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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2003
[ ] 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
Massachusetts 04-2464749
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Parlex Place, Methuen, Massachusetts 01844
(Address of Principal Executive Offices, Zip Code)
978-685-4341
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Common Stock ($.10 par value) NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 27, 2002 was approximately $31,070,863.
The number of shares outstanding of the registrant's common stock as of
October 7, 2003 was 6,312,216 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.
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1
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
PAGE
PART 1
ITEM 1. Business 3
ITEM 2. Properties 14
ITEM 3. Legal Proceedings 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
ITEM 6. Selected Consolidated Financial Data 16
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 38
ITEM 8. Financial Statements and Supplementary Data 39
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 40
ITEM 9A. Controls and Procedures 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant 40
ITEM 11. Executive Compensation 40
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 40
ITEM 13. Certain Relationships and Related Transactions 41
ITEM 14. Principal Accountant Fees and Services 41
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 41
SIGNATURES 43
2
FORWARD-LOOKING STATEMENTS
This document includes and incorporates forward-looking statements that are
subject to a number of risks and uncertainties. All statements, other than
statements of historical facts included or incorporated in this document,
regarding our strategy, future operations, financial position and estimated
revenues, projected costs, prospects, plans and objectives of management are
forward-looking statements. When used in this document, the words "will,"
"believe," "anticipate," "intend," "estimate," "expect," "project" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
We cannot guarantee future results, levels of activity, performance or
achievements and you should not place undue reliance on our forward-looking
statements. Our forward-looking statements do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
strategic investments. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various
factors, including the risks described in the section of this report entitled
"Factors that May Affect Future Results" and elsewhere in this document.
PART I
Item 1. Business
- ----------------
Overview
We believe that we are a leading provider of flexible interconnect solutions
to the automotive, telecommunications and networking, diversified
electronics, military, home appliance, electronic identification and computer
markets. Our product offerings, which we believe are the broadest of any
company in the flexible interconnect industry, include flexible circuits,
laminated cable, flexible interconnect hybrid circuits, and flexible
interconnect assemblies.
Our objective is to be the supplier of choice for key customers in markets
where cost-effective flexible interconnects provide added value to our
customers' products. We believe that our creative engineering expertise, our
ability to advance the technology of manufacturing processes and materials
and our broad product portfolio allow us to provide a low cost solution that
meets the performance requirements of our customers.
We have a long history of providing flexible interconnect solutions to some
of the leading original equipment manufacturers, or OEMs, in our target
markets, including Hewlett-Packard, Raytheon, Motorola, Dell Computer,
Siemens, and Whirlpool. We also supply these products to major electronic
manufacturing services companies such as Flextronics, Solectron, Sanmina, and
JABIL. We have a global presence and operate six manufacturing facilities,
which are located in China, Mexico, the United Kingdom and the United States.
Certain information related to revenues derived by geographic location, major
customers and product lines is included in Note 16 of our financial
statements and is incorporated herewith by reference.
Industry Background
Over the past two decades, electronic systems have become smaller, lighter
and more complex, while demands for increased performance at lower costs have
increased dramatically. The demand for more portable electronic packaging has
also increased. As two-dimensional rigid printed circuit boards, a
conventional form of electronic interconnect packaging, limit the options
available to design engineers, the demand for three-dimensional, flexible
interconnect solutions has increased. In addition to their improved packaging
and performance characteristics, they offer superior heat dissipation
characteristics compared to conventional circuits, making flexible
interconnects attractive for use in advanced, high-speed electronics.
According to the NTI Quarterly Newsletter (published by N.T. Information
Ltd.) for the 2nd Quarter 2003, a technology consulting firm, the market size
for flexible circuits was approximately $4.7 billion in 2002 and is expected
to grow to $5.2 billion by 2004.
3
Flexible interconnects provide an electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic devices. Flexible interconnects offer several
advantages over rigid printed circuit boards and ceramic hybrid circuits,
particularly for small, complex electronic systems:
* Their ability to physically bend or flex and their three-dimensional
shape permit them to accommodate packaging contours and motion in a
manner that traditional two-dimensional rigid printed circuit boards
cannot;
* They provide improved heat dissipation and signal integrity as compared
to printed circuit boards; and
* They permit the use of substrates for component attachment, as well as
connectors, cables and other interconnection devices, with reduced size,
weight and expense.
We consider the following trends important in understanding the flexible
interconnect industry:
Miniaturization, Portability and Complexity of Electronic Products
High-performance electronic products, such as mobile communications devices
including cellular phones, laptop computers and personal digital assistants,
continue to become more compact, portable and contain greater functionality.
The complexity of these new products requires flexible interconnects with
smaller size, lighter weight, greater circuit and component density, better
heat dissipation properties, higher frequencies and increased reliability. As
electronic products become increasingly sophisticated, electronic
interconnect suppliers will require greater engineering expertise and
investment in manufacturing and process technology to produce high-quality
electronic interconnect products on time, in volume and at acceptable cost.
Shorter Product Life Cycles and Time-to-Market Pressure
Rapid technological advances have significantly shortened the life cycle of
complex electronic products and increased pressure to develop and introduce
new products quickly. These time-to-market challenges have in turn increased
OEMs' emphasis on the development, design, engineering, prototype development
and ramp-to-volume capabilities of their suppliers.
Globalization and Reduction of Manufacturing Costs
Customers continue to demand increased electronic performance at lower
prices. Leading OEMs who often manufacture products in multiple geographic
regions are relying more on suppliers with global sourcing capabilities.
Local sourcing can help to shorten the manufacturer's supply chain and
provide regionally competitive pricing. OEMs also increasingly demand that
their suppliers provide infrastructure for local delivery of engineering,
manufacturing and sales support.
Increased Outsourcing
To avoid delays in new product introductions, reduce manufacturing costs and
avoid logistical complexities, OEMs are increasingly turning to suppliers
capable of producing electronic interconnect products from development,
design, quick-turn prototype and pre-production through volume production and
assembly. The accelerated time-to-market and ramp-to-volume needs of
manufacturers have resulted in increased collaboration with qualified
suppliers capable of providing a broad and integrated offering. Many OEMs now
seek to use a small number of technically qualified, strategically located
suppliers capable of providing both quick-turn prototype and pre-production
quantities as well as cost-competitive volume production quantities.
4
Our Solution
We combine creative engineering design capabilities with innovative
manufacturing processes and materials to provide our customers with a
complete and cost-effective flexible interconnect solution. We believe that
our processes and technologies allow us to produce superior flexible
interconnect solutions at a competitive cost. In addition, because we are
able to produce a broad range of flexible interconnects ranging from low-cost
laminated cable to more expensive high-performance multi-layer and rigid-
flexible interconnects, we are able to provide our customers with a product
that most efficiently meets their demands for functionality.
