Time is of the essence hereof of this Agreement.
B. CLIENT hereby agrees to deposit with OFFSHORE at the time of
execution of this Agreement the amount of $20,000.00(the "Security
Deposit"), which OFFSHORE may use, from time to time and in OFFSHORE'S sole
discretion, to pay amounts to be reimbursed by CLIENT hereunder. CLIENT is
not hereby relieved of the responsibility to pay all reimbursable costs when
requested by OFFSHORE in accordance with this Agreement. Any amount so
reimbursed after OFFSHORE has used the Security Deposit to pay such
reimbursable cost, will be used by OFFSHORE to replenish the Security
Deposit. OFFSHORE may intermingle the Security Deposit with its own funds
and is not required to pay interest thereon. As long as no Event of
Default, then exists hereunder, OFFSHORE will release the Security Deposit
to CLIENT at the termination of this Agreement.
C. As collateral security for CLIENT'S faithful performance of its
obligation hereunder, CLIENT hereby grants OFFSHORE a security interest in
all property of CLIENT (the "Collateral") that is in the possession or
control of OFFSHORE or Maquilas Teta Kawi S.A. de C.V., a Mexican
corporation.
ARTICLE XVII - DEFAULTS AND REMEDIES
If any of the Parties fail to pay or perform their duties in a
material manner under this Agreement, such material failure will be
considered to be an Event of Default hereunder. Failure by either party to
make a payment when due hereunder or to perform any other material
obligation hereunder within seven (7) days after written notice of such
failure to pay or perform from the non-defaulting party ( the "Default
Notice"), shall constitute an Event of Default hereunder; provided, however,
if the failure to perform a material obligation ( other than the payment of
any amounts due hereunder) cannot reasonably be cured within seven (7) days
after the Default notice, it shall not constitute an Event of Default if the
defaulting party commences reasonable steps to correct such failure within
such seven (7) day period and diligently pursues such corrective action to
its logical conclusions as soon as practical. Upon the occurrence of an
Event of Default, the non-defaulting party will be entitled to pursue all
remedies available to it under this Agreement or under the common law of the
State of Arizona, including but not limited to, the right of set-off. The
Parties agree that the non-defaulting party may pursue such remedies through
its agents.
No failure or delay on the part of the aggrieved party to exercise any
such right, power or remedy and no notice or demand which may be given to or
made with respect to any such remedies shall operate as a waiver thereof, or
limit or impair the aggrieved party's right to take any action or to
exercise any power or remedy hereunder, without notice or demand, or
prejudice its rights.
ARTICLE XVIII - ENTIRE AGREEMENT
The terms and provisions contained herein constitute the entire
Agreement between the parties and supersede all previous communications and
understandings, either oral or written, between the parties hereto with
respect to the subject matter hereof. No agreements or understandings
varying or extending the terms of this Agreement will be binding upon either
party hereto unless in writing signed by a duly authorized officer or
representative thereof of each party.
For purposes of this Agreement, the CONTRACT START DATE shall be March 6,
1998.
OFFSHORE INTERNATIONAL, INC.
an Arizona corporation
____________________________
Paul Karon, President
Date: May 3, 1998
Company: Parlex Corporation
By: ________________________
Its: President
[Client]
Date: March 6, 1998
FLEET NATIONAL BANK LOAN AGREEMENT
THIS AGREEMENT made this _____ day of November, 1997, by and between
Parlex Corporation, a Massachusetts corporation with an address and
principal place of business at 145 Milk Street, Methuen, Massachusetts 01844
(hereinafter called the "Borrower") and Fleet National Bank, a national
banking association organized and existing under the laws of the United
States of America, with a principal place of business at One Federal Street,
Boston, Massachusetts 02110-2010 (the "Bank").
W I T N E S S E T H :
The following constitutes the agreement of the parties:
SECTION 1
---------
AMOUNT AND TERMS OF CREDIT AND INTEREST
---------------------------------------
1.1 Subject to the terms and conditions of this Agreement, the Bank
hereby establishes a revolving line of credit (the "Revolving Loan") of up
to Ten Million ($10,000,000.00) Dollars (the "Credit Limit") to be advanced
as hereinafter provided. The Bank shall, as long as no Event of Default has
occurred hereunder, from time to time, make advances comprising the
Revolving Loan (all of which shall be called "Loans" hereunder) to the
Borrower upon the Borrower's request; provided, however, that no advance
will be made if, after giving effect to the Borrower's request for such
advance, the outstanding principal balance of the Revolving Loan would
exceed the Credit Limit.
