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 December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-12942
PARLEX CORPORATION
(Exact Name of Registrant As Specified in its Charter)
Massachusetts 04-2464749
(State or other jurisdiction of (IRS Employer Identification
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 January 31, 1998, was 4,627,717 shares.
<PAGE> -1-
PARLEX CORPORATION
INDEX
Part I - Financial Statements:
Consolidated Balance Sheets - December 28, 1997 and June 30, 1997 3
Consolidated Statements of Income - For the Three Months
and Six Months Ended December 28, 1997 and December 29, 1996 4
Consolidated Statements of Cash Flows - For the Six Months
Ended December 28, 1997 and December 29, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information 11
Index 12
Signatures 13
Exhibit 14
<PAGE> -2-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 1997 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
December 28, June 30,
1997 1997
------------ -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,611,944 $ 596,614
Accounts receivable - net 10,138,354 9,029,388
Inventories:
Raw material 3,004,529 2,706,302
Work in process 4,911,041 4,556,175
Deferred income taxes 294,033 294,033
Other current assets 1,427,282 850,956
----------------------------
Total current assets 34,387,183 18,033,468
----------------------------
Property, plant and equipment:
Land 468,864 468,864
Buildings 7,017,478 7,017,478
Machinery and equipment 24,020,344 22,823,785
Leasehold improvements, construction
in progress and other 5,069,722 3,974,058
----------------------------
Total 36,576,408 34,284,185
Less accumulated depreciation and
amortization (20,948,684) (20,671,859)
----------------------------
Property, plant and equipment - net 15,627,724 13,612,326
----------------------------
Other assets 550,066 588,098
----------------------------
Total $50,564,973 $32,233,892
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt - $ 500,000
Bank loan $ 701,743 500,000
Accounts payable 4,412,683 5,047,284
Accrued liabilities 1,574,346 2,150,228
Income taxes payable (46,149) 244,404
----------------------------
Total current liabilities 6,642,623 8,441,916
----------------------------
Long-term debt 300,000 2,500,000
----------------------------
Other non-current liabilities 2,348,087 1,986,924
----------------------------
Minority interest in Parlex (Shanghai) 1,758,530 1,521,363
----------------------------
Stockholders' equity
Preferred stock -0- -0-
Common stock 480,444 379,875
Additional paid-in capital 23,636,676 3,334,424
Retained earnings 16,426,988 15,111,769
Less treasury stock at cost (1,037,625) (1,037,625)
Cumulative translation adjustments 9,250 (4,754)
----------------------------
Total Stockholders' equity 39,515,733 17,783,689
----------------------------
Total $50,564,973 $32,233,892
============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
<PAGE> -3-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended December 28, 1997
and December 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Dec. 28, 1997 Dec. 29, 1996 Dec. 28, 1997 Dec. 29, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product sales $14,130,813 $14,031,241 $27,803,039 $26,804,712
License fees and royalties 52,771 37,099 97,596 70,575
--------------------------------------------------------------
Total Revenues 14,183,584 14,068,340 27,900,635 26,875,469
--------------------------------------------------------------
Costs and Expenses:
Cost of products sold 11,315,973 11,472,916 21,854,885 22,384,959
Selling, general and
administrative expenses 1,932,421 1,737,174 3,811,843 3,324,489
--------------------------------------------------------------
Operating costs and expenses 13,248,394 13,210,090 25,666,728 25,709,448
--------------------------------------------------------------
Operating income 935,190 858,250 2,233,907 1,166,021
Other income - (Note 2) 140,276 10,713 231,065 123,108
Interest expense (64,265) (115,603) (158,237) (220,533)
--------------------------------------------------------------
Income before income taxes 1,011,201 753,360 2,306,735 1,068,596
Provision for income taxes (277,400) (286,900) (754,350) (406,900)
--------------------------------------------------------------
Net income before minority
interest 733,801 466,460 1,552,385 661,696
Minority interest (Note 3) (146,862) 91,405 (237,167) 84,581
--------------------------------------------------------------
Net income (Notes 4, 5) $ 586,939 $ 557,865 $ 1,315,218 $ 746,277
==============================================================
Basic EPS $.14 $.16 $.33 $.21
Diluted EPS $.13 $.15 $.32 $.20
==============================================================
Weighted average shares - Basic 4,330,431 3,558,285 3,960,892 3,558,168
==============================================================
Weighted average shares - Diluted 4,537,906 3,669,556 4,170,327 3,675,830
==============================================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
<PAGE> -4-
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 28, 1997 and December 29, 1996
(Unaudited)
<TABLE>
<CAPTION>
December 28, 1997 December 29, 1996
----------------- -----------------