Our solution begins with the product design phase in which our engineers
typically work closely with customers to develop a technically advanced
flexible interconnect design. Although our customers generally provide the
initial engineering guidelines for a particular interconnect, our design
engineers are often called upon to work in tandem with a customer's design
team to develop a solution. An important part of the Parlex solution is
ensuring at an early stage, before time and money are spent on manufacturing,
that the design can be produced efficiently and cost-effectively.
Once the design is completed, we apply our experience with materials and
manufacturing processes to produce a flexible interconnect solution that
meets our customer's objectives. We have developed materials and processes
that provide customers improved performance at a competitive production cost.
In addition, we provide a dedicated quick-turn capability for producing
prototype flexible interconnects and supporting our customers' needs for
limited quantities of flexible interconnects on short notice. We believe that
we are one of the few volume manufacturers of flexible interconnects to offer
this valuable service in a dedicated facility. When customers come to us for
prototype development of a flexible interconnect, we believe that we enjoy a
competitive advantage in pursuing the subsequent volume production of that
flexible interconnect. Over the past several years we have gained substantial
experience in producing products in high volume, and we believe this
expertise is a key factor in our ability to provide customers with cost-
effective, flexible interconnect solutions.
We believe that our capability to supply worldwide a broad range of products
with a diverse mix of performance characteristics will enable us to capture
additional market share in the flexible interconnect industry. We are one of
a limited number of independent manufacturers that offers a range of flexible
interconnect solutions from design concept through high-volume production. By
offering a variety of products and services, we can provide design and
manufacturing solutions for our customers while reducing their time-to-market
and product development costs.
Our Strategy
Our objective is to be the flexible interconnect supplier of choice for
customers in our target markets. Our strategy to achieve this objective
includes the following key elements:
Develop Innovative Processes and Materials
We believe that our ability to develop innovative processes and materials
enhances our opportunity for growth within our target markets. We intend to
continue to focus our development efforts on proprietary flexible materials
and processes that have a broad range of applications. These materials and
processes enable us to produce, at reduced cycle times, cost-effective
flexible interconnects that are reliable and improve product performance. Our
PALFlex(R), PALCoat(R), U-Flex(R), PALCore(R) HP, Polysolder(R) and
AutoNet(TM) technologies are examples of some of our innovative materials and
manufacturing processes.
Offer the Broadest Range of Products and Services in the Flexible
Interconnect Industry
We offer product lines that service virtually all of our customers' flexible
interconnect needs. We are not aware of another company in the flexible
interconnect industry that provides a broader range of products and services.
Our product line includes flexible and rigid-flexible circuits from 1 to 24
layers, laminated
5
cable, flexible interconnect hybrid circuits, flexible interconnect
assemblies and, surface mount assembly capabilities. We offer products using
a variety of materials, including adhesiveless and adhesive-based polyimide,
polyester, and polymer thick film technologies. We believe this wide product
range enables us to remain the flexible interconnect supplier of choice to
customers even when their functional requirements change.
Develop Strategic Relationships with Key Customers
We seek to develop strategic relationships with key customers in targeted
industries. As a value-added strategic partner with our customers, we work
with a customer's technology roadmap to design and develop cost-effective
flexible interconnect solutions. We believe that these relationships are most
effective when we provide a significant portion of a customer's flexible
interconnect needs. Through these strategic relationships, we achieve greater
visibility into our customers' entire range of flexible interconnect
requirements. As a result of our relationships with key customers, we
developed PALFlex(R), PALCore(R), PALCore(R) HP, PALCoat(R), and HSI+(R) with
the knowledge that successful development would result in immediate market
acceptance.
Diversify Customer Base across Specific Target Markets
We seek to serve a variety of markets to help mitigate the effects of
economic cycles in any one industry. We believe our diversification among the
major segments provides greater insight into emerging technological
requirements. For example, we applied our proprietary knowledge of shielding
and impedance control which was developed for the laptop computer market to
gain a competitive advantage in the telecommunications and networking market.
Expand Global Presence
We believe that our customers will increasingly require service and support
on a global basis. To address these requirements, we have continued to expand
our global presence in emerging markets and throughout the world. We now have
facilities in Asia, Europe, and the east and west coasts of North America. In
1995 we established a joint venture in China, Parlex (Shanghai) Circuit Co.,
Ltd. ("Parlex Shanghai"), to serve the emerging flexible circuit market
throughout Asia and to produce specific products more cost-effectively for
North America's customers. In May 1998, we leased a facility in Mexico that
performs the finishing and, in some instances, assembly operations for
flexible interconnects manufactured at our other facilities. In April 1999,
we purchased a business in San Jose, California to produce low to medium
volumes of flexible circuits and provide our customers with quick-turn and
prototyping services. This facility also supports several customers who use
Parlex Shanghai for high volume production. In addition, we have developed,
and plan to continue to develop, strategic relationships and alliances that
we believe are necessary for the success of our international business. In
March 2000, we acquired Poly-Flex which has manufacturing facilities in Rhode
Island and the United Kingdom. We believe these transactions have positioned
us to further expand our sales presence in Asia and Europe. We will continue
to explore appropriate expansion opportunities as demand for our solutions
increases.
The additional expenses and risks related to our existing international
operations, as well as any expansion of our global operations, could
adversely affect our business. See "Factors That May Affect Future Results"
within Item 7 of the "Management Discussion and Analysis of Financial
Condition and Results of Operations" section of this document for a
discussion of the inherent risks associated with our international
operations.
Our Markets
Flexible interconnects are used in most segments of the electronics industry.
The primary market segments that place high value on superior, cost-effective
flexible interconnect solutions include:
6
Automotive
Automobile manufacturers increasingly use electronics to enhance vehicle
performance and functionality, while at the same time reducing electronic
component size, weight and manufacturing and assembly costs. Flexible
circuits and laminated cable can provide cost-effective interconnect
solutions for such applications as dashboard instrumentation, automotive
entertainment systems, electronic engine control units, steering wheel
controls, power distribution, sensors and anti-lock brakes. Providers of
flexible interconnects typically work closely with the companies that supply
these electronic systems to the vehicle manufacturers. Because automotive
production cycles generally last three to five years and designs are unlikely
to change during that period, a flexible interconnect that is designed into
an automobile model or platform provides a relatively predictable source of
demand over an extended time period.
Telecommunications and Networking
The telecommunications and networking market includes infrastructure
equipment and subscriber equipment sub-markets. Infrastructure equipment
consists of support electronics for the distribution of voice and data
transmission. Infrastructure equipment employs sophisticated electronics
which usually require the use of complex flexible interconnects. Subscriber
equipment consists of cellular devices such as handsets and battery
assemblies. Tight packaging and the need to reduce weight have driven the
demand for flexible interconnects in this sub-market. Laminated cable and
single and double-sided flexible circuits are generally used in subscriber
equipment.
