SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-12942
PARLEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2464749
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
145 Milk Street, Methuen, Massachusetts 01844
(Address of principal executive offices) (Zip Code)
978-685-4341
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at October 31, 1998 was 4,640,836 shares.
<PAGE> -1-
PARLEX CORPORATION
INDEX
Part I - Financial Statements:
Consolidated Balance Sheets - September 27, 1998 and June 30, 1998 3
Consolidated Statements of Income - For the Three Months
Ended September 27, 1998 and September 28, 1997 4
Consolidated Statements of Cash Flows - For the Three Months
Ended September 27, 1998 and September 28, 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
And Results of Operations 7
Part II - Other Information 11
Exhibit Index 12
Signatures 15
<PAGE> -2-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 27, 1998 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Sept 27, 1998 June 30, 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,554,783 $ 5,824,233
Short-term Investments 5,234,790 6,789,469
Accounts receivable - net 10,907,369 11,145,750
Inventories:
Raw material 3,544,714 3,413,657
Work in process 6,088,973 5,933,000
Refundable income taxes 126,933 323,626
Deferred income taxes 372,725 372,725
Other current assets 927,363 1,706,367
-----------------------------
Total current assets 32,757,650 35,508,827
=============================
Property, plant and equipment:
Land 468,864 468,864
Buildings 7,724,022 7,724,022
Machinery and equipment 27,370,499 27,200,755
Leasehold improvements and other 2,302,337 2,270,658
Construction in progress 7,069,851 4,390,805
-----------------------------
Total 44,935,573 42,055,104
Less accumulated depreciation and
Amortization (22,815,377) (22,031,645)
-----------------------------
Property, plant and equipment
- net 22,120,196 20,023,459
-----------------------------
Other assets 1,166,789 649,198
-----------------------------
Total $56,044,635 $56,181,484
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 307,300 $ 121,158
Bank loan 360,577 310,577
Accounts payable 5,298,107 6,437,169
Accrued liabilities 1,706,695 2,353,800
-----------------------------
Total current liabilities 7,672,679 9,222,704
-----------------------------
Long-term debt 2,062,757 1,165,751
-----------------------------
Other non-current liabilities 2,269,365 2,247,444
-----------------------------
Minority interest in Parlex (Shanghai) 2,244,958 1,954,472
-----------------------------
Stockholders' equity
Preferred stock -0- -0-
Common stock 485,083 485,065
Additional paid-in capital 23,873,819 23,872,745
Retained earnings 18,467,813 18,268,743
Unrealized gain on short-term
investments 13,472 10,192
Cumulative translation adjustments (7,686) (8,007)
Less treasury stock at cost (1,037,625) (1,037,625)
-----------------------------
Total Stockholders' equity 41,794,876 41,591,113
-----------------------------
Total $56,044,635 $56,181,484
=============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
<PAGE> -3-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 27, 1998 and September 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 27, 1998 September 28, 1997
------------------ ------------------
<S> <C> <C>
Product sales $15,419,212 $13,672,226
License fees and royalties 72,544 44,825
--------------------------------
Total Revenues $15,491,756 $13,717,051
================================
Costs and Expenses:
Cost of products sold 13,051,471 10,538,912
Selling, general and administrative
expenses 2,114,422 1,879,422
--------------------------------
Operating costs and expenses 15,165,893 12,418,334
--------------------------------
Operating income 325,863 1,298,717
Other income 169,283 90,789
Interest expense (76,440) (93,972)
--------------------------------
Income before income taxes 418,706 1,295,534
Credit (provision) for income taxes 70,850 (476,950)
--------------------------------
Net income before minority interest 489,556 818,584
Minority interest (Note 2) (290,486) (90,305)
--------------------------------
Net income $ 199,070 $ 728,279
================================
Basic income per share $ .04 $ .20
================================
Diluted income per share $ .04 $ .19
================================
Weighted average shares - basic 4,640,795 3,591,353
================================
Weighted average shares - diluted 4,788,893 3,802,747
================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
<PAGE> -4-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 27, 1998 and September 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 27, 1998 September 28, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net Income $ 199,077 $ 728,279
-------------------------------
ADJUSTMENTS TO RECONCILE NET
INCOME TO CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and Amortization 796,526 571,792
(Gain)Loss on sale of equipment 0 (67,872)
Deferred compensation 21,921 20,141
Minority Interest 290,486 90,305