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net income $ 1,315,218 $ 746,277
---------------------------------
Adjustments to reconcile net income to net
cash provided by (used for)operating
activities:
Depreciation and amortization 1,160,993 1,001,954
Refundable income taxes - 17,794
Deferred compensation 40,713 36,348
Gain on sale of equipment (67,572) (250)
Minority interest 237,167 (85,681)
Increase (decrease) in cash from:
Accounts receivable - net (1,108,966) (1,962,363)
Inventories (653,093) 809,616
Other current assets (576,326) (118,277)
Accounts payable (634,601) (481,850)
Accrued liabilities (575,881) 156,772
Income taxes payable (290,553) 331,934
---------------------------------
Total adjustments (2,468,119) (294,003)
---------------------------------
Net cash provided (used) by operating activities (1,152,901) 452,274
---------------------------------
Investment Activities:
Additions to property, plant and equipment (2,865,170) (1,039,600)
(Increase) decrease in other assets 38,032 (67,648)
Proceeds from the sale of equipment 76,800 250
---------------------------------
Net cash used for investment activities (2,750,338) (1,106,998)
---------------------------------
Financing Activities:
Borrowings (repayments) under revolving credit
agreement (2,200,000) 375,000
Loan payable - Joint Venture (298,257) 99,332
Decrease in long-term debt - (100,000)
Exercise of stock options and stock offering 20,402,821 1,781
---------------------------------
Net cash from financing activities 17,904,564 376,113
---------------------------------
Effect of exchange rate changes on cash 14,005 -
---------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 14,015,330 (287,611)
Cash and Cash Equivalents at Beginning of
Period 596,614 386,608
---------------------------------
Cash and Cash Equivalents at End of Period $14,611,944 $ 107,997
=================================
Supplementary Disclosure of Non Cash
Transactions:
Equipment acquired via capital lease 320,450
===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
<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 December 28, 1997 and the results of
operations and cash flows for the three months and six months ended December
28, 1997, and December 29, 1996. All adjustments made to the interim
financial statements were of a normal recurring nature.
The Company followed the same accounting policies in the preparation
of these interim financial statements as described in the Company's annual
filing on Form 10-K for the year ended June 30, 1997, and this filing should
be read in conjunction with that annual report.
2. Other Income
In the current quarter this year, other income was comprised
principally of interest income, and to a lesser extent, items of a
miscellaneous nature, while last year other income contained no interest
income. For the first six months, both this year and last, other income
also included the gain on the sale of equipment.
3. Joint Venture
In May 1995, the Company entered into an agreement to establish a
limited liability company in the form of a joint venture in the People's
Republic of China. The Company owns 50.1% of the joint venture. The joint
venture manufactures flexible printed circuits and commenced operations in
September 1995. The Company reports the financial results of this venture
on a three month time lag.
4. Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." The Company adopted this standard in the quarter ended December 28,
1997, and restated earnings per share information to conform with the new
pronouncement's requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements.
SFAS No. 131 establishes standards for the manner in which public business
enterprises report selected information about operating segments in annual
financial statements and
<PAGE> -6-
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Both standards will be adopted by the Company during the first
quarter of fiscal year 1999.
5. Common Stock
In October 1997, the Company completed a stock offering of 1,150,000
shares of its common stock, of which 1,000,000 shares were issued by the
Company and 150,000 were sold by selling shareholders. After deducting
underwriting discounts and commissions and offering expenses, the net
proceeds to the Company approximated $20,000,000.
<PAGE> -7-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company made an announcement during the quarter that there was an
issue with the quality of some incoming raw materials associated with the
Flexible Circuit Product line. This situation resulted in reduced levels of
shipments, as well as increases in the cost of products sold as a percentage
of sales. Most of the effects of this problem were resolved in the month of
December 1997.
In October 1997, the Company completed a secondary offering of its
common stock, resulting in proceeds approximating $20,000,000 after
expenses.
Operations
Total revenues in the second quarter of the current fiscal year were
$14,183,584, a slight increase from the $14,068,340 reported in the
corresponding period a year ago. Revenues were generated primarily from
product sales, while the remainder was derived from licensing and royalty
fees.
