<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 26, 2000
Commission File No. 0-12942
PARLEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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<S> <C>
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)
</TABLE>
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 April 30, 2000 was 4,819,284 shares.
<PAGE>
PARLEX CORPORATION
On May 10, 2000, we filed a Quarterly Report on Form 10-Q with the
Securities and Exchange Commission. On May 19, 2000, we filed a Form 10-Q/A
to correct financial information presented in the pro forma condensed
consolidated results of operations data reported in Item 1 and Item 2 and to
correct other typographical errors. We have filed this Form 10-Q/A to set out
in full the Items we amended in our Form 10-Q/A filed on May 19, 2000 and to
correct other typographical errors.
INDEX
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Part I - Financial Information PAGE
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets - March 26, 2000 and June 30, 1999 ........ 3
Consolidated Statements of Income - For the Three Months
And Nine Months Ended March 26, 2000 and March 28, 1999 ............... 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended March 26, 2000 and March 28, 1999 ............................... 5
Notes to Unaudited Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations ............................................. 9
Signatures ............................................................ 15
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<PAGE>
PART I. FINANCIAL INFORMATION
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 26, 2000 and June 30, 1999
(Unaudited)
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<CAPTION>
MARCH 26, 2000 JUNE 30, 1999
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 2,209,744 $ 1,175,889
Short-term Investments ..................................... 602 1,606,953
Accounts receivable - net .................................. 19,951,980 14,053,046
Inventories:
Raw material ............................................. 6,684,160 3,746,245
Work in process .......................................... 11,856,305 7,197,212
Refundable income taxes .................................... -0- 129,790
Deferred income taxes ...................................... 559,084 559,084
Other current assets ....................................... 1,783,648 1,585,435
Total current assets ..................................... 43,045,523 30,053,654
------------ ------------
Property, plant and equipment:
Land ....................................................... 893,865 468,864
Buildings .................................................. 11,222,411 7,796,488
Machinery and equipment .................................... 44,998,561 30,756,650
Leasehold improvements and other ........................... 3,712,205 2,929,101
Construction in progress ................................... 19,095,098 13,844,489
Total .................................................... 79,922,140 55,795,592
Less accumulated depreciation and
amortization ............................................. (26,932,393) (23,915,018)
------------ ------------
Property, plant and equipment - net ...................... 52,989,747 31,880,574
------------ ------------
Other assets ................................................. 1,578,352 1,586,383
------------ ------------
Total .................................................... $ 97,613,622 $ 63,520,611
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 4,595,623 $ 619,206
Accounts payable ........................................... 10,632,917 8,080,085
Accrued liabilities ........................................ 6,166,979 2,592,655
------------ ------------
Total current liabilities ................................ 21,395,519 11,291,946
------------ ------------
Long-term debt ............................................... 19,834,863 1,631,782
------------ ------------
Other non-current liabilities ................................ 2,659,888 2,611,942
------------ ------------
Minority interest in Parlex (Shanghai) ....................... 3,600,908 2,651,711
------------ ------------
Stockholders' equity
Preferred stock ............................................ -0- -0-
Common stock ............................................... 502,909 499,115
Additional paid-in capital ................................. 24,774,263 24,568,566
Retained earnings .......................................... 25,888,582 21,288,296
Accumulated other comprehensive income ..................... (5,685) 14,878
Less treasury stock at cost ................................ (1,037,625) (1,037,625)
------------ ------------
Total Stockholders' equity ............................... $ 50,122,444 $ 45,333,230
------------ ------------
Total .................................................... $ 97,613,622 $ 63,520,611
============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
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<PAGE>
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 26, 2000 March 28, 1999 March 26, 2000 March 28, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Product sales ................................... $24,716,151 $15,747,974 $68,677,279 $46,504,334
License fees and royalties ...................... 555,000 351,021 1,343,508 440,407
---------- ---------- ---------- ----------
Total Revenues .................................. 25,271,151 16,098,995 70,020,787 46,944,741