Increase(Decrease) in cash from:
Accounts Receivable - Net 238,381 (1,173,835)
Other Current Assets 766,210 201,854
Refundable Income Taxes 196,693 0
Inventories (287,030) (583,421)
Accounts Payable (1,139,062) 501,616
Accrued Liabilities (647,105) (184,549)
Income Taxes Payable 0 121,187
-------------------------------
Total Adjustments: 237,020 (503,122)
-------------------------------
Net cash provided by
operating activities: 436,090 235,157
-------------------------------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment (2,880,469) (958,116)
(Increase)Decrease in Other
assets (517,591) 4,236
Proceeds from sale of equipment 0 76,800
Maturities of investments
available for sale 1,557,959 0
-------------------------------
Net cash used for investing
activities: (1,840,101) (877,080)
-------------------------------
FINANCING ACTIVITIES:
Payments - Long-term debt (116,852) 0
Loan Payable - JV 50,000 99,435
Borrowings under revolving
credit agreement 1,200,000 50,000
Exercise of stock options 1,092 4,299
-------------------------------
Net cash provided by
financing activities: 1,134,240 153,734
-------------------------------
EFFECT OF EXCHANGE RATE CHARGES ON
CASH: 321 1,418
-------------------------------
NET DECREASE IN CASH & CASH
EQUIVALENTS: (269,450) (496,771)
CASH & CASH EQUIVALENTS AT BEGINNING
OF PERIOD: 5,824,233 596,614
-------------------------------
CASH & CASH EQUIVALENTS AT END
OF PERIOD: $5,554,783 $ 99,843
===============================
</TABLE>
<PAGE> -5-
PARLEX CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Management Statement
The financial statements as reported in Form 10-Q reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial position as of September 27, 1998 and the results of
operations and cash flows for the three months ended September 27, 1998 and
September 28, 19976. All adjustments made to the interim financial
statements were of a normal recurring nature. The results of operations
for the interim period are not necessarily indicative of the results of
operations to be expected for the entire fiscal year.
The Company followed the same accounting policies in the preparation
of this interim financial statement as described in the Company's annual
filing on Form 10-K for the year ended June 30, 1998, and this filing should
be read in conjunction with that annual report.
2. Comprehensive Income
During the first quarter of 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Comprehensive income for the three months
ended September 27, 1998 and September 28, 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other Comprehensive Income:
Unrealized gain on short term Investments $3,280 $ -0-
Cumulative translation adjustments 321 1,417
------------------
$3,601 $1,417
==================
</TABLE>
The accumulated other comprehensive income balance is as follows:
<TABLE>
<CAPTION>
Unrealized gains Cummulative
on Short term Translation
Investments Adjustments Total
---------------- ----------- -----
<S> <C> <C> <C>
Beginning Balance $10,192 $(8,007) $2,185
Current Period Change 3,280 321 3,601
---------------------------------------
Ending Balance $13,472 $(7,686) $5,786
=======================================
</TABLE>
<PAGE> -6-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Total revenues in the first quarter of the current fiscal year were
$15,491,756 versus $13,717,051 for the comparable quarter last year.
Revenues were generated primarily from product sales, while some was derived
from licensing and royalty fees. The increase in total revenues was
primarily attributable to an increase in the volume of units shipped.
The cost of products sold was $13,051,471 or 84% of sales in the
current quarter versus $10,538,912 or 77% of revenues in the first quarter
last year. While the laminated cable and Chinese operations performed well,
some unanticipated losses were incurred in the manufacturing of flexible
circuits associated with automotive applications. Product shipped to the
Company's Mexican facility was returned because of an unexpected delay by
our customer to qualify the site for finishing operations. As a result, the
material was contaminated during unplanned storage and shipment back to our
Methuen, Massachusetts facility. These circuits required extensive rework
with a significant quantity being scrapped. The Company also failed to
achieve desired yields on its recently introduced PALFlex (process for
automotive applications.
Selling, general, and administrative expenses as a percentage of
revenue were 14% in the first quarter, both this year as well as last year.
Other income of $169,283 this quarter was primarily associated with
interest income on short-term investments; last year, other income of
$90,789 related primarily to the gain on the sale of equipment.
Interest expense was $76,440 this quarter as compared to $93,972 last
year. The decrease was due to a lower level of average borrowings. The
interest rate in the first quarter remained essentially unchanged from the
same period last year.