Diversified Electronics
The diversified electronics market, which we define to include medical
electronics, encompasses many applications. Virtually any electronic device
which requires tight packaging, lightweight or high reliability is a product
that could incorporate flexible interconnects. Typical applications include
electronic scales, industrial controls, metering devices, scanners, sensors
and medical monitoring and testing equipment.
Military
Military electronics were at one time the primary applications for flexible
circuitry. Because of product complexity and space restrictions, military
applications often require multi-layer rigid-flexible circuits. Typical
applications are navigation systems, flight controls, displays,
communications equipment and munitions. We believe that procurement of
flexible interconnects in this market will experience growth. We believe that
the trend toward "smart" military systems will continue to drive demand for
flexible interconnects in this segment.
Home Appliance
The home appliance market is beginning to make the transition from electro-
mechanical controls to electronic controls containing intelligence and
display. Over time, appliances are expected to become more technologically
advanced. The utility and ease of use and repair associated with flexible
interconnects make them especially suitable for these applications. Our
primary application today is the dishwasher market but we have targeted the
range and laundry markets for growth.
Electronic Identification
The emerging identification and tracking market is based upon next generation
identification tags, which in some cases are attached to an antenna, emitting
radio frequency signals. Advancing technology at lower prices, increasing
cooperation among industry participants and high volume applications such as
automated fuel payment, ATM and credit cards, electronic ticketing, baggage
handling and parcel tracking are expected to be the growth drivers for this
market. The size, cost and performance requirements demanded by this market
are expected to drive the use of flexible circuits and assemblies in these
applications. In 2002, we entered into a multiyear agreement to provide
substrates for a major producer of smart cards utilizing our
7
proprietary technology. This agreement has not produced significant revenues,
and is not forecasted to provide significant revenues until fiscal 2005. We
remain optimistic as to the potential for significant revenues from this new
market in future periods, but can provide no reasonable assurance that
significant revenues will be realized.
Computer
Demand for flexible circuits and laminated cable in the computer market is
driven by short product life cycles as consumers demand increasingly
powerful, less expensive, smaller, faster and lighter equipment. Disk drives
represent the largest application for flexible circuits in this market. Other
applications include personal computers, notebook displays, personal digital
assistants, mass storage devices and peripheral equipment such as scanners,
printers and docking stations.
Our Products
Our current flexible interconnect products include flexible circuits,
laminated cable, flexible interconnect hybrid circuits and flexible
interconnect assemblies. We manufacture our products, which are designed by
us, our customers or jointly, to our customers' application-specific
requirements. Lead times for the design and manufacture of our products
generally range from one week for some products to three months for more
sophisticated products.
Flexible Circuits
Flexible circuits, which consist of conductive patterns that are etched or
printed onto flexible substrate materials such as polyimide or polyester, are
used to provide connections between electronic components and as a substrate
to support these electronic devices. The circuits are manufactured by passing
base materials through multiple processes such as drilling, screening, photo
imaging, etching, plating and finishing. Flexible circuits can be produced in
single or multiple layers. We produce a wide range of flexible circuits
including:
* Single-Sided Flexible Circuits, which have a conductive pattern only on
one side. Single-sided flexible circuits are usually less costly and more
flexible than double-sided flexible circuits. Through our proprietary
high-speed interconnect screening technology, HSI+(R), which eliminates
the need for a separate shield layer, we can produce single-sided
flexible circuits that provide the same functionality as double-sided
flexible circuits at a lower cost. We manufacture single-sided circuitry
in both the United States and at Parlex Shanghai, where substantially all
of our production to date has been single-sided.
* Double-Sided Flexible Circuits, which have conductive patterns or
materials on both sides that are interconnected by a drilled and copper-
plated hole. Double-sided flexible circuits can provide either more
functionality than a single-sided flexible circuit by containing
conductive patterns on both sides, or can provide greater shielding than
a single-sided flexible circuit by having a conductive pattern on one
side and a layer of shielding material on the other.
* Multilayer and Rigid-Flexible Circuits, which consist of layers of
circuitry that are stacked and then laminated. These circuits are used
where the complexity of the electronic design demands multiple layers of
flexible circuitry. If some of the layers are rigid printed circuit board
material, the product becomes a rigid-flexible circuit. We have
manufactured these circuits with up to 40 layers in prototype programs
and 24 layers in production.
* Polymer Thick Film Flexible Circuits, which are flexible circuits
manufactured using a technology that uses a low-cost thick film polyester
dielectric substrate and a silver screen-printed conductive pattern.
These circuits are made with an additive process involving the high-speed
screen printing of conductive traces utilizing internally developed ink
systems. We are able to produce multilayer circuits using
8
proprietary dielectric materials and double-sided circuits using
proprietary printed through-hole technologies. Polymer thick film
flexible circuits are used in low-cost, low-temperature, low-power
interconnect applications.
Laminated Cable
Laminated cable, which consist of flat or round wire laminated to a flexible
substrate material, provide connections between electronic sub-systems and
replace conventional wire harnesses. We manufacture laminated cable in an
efficient, proprietary roll process. Substantially all of the laminated cable
that we produce uses flat wire. Approximately 95% of the laminated cable that
we produce is insulated with polyester material, which meets or exceeds our
customers performance requirements and cost parameters. Our laminated cable
is capable of handling both power (high current) and signal (low current).
Improving the process by which laminated cable is manufactured can increase
functionality and lower the cost of production. To this end, we have
developed U-Flex(R), a proprietary technique that forms flat wire into a u-
shape, followed by an injection molding process that enables the u-shaped end
to function as a connector. This technique improves electrical performance
and eliminates the need for a separate costly connector. We have also
developed Pemacs(R) shielding, which adds a specially designed silver ink to
laminated cable to meet stringent electronic shielding requirements without
compromising flexibility.
Flexible Interconnect Hybrid Circuits
In many cases, although a laminated cable is capable of carrying the
necessary signals, etched circuitry is required for termination. For these
applications we manufacture flexible interconnect hybrid circuits, which take
advantage of the lower cost of laminated cable and the technology of flexible
circuits by combining them into a single interconnect. On some products, we
apply our HSI+(c) process to the flexible interconnect hybrid circuit in order
to provide signal clarity and shielding.
Flexible Interconnect Assemblies
Both flexible circuits and laminated cable can be converted into an
electronic assembly by adding electronic components. This process can be as
simple as adding a connector or as complex as attaching components such as
capacitors, resistors or integrated circuits onto a flexible circuit using
surface mount assembly. We attach surface mount components to both copper and
polymer thick film circuits with either solder paste or our patented
Polysolder(R) conductive adhesive. We can place a full range of electronic
devices, from passive components to computing devices, on our flexible
interconnects.