1.2 The Revolving Loan shall be evidenced by a Revolving Line of
Credit Note executed by the Borrower made payable to the Bank of even date
herewith, in the maximum principal amount of $10,000,000.00 (the "Revolving
Note").
1.3 Interest on advances under the Revolving Loan shall accrue and
be payable as provided in a Revolving Note.
1.4 The principal balance of the Revolving Loan shall be payable as
provided in the Revolving Note.
1.5 Prior to the Expiration Date (as defined below), the Borrower
shall pay to the Bank quarterly in arrears, commencing on January 1, 1998
and continuing on the first day of each April, July, October and January
thereafter, a commitment fee in an amount equal to one-quarter of one (1/4%)
percent per annum (calculated on the basis of the actual number of days
elapsed and a 360-day year) of the average daily unused principal amount of
the Revolving Loan for the preceding calender quarter.
1.6 On any date on which a payment of interest or principal is due
under the Revolving Note, the Bank may charge the Borrower's demand deposit
account(s) with the amount thereof. The failure of the Bank to so charge
such account shall not relieve the Borrower of its obligations to make
payments hereunder.
1.7 The Bank need not enter payments of interest and principal upon
the Revolving Note but may maintain a record thereof on a separate ledger
maintained by the Bank.
1.8 No advance under the Revolving Loan will be made after September
30, 2000 (the "Expiration Date").
1.9 At any time prior to the close of the Bank's business on the
Expiration Date, the Borrower may repay, in whole or in part, the principal
amount of the Revolving Loan and may, in the Bank's discretion, reborrow any
such amounts repaid, all in accordance with this Section 1.
1.10 The Bank may, at any time and from time to time, upon the
request of the Borrower, but in the Bank's sole and absolute discretion,
extend the Expiration Date.
SECTION 2
---------
WARRANTIES AND REPRESENTATIONS
------------------------------
2.1 To induce the Bank to enter into this Loan Agreement and to make
the Loans, the Borrower warrants and represents that, as of this date:
(a) The Borrower is a duly organized and existing corporation under
the laws of the Commonwealth of Massachusetts and is in good
standing under the laws of said Commonwealth.
(b) The Borrower is duly qualified to do business and in good
standing as a foreign corporation in each state or other
jurisdiction where the nature of the business conducted by it or
the property owned by it requires such qualification, except
where the failure to qualify would not have a material adverse
effect on the business, assets or financial condition of the
Borrower.
(c) The Borrower has good and clear record and marketable title to
all properties and assets which it purports to own, free and
clear of all mortgages, liens, pledges, charges, security
interests and encumbrances, other than those listed on Exhibit A
attached hereto.
(d) The Borrower owns and holds or leases all real and personal
property necessary or incidental to the present and planned
future (to the extent reasonably possible) conduct of its
business, including, without limitation, patents, trademarks,
service marks, trade names, copyrights and licenses and other
rights with respect to the foregoing.
(e) All books and records of the Borrower, including, but not
limited to, minute books, by-laws and books of account are
accurate and reflect all matters and transactions which should
currently be reflected therein.
(f) The general nature of the Borrower's business is as set forth on
Exhibit A attached hereto.
(g) The Borrower has no subsidiaries and no investments in the stock
or securities of any other corporation, firm, trust or other
entity, except as set forth on Exhibit A.
(h) Except as set forth on Exhibit A, there are no actions, suits,
investigations or proceedings pending, or to the actual
knowledge of the Borrower threatened, against the Borrower or
any of its properties in any court, before any governmental
authority, arbitration board, or any other tribunal which,
singly or in the aggregate, if decided adversely to the
Borrower, would materially and adversely affect the business,
properties or condition (whether financial or otherwise) of the
Borrower. The Borrower is not, nor by execution and delivery of
this Agreement and the performance of its obligations hereunder
(with or without the passage of time) will the Borrower be in
default with respect to any order of any court, governmental
authority, arbitration board or other tribunal.
(i) The Borrower has furnished to the Bank the financial statements
for the time period indicated on Exhibit A attached hereto.