For the first six months, revenues were $27,900,635, or 4% higher than
the $26,875,469 reported last year.
The cost of products sold as a percentage of revenue was 80%, a
reduction from the 82% reported in the second quarter last year. An
improvement in operational efficiency was the primary factor contributing to
the reduction. A further improvement would otherwise have been realized had
it not been for the quality issue associated with incoming raw materials
mentioned previously.
For the first six months, the cost of sales percentage was 78% versus
83% for the same period a year ago.
Selling, general, and administrative expenses as a percentage of
revenue was 14% in the current quarter and first six months this year versus
12% for the same periods last year. The significant growth being
experienced by Parlex (Shanghai), the Chinese joint venture and the
additional selling expenses being incurred by the Company's domestic
operations in anticipation of accommodating its future growth were the
primary factors contributing to the increase.
Other income this year was $140,276 as compared to $10,713 in the
second quarter last year. This year, the principal portion of "other
income" related to interest income, with the remainder comprised of items of
a miscellaneous nature. Last year, "other income" was comprised only of
items of a miscellaneous nature. For the first six months, both this year
and last, other income also included the gain on the sale of equipment.
<PAGE> -8-
Interest expense was $64,265 this quarter as compared to $115,603 last
year. For the first six months, interest expense was $158,237 versus
$220,533 last year. Some of the proceeds from the secondary offering (refer
to "Liquidity and Capital Resources") were used to reduce the Company's
long-term debt of $3,200,000, which resulted in a reduction of interest
expense.
The above factors resulted in income before income taxes of $1,011,201
and $2,306,735 for the second quarter and first six months, respectively.
This compares to $753,360 in the second quarter and $1,068,596 for the first
six months last year.
The Company's effective tax rate was approximately 27% in the second
quarter this year, and 33% for the first six months. The latter rate is the
effective tax rate anticipated for the year. The reduction in rate relates
primarily to the earnings generated from the Chinese joint venture. No
provision has been made for the earnings generated thus far since they are
being permanently reinvested in the Chinese venture and no taxes will become
due.
After providing for taxes and recognizing the minority interest in the
Chinese joint venture, the Company's net income was $586,939 and $1,315,218
for the current quarter and first six months, respectively. This compares
to $557,865 and $746,277 for the respective time periods last year.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". The Company adopted this standard in the quarter ended December 28,
1997, and restated all previously reported earnings per share information to
conform with the new pronouncement's requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 established standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements.
SFAS No. 131 establishes standards for the manner in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Both standards will be adopted by the Company
during the first quarter of fiscal year 1999.
<PAGE> -9-
Liquidity and Capital Resources
In October 1997, the Company completed a stock offering of 1,150,000
shares of its common stock, of which 1,000,000 shares were issued by the
Company and 150,000 were sold by selling shareholders. The shares were
priced at $22.00 per share. After deducting underwriting discounts and
commissions and offering expenses paid by the Company, the net proceeds to
the Company approximated $20,000,000.
Since the offering, the Company has paid off its revolver loan balance
and plans to spend approximately $12,000,000 over the next two years to
expand its manufacturing facilities and purchase capital equipment that will
increase its manufacturing capacity and accommodate various new
technological processes. The remaining portion of the proceeds will be used
for general corporate purposes.
Additionally, the Company has a $10,000,000 unsecured revolving line
of credit to replace the $5,000,000 revolving credit facility that
previously existed.
The Company believes that its cash flow from operations, together with
the proceeds from the offering and the amount available under its revolving
credit facility, should be sufficient to meet the Company's foreseeable
needs.
The Company has a deferred compensation obligation that is owed to an
employee. Under the current arrangement, monthly payments begin in June
1999, or the first month after the termination of employment, whichever
occurs first, and continues for no fewer than 60 months or, at the election
of the employee prior to his termination of employment, for up to 120
months. Amounts to be paid within one year are not expected to be material.
"Safe Harbor" Statement Under the Private Securities
Litigation Reform Act of 1995
This Report contains certain forward-looking statements. The
Company's actual results of operations may differ significantly from those
contemplated by such forward-looking statements as a result of various
factors beyond its control, including, but not limited to, economic
conditions in the electronics industry, particularly in the principal
industry sectors served by the Company, changes in customer requirements and
in the volume of sales to principal customers, competition and technological
change.
<PAGE> -10-
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was held
on December 2, 1997.