The following table sets forth representative applications in which our
products are used:
Flexible Circuits
-----------------
Single-Sided Automotive Displays
Batteries for Cellular Phones
Printers
Personal Digital Assistants
Data Storage
Double-Sided Engine Control Units
Laptop Computers
Cellular Phones (Including Batteries)
Engine Sensors
Smart Cards
Multilayer and Rigid-Flexible Engine Control Units
Computer Networks
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Network Switching Systems
Aircraft Displays
Automotive Transmission Systems
Polymer Thick Film Business Phones
Disposable Medical Devices
Appliances
Radio Frequency Identification
Laminated Cable Postage Meters
--------------- Automotive Sound Systems
Notebook Computers
Industrial Controls
Electronic Scales
Flexible Interconnect Hybrid Circuits Total Vehicle Interconnection
------------------------------------- Printers
Sensors
Scanning Devices
Night Vision Systems
Flexible Interconnect Assemblies Aircraft Identification Systems
-------------------------------- Sensors
Scanning Devices
Batteries for Portable Products
Disk Drives
Night Vision Systems
Personal Computers
New Process and Material Technologies
An important part of our strategy is development of new processes and
materials for use in our products. Our proprietary processes and materials
include:
PALCore(R) HP - PALCore(R) HP is a low-cost multilayer flexible material that
is designed to minimize the difference between the cost of materials used in
flexible circuits and those used in conventional rigid circuits. We have
received patents on our latest, more flexible version of PALCore(R) HP, which
entered production in January 2000.
Polysolder(R) - Polysolder(R) is both a patented lead-free, conductive
adhesive used to attach electronic components onto flexible interconnects and
a patented manufacturing process that enables the attachment of electronic
devices onto substrates at low temperatures. Polysolder(R) has been used in
the production of polymer thick film flexible circuit assemblies for several
years. We plan to apply the Polysolder(R) process to etched flexible circuits
and laminated cable. This technology will enable us to use polyester, instead
of the more expensive polyimide, as a substrate in the production of these
flexible interconnect assemblies.
Electronic Identification Flip Chip Attachment Process - We have developed a
low-cost process that we believe will be an enabling technology in the
electronic identification market. Our high-speed flip chip attachment process
is up to ten times faster at placing semiconductors on low-cost materials
than conventional process alternatives. This process allows us to meet our
customer's goals for cost and reliability. This process entered production in
September 1999.
AutoNet(TM) - AutoNet(TM) is a proprietary flexible interconnect designed
specifically to meet the emerging needs of the automotive industry. As each
generation of vehicles incorporates greater electronic content,
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interconnection becomes both more important and more difficult. AutoNet(TM)
draws upon our flexible interconnect process and materials technology to
provide a cost-effective interconnect for placement in the headliners, trunks
and doors of automobiles. AutoNet(TM) is designed to replace traditional wire
harnesses and is lighter, smaller, more reliable and provides shielding
necessary to control the emission of electronic signals. We believe that the
potential market for AutoNet(TM) is substantial and will develop over the
next few years.
Print - Plate - Through a joint development project with Nashua Corporation,
we are developing a method of printing circuit patterns using high-speed
commercial presses. Copper plating on the circuit patterns follows this
process. This technology may dramatically reduce the cost of flexible
circuits for certain applications. We will begin to market this technology to
our customers in late fiscal 2004.
Our Customers
Our customers are a diverse group of OEMs that serve a variety of industries.
Our largest 20 customers based on sales accounted for approximately 50% of
total revenues in 2003, 44% in 2002 and 55% in 2001. In addition, two
customers individually accounted for more than 10% of our accounts receivable
at June 30, 2002.
The loss of more than one of our largest customers may have a significant
impact on our operations. However, the loss of any one customer is not
expected to have a significant impact on our business as the individual
receivable balances are closely monitored and no single customer represented
10% or more of total revenues in 2003, 2002 or 2001.
Our major end-customers include: BAE, Dell Computer, Delphi, Hewlett-Packard,
Hitachi, Infineon, Johnson Controls, Maytag, Motorola, Pitney Bowes,
Raytheon, Samsung, Siemens, Visteon, and Whirlpool. To support these end
customers, we work closely with major electronics manufacturing services
(EMS) companies such as Flextronics, Solectron, Sanmina, JABIL, Plexus, and
Celestica.
Sales and Customer Service
In fiscal 2002, we realigned our sales and marketing organization to support
a very geographically dispersed customer base. We established a corporate
sales organization that is regionally focused and provides local support to
the various customer engineering, procurement, and operations teams. The
transition to a regionally-based sales organization improves program support
throughout the entire product life cycle. The regional sales teams are
responsible for marketing and selling the entire Parlex product offering to
existing and potential customers within their territories. These regional
organizations include direct sales engineers and independent manufacturers'
representatives. Parlex currently has sales or engineering support offices in
six locations in the United States, two locations in Europe and three
locations in Asia.
Complementing the restructured sales force are robust product line
organizations within each of the manufacturing organizations. Led by a
product line manager, this group provides technical marketing, research and
development input, and sustaining customer support for our customer base.
Manufacturing
We believe that our manufacturing expertise in a number of specialized areas,
together with our investment in process research and development and
equipment, have contributed to our position as an industry leader. A
significant amount of our production equipment is proprietary, including
cable laminators, precision cable slitters and roll plating, roll etching and
automatic punching equipment.
Our computer-aided manufacturing system takes the customer's design and
programs the various steps that will be required to manufacture the
particular product. The manufacturing process varies a great deal from
product to product. Although there is no standard process, significant
elements of production are highlighted below:
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Polymer Thick Film
Etched Flexible Circuit Flexible Circuit Laminated Cable
- ----------------------- ------------------ ---------------
Drilling Convert/Condition Substrate Lamination
Plating Screen Print Slitting
Photo Imaging Diecut Conductor Forming
Etching Conductive Adhesive Injection Molding
Lamination Surface Mount/Flip Chip Assembly Shielding
Electrical Testing Electrical Testing Laser Skiving
Assembly Assembly
During 2003 and 2002, we continued to focus on cost reduction initiatives.
Core to this strategy is relocation of high-volume low-cost manufacturing to
China and Mexico and better utilization of our excess capacity. In June 2002,
we decided to close our Salem, New Hampshire facility and transfer our
laminated cable business to Methuen, Massachusetts, better utilizing our
excess capacity. In January 2003, we completed the closure of our Salem, New
Hampshire facility and transferred our laminated cable business to Methuen,
Massachusetts and Mexico. Further, in February 2003, we completed the
transfer of PALFlex manufacturing to China and discontinued production in the
U.S. We believe that we have sufficient capacity to meet forecast demand in
the U.S. operations for the next several years.