Said statements fairly present the condition of the Borrower at
the dates thereof, and the statements of operation contained
therein fairly present the results of the operations of the
Borrower for the periods indicated, all in conformity with
generally accepted accounting principles consistently applied.
(j) Except to the extent reflected or reserved against in the
financial statements referred to above, the Borrower, as of the
date of said financial statements, had no liabilities of any
nature, whether accrued, absolute or contingent, including,
without limitation, tax liabilities, due or to become due, or
arising out of transactions entered into.
(k) Since the date of the financial statements referred to in
Section 2.1(i), and except as shown on Exhibit A, there has not
been:
(i) any change in the condition of the Borrower's assets or
liabilities, other than changes in its ordinary course of
business, none of which has been materially adverse, nor
has there been any depletion of cash or decrease of
working capital which has been materially adverse;
(ii) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the
Borrower's properties or business;
(iii) any declaration of, setting aside of, or making of a
payment of any dividend or other distribution with respect
to the Borrower's capital stock or any direct or indirect
redemption, purchase or other acquisition of any such
stock, except for distributions to its stockholders to
satisfy federal and state tax liabilities on undistributed
income (if Borrower is a Subchapter "S" corporation); or
(iv) any materially adverse:
(1) controversy with any labor organization or employees;
(2) claim or controversy involving any federal, state or
local governmental agencies; or
(3) other event or condition materially affecting the
business or properties of the Borrower.
(l) The Borrower has filed all federal and state income tax returns,
excise tax returns, and all other tax returns of every kind and
nature which are required to be filed by the Borrower as of the
date hereof and has paid all taxes shown to be due on said
returns.
(m) The Borrower has no other addresses at which the Borrower has an
office, conducts business or at which any of the Borrower's
property is located except as set forth on Exhibit A.
(n) The execution and delivery of this Agreement, the borrowing by
the Borrower as herein provided, the execution and delivery by
the Borrower of all instruments, agreements and documents of
every kind and nature pursuant hereto and the performance by the
Borrower of all of its obligations to the Bank hereunder have
been duly authorized by the Board of Directors of the Borrower
and this Agreement and all instruments, agreements and documents
executed pursuant hereto are valid and binding obligations of
the Borrower enforceable in accordance with their terms except
to the extent such enforceability may be limited by laws of
general application affecting the rights of creditors.
(o) There is no provision in the articles of organization, agreement
of association or the by-laws of the Borrower, or any indenture,
contract or agreement to which it is a party or by which it is
bound, which prohibits the execution and delivery of this
Agreement or the performance by the Borrower of its obligations
hereunder.
(p) No event has occurred and no condition exists, which, upon the
execution and delivery of this Agreement would constitute a
default or an Event of Default hereunder. Neither the nature of
the Borrower or any of its business or properties, nor any
relationships between the Borrower and any other person, nor any
circumstances in connection with the execution or delivery of
this Agreement, is such as to require a consent, approval, or
authorization of or filing, registration, or qualification with,
any governmental authority on the part of the Borrower as a
condition of the execution and delivery of this Agreement or any
other instrument, agreement or document contemplated hereby, or
the performance by the Borrower of its obligations hereunder or
thereunder.
(q) The Borrower has no pension, profit sharing, stock option,
Employee Stock Ownership Trust ("ESOT"), insurance or other
similar plan providing for a program of deferred compensation or
benefits for any employee or officer, except as indicated on
Exhibit A hereto.
SECTION 3
---------
AFFIRMATIVE COVENANTS
---------------------
3.1 The Borrower will duly and punctually pay all interest and
principal becoming due to the Bank and will duly and punctually perform all
things on its part to be done or performed under this Agreement, or pursuant
to any instrument, document or agreement executed pursuant hereto.
3.2 The Borrower will, at all times, keep proper books of account in
which full, true and correct entries will be made of its transactions in
accordance with generally accepted accounting principles consistently
applied.
3.3 The Borrower will, at all reasonable times, and upon reasonable
notice from the Bank, make its books and records available, in its offices,
for inspection, examination and copying by the Bank and the Bank's
representatives and will, at all reasonable times, and upon reasonable
notice from the Bank, permit inspection of its properties by the Bank and
the Bank's representatives.
3.4 The Borrower will, at reasonable times, furnish the Bank with
such information and statements as the Bank may reasonably request and with
copies of all financial statements and reports that it shall send or make
available to stockholders.