---------- ---------- ---------- ----------
Costs and Expenses:
Cost of products sold ......................... 18,905,358 12,112,294 53,171,319 37,683,883
Selling, general and administrative expenses .. 3,129,444 2,566,873 8,761,719 6,685,571
---------- ---------- ---------- ----------
Operating costs and expenses .................. 22,034,802 14,679,167 61,933,038 44,369,454
---------- ---------- ---------- ----------
Operating income ................................ 3,236,349 1,419,828 8,087,749 2,575,287
Other income (expense) .......................... (150,529) 123,545 5,224 378,095
Interest expense ................................ (214,821) (40,079) (368,490) (172,719)
---------- ---------- ---------- ----------
Income before income taxes ...................... 2,870,999 1,503,294 7,724,483 2,780,663
Provision for income taxes ...................... (781,987) (410,000) (2,175,000) (653,165)
---------- ---------- ---------- ----------
Net income before minority interest ............. 2,089,012 1,093,294 5,549,483 2,127,498
Minority interest ............................... (384,886) (149,617) (949,197) (445,211)
--------- --------- --------- ---------
Net income $1,704,126 $ 943,677 $4,600,286 $1,682,287
========== ========= ========== ==========
Basic income per share ........................ $.35 $.20 $.96 $.36
==== ==== ==== ====
Diluted income per share ...................... $.34 $.20 $.94 $.35
==== ==== ==== ====
Weighted average shares - basic ................. 4,812,936 4,651,506 4,805,473 4,644,652
========= ========= ========= =========
Weighted average shares - diluted ............... 4,938,776 4,768,882 4,883,645 4,772,496
========= ========= ========= =========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
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<PAGE>
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Nine Months Ended
MARCH 26, 2000 MARCH 28, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
Net Income ................................................................... $ 4,600,286 $ 1,682,287
------------ ------------
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation and amortization of property, plant
and equipment and other assets .................................... 3,107,973 2,216,653
Deferred compensation ................................................. 47,945 63,350
Minority interest ..................................................... 949,198 445,211
Gain on sale of equipment ............................................. -0- (4,300)
Changes in current assets and liabilities (net of acquired business):
Accounts receivable - net .......................................... (2,619,170) (722,431)
Inventories ........................................................ (5,359,771) (562,142)
Refundable income taxes ............................................ 129,790 319,852
Other current assets ............................................... (8,404) 234,715
Accounts payable and accrued liabilities ........................... 3,506,805 690,538
------------ ------------
Total adjustments: ........................................................... (245,634) 2,681,446
------------ ------------
Net cash provided by operating activities: ..................................... 4,354,652 4,363,733
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Poly-Flex business ............................................... (20,240,000) -0-
Maturity of investments available for sale, net .............................. 1,606,351 4,010,663
Additions to property, plant and equipment ................................... (7,094,256) (10,552,483)
Decrease (increase) in other assets .......................................... 38,682 103,870
Proceeds from sale of equipment .............................................. -0- 4,300
------------ ------------
Net cash used for investment activities ........................................ (25,689,223) (6,433,650)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bank loan ......................................................... (2,660,000) (251,792)
Loan payable - Joint Venture ................................................. 761,346 (310,577)
Borrowings under revolving credit loan ....................................... 9,339,589 -0-
Borrowings under term loan ................................................... 15,000,000 -0-
Payments of other long-term debt ............................................. (261,437) -0-
Exercise of stock options .................................................... 209,491 67,609
------------ ------------
Net cash provided by (used for) financing activities ........................... 22,388,989 (494,760)
------------ ------------
Effect of exchange rate changes on cash ........................................ (20,563) 699
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 1,033,855 (2,563,978)
Cash and cash equivalents, beginning of year ................................... 1,175,889 5,824,233
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 2,209,744 $ 3,260,255
============ ============
</TABLE>
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<PAGE>
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 March 26, 2000 and the results of operations and
cash flows for the three months and nine months ended March 26, 2000 and March
28, 1999. 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, 1999, and this filing should be read in
conjunction with that annual report.
