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 27, 1998
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)
One Parlex Place, 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, 1999 was 4,642,399 shares.
PARLEX CORPORATION
------------------
INDEX
-----
Part I - Financial Information: Page Number
Consolidated Balance Sheets - December 27, 1998 and June 30, 1998 3
Consolidated Statements of Income - For the Three Months
And Six Months Ended December 27, 1998 and December 28, 1997 4
Consolidated Statements of Cash Flows - For the Six Months
Ended December 27, 1998 and December 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 13
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, 1998 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Dec 27, 1998 June 30, 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,443,131 $ 5,824,233
Short-term Investments 3,253,594 6,789,469
Accounts receivable - net 10,849,784 11,145,750
Inventories:
Raw material 3,535,385 3,413,657
Work in process 6,190,177 5,933,000
Refundable income taxes 70,110 323,626
Deferred income taxes 372,725 372,725
Other current assets 880,197 1,706,367
----------------------------
Total current assets 28,595,103 35,508,827
----------------------------
Property, plant and equipment:
Land 468,864 468,864
Buildings 7,724,022 7,724,022
Machinery and equipment 28,085,069 27,200,755
Leasehold improvements and other 2,300,645 2,270,658
Construction in progress 9,820,098 4,390,805
----------------------------
Total 48,398,698 42,055,104
Less accumulated depreciation and
Amortization (23,472,350) (22,031,645)
----------------------------
Property, plant and equipment - net 24,926,348 20,023,459
----------------------------
Other assets 550,228 649,198
----------------------------
Total $54,071,679 $56,181,484
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 121,158 $ 121,158
Bank loan -0- 310,577
Accounts payable 4,518,140 6,437,169
Accrued liabilities 1,582,628 2,353,800
----------------------------
Total current liabilities 6,221,926 9,222,704
----------------------------
Long-term debt 981,622 1,165,751
Other non-current liabilities 2,289,989 2,247,444
Minority interest in Parlex (Shanghai) 2,250,066 1,954,472
Stockholders' equity
Preferred stock -0- -0-
Common stock 485,240 485,065
Additional paid-in capital 23,880,180 23,872,745
Retained earnings 19,007,353 18,268,743
Unrealized gain on short-term investments 536 10,192
Cumulative translation adjustments (7,608) (8,007)
Less treasury stock at cost (1,037,625) (1,037,625)
----------------------------
Total Stockholders' equity 42,328,076 41,591,113
----------------------------
Total $54,071,679 $56,181,484
============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended December 27, 1998
and December 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Dec 27, 1998 Dec 28, 1997 Dec 27, 1998 Dec 28,1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Product sales $15,337,148 $14,130,813 $30,756,360 $27,803,039
License fees and royalties 16,842 52,771 89,386 97,596
--------------------------------------------------------
Total Revenues 15,353,990 14,183,584 30,845,746 27,900,635
--------------------------------------------------------
Costs and Expenses:
Cost of products sold 12,520,118 11,315,973 25,571,589 21,854,885
Selling, general and administrative
expenses 2,004,276 1,932,421 4,118,698 3,811,843
--------------------------------------------------------
Operating costs and expenses 14,524.394 13,248,394 29,690,287 25,666,728
Operating income 829,596 935,190 1,155,459 2,233,907
Other income 85,267 140,276 254,550 231,065
Interest expense (56,200) (64,265) (133,640) (158,237)
--------------------------------------------------------
Income before income taxes 858,663 1,011,201 1,277,369 2,306,735
Provision for income taxes (314,015) (277,400) (243,165) (754,350)
--------------------------------------------------------
Net income before minority interest 544,648 733,801 1,034,204 1,552,385
Minority interest (5,108) (146,862) (295,594) (237,167)
--------------------------------------------------------
Net income $ 539,540 $ 586,939 $ 738,610 $ 1,315,218
========================================================
Basic earnings per share $ .12 $ .14 $ .16 $ .33
========================================================
Diluted earnings per share $ .11 $ .13 $ .15 $ .32
========================================================
Weighted average shares - basic 4,641,656 4,330,431 4,641,226 3,960,892
========================================================
Weighted average shares - diluted 4,759,714 4,537,906 4,774,304 4,170,327
========================================================
</TABLE>
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 27, 1998 and December 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
December 27, 1998 December 28, 1997
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net Income $ 738,610 $ 1,315,218
-------------------------------
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,503,207 1,160,993
Deferred compensation 42,545 40,713
Gain on sale of equipment (300) (67,572)
Minority interest 295,594 237,167
Increase (decrease) in cash from:
Accounts receivable - net 295,966 (1,108,966)
Inventories (378,905) (653,093)
Refundable income taxes 253,516 -
Other current assets 826,170 (576,326)
Accounts payable (1,919,029) (634,601)
Accrued liabilities (771,172) (575,881)
Income taxes payable - (290,553)
-------------------------------
Total adjustments 147,592 (2,468,119)
-------------------------------
Net cash provided (used) by operating activities 886,202 (1,152,901)