In 2003, we expanded our China facilities, leasing an additional 12,000
square feet of manufacturing space in Suzho and an additional 50,000 square
feet of assembly and finishing space in Kunshan.
In fiscal 2001, we added capacity in Shanghai of 52,000 square feet and
relocated our Dynaflex operations to a more efficient 16,800 square foot
facility in San Jose, California.
Five of our manufacturing facilities are certified to the international
standard ISO 9001 or ISO 9002 and to the automotive standard QS 9000. One
facility is certified to the environmental standard ISO 14001.
Materials and Materials Management
We aggressively attempt to control our cost of purchased materials and our
level of inventories through long-term relationships with our suppliers. Our
goal is to attain a competitive price from suppliers and foster a shared
vision towards advancing technology.
We purchase raw materials, process chemicals and various components from
multiple outside sources. We often make long-term purchasing commitments with
key suppliers for specific customer programs. These suppliers commit to
provide cooperative engineering as required and in some cases to maintain a
local inventory to provide shorter lead times and reduced inventory levels.
In many cases our customers approve, and often specify, sources of supply.
We qualify our suppliers through a vendor rating system that limits the
number of suppliers to those that can provide the best total value and
quality. We monitor each supplier's quality, delivery, service and technology
so that the materials we receive meet our objectives.
Competition
Our business is highly competitive. We compete against other manufacturers of
flexible interconnects as well as against manufacturers of rigid-printed
circuits. In addition to competing with industry peers who produce flexible
circuitry (etched), laminated cable, and polymer think film products, we also
compete with alternative technology leaders in the rigid printed circuit,
wire harness and cable, and connector industries. Competitive factors among
flexible circuit and laminated cable suppliers are price, product quality,
technological capability and service. We believe that we compete favorably on
all of these competitive factors, but believe that our competitive strength
is in our ability to apply technology to reduce cost. We
12
compete against rigid board products on the basis of product versatility,
although price can also be a competitive factor if the difference between the
cost of a rigid circuit and a flexible circuit becomes too great.
Intellectual Property
We have acquired patents and we seek patents on new products and processes
where we believe patents would be appropriate to protect our interests.
Although patents are an important part of our competitive position, we do not
believe that any single patent or group of patents is critical to our
success. We believe that, due to the rapid technological change in the
flexible interconnect business, our success depends more on design creativity
and manufacturing expertise than on patents and other intellectual property.
We own 21 patents issued, and have 17 patent applications pending, in the
United States and several foreign countries. We have obtained federal
trademark registrations for PALFlex(R), PALCore(R), U-Flex(R), PALCoat(R),
Polysolder(R), and HSI and have one trademark application pending. We also
rely on internal security measures and on confidentiality agreements for
protection of trade secrets and proprietary know-how. We cannot be sure that
our efforts to protect our intellectual property will be effective to prevent
misappropriation or that others may not independently develop similar
technology.
Environmental Regulations
Flexible interconnect manufacturing requires the use of metals and chemicals.
Water used in the manufacturing process must be treated to remove metal
particles and other contaminants before it can be discharged into the
municipal sanitary sewer system. We operate and maintain water effluent
treatment systems and use approved laboratory testing procedures to monitor
the effectiveness of these systems at our San Jose, California and Methuen,
Massachusetts facilities. We operate these treatment systems under an
effluent discharge permit issued by the local governmental authority. Air
emissions resulting from our manufacturing processes are regulated by permits
issued by government authorities. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental
laws. We believe that the waste treatment equipment at our facilities is
currently in compliance with the requirements of environmental laws in all
material respects and that our air emissions are within the limits
established in the relevant permit. However, violations may occur in the
future. We are also subject to other environmental laws including those
relating to the storage, use and disposal of chemicals, solid waste and other
hazardous materials, as well as to work place health and safety and indoor
air quality emissions. Furthermore, environmental laws could become more
stringent or might apply to additional aspects of our operations over time,
and the costs of complying with such laws could be substantial. Compliance
with local, state and federal laws did not have a material impact on our
capital expenditures, earnings or competitive position in 2003. We estimate
that the total capital expenditures in 2003 and 2004 associated with
environmental compliance will be approximately $100,000.
Employees
As of June 30, 2003, we employed approximately 507 people in the United
States. Of these employees, 456 were direct employees of Parlex and 51 worked
for interim staffing agencies. In addition, we employed approximately 85
people in Mexico, approximately 124 people in the United Kingdom and
approximately 924 people in China. We are not a party to any collective
bargaining agreement and we believe our relations with our employees are
good.
13
Item 2. Properties
- ------------------
Facilities
Our facilities at June 30, 2003 are:
Approximate
Location Square Feet Leased/Owned Description
- -------- ----------- ------------ -----------
Methuen, Massachusetts 172,000 Leased (lease expires in Corporate headquarters, product
June 2018) and process development,
flexible circuit and laminated cable
manufacturing
Cranston, Rhode Island 55,000 Leased (lease expires in Polymer thick film and surface
June 2008) mount assembly operations
Salem, New Hampshire 46,000 Leased (lease expires in Vacated January 2003
June 2004)
Newport, Isle of Wight, 40,000 Leased (lease expires in Polymer thick film and surface
United Kingdom November 2009) mount assembly operations
Shanghai, China 47,000 Leased (lease expires in Single- and double-sided
August 2004) flexible circuit manufacturing
Shanghai, China 55,000 Leased (month-to-month) Single- and double-sided
flexible circuit manufacturing
Suzho, China 12,000 Leased (lease expires in Flexible circuit manufacturing
June 2005)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
February 2008)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
June 2008)
Empalme, Sonora, Mexico 18,700 Leased (lease expires in Finishing and assembly operations
January 2005)
San Jose, California 16,800 Leased (lease expires in Prototype and quick-turn operations
December 2008)
In December 2001, one of our subsidiaries, Parlex (Shanghai) Interconnect
Products Co., Ltd. ("Parlex Interconnect"), purchased land use rights for a
parcel of land located in the People's Republic of China. The purchase price
of the land use rights was approximately $1.1 million. In July 2003, Parlex
Interconnect executed an agreement to sell the land use rights for
approximately $1.2 million. Parlex Interconnect received approximately $1.0
million in cash in August 2003 and the balance will be paid at closing.
14
Item 3. Legal Proceedings
- -------------------------
From time to time we are involved in litigation relating to claims arising
out of our operations in the normal course of business. We are not currently
involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
Price Range of Common Stock
Our common stock is quoted on the NASDAQ National Market under the symbol
"PRLX." The following table sets forth, for the periods indicated, the high
and low closing prices for our common stock as reported on the NASDAQ
National Market.