2. OTHER SIGNIFICANT ACCOUNTING POLICIES
(a) AMORTIZATION ON INVESTMENTS AVAILABLE FOR SALE:
The Company, when investing in bonds purchased at a premium,
amortizes the premium from the date of purchase to the maturity
date.
(b) IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less cost to sell.
3. COMPREHENSIVE INCOME
Comprehensive income for the three months and nine months ended March
26, 2000 and March 28, 1999 is as follows:
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<CAPTION>
Third Quarter Nine Months
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income ........................................... $ 1,704,126 $ 943,677 $ 4,600,286 $ 1,682,287
Other Comprehensive Income:
Unrealized loss on short term investments .......... -0- (8,989) (1,886) (18,645)
Cumulative translation adjustments ................. 513 300 (18,677) 699
Total comprehensive income ........................... $ 1,704,639 $ 934,988 $ 4,579,723 $ 1,664,341
=========== =========== =========== ===========
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The accumulated other comprehensive income balance is as follows:
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<CAPTION>
Unrealized gains
(losses) on Cumulative Trans-
SHORT TERM INVESTMENTS LATION ADJUSTMENTS TOTAL
<S> <C> <C> <C>
Beginning Balance ................. $ 1,886 $ 12,992 $ 14,878
Current Period Change ............. (1,886) (18,677) (20,563)
-------- -------- --------
Ending Balance .................... -0- ($ 5,685) ($ 5,685)
======== ======== ========
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4. POLY-FLEX ACQUISITION
On March 1, 2000, the Company acquired the businesses of Poly-Flex
Circuits, Inc. and Poly-Flex Circuits, Limited (collectively "Poly-Flex").
Poly-Flex is engaged in the manufacture of polymer thick film, flexible
circuits and flexible interconnect assemblies. The acquisition was accounted
for using the purchase method of accounting. A preliminary allocation of
purchase price has been made to the assets acquired, principally inventory,
accounts receivable and property, plant and equipment, and the liabilities
assumed based on their estimated fair values at the date of acquisition.
Approximately $120,000 representing a preliminary allocation of purchase
price over the estimated fair value of net assets acquired has been recorded
as goodwill and will be amortized over a 10 year period. The Company is in
the process of obtaining appraisals on certain of the assets acquired. The
excess of purchase price over estimated fair value will be adjusted based on
the results of such appraisals.
The Company paid in cash at closing $19,650,000 and, as of March 26,
2000, has incurred approximately $430,000 of an estimated $600,000 of
transaction related costs for the acquisition. The purchase was financed
through borrowings from two new credit facilities, which consist of a $15.0
million revolving line of credit and a $15.0 million term loan.
The results of operations of the Poly-Flex business from March 1,
2000 through March 26, 2000 are included in the consolidated financial
statements for the quarter and nine months ended March 26, 2000. Net sales
for this period totaled $1,821,000 representing 7% and 3% of the quarter and
nine months ended March 26, 2000 sales, respectively.
This acquisition further diversified our product offerings by
providing us with polymer thick film and surface mount assembly capabilities.
Poly-Flex has manufacturing facilities in Cranston, Rhode Island and the
United Kingdom.
PRO-FORMA CONDENSED CONSOLIDATED RESULTS OF OPERATIONS. The
following unaudited pro forma summary presents the condensed consolidated
results of operations as if the Poly-Flex acquisition had occurred at the
beginning of the periods presented after giving effect to certain
adjustments, including changes in depreciation and interest expense on the
acquisition debt. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made as of July 1, 1998 or of results,
which may occur in the future.