-------------------------------
Investment Activities:
Additions to property, plant and equipment (6,406,096) (2,865,170)
Decrease in other assets 98,970 38,032
Proceeds from the sale of equipment 300 76,800
Maturity of investments available for sale 3,526,219 -0-
-------------------------------
Net cash used for investment activities (2,780,607) (2,750,338)
-------------------------------
Financing Activities:
Repayments under revolving credit agreement -0- (2,200,000)
Loan payable - Joint Venture (310,577) (298,257)
Decrease in long-term debt (184,129) -0-
Exercise of stock options and stock offering 7,610 20,402,821
-------------------------------
Net cash provided (used) by financing activities (487,096) 17,904,564
-------------------------------
Effect of exchange rate changes on cash 399 14,005
-------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,381,102) 14,015,330
Cash and Cash Equivalents at Beginning of Period 5,824,233 596,614
-------------------------------
Cash and Cash Equivalents at End of Period $3,443,131 $14,611,944
===============================
Supplementary Disclosure of Non Cash Transactions:
Equipment acquired via capital lease $ -0- $ 320,450
===============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
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 27, 1998 and the results of
operations and cash flows for the three months and six months ended December
27, 1998 and December 28, 1997. 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 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
--------------------
At the commencement of fiscal year 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income for the three
months and six months ended December 27, 1998 and December 28, 1997 are as
follows:
<TABLE>
<CAPTION>
Second Qtr 6 Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Comprehensive Income:
Unrealized gain (loss) on short
term Investments $(12,936) $ -0- $(9,656) $ -0-
Cumulative translation adjustments 78 12,586 399 14,005
------------------------------------------
$(12,858) $12,586 $(9,257) $14,005
==========================================
</TABLE>
The accumulated other comprehensive income balance is as follows:
<TABLE>
<CAPTION>
Unrealized gains on Cumulative Trans-
Short term Investments lation Adjustments Total
------------------------------------------------------
<S> <C> <C> <C>
Beginning Balance $10,192 $(8,007) $ 2,185
Current Year Change (9,656) 399 (9,257)
-----------------------------------------------
Ending Balance $ 536 $(7,608) $(7,072)
===============================================
</TABLE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with "Factors That May
Affect Future Results" set forth on Page 10 and in the Company's other
filings with the U.S. Securities and Exchange Commission.
Total revenues increased 8% in the second quarter of the current
fiscal year to $15,353,990 versus $14,183,584 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 attributable to an increase in the volume of units shipped from each of
the Company's various locations.
For the first six months, revenues were $30,845,746, or 11% higher
than the $27,900,635 reported last year during the same period.
The cost of products sold as a percentage of sales was 82%, a slight
increase from the 80% reported in the second quarter last year, but an
improvement over the 85% reported in the first quarter this year. From an
operations perspective, improvement in yields and other measurements of
performance were achieved this quarter. However, these improvements were
offset by unabsorbed overhead associated with the Company's Mexican
facility. In addition, there were some additional write-offs of inventory
relating to the contamination issue that resulted during the first quarter
of this year (and discussed in the preceding Form 10-Q filing). These
problems should not have any significant impact in the ensuing quarters.
For the first six months, the cost of sales percentage was 83% versus
78% for the same period a year ago. The increase in percentage resulted
from the same factors described above.
Selling, general and administrative expenses as a percentage of sales
were 13% in the current quarter and first six months this year. Last year,
the percentage was 14% in each of the respective periods.
Other income this year was $85,267 as compared to $140,276 in the
second quarter last year. Other income in each period related primarily to
interest income earned on investments. Fewer dollars were available for
investment this year as a result of the Company's investment in facilities
and equipment to increase capacity.
For the first six months, other income amounted to $254,550 versus
$231,065 last year. The monies available for investment arose from the
secondary offering completed in October 1997. Therefore, no interest income
was earned in the first quarter of last year. A significant portion of last
year's other income related to the gain on sale of equipment, as well as
interest income earned during the second quarter.
Interest expense was $56,200 this quarter versus $64,265 last year.
For the first six months, interest expense was $133,640 as compared to
$158,237 last year. Other than the Chinese joint venture, the Company, at
present, does not have any funded debt, which is the primary factor
contributing to the decrease in expense.
The above factors resulted in income before taxes of $858,663 and
$1,277,369 for the second quarter and first six months, respectively. This
compares to $1,011,201 in the second quarter and $2,306,735 for the first
six months last year.