3.5 The Borrower will furnish the Bank quarterly, within forty-five
(45) days after the close of each fiscal quarter, commencing with the
quarterly period in which this Agreement is executed, a balance sheet and
income statement reflecting the financial condition of the Borrower at the
end of each such period and the results of its operations during each such
period. Each statement shall also contain comparative statements for the
same period during the prior fiscal year. Each balance sheet and income
statement shall be prepared by the Borrower and certified by the President,
Treasurer or Chief Financial Officer of the Borrower, such certification to
state that such balance sheet and income statement fairly present the
financial condition and the results of operations of the Borrower at the end
of such period and during such period in accordance with generally accepted
accounting principles consistently applied, subject, however, to year-end
adjustments, none of which will be materially adverse.
3.6 The Borrower will furnish the Bank annually, within ninety (90)
days after the close of each fiscal year, a balance sheet and income and
surplus statement reflecting the financial condition of the Borrower at the
end of each such fiscal year and the results of its operation during such
fiscal year. Each such statement shall also contain comparative statements
for the prior fiscal year. Each such balance sheet and income statement is
to be audited by an independent certified public accountant selected by the
Borrower and satisfactory to the Bank with an audit quality statement to be
issued by the accountant and signed by the President and/or Treasurer and/or
Chief Financial Officer representing that neither the accounting firm nor
the President and/or Treasurer of the Borrower is aware of any material
modifications necessary to the financial statements for them to be in
conformity with generally accepted accounting principles consistently
applied. The Bank hereby acknowledges that Deloitte & Touche is a
satisfactory independent certified public accountant. In addition, the
Borrower shall furnish to the Bank, in a timely manner, all reports filed
with the Securities and Exchange Commission ("SEC").
3.7 The Borrower will, on a quarterly basis, within forty-five (45)
days of the end of each fiscal quarter, deliver to the Bank a Compliance
Certificate in the form of Exhibit B attached hereto, signed by its
President or Treasurer certifying that each such officer has reviewed the
provisions of this Agreement (including, without limitation, the financial
covenants contained in this Agreement, to the extent they are being tested
at that time) and stating in his opinion, if such be the fact, that the
Borrower has not been and is not in default as to any of the covenants and
agreements of the Borrower contained in this Agreement, or in the event of
any such default, setting forth the details thereof.
3.8 The Borrower shall make its books and records available to the
Bank, upon reasonable request, for audit at such reasonable times as the
Bank deems necessary, in its reasonable business judgment.
3.9 The Borrower will maintain its corporate existence in good
standing, comply with all laws and regulations of the United States, of any
state or states thereof, of any political subdivision thereof and of any
governmental authority which may be applicable to the Borrower or to the
Borrower's business.
3.10 The Borrower will pay all real and personal property taxes,
assessments and charges and all franchise, income, unemployment, old age
benefit, withholding, sales and other taxes assessed against it or payable
by it at such times and in such manner to prevent any lien or charge from
attaching to its properties which in each instance would exceed $175,000.00.
The provisions of this section, however, shall not preclude the Borrower
from contesting in good faith and diligently prosecuting any such tax,
provided, however, that the Borrower shall, upon reasonable request of the
Bank, maintain reserves sufficient to discharge such tax in the event such
contest is resolved against the Borrower. The Borrower shall not be in
default under this Section by reason of the existence of a lien for taxes
not then due.
3.11 The Borrower will put and maintain its properties in good
repair, working condition and order and, from time to time, make all needful
and proper repairs, renewals and replacements.
3.12 The Borrower will maintain insurance at all times covering such
risks and in such amounts as the Bank may reasonably require in accordance
with industry standards, all such insurance to be in such form and for such
periods and written by such companies as shall be reasonably acceptable to
the Bank.
3.13 The Borrower will pay or reimburse the Bank, on demand, for all
reasonable expenses (including, without limitation, counsel fees and
expenses) incurred or paid by the Bank in connection with the preparation,
amendment, interpretation, extension or negotiation of this Agreement, and
any instrument, agreement or document to be delivered pursuant hereto; the
enforcement by the Bank of its rights as against the Borrower; and in the
defense of any action against the Bank with respect to its rights or
liabilities hereunder or thereunder if the Bank prevails in such action.