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<CAPTION>
Nine Months Ended
March 26, 2000 March 28, 1999
(Unaudited)(1,2) (Unaudited)(1,3)
-------------- -----------------
<S> <C> <C>
Revenue $85,090 $66,123
Net Income 3,568 1,824
Earnings per share - basic .74 .39
Earnings per share - diluted .73 .38
Weighted average shares - basic 4,805 4,645
Weighted average shares - diluted 4,884 4,772
</TABLE>
1) Pro forma to give effect to the Poly-Flex acquisition and related debt
as if it had occurred at the beginning of Parlex's fiscal year.
2) Includes additional interest expense of $651,000 and depreciation of
$352,000, net of an income tax benefit of $401,000. This results in a net
income per share decrease of $0.16 basic and $0.15 diluted. Independently,
Poly-Flex reported net loss of ($379,000) for the nine months ended March
26, 2000 resulting in a net income per share decrease of $0.06 and $0.06
for basic and diluted shares, respectively. These two factors, combined,
result in an overall decrease of $.22 and $.21 earnings per share.
3) Includes additional interest expense of $638,000 and depreciation of
$352,000, net of an income tax benefit of $396,000. This results in a net
income per share decrease of $0.17 basic and $0.17 diluted. Independently,
Poly-Flex reported net income of $736,000 for the nine months ended March
28, 1999 resulting in a net income per share increase of $0.20 and $0.20
for basic and diluted shares, respectively. These two factors, combined,
result in an overall increase of $.03 earnings per share.
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<PAGE>
5. REVOLVER LOAN AND TERM LOAN AGREEMENTS
On March 1, 2000 we entered into a new credit facility consisting
of a $15.0 million revolving line of credit and a $15.0 million term loan,
each subject to a right of setoff that our lender has against our deposits or
other property in its possession or control. We borrowed approximately $19.6
million in connection with our Poly-Flex acquisition. Borrowings under both
the revolving line of credit and the term loan bear interest at either our
lender's prime rate (9.0% at March 26, 2000) or LIBOR (6.18% at March 26,
2000) plus a margin that varies from 1.5% to 2.0%. As of March 26, 2000, we
had borrowed $15.0 million under the term loan and $7.4 million under our
revolving line of credit facility. No further advances of principal will be
made under this credit facility after December 31, 2001. We are required to
repay our revolving line of credit borrowing in forty-five equal monthly
installments, the first being due on January 1, 2002, and our term loan in
twenty quarterly installments of $750,000, the first being due on June 1,
2000. We must also pay, quarterly in arrears and commencing on June 1, 2000,
a fee of one-quarter of one percent per annum on the unused portion of our
revolving line of credit. Our credit facility requires compliance with a
number of covenants, including restrictions on payment of dividends, making
of loans, investment in securities and changes in control, and financial
covenants.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued Statement of Financial Accounting
Standards, of SFAS, No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments
embedded in other contract and for hedging activities. We will adopt SFAS No.
133 during fiscal 2001. We have not completed an evaluation of the effect of
adopting SFAS No. 133 on our consolidated financial position, results of
operations and financial statement disclosures.
7. LOAN AGREEMENTS - PARLEX (SHANGHAI)
USD Installment Loan - The Chinese joint venture has an installment
bank loan face amount of $1,000,000, of which $360,000 is outstanding at
March 31, 2000. Payments are due quarterly (in varying amounts), with
interest payable monthly at 9%. The loan is due December 31, 2000. The note
is unsecured but guaranteed by each of the partners in direct proportion to
their respective interests in the joint venture.
RMB Term Loan - The Chinese joint venture also has an RMB (Functional
Currency) loan, face amount of $850,000, all due September 30, 2000. The
interest is payable at 7.2% p.a. The loan is unsecured but guaranteed by each
of the partners in direct proportion to their respective interests in the
joint venture.
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<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the
financial information included in this Quarterly Report on Form 10-Q. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
contemplated by these forward-looking statements as a result of many factors,
including those discussed below and elsewhere in this Quarterly Report on Form
10-Q.