The Company's effective tax rate was approximately 37% in the second
quarter this year, and 19% for the first six months. This compares to last
year's rates of 27% in the second quarter last year, and 33% for the first
six months. The difference in the rates relates to the mix of earnings
between the U.S. operations and the Chinese joint venture. The Company
continues to benefit from the income generated by the Chinese joint venture,
which currently is not subject to tax.
After providing for taxes and recognizing the minority interest in the
Chinese joint venture, the Company's net income was $539,540 and $738,610
for the current quarter and first six months, respectively. This compares
to $586,939 and $1,315,218 for the respective time periods last year.
Liquidity and Capital Resources
- -------------------------------
As of December 27, 1998, the Company had cash and short term
investments of approximately $6,700,000, after having expended over
$6,400,000 in the first six months to pay for its planned facilities
expansion and investment in equipment. The Company has a $10,000,000
unsecured revolving line of credit, all of which was available. For the
remainder of the year, the Company anticipates spending an additional
$4,000,000 to expand 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, if
any, are not deemed to be material.
In January 1999, the Company announced that it reached a preliminary
agreement to acquire 55% ownership in a manufacturer of flexible printed
circuit boards for a cash payment of $1,800,000. The agreement is subject
to completion of due diligence, reviews and the execution of a definitive
agreement.
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, 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 calendar 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
have been certified as Year 2000 compliant. The total cost of this project
is approximately $800,000 of which approximately $465,000 has thus far been
expended.
The Company has inventoried all of 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 by January 1, 2000.
This inventory was completed in the fourth quarter of calendar 1998.
The required remediation of all mission critical systems will be completed
by the end of the first quarter of calendar 1999 and the testing necessary
to validate compliance is scheduled to be completed by August 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 the Company's key contractors will have successful
conversion programs, and that any such "Year 2000" compliance failures will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
Quantitative and Quality Disclosures About Market Risk
- ------------------------------------------------------
As of December 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 December 27, 1998, no monies were borrowed
under this line of credit. The Company has the option to repay borrowings
at anytime without penalty and therefore believes that the market risk is
not material.
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.
"Factors That May Affect Future Results"
- ----------------------------------------
This Quarterly Report on Form 10-Q contains certain forward-looking
statements as defined under the Federal Securities Laws. 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.
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 1, 1998.
(b) At the Annual Meeting, stockholders elected the following
Class I directors whose terms expire in 2001:
<TABLE>
<CAPTION>
Withheld
For Authority
--- ---------
<S> <C> <C>
Richard W. Hale 4,405,068 32,523
Lester Pollack 4,402,953 34,638
Benjamin M. Rabinovici 4,402,453 35,138
</TABLE>
The following other directors' respective terms of office continued in
effect after the meeting:
Continuing Class II Directors
Continuing in Office until 1999
-------------------------------
M. Joel Kosheff
Peter J. Murphy
Continuing Class III Directors
Continuing in Office until 2000
-------------------------------
Herbert W. Pollack
Sheldon A. Buckler
(c) At the Annual Meeting, stockholders approved an amendment to
the 1989 Employees' Stock Option Plan as described in the
Company's proxy statement.
For 3,187,974
Against 274,042
Abstain 10,495
Delivered-Not-Voted 965,080
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 27, 1998.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Exhibit Page
- ------- ---------------------- ----
<C> <S> <C>
11 Statement Regarding Computation of Per Share Earnings 14
27 Financial Data Schedule 15
</TABLE>
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)
February 10, 1999
------------------------------
Date
EXHIBIT 11
PARLEX CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 27,1998 December 28, 1997 December 27, 1998 December 28, 1997
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income per share - basic $.12 $.14 $.16 $.33
Weighted average number
of shares outstanding 4,641,656 4,330,431 4,641,226 3,960,892
Net income per share - diluted $.11 $.13 $.15 $.32
Weighted average number of
shares outstanding 4,641,656 4,330,431 4,641,226 3,960,892
Effect of dilutive stock options 118,058 207,475 133,078 209,435
Adjusted weighted average number
of shares outstanding 4,759,714 4,537,906 4,774,304 4,170,327
</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>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-27-1998
<CASH> 3,443,131
<SECURITIES> 3,253,594
<RECEIVABLES> 11,182,805
<ALLOWANCES> 333,021
<INVENTORY> 9,725,562
<CURRENT-ASSETS> 28,595,103
<PP&E> 48,398,698
<DEPRECIATION> 23,472,350
<TOTAL-ASSETS> 54,071,679
<CURRENT-LIABILITIES> 6,221,926
<BONDS> 0
0
0
<COMMON> 485,240
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 54,071,679
<SALES> 30,756,360
<TOTAL-REVENUES> 30,845,746
<CGS> 25,571,589
<TOTAL-COSTS> 29,690,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,640
<INCOME-PRETAX> 1,277,369
<INCOME-TAX> 243,165
<INCOME-CONTINUING> 738,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 738,610
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