3.14 The Borrower will punctually and promptly make all payments and
perform all other obligations which may be required of it with respect to
any indebtedness (whether for money borrowed, goods purchased, services
rendered or however such indebtedness may otherwise arise) owing to persons,
firms or corporations other than the Bank, including, without limitation,
indebtedness which may be secured by a security interest in assets of the
Borrower or property of the Borrower, and all obligations under the terms of
any lease in which the Borrower is the lessee. The provisions of this
section shall not preclude the Borrower from contesting in good faith and
diligently prosecuting any such indebtedness or obligation.
3.15 The Borrower shall pay or cause to be paid when due all amounts
necessary to fund in accordance with their terms all the Borrower's deferred
compensation plans whether now in existence or hereafter created, and the
Borrower will not withdraw from participation in, permit the termination or
partial termination of, or permit the occurrence of any other event with
respect to any deferred compensation plan maintained for the benefit of its
employees under circumstances that could result in liability to the Pension
Benefit Guaranty Corporation, or any of its successors or assigns, or to the
entity which provides funds for such deferred compensation plan.
SECTION 4
---------
NEGATIVE COVENANTS
------------------
4.1 The Borrower (not including Parlex Shanghai) will not issue
evidences of indebtedness or create, assume, become contingently liable for,
or suffer to exist indebtedness in addition to indebtedness to the Bank,
except for debt to its officers, directors and stockholders that is
subordinated to the Loans on terms reasonably satisfactory to the Bank (the
"Subordinated Debt"); provided, however, that the Borrower may incur
liabilities which are incurred or arise in the ordinary course of the
Borrower's business (other than liabilities incurred or arising with respect
to money borrowed.
4.2 The Borrower will not declare or pay dividends (unless payable
in capital stock of the Borrower, which shall be allowed) or authorize or
make any other distribution with respect to its shares of capital stock of
the Borrower, whether now or hereafter outstanding (unless all financial
covenants contained herein have been satisfied and such action would not
cause the Borrower to violate any such covenants).
4.3 The Borrower will not make any loans or advances to any
individual, firm or corporation, including, without limitation, its officers
and employees; provided, however, that (a) the Borrower may make advances to
its employees, including its officers, with respect to expenses incurred by
such employees, which expenses are reimbursable by the Borrower and directly
related to the conduct of the Borrower's business; and (b) the Borrower may
make loans to Parlex Shanghai.
4.4 The Borrower will not invest in or purchase any stock or
securities of any individual, firm or corporation, provided, however, that
the Borrower may invest in (a) direct obligations of the United States of
America having a maturity of one year or less from the date of investment;
(b) investment grade bonds; (c) any other security for the purpose of
obtaining 10-K's and other financial reports, provided that such investment
does not exceed One Thousand ($1,000.00) Dollars; (d) the Parlex Shanghai
joint venture; and (e) the proposed "Chinese" joint venture. In addition,
the Borrower may buy back shares of its own stock.
4.5 The Borrower will not, without the Bank's prior written consent
(which shall not be unreasonably withheld), merge or consolidate or be
merged or consolidated with or into any other corporation.
4.6 The Borrower will not sell or dispose of any of its assets,
except that the Borrower may: (a) sell inventory in the ordinary and usual
course of its business;(b) dispose of (or trade in) equipment which is no
longer required for the conduct of the Borrower's business so long as the
Borrower receives therefor a sum (or credit) substantially equal to such
equipment's fair value; and (c) sell any of its other assets, provided that
the net book value thereof does not exceed $300,000.00 in any fiscal year.
4.7 Except as set forth on Exhibit A, the Borrower will not grant or
suffer to exist any mortgage, pledge, title retention agreement, security
interest, lien, charge or encumbrance with respect to any of its assets,
tangible or intangible, whether now owned or hereafter acquired, or subject
any of such assets to the prior payment of any indebtedness, or transfer in
any manner any of such assets with the intent or purpose, directly or
indirectly, of subjecting such assets to the payment of indebtedness, except
for purchase money security interests in the Borrower's equipment.
4.8 The Borrower will not engage in any business other than the
business in which it is currently engaged or a business reasonably allied
thereto.
4.9 (Minimum Current Ratio). The Borrower will not permit the ratio
of its current assets to its current liabilities, determined on a
consolidated basis, to be less than 1.5 to 1 as at the last day of each
fiscal quarter of the Borrower.