OVERVIEW
We are a leading supplier of flexible interconnects principally for
sale to the automotive, telecommunications and networking, diversified
electronics, aerospace and computer markets. We believe that our development of
innovative materials and processes provides us with a competitive advantage in
the markets in which we compete. During the past three years, we have invested
approximately $23.9 million in property and equipment and approximately $9.6
million in research and development to develop materials and enhance our
manufacturing processes. We believe that these expenditures will help us to meet
increased customer demand for our products, and enable us to continue to be a
technological leader in the flexible interconnect industry. Our research and
development expenses are included in our cost of products sold.
RECENT ACQUISITIONS
On April 30, 1999, we acquired the Dynaflex division of CCIR of
California Corp., an indirect wholly-owned subsidiary of Hadco Corporation, for
approximately $2.7 million. Dynaflex, located in San Jose, California, is a
prototype and quick-turn facility. This acquisition gives us a West Coast
presence and a greatly improved rapid prototype and quick-turnaround capability.
Quick-turnaround capability permits production of a small number of flexible
interconnects upon short notice. This service often leads to large volume orders
at our other manufacturing facilities.
On March 1, 2000, the Company acquired the businesses of Poly-Flex
Circuits, Inc. and Poly-Flex Circuits, Limited (collectively "Poly-Flex").
Poly-Flex is engaged in the manufacture of polymer thick film, flexible circuits
and flexible interconnect assemblies. The acquisition was accounted for using
the purchase method of accounting. A preliminary allocation of purchase price
has been made to the assets acquired, principally inventory, accounts receivable
and property, plant and equipment, and the liabilities assumed based on their
estimated fair values at the date of acquisition. Approximately $120,000
representing a preliminary allocation of purchase price over the estimated fair
value of net assets acquired has been recorded as goodwill and will be amortized
over a 10 year period. The Company is in the process of obtaining appraisals on
certain of the assets acquired. The excess of purchase price over estimated fair
value may be adjusted based on the results of such appraisals.
The Company paid in cash at closing $19,640,000 plus $430,000 of an
estimated $600,000 of transaction related costs for the acquisition. The
purchase was financed through $20,000,000 in borrowings from a new credit
facility, which consists of $15.0 million revolving line of credit and a $15.0
million term loan.
The results of operations of the Poly-Flex business from March 1, 2000
through March 26, 2000 are included in the consolidated financial statements for
the quarter and nine months ended March 26, 2000. Net sales for this period
totaled $1,821,000 representing approximately 7.2% and 3% of the quarter and
nine months ended March 26, 2000 sales, respectively.
-9-
<PAGE>
This acquisition further diversified our product offerings by providing
us with polymer thick film and surface mount assembly capabilities. Poly-Flex
has manufacturing facilities in Cranston, Rhode Island and the United Kingdom.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
items in our statements of income as a percentage of total revenue. You
should read the table and the discussion below in conjunction with our
Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 26, 2000 March 28, 1999 March 26, 2000 March 28, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of products sold 74.8% 75.2% 75.9% 80.3%
----- ----- ----- -----
Gross profit 25.2% 24.8% 24.1% 19.7%
Selling, general and
administrative expenses 12.4% 15.9% 12.5% 14.2%
----- ----- ----- -----
Operating income 12.8% 8.9% 11.6% 5.5%
Income from operations before
income taxes and minority
interest 11.4% 9.3% 11.0% 5.9%
Net income 6.7% 5.9% 6.6% 3.6%
===== ===== ===== ====
</TABLE>
THREE MONTHS ENDED MARCH 26, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 28,
1999
TOTAL REVENUES. Our total revenues were $25.3 million in the three
months ended March 26, 2000, an increase of 57% from $16.1 million in the three
months ended March 28, 1999. Revenues were generated primarily from product
sales. The increase in total revenues was attributable to an increase in the
volume of units shipped from each of our various locations. The revenues also
included some shipments in March 2000 from Poly-Flex. Sales were strong in all
markets, with the largest growth coming from the telecommunications and
networking sector. We also benefited from an increase in demand in the aerospace
sector.