High Low
---- ---
Fiscal Year Ended June 30, 2003
First Quarter $13.17 $11.80
Second Quarter $11.87 $10.20
Third Quarter $10.52 $ 7.29
Fourth Quarter $ 8.30 $ 7.69
Fiscal Year Ended June 30, 2002
First Quarter $13.47 $ 8.90
Second Quarter $15.80 $ 8.70
Third Quarter $15.80 $12.00
Fourth Quarter $13.11 $11.50
On October 7, 2003, the closing sale price of our common stock as reported on
the NASDAQ National Market was $7.68 per share and there were 85 holders of
record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and we
presently intend to retain future earnings, if any, for our business. Our
credit agreement prohibits us from paying or declaring any cash dividends on
our capital stock without the bank's prior written consent.
15
Item 6. Selected Consolidated Financial Data
- --------------------------------------------
The following table sets forth financial data for the last five years. This
selected financial data should be read in conjunction with the Consolidated
Financial Statements and related notes included in Item 15 of this Form 10-K.
Fiscal Year Ended June 30,
2003 2002 2001 2000(a) 1999(b)
---- ---- ---- ------- -------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Total revenues $ 82,821 $ 87,056 $103,620 $101,839 $67,047
Cost of products sold 80,803 90,294 97,460 76,614 52,785
-------- -------- -------- -------- -------
Gross profit (loss) 2,018 (3,238) 6,160 25,225 14,262
Selling, general and administrative expenses 14,484 14,049 17,706 14,097 9,715
-------- -------- -------- -------- -------
Operating (loss) income (12,466) (17,287) (11,546) 11,128 4,547
(Loss) income from operations before income taxes
and minority interest (13,411) (17,724) (11,517) 10,473 4,681
Net (loss) income $(19,517) $(10,388) $ (6,199) $ 6,335 $ 3,020
======== ======== ======== ======== =======
Net (loss) income per share:
Basic $ (3.09) $ (1.65) $ (0.99) $ 1.31 $ 0.65
======== ======== ======== ======== =======
Diluted $ (3.09) $ (1.65) $ (0.99) $ 1.28 $ 0.63
======== ======== ======== ======== =======
Weighted average shares outstanding:
Basic 6,309 6,303 6,289 4,842 4,662
Diluted 6,309 6,303 6,289 4,940 4,771
2003 2002 2001 2000(a) 1999(b)
---- ---- ---- ------- -------
(in thousands)
Consolidated Balance Sheet Data:
Working capital $12,722 $ 22,320 $ 31,016 $ 38,752 $18,762
Total assets 86,033 106,054 110,864 115,341 63,521
Current portion of long-term debt 3,813 3,561 10,710 1,483 619
Long-term debt, less current portion 10,802 12,000 119 360 1,632
Stockholders' equity 51,248 70,141 81,351 87,790 45,333
(a) On March 1, 2000, we acquired Poly-Flex Circuits, Inc. ("Poly-Flex").
The acquisition was recorded under the purchase method of accounting.
Accordingly, the information for 2000 includes Poly-Flex's operations
beginning March 1, 2000.
(b) On April 30, 1999, we acquired the Dynaflex division of CCIR of
California Corp ("Dynaflex"). The acquisition was recorded under the
purchase method of accounting. Accordingly, the information for 1999
includes Dynaflex's operations beginning April 30, 1999.
16
Item 7. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
-------------------------
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the financial information
included in this Annual Report on Form 10-K and with "Factors That May
Affect Future Results" set forth on page 31. The following discussion
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, and is subject to the safe-harbor
created by such Act. Forward-looking statements express our expectations or
predictions of future events or results. They are not guarantees and are
subject to many risks and uncertainties. There are a number of factors -
many beyond our control - that could cause actual events or results to be
significantly different from those described in the forward-looking
statement. Any or all of our forward-looking statements in this report or
in any other public statements we make may turn out to be wrong. Forward-
looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe"
or words of similar meaning. They may also use words such as "will,"
"would," "should," "could" or "may". 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 Annual Report on Form 10-K.
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements included in this Annual Report on
Form 10-K, and in Part IV, Item 15 "Exhibits, Financial Statement Schedules
and Reports on Form 8-K". However, certain of our accounting policies are
particularly important to the portrayal of our financial position and
results of operations and require the application of significant judgement
by our management which subjects them to an inherent degree of uncertainty.
In applying our accounting policies, our management uses its best judgement
to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical experience,
terms of existing contracts, our observance of trends in the industry,
information provided by our customers, information available from other
outside sources, and on various other factors that we believe to be
appropriate under the circumstances. We believe that the critical
accounting policies discussed below involve more complex management
judgement due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset, liability, revenue and expense
amounts.
Overview
We believe we are a leading supplier of flexible interconnects principally
for sale to the automotive, telecommunications and networking, diversified
electronics, military, home appliance, electronic identification 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 $16.7
million in property and equipment and approximately $18.6 million in research
and development to develop materials and enhance our manufacturing processes.
We believe that these expenditures will help us to meet 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.
In 2003 and 2002, we were adversely affected by the economic downturn and
its impact on our key customers and markets. We have incurred operating losses
during these periods of $29.8 million, and have used cash to fund operations
and working capital of $2.4 million during this time. We have taken certain
steps to improve operating margins, including closure of facilities, downsizing
of our employee base, and transfer of manufacturing operations to lower cost
locations, such as the Peoples' Republic of China. In addition, we have worked
closely with our lenders to manage through this difficult time and have
obtained additional capital in 2003 and in early 2004 through sale leasebacks
of selected corporate assets and the issuance of convertible debt. As a result
of the difficult environment facing us, we have had difficulty maintaining
compliance with the terms and conditions of certain of our financing
facilities, and at June 30, 2003, we were not in compliance with certain
financial covenants of our principal external financial agreement with Silicon
Valley Bank, or our guarantee of $3.8 million of debt owed by our subsidiary,
Parlex Interconnect, to CITIC Ka Wah Bank, Limited ("CITIC"), a Hong Kong bank.
On September 23, 2003, we executed a Loan Modification Agreement (the
"Modification Agreement") with Silicon Valley Bank. The Modification Agreement
increases the interest rate on borrowings to the bank's prime rate (as defined
therein) plus 1.5% (decreasing to prime plus 0.75% after one quarter of
positive operating income and to prime plus 0.25% after two quarters of
positive net income, respectively) and amends the financial covenants.
Effective October 8, 2003, CITIC entered into a Supplemental Deed with Parlex
Interconnect relating to the CITIC Loan Agreement (the "CITIC Loan Agreement
Amendment"), and with us (the "Guarantee Agreement Amendment"). Among other
matters, the Modification Agreement, the CITIC Loan Agreement Amendment and
the Guarantee Agreement Amendment modified certain restrictive financial
covenants such as EBITDA, Current Ratio, Tangible Net Worth and Total
Liabilities to Tangible Net Worth. We are and expect to remain in compliance
with all of our financial covenants, as amended.