4.10 (Minimum Tangible Net Worth). The Borrower will not permit its
tangible net worth, determined on a consolidated basis, to be less than
$30,000,000.00 as at the last day of each fiscal quarter of the Borrower.
The term "tangible net worth" shall mean stockholders' equity determined in
accordance with generally accepted accounting principles, consistently
applied, subtracting therefrom: (i) intangibles (as determined in accordance
with such principles so applied), including, without limitation, goodwill,
purchased technology and capitalized software development costs; and (ii)
accounts and indebtedness owing from any employee or parent, subsidiary or
other affiliate.
4.11 (Maximum Total Liabilities to Tangible Net Worth Ratio). The
Borrower will not permit the ratio of its total liabilities (including,
without limitation, all deferred taxes and contingent liabilities such as
guarantees) to its tangible net worth, determined on a consolidated basis,
to be more than 1.0 to 1 as at the last day of each fiscal quarter of the
Borrower.
4.12 (Minimum Debt Service Coverage Ratio). The Borrower will not
permit the ratio of its: (a) EBITDA, minus unfinanced capital expenditures,
minus dividends and distributions; to (b) interest, plus current maturities
of long term indebtedness; determined on a consolidated basis, to be less
than 2.0 to 1 for the twelve-month period ending on the last day of each
fiscal quarter of the Borrower. For the purposes of this Section, the term
"EBITDA" shall mean, for the applicable period, income from operations
before the payment of interest and taxes, plus depreciation and
amortization. Prior to the Expiration Date, outstanding balances under the
Revolving Loan shall not be considered current maturities of long term
indebtedness.
4.13 (Maximum Senior Indebtedness to EBITDA). The Borrower will not
permit the ratio of its senior indebtedness to its EBITDA, determined on a
consolidated basis, to be more than 2.0 to 1 for the twelve-month period
ending on the last day of each fiscal quarter of the Borrower. For the
purposes of this Section, the term "senior indebtedness" shall mean all
funded indebtedness owing by the Borrower to the Bank and any other
institutional lender.
4.14 All accounting terms not otherwise specifically defined herein
shall be construed and interpreted in accordance with generally accepted
accounting principles consistently applied.
SECTION 5
---------
DEFAULT
-------
5.1 The occurrence of any of the following events (after the
expiration of any applicable grace period) shall be an Event of Default
hereunder:
(a) The Borrower shall fail to pay any installment of principal or
interest on account of the Loans when such payment is due, which
failure remains uncured for five (5) business days.
(b) The Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement or in any instrument,
document or agreement executed pursuant hereto, and in the event
that such failure can be cured, such failure remains uncured for
ten (10) business days.
(c) Any warranty, representation or statement made or furnished to
the Bank by or on behalf of the Borrower proves to have been
false in any material respect when made or furnished.
(d) Any event which results in the acceleration of the maturity of
the indebtedness of the Borrower to others under any indenture,
agreement, undertaking or otherwise.
(e) Dissolution, termination of existence or insolvency of the
Borrower.
(f) The Borrower shall: (i) cease, be unable, or admit in writing
its inability to pay its debts as they mature, or make a general
assignment for the benefit of, or enter into any composition,
trust mortgage or other arrangement with creditors; (ii) apply
for, or consent (by admission of material allegations of a
petition or otherwise) to the appointment of a receiver, trustee
or liquidator of the Borrower or of a substantial part of its
assets, or authorize such application or consent, or proceedings
seeking such appointment shall be commenced against the
Borrower; or (iii)the filing of any complaint, application or
petition by the Borrower or with the Borrower's consent (by
admission of material allegations of a petition or otherwise)
initiating any matter in which the Borrower is or may be granted
any relief from its debts pursuant to Title 11 of the United
States Code entitled "Bankruptcy" (the "Bankruptcy Code") or any
other bankruptcy, reorganization, readjustment of debt,
insolvency, dissolution, liquidation or other similar law of any
jurisdiction.
(g) The filing against the Borrower of a petition under the
Bankruptcy Code naming the Borrower as debtor, which is not
dismissed within sixty (60) days thereafter.
(h) The calling or sufferance by the Borrower of a meeting of the
creditors of the Borrower or the occurrence of a meeting by the
Borrower or a representative thereof with a formal or informal
committee of creditors of the Borrower.