Income before income taxes was $418,706 in the first quarter this year
versus $1,295,534 last year. The decrease was due to the losses on
automotive programs described above.
The Company reflected a tax credit of $70,850 this year versus a
provision of $476,950 (or 37% effective tax rate) last year. The credit
relates to the loss incurred in the Company's U.S. operations, while the
Company continues to benefit from the income generated by the Chinese joint
venture, which currently is not subject to tax.
The Company's net income, after recognizing the minority interest in
the Chinese joint venture, was $199,070 in the first quarter this year
versus $728,279 last year.
<PAGE> -7-
Liquidity and Capital Resources
As of September 27, 1998, the Company had cash, marketable securities,
and short term investment of approximately $10,800,000, after having
expended over $2,800,000 in the first quarter to pay for its planned
expansion. In addition, the Company has a $10,000,000 unsecured revolving
line of credit, of which $9,800,000 was available as of November 2, 1998.
For the remainder of the year, the Company anticipates spending an
additional $6,000,000 to expand its manufacturing facilities and purchase
capital equipment that will increase its manufacturing capacity and
accommodate various new technological processes.
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. Amounts to be paid within one year are not
deemed to be significant.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that these 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. 131 will be adopted by the Company during the fourth
quarter of fiscal 1999. This standard is not expected to have a material
effect on its consolidated financial position, results of operations, and
financial statement disclosures.
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 has scheduled its enterprise system to be fully Year 2000
compliant by the second 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.
<PAGE> -8-
This inventory is scheduled to be completed by 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.
There can be no assurance that the conversion of the Company's systems
will be successful or that the Company's key contractors will have successful
conversion programs, and that any such "Year 2000" compliance failures will not
have a material effect on the Company's business, results of operations or
financial conditions.
Quantitative and Quality Disclosures About Market Risk
As of September 27, 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. As of November 2, 1998, the Company owed $200,000 under this
arrangement 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 impace 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.
<PAGE> -9-
"Safe Harbor" Statement Under the Private Securities Litigation Reform
Act of 1995
This quarterly Report on Form 10-Q contains certain forward-looking
statements as defined under the Federal Securities Laws. The Company's
actual results of operations may differ significantly from those
contemplated by such forward-looking statements as a result of various
risk factors beyond its control, including, but not limited to, economic
conditions in the electronics industry, particularly in the principal
industry sectors served by the Company, changes in customer requirements and
in the volume of sales to principal customers, competition and technological
change.
<PAGE> -10-
PART II - OTHER INFORMATION
Items 1-5 THESE ITEMS ARE INAPPLICABLE
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K - No reports on Form 8-K were
filed by the Company for the quarter ended
September 27, 1998.
<PAGE> -11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARLEX CORPORATION
By: /s/ Peter J. Murphy
Peter J. Murphy
President
By: /s/ Steven M. Millstein
Steven M. Millstein
Vice President of Finance
(Principal Accounting and
Financial Officer)
November 12, 1998
Date
<PAGE> -15-
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
11 Statement Regarding Computation of Per
Share Earnings 13
27 Financial Data Schedule 14
EXHIBIT 11
PARLEX CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
Sept. 27, 1998 Sept. 28, 1997
-------------- --------------
<S> <C> <C>
Net Income Per Share - Basic $.04 $.20
Weighted Average Number
of Shares Outstanding 4,640,795 3,591,353
Net Income Per Share - Diluted $.04 $.19
Weighted Average Number
of Shares Outstanding 4,640,795 3,591,353
Effect of Dilutive Stock Option 148,098 211,394
Adjusted Weighted Average
Number of Shares Outstanding 4,788,893 3,802,747
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary of financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-27-1998
<CASH> 5,554,783
<SECURITIES> 5,234,790
<RECEIVABLES> 11,203,730
<ALLOWANCES> 296,361
<INVENTORY> 9,633,687
<CURRENT-ASSETS> 32,757,650
<PP&E> 44,935,573
<DEPRECIATION> 22,815,377
<TOTAL-ASSETS> 56,044,635
<CURRENT-LIABILITIES> 7,672,679
<BONDS> 0
0
0
<COMMON> 485,083
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 56,044,635
<SALES> 15,419,212
<TOTAL-REVENUES> 15,491,756
<CGS> 13,051,471
<TOTAL-COSTS> 15,165,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,440
<INCOME-PRETAX> 418,706
<INCOME-TAX> 70,850
<INCOME-CONTINUING> 199,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,070
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