We formed a Chinese joint venture, Parlex Shanghai, in 1995 to better serve
our customers that have production facilities in Asia and to more cost
effectively manufacture products for worldwide distribution. Effective
October 22, 2001, we purchased the 40% share of Parlex Shanghai held by one
of our joint venture partners, Shanghai Jinling Co., Ltd's ("Jinling"),
increasing our equity interest in Parlex Shanghai to 90.1%. Parlex Shanghai's
results of operations, cash flows and financial position are included in our
17
consolidated financial statements. In 2003 we completed the transfer of the
production of our automotive related products utilizing our PALFlex(R)
technology from our Methuen, Massachusetts facility to Parlex Interconnect, a
wholly owned subsidiary of Parlex Asia Pacific Limited, which is located in
China.
Critical Accounting Policies
The preparation of consolidated financial statements requires that we make
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures. On an ongoing
basis, we evaluate our estimates, including those related to bad debts,
inventories, property, plant and equipment, goodwill and other intangible
assets, valuation of stock options and warrants, income taxes and other
accrued expenses, including self-insured health insurance claims. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgements about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
will differ from these estimates under different assumptions or conditions.
Revenue recognition and accounts receivable. We recognize revenue on product
sales when persuasive evidence of an agreement exists, the price is fixed and
determinable, delivery has occurred and there is reasonable assurance of
collection of the sales proceeds. We generally obtain written purchase
authorizations from our customers for a specified amount of product, at a
specified price and consider delivery to have occurred at the time title to
the product passes to the customer. Title passes to the customer according to
the shipping terms negotiated between the customer and us, which occurs at the
time of shipment, unless otherwise specified by the customer. License fees and
royalty income are recognized when earned. We have demonstrated the ability to
make reasonable and reliable estimates of product returns in accordance with
SFAS No. 48 and of allowances for doubtful accounts based on significant
historical experience. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories. We value our raw material inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. Work in process and finished goods are valued
as a percentage of completed cost, not in excess of net realizable value. We
regularly review our inventory and record a provision for excess or obsolete
inventory based primarily on our estimate of expected and future product
demand. Our estimates of future product demand will differ from actual demand
and, as such, our estimate of the provision required for excess and obsolete
inventory will change, which we will record in the period such determination
was made. Raw material, work in process and finished goods inventory
associated with programs cancelled by customers are fully reserved for as
obsolete. Reductions in obsolescence reserves are recognized when realized.
Goodwill. Effective July 1, 2001, we adopted the provisions of SFAS No.142,
"Goodwill and Other Intangible Assets". Accordingly, goodwill is not
amortized but is tested for impairment, for each reporting unit, on an
annual basis and between annual tests in certain circumstances. We evaluate
goodwill for impairment by comparing our market capitalization, as adjusted
for a control premium, to our recorded net asset value. In order to compute
the control premium adjustment, we have utilized the control premium
realized by competitors or electronic manufacturers of similar size and
operating characteristics in acquisitions. If our market capitalization, as
adjusted for a control premium, is less than our recorded net asset value,
we will further evaluate the implied fair value of our goodwill with the
carrying amount of the goodwill, as required by SFAS No. 142, and we will
record an impairment charge against the goodwill, if required, in our
results of operations in the period such determination was made.
Income Taxes. We determine if our deferred tax assets and liabilities are
realizable on an ongoing basis by assessing our valuation allowance and by
adjusting the amount of such allowance, as necessary. In the determination of
the valuation allowance, we have considered future taxable income and the
feasibility of tax planning initiatives. Should we determine that it is more
likely than not that we will realize certain of our deferred tax assets for
which we previously provided a valuation allowance, an adjustment would be
18
required to reduce the existing valuation allowance. In addition, we operate
within multiple taxing jurisdictions and are subject to audit in these
jurisdictions. These audits can involve complex issues, which may require an
extended period of time for resolution. Although we believe that adequate
consideration has been made for such issues, there is the possibility that
the ultimate resolution of such issues could have an adverse effect on the
results of our operations.
Off-Balance Sheet Arrangements. We have not created, and are not party to,
any special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating parts of our business that are not
consolidated into our financial statements. We do not have any arrangements
or relationships with entities that are not consolidated into our financial
statements that are reasonably likely to materially affect our liquidity or
the availability of capital resources, except as may be set forth below
under "Liquidity and Capital Resources."
Results of Operations
The following table sets forth, for the periods indicated, selected items in
our statements of operations 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 included elsewhere in this Annual
Report on Form 10-K.
Fiscal Year Ended June 30,
-----------------------------
2003 2002 2001
---- ---- ----
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 97.6% 103.7% 94.1%
Gross profit (loss) 2.4% (3.7%) 5.9%
Selling, general and administrative expenses 17.5% 16.1% 17.1%
Operating loss (15.1%) (19.9%) (11.1%)
Loss from operations before income taxes and minority interest (16.2%) (20.4%) (11.1%)
Net loss (23.5%) (11.9%) (6.0%)
Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002
Total Revenues. Total revenues for 2003 were $82.8 million, a decrease of
5% from $87.1 million in 2002. In February 2003, we closed our domestic
PALFlex operations in Methuen, Massachusetts. PALFlex is a proprietary
adhesiveless double-sided copper flexible circuit roll to roll
manufacturing process. Revenues generated from our PALFlex operations in
2003 were $6.4 million versus $15.0 million in 2002. Excluding PALFlex
revenues from both years, total revenues grew by 6%. Decreases in our
Multi-Layer ($4.7 million) and Laminated Cable ($2.2 million) operations
were offset by strong growth in our Polymer Thick Film ($5.4 million) and
China ($6.3 million) operations.
In 2003, we continued to emphasize a strategy of market diversification.
Our major markets, which represent growth versus the prior year, include
the home appliance market with Whirlpool and Maytag our largest customers,
the military market with Raytheon, BAE and General Dynamics and the
computer market with strong growth from Hewlett Packard. Reductions in
revenues occurred primarily in the automotive market driven by the closing
of our domestic PALFlex operations.
Total revenues included licensing and royalty fees of approximately $41,000
for 2003 and $50,000 for 2002. Although we intend to continue developing
materials and processes that we can license to third parties, we do not
expect that licensing and royalty revenues will represent a significant
portion of total revenues in the near term.
19
Cost of Products Sold. Cost of products sold was $80.8 million, or 98% of
total revenues, for 2003, versus $90.3 million, or 104% of total revenues
for 2002. In 2003, cost of products sold was adversely impacted by the cost
of closing the domestic PALFlex operation. In 2003, we recorded $13.1
million in costs of products sold from our PALFlex operations on $6.4
million in revenue. In addition to operating significantly under capacity
and therefore absorbing high fixed costs, we recorded severance costs for
60 people terminated in March and capital and inventory write-downs. In
addition, the Methuen operation continued to experience low capacity
utilization and correspondingly, significant unfavorable manufacturing
variances. In 2003, these variances totaled approximately $13 million and
have been charged to cost of products sold. To improve utilization in 2003,
we relocated our Salem, New Hampshire laminated cable business to Methuen.