COST OF PRODUCTS SOLD. Cost of products sold was $18.9 million, or 75%
of total revenues, for the three months ended March 26, 2000, versus $12.1
million, or 75% of total revenues for the comparable period in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3.1 million, or 12% of total revenues, for the
three months ended March 26, 2000, and $2.6 million for the comparable period
in the prior year, or 16% of total revenues for that period. The increase in
expenses resulted primarily from the inclusion of the Dynaflex operations,
which we purchased in April 1999, an increase in sales commissions associated
with increased sales, and the inclusion of the March expenses of Poly-Flex,
acquired by the Company in March 2000.
OTHER INCOME, INTEREST EXPENSE, AND PROVISION FOR INCOME TAXES.
Other expenses in the current quarter totaled $150,529 while the Company
recognized other income of $123,545 for the same quarter last year. The
change is due to lower interest income which results from the Company's lower
cash and investment balances as well as expenses incurred this quarter which
did not occur in the quarter of the previous year.
Interest expense was $215,000 for the three months ended March 26,
2000, compared to $40,000 for the comparable period in the prior year. The
increase was due to the larger amount of borrowings required to finance our
Poly-Flex acquisition and our increased working capital requirements and capital
expenditure needs.
Our income before provision for income taxes and for the minority
interest in our Chinese joint venture, Parlex Shanghai, was $2.9 million for
the three months ended March 26, 2000, an increase of 91% from $1.5 million
for the three months ended March 28, 1999. We own 50.1% of the equity
interest in Parlex Shanghai and, accordingly, include Parlex Shanghai's
results of operations, cash flows and financial position in our consolidated
financial statements.
We provided for an effective tax rate of approximately 27% in the three
months ended March 26, 2000, versus a 27% effective tax rate for the comparable
period in the prior year.
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<PAGE>
Our income after provision for income taxes and for the minority
interest in Parlex Shanghai was $1.7 million for the three months ended March
26, 2000, an increase of 80% from $944,000 for the three months ended March
28, 1999.
NINE MONTHS ENDED MARCH 26, 2000 COMPARED WITH NINE MONTHS ENDED MARCH 28, 1999
TOTAL REVENUES. Our total revenues were $70.0 million in the nine
months ended March 26, 2000, an increase of 49% from $46.9 million in the
nine months ended March 28, 1999. Revenues were generated primarily from
product sales. The revenues also included March shipments of Poly-Flex, the
business acquired by the Company in March, 2000. Revenues grew in each of our
principal product lines--flexible circuits, laminated cable, flexible
interconnect hybrid circuits and flexible interconnect assemblies. Sales were
strong in all markets, with the largest growth coming from the
telecommunications and networking sector.
COST OF PRODUCTS SOLD. Cost of products sold was $53.2 million, or 76%
of total revenues, for the nine months ended March 26, 2000, versus $37.7
million, or 80% of total revenues for the comparable period in the prior year.
Our gross margins improved as a result of various factors, including the shift
of more automotive products to our proprietary PALFlex(R) technology, which can
produce a higher performance flexible circuit at a cost lower than using
conventional materials. A greater percentage of shipments were sophisticated
multilayer technology, which traditionally provide higher margins. We also sent
more product to our facility in Mexico for its cost-effective finishing and
assembly processes. Dynaflex satisfied our customers' prototype demands,
allowing other facilities to concentrate on larger production orders, which
contributed to enhanced operating efficiency. Dynaflex did not operate at a
profitable level but we do not consider its losses for the nine-month period
ended March 26, 2000 material to our overall results. In addition, during the
nine months ended March 28, 1999, we incurred substantial costs associated with
the start up of our Mexican facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $8.8 million, or 13% of total revenues, for the
first nine months of fiscal 2000, and $6.7 million for the comparable period
in the prior year, or 14% of total revenues for that period. The increase in
expenses resulted primarily from the inclusion of the Dynaflex operations,
which we purchased in April 1999, an increase in sales commissions associated
with increased sales, the March expenses of Poly-Flex, acquired in March,
2000, and an increase in our 401(k) contributions.