5.2 Upon the occurrence of any Event of Default, all Loans of the
Borrower to the Bank shall, at the Bank's option and without notice or
demand, and notwithstanding any terms of payment in any note or other
instrument evidencing such Loans, become immediately due and payable, and
any obligation of the Bank to consider making Loans pursuant to Section 1
shall terminate.
SECTION 6
---------
NOTICE
------
6.1 All notices and other communications hereunder shall be made by
facsimile, overnight air courier, or certified or registered mail, return
receipt requested, and shall be deemed to be received by the party to whom
it was sent one (1) business day after sending, if sent by facsimile, or
overnight air courier, and three (3) business days after mailing if sent by
certified or registered mail. All such notices and other communications to
a party hereto shall be addressed to such party at the address set forth at
the beginning of this Agreement or to such other address as such party may
designate for itself in a notice to the other party given in accordance with
this section.
6.2 The addresses to which such communications shall be sent are as
follows:
(a) If intended for the Borrower, to:
Parlex Corporation
145 Milk Street
Methuen, MA 01844
ATTN: Peter J. Murphy, President
Phone: (978) 685-4341
Fax: (978) 685-7867
with copies to:
Edward D. Kutchin, Esq.
Kutchin & Rufo, P.C.
One Liberty Square
Boston, MA 02109
Phone: (617) 542-3000
Fax: (617) 542-3001
(b) If intended for the Bank, to:
Fleet National Bank
One Federal Street
Boston, MA 02110
ATTN: David M. Farwell, Assistant Vice President
Phone: (617) 346-0658
Fax: (617) 346-0600
with copies to:
Brian T. Garrity, Esq.
Shapiro, Israel & Weiner, P.C.
100 North Washington Street
Boston, MA 02114
Phone: (617) 742-4200
Fax: (617) 742-2355
6.3 The addresses set forth herein may be changed by notice hereunder.
SECTION 7
---------
MISCELLANEOUS
-------------
7.1 The Borrower will from time to time execute and deliver to the
Bank all such other and further instruments and documents and take or cause
to be taken all such other and further action as the Bank may reasonably
request in order to effect and confirm or vest more securely in the Bank all
rights contemplated in this Agreement.
7.2 The Borrower may take any action herein prohibited or omit to
perform any act required to be performed by the Borrower if the Borrower
shall obtain the Bank's prior written consent to each such action, or
omission to act, which consent shall not be unreasonably withheld. No
waiver on the Bank's part on any one occasion shall be deemed a waiver on
any other occasion. The Bank shall not be deemed to have waived any of its
rights hereunder unless such waiver shall be in writing and duly signed by
an authorized officer of the Bank.
7.3 This Agreement may be amended only by an instrument in writing
and duly signed by an authorized officer of the Borrower and an authorized
officer of the Bank.
7.4 All covenants, agreements, representations and warranties
contained in this Agreement shall bind the Borrower, its respective
successors and assigns, and shall inure to the Bank's benefit and the
benefit of the Bank's successors and assigns, whether expressed or not.
7.5 All rights of the Bank hereunder shall be cumulative. The
Borrower and any guarantor hereby waives presentment and protest of any
instrument and any notice thereof.
7.6 If any provisions of this Agreement shall be held to be illegal
or unenforceable, such illegality or unenforceability shall relate solely to
such provision and shall not affect the remainder of this Agreement.
7.7 This Agreement shall be construed and enforced in accordance
with the laws of the Commonwealth of Massachusetts.
7.8 This Agreement shall take effect as an instrument under seal.
7.9 BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS AGREEMENT. Borrower hereby certifies that neither Bank nor any of
its representatives, agents or counsel has represented, expressly or
otherwise, that Bank would not, in the event of any such suit, action or
proceeding, seek to enforce this waiver of right to trial by jury. Borrower
acknowledges that Bank has been induced to enter into this Agreement by,
among other things, this waiver. Borrower acknowledges that it has read the
provisions of this Agreement and in particular, this Section; has consulted
legal counsel; understands the right it is granting in this Agreement and is
waiving in this Section in particular, and makes the above waiver knowingly,
voluntarily and intentionally.
7.10 Borrower and Bank agree that any action or proceeding to enforce
or arising out of this Agreement may be commenced in any court of the
Commonwealth of Massachusetts sitting in the counties of Suffolk or
Middlesex, or in the District Court of the United States for the District of
Massachusetts.