(b) At the Annual Meeting, stockholders elected the following
Class III directors whose terms expire in 2000:
<TABLE>
<CAPTION>
Withheld
For Authority
--- ---------
<S> <C> <C>
Herbert W. Pollack 3,375,099 3,295
Sheldon A. Buckler 3,373,599 4,795
</TABLE>
The following other directors' respective terms of office continued in
effect after the meeting:
Continuing Class I Directors
Continuing in Office until 1998
-------------------------------
Richard W. Hale
Lester Pollack
Benjamin M. Rabinovici
Continuing Class II Directors
Continuing in Office until 1999
-------------------------------
M. Joel Kosheff
Peter J. Murphy
(c) No other votes were submitted to the security holders.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits; see Exhibit Index
(b) No reports on Form 8-K were filed during the quarter ended
December 28, 1997.
<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
/s/ Peter J. Murphy
Peter J. Murphy
President
/s/ Steven M. Millstein
Steven M. Millstein
Vice President of Finance
(Principal Accounting and
Financial Officer)
February 9, 1998
Date
<PAGE> -12-
Exhibit Index
Exhibit Description of Exhibit Page
3-D Articles of Amendment dated October 21, 1997 14
FEDERAL IDENTIFICATION
NO. 04-2464749
BAHG THE COMMONWEALTH OF MASSACHUSETTS
Examiner William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
N/A ARTICLES OF AMENDMENT
Name (General Laws, Chapter 156B, Section 72)
Approved
We, Peter J. Murphy, President
and Jill Pollack Kutchin, Clerk
of Parlex Corporation
(Exact name of corporation)
located at 145 Milk Street, Methuen, Massachusetts
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on
October 20, 1997, by vote of 2,681,606 shares of Common Stock of 3,593,310
shares outstanding.
C [ ]
P [ ]
M [ ]
R.A. [ ]
(1) being at least a majority of each type, class or series outstanding and
entitled to vote thereon
* Delete the inapplicable words. ** Delete the inapplicable clause.
1 For amendments adopted pursuant to Chapter 156B, Section 70.
2 For amendments adopted pursuant to Chapter 156B, Section 71.
Note: if the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of separate 8
1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to
more than one article may be made on a single sheet so long as each article
requiring each addition is clearly indicated.
3/20/70 C
To change the number of shares and the par value (if any) of any type, class
or series of stock which the corporation is authorized to issue, fill in the
following:
The total presently authorized is:
- ----------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------- -------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ---------------------------- -------------------------------------------
Common: Common: 5,000,000 $.10
Preferred: Preferred: 1,000,000 $1.00
- ----------------------------------------------------------------------------
Change the total authorized to:
- ----------------------------------------------------------------------------
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ---------------------------- -------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ---------------------------- -------------------------------------------
Common: Common: 10,000,000 $.10
Preferred: Preferred: 1,000,000 $1.00
- ----------------------------------------------------------------------------
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: ______________________
SIGNED UNDER THE PENALTIES OF PERJURY, this 21st day of October, 1997.
/s/ Peter J. Murphy, President
Peter J. Murphy
/s/ Jill Pollack Kutchin, Clerk
Jill Pollack Kutchin
*Delete the inapplicable words.
592325
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
=============================
I hereby approve the within Articles of
Amendment and, the filing fee in the amount
of $5,000 having been paid, said articles
are deemed to have been filed with me this
21st day of October 1997.
Effective date: __________________________
/s/ William Francis Galvin
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Edward D. Kutchin, Esq.
Kutchin & Rufo, P.C.
One Liberty Square
Boston, MA 02109
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-28-1997
<CASH> 14,611,944
<SECURITIES> 0
<RECEIVABLES> 10,292,835
<ALLOWANCES> 154,481
<INVENTORY> 7,915,557
<CURRENT-ASSETS> 34,387,183
<PP&E> 36,576,408
<DEPRECIATION> 20,948,684
<TOTAL-ASSETS> 50,564,973
<CURRENT-LIABILITIES> 6,642,623
<BONDS> 0
0
0
<COMMON> 480,444
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,564,973
<SALES> 27,803,039
<TOTAL-REVENUES> 27,900,635
<CGS> 21,854,885
<TOTAL-COSTS> 25,666,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,237
<INCOME-PRETAX> 2,306,735
<INCOME-TAX> 754,350
<INCOME-CONTINUING> 1,315,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,315,218
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
</TABLE>