OTHER INCOME AND INTEREST EXPENSE AND PROVISION FOR INCOME TAXES.
Other income was $5,000 for first nine months of fiscal 2000, compared to
$378,000 for the comparable period in the prior year.
Interest expense was $368,000 for the first nine months of fiscal 2000,
compared to $173,000 for the comparable period in the prior year. The increase
was due to the larger amount of borrowings required to finance our Poly-Flex
acquisition and our increased working capital requirements and capital
expenditure needs.
Our income before provision for income taxes and for the minority
interest in Parlex Shanghai was $7.7 million for the nine months ended March
26, 2000, an increase of 178% from $2.8 million for the nine months ended
March 28, 1999.
We provided for an effective tax rate of nearly 28% in the first nine
months of fiscal 2000, versus a 23% effective tax rate for the comparable period
in the prior year. The increase in the anticipated effective tax rate resulted
from a reduced amount of available tax credits and a greater proportion of our
income being earned in higher tax jurisdictions.
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<PAGE>
Our income after provision for income taxes and our minority interest
in Parlex Shanghai was $4.6 million for the nine months ended March 26, 2000, an
increase of 173% from $1.7 million for the nine months ended March 28, 1999.
PRO-FORMA CONDENSED CONSOLIDATED RESULTS OF OPERATIONS. The
following unaudited pro forma summary presents the condensed consolidated
results of operations as if the Poly-Flex acquisition had occurred at the
beginning of the periods presented after giving effect to certain
adjustments, including changes in depreciation and interest expense on the
acquisition debt. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made as of July 1, 1998 or of results
which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
March 26, 2000 March 28, 1999
(000'S except per share data)
<S> <C> <C>
Revenue .............................. $85,090 $66,123
Net Income ........................... 3,568 1,824
Earnings per share - basic ........... .74 .39
Earnings per share - diluted ......... .73 .38
Weighted average shares - basic ...... 4,805 4,645
Weighted average shares - diluted .... 4,884 4,772
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 26, 2000, the Company has cash on hand of approximately
$2,210,000.
For the first nine months, the Company had net income of $4,600,000,
and non-cash items totalling $4,105,000, which, in the aggregate amounted to
$8,705,000. These monies, together with $1,606,000 from maturity of
investments and $209,000 from the exercise of stock options, accounted for
approximately $10,520,000 in receipts. In addition, the Company, for the
first nine months, borrowed approximately $25,101,000 to meet its obligations
and increase its cash position by approximately $1,000,000. These funds were
used to purchase Poly-Flex for $19,650,000 plus approximately $430,000 of
transaction related costs for the acquisition, additional working capital
requirements of $4,350,000, finance capital expenditures of $7,094,000, and
pay debt of $2,921,000.
On March 1, 2000 we entered into two new credit facilities
consisting of a $15.0 million revolving line of credit and a $15.0 million
term loan, each subject to a right of setoff that our lender has against our
deposits or other property in its possession or control. We borrowed
approximately $20 million in connection with our Poly-Flex acquisition.