7.11 The exhibits annexed hereto as Exhibit A and Exhibit B are the
only exhibits to be annexed to this Agreement, and the material contained
therein shall be incorporated herein.
7.12 The captions herein contained are inserted as a matter of
convenience only and such captions do not form a part of this Agreement and
shall not be utilized in the construction hereof.
WITNESS: PARLEX CORPORATION
______________________________ By:____________________________________
Peter J. Murphy, President
FLEET NATIONAL BANK
By:____________________________________
David M. Farwell, Assistant Vice President
EXHIBIT A
---------
2.1(c) Encumbrances
SECURED PARTY OR LESSOR: COLLATERAL:
- ------------------------ -----------
2.1(f) General Nature of Borrower's Business
2.1(g) Subsidiaries and Investments
2.1(h) Litigation
2.1(i) Date and Period Covered of Most Recent Financial Statements
Furnished to the Bank
2.1(k) Material Changes in Operations
2.1(m) Other Locations
2.1(q) Deferred Compensation Plans
EXHIBIT 11
Parlex Corporation and Subsidiaries
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Basic earnings per share $.73 $.59
Weighted average number of shares outstanding
- Basic 4,295,706 3,569,052
Diluted earnings per share $.71 $.57
Weighted average number of shares outstanding
- Basic 4,295,706 3,569,052
Effect of dilutive stock options 169,821 145,987
Weighted average number of shares outstanding
- Dilutive 4,465,527 3,715,039
</TABLE>
EXHIBIT 21
PARLEX CORPORATION
Listing of Subsidiaries
-----------------------
Parlex International Corp.
Incorporated - St. Thomas, U.S. Virgin Islands
Organized as a Foreign Sales Corporation
January 8, 1985
Parlex (Shanghai) Circuit Co., Ltd.
Incorporated in Shanghai, China
Date of Incorporation - May 29, 1995
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-10250, 33-39648, 33-88470, 33-88472 and 333-18869 of Parlex Corporation
on Form S-8 of our report dated August 5, 1998, appearing in this Annual
Report on Form 10-K of Parlex Corporation for the year ended June 30, 1998.
Deloitte & Touche LLP
Boston, Massachusetts
September 28, 1998
EXHIBIT 24
POWER OF ATTORNEY
We the undersigned, officers and directors of Parlex Corporation, hereby
severally constitute Herbert W. Pollack and Steven M. Millstein, and each of
them singly, our true and lawful attorneys, with full power indicated below,
to sign for us the Report on Form 10-K of Parlex Corporation for the fiscal
year ended June 30, 1998 and any required amendments thereto, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys to
said Report and any and all such amendments.
Witness our hands on the dates set forth below:
Dated:
-------------------------
*/s/ Sheldon A. Buckler Director
- -------------------------------
Sheldon A. Buckler
*/s/ Richard W. Hale Director
- -------------------------------
Richard W. Hale
*/s/ M. Joel Kosheff Director
- -------------------------------
M. Joel Kosheff
*/s/ Peter J. Murphy Director
- -------------------------------
Peter J. Murphy
*/s/ Lester Pollack Director
- -------------------------------
Lester Pollack
*/s/ Benjamin Rabinovici Director
- -------------------------------
Benjamin Rabinovici
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary of financial information extracted from the
condensed Consolidated Balance Sheet and Condensed Consolidated Statement of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,824,233
<SECURITIES> 6,789,469
<RECEIVABLES> 11,397,750
<ALLOWANCES> 252,000
<INVENTORY> 9,346,657
<CURRENT-ASSETS> 35,508,827
<PP&E> 42,055,104
<DEPRECIATION> 22,031,645
<TOTAL-ASSETS> 56,181,484
<CURRENT-LIABILITIES> 9,222,704
<BONDS> 0
0
0
<COMMON> 485,065
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 56,181,484
<SALES> 60,048,336
<TOTAL-REVENUES> 60,275,171
<CGS> 47,304,136
<TOTAL-COSTS> 55,575,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,509
<INCOME-PRETAX> 5,129,598
<INCOME-TAX> 1,539,514
<INCOME-CONTINUING> 3,156,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,156,974
<EPS-PRIMARY> .73
<EPS-DILUTED> .71
</TABLE>