Borrowings under both the revolving line of credit and the term loan bear
interest at either our lender's prime rate (9.0% at March 26, 2000) or LIBOR
(6.18% at March 26, 2000) plus a margin that varies from 1.5% to 2.0%. As of
March 26, 2000, we had borrowed $15.0 million under the term loan and $7.4
million under our revolving line of credit facility. No further advances of
principal will be made under the revolving credit facility after December 31,
2001. We are required to pay our revolving line of
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<PAGE>
credit borrowing in forty-five equal monthly installments, the first being due
on January 1, 2002, and our term loan in twenty quarterly installments of
$750,000, the first being due on June 1, 2000. We must also pay quarterly in
arrears and commencing on June 1, 2000, a fee of one-quarter of one percent per
annum on the unused portion of our revolving line of credit. Our credit facility
requires compliance with a number of covenants, including restrictions on
payment of dividends, making of loans, investment in securities and changes in
control, and financial covenants.
We have filed a registration statement with the Securities and
Exchange Commission for a common stock offering of 1,250,000 shares by us and
150,000 shares by selling stockholders. Our underwriters have an option to
purchase up to an additional 210,000 shares from us to cover overallotments.
We intend to use the proceeds from this offering to pay off approximately
$22.4 million of debt, including approximately $20 million that we borrowed
in connection with our acquisition of Poly-Flex. We can, however, give no
assurance that we will complete this offering. If we do not complete this
offering, we expect our interest expenses to increase due to the increased
amount of our long-term debt.
We believe that our cash on hand, our anticipated cash flow from
operations, and the amount available under our revolving credit facility should
be sufficient to meet our anticipated needs for at least the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities. We will adopt SFAS No. 133 during fiscal
2001. We have not completed an evaluation of the effects of adopting SFAS No.
133 on our consolidated financial position, results of operations and financial
statement disclosures.
MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
We are exposed to market risks, which include changes in U.S. and
foreign interest rates and fluctuations in exchange rates.
We also have a revolving credit line and a term loan that bears interest, at our
choice, at our lender's prime rate or LIBOR plus a margin that varies from 1.5%
to 2.0%. Both the prime and LIBOR rates are affected by changes in market
interest rates. We owed approximately $22.4 million as of March 26, 2000. We
have the option to repay borrowings at anytime without penalty, other than
breakage fees in the case of prepayment of LIBOR rate borrowings, and therefore
believe that our market risk is not material.
The remainder of our long-term debt bears interest at fixed rates and
is therefore not subject to market risk.
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<PAGE>
Sales of Parlex Shanghai and Poly-Flex Circuits Limited are typically
denominated in the local currency, which is Parlex Shanghai's and Poly-Flex
Circuits Limited's functional currency. This creates exposure to changes in
exchange rates. The changes in the Chinese/U.S. and U.K./U.S. exchange rate may
positively or negatively impact our sales, gross margins and retained earnings.
Based upon the current volume of transactions in China and the United Kingdom
and the stable nature of the exchange rate between China and the U.S. and the
United Kingdom and the U.S., we do not believe the market risk is material. We
do not engage in regular hedging activities to minimize the impact of foreign
currency fluctuations. Parlex Shanghai had net assets as of December 26, 1999,
which are reported in our financial statements for the quarter ended March 26,
2000, of approximately $7.2 million. Poly-Flex Circuits Limited had net assets
as of March 26, 2000 of approximately $4.7 million. We believe that a 10%
change in exchange rates would not have a significant impact upon Parlex
Shanghai's or Poly-Flex Circuits Limited's financial position, results of
operation or outstanding debt. As of December 26, 1999, Parlex Shanghai had
outstanding debt of $1.3million. As of March 26, 2000, Poly-Flex Circuits
Limited had no outstanding debt.
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. Our actual results of
operations may differ significantly from those contemplated by such
forward-looking statements as a result of various risk factors beyond our
control, including, but not limited to, economic conditions in the electronics
industry, particularly in the principal industry sectors we serve, changes in
customer requirements and in the volume of sales to principal customers,
competition and technological change.
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<PAGE>
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/ Robert A. Rieth
-----------------------------------------
Robert A. Rieth
Vice President and CFO
(Principal Accounting and Financial Officer)
5/23/2000
--------------------------------------------
Date