Relocation costs of approximately $500,000 were expensed as incurred in the
first half of the year. The move was completed in January 2003.
During the past year, we have made a significant investment to improve our
margins through the transfer of labor intensive manufacturing operations in
the United States to more cost-effective locations. A large portion of the
final assembly, inspection, and test procedures previously performed in our
Methuen, Massachusetts and Salem, New Hampshire facilities are now
performed in Mexico. During 2003, we completed the transfer of our PALFlex
operations to China. The transfer of manufacturing capabilities is costly,
however this investment is core to our long-term strategy for cost
effective manufacturing. Although these cost reduction measures are
expected to improve our gross margins, a return to profitability is
predicated upon operational performance, a favorable product mix and
increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.5 million in 2003, or 17.5% of total
revenues, and $14.0 million or 16% of total revenues for the comparable
period in the prior year. Due to the reorganization of our sales force in
mid-2002 and the staffing of several open regional positions, selling
expenses increased $753,000 in 2003. The increase in selling expenses was
partially offset by a $317,000 decrease in administrative expenses.
Interest Income. Interest income was $36,000 in 2003 compared to $207,000
in 2002 and primarily consists of interest income on short-term
investments. The reduction in interest income is due to lower average
investment balances and lower interest rates.
Interest Expense. Interest expense was $900,000 in 2003 and $644,000 in
2002. The interest expense represents interest incurred on our short and
long-term borrowings for working capital needs, interest expense associated
with deferred compensation and, beginning in 2003, interest associated with
the sale-leaseback of our corporate headquarters and manufacturing facility
in Methuen, Massachusetts ("Methuen Facility") which has been accounted for
as a financing obligation. The increase in interest expense in 2003 is due
to higher average borrowing levels and to the interest associated with the
sale-leaseback of the Methuen Facility.
Non operating income. Non operating income was $3,000 in 2003 and $105,000
in 2002. Non operating income in 2002 represents currency exchange rate
gains.
Non operating expense. Non operating expense was $84,000 in 2003 and
$105,000 in 2002. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese joint
venture, Parlex Shanghai, was $13.4 million in 2003 compared to $17.7
million in 2002. We own 90.1% 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.
Income Taxes. Our effective tax rate was approximately 46% in 2003 compared
to an effective tax rate benefit of (39%) in 2002. Our effective tax rate
is impacted by the proportion of our estimated annual income being earned
in domestic versus foreign tax jurisdictions, the generation of tax credits
and the
20
recording of any valuation allowance. As a result of our recent history of
operating losses, uncertain future operating results, and the non-
compliance with certain of our debt covenants requirements, which has
subsequently been waived, we determined that it is more likely than not
that certain historic and current year income tax benefits will not be
realized. Consequently, we increased our valuation allowance by $11.5
million in 2003.
Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001
Total Revenues. Total revenues in 2002 were $87.1 million, a decrease of
16% from $103.6 million in 2001. Revenues were generated primarily from
product sales with decreases in each of our principal product lines,
flexible circuits (14%) and laminated cable (23%).
Reductions in revenues in 2002 were attributable to the general decline in
customer demand within the global electronics industry and a general
downturn of the U.S. economy. Parlex revenues for 2002 declined 16% while
the overall industry declined 19% based upon calendar year 2001 data from
the IPC -Association Connecting Electronic Industries ("IPC"), the premier
industry trade organization with over 2,000 members including Parlex. This
downturn has had a significant impact on Parlex's customers and their end
markets. We experienced significant reductions in revenues from our
customers in the telecommunications and networking, and computer peripheral
markets, which affected all of our manufacturing operations. The revenue
decline in 2002 was partially offset by increased revenues in the military,
automotive, and home appliance markets. Our revenue in the military,
automotive, and home appliance markets increased an aggregate of $6.7
million while overall revenues declined $16.5 million from 2001.
Total revenues included licensing and royalty fees of approximately $50,000
for 2002 and $194,000 in 2001. The higher revenues in 2001 reflect the
final installment received from the $1.3 million patent assignment
agreement executed with Polyclad Laminates, Inc. in 2000.
Cost of Products Sold. In 2002, cost of products sold was $90.3 million, or
104% of total revenues, versus $97.5 million, or 94% of total revenues for
2001. The percentage increase primarily represents $1.5 million for the
elimination of excess facilities, $209,000 for severance costs associated
with reductions in workforce, and $3.4 million for increases in inventory
reserves and inventory write-downs.
Prior to June 30, 2002, Parlex management having the appropriate level of
authority approved, communicated and committed a plan to exit our Salem,
New Hampshire manufacturing facility. The $1.5 million for the elimination
of excess facilities was comprised of $656,000 in future rental payments,
$574,000 for the abandonment of leasehold improvements, $141,000 in
facility refurbishment expenses and $109,000 in early lease termination
penalty fees. Certain amounts were estimated based upon our expected exit
date of January 2003 through the remaining lease commitment date of June
2004. Exit of the facility was completed, as expected, in January 2003. No
amounts were paid as of June 2002.
During 2003, lease costs of $216,145 consisting of rent expense and
utilities for the period January 1, 2003 through June 30, 2003 were paid
and charged against the facility exit costs accrual. In January 2003, upon
exiting the facility, we wrote-down the value of the leasehold improvements
at our Salem, New Hampshire facility to zero to reflect our abandonment of
such assets. The lease termination notice was provided to the landlord on
June 27, 2003 as required under the terms of the lease agreement, and
resulted in the payment of the lease termination fee of $107,000.
The following is a summary of the facility exit costs activity during 2003:
21
Facility 2003 Activity Facility
Exit Costs ---------------------------------------- Exit Costs
Accrued Cash Asset Change in Accrued
June 30, 2002 Payments Write-offs Estimates June 30, 2003
------------- -------- ---------- --------- -------------
Lease costs $ 656,000 $(216,145) $ - $ - $439,855
Leasehold improvements 573,767 - (573,767) - -
Facility refurbishment costs 141,233 - - 2,433 143,666
Lease termination penalty 109,000 (106,567) - (2,433) -
---------- --------- --------- ------- --------
Total $1,480,000 $(322,712) $(573,767) $ - $583,521
========== ========= ========= ======= ========
We expect the remaining $583,521 of accrued facility exit costs at June 30,
2003 consisting of twelve months of lease payments and estimated costs to
refurbish the facility, to be paid within the next twelve months.
Anticipated annual facility cost savings is more than $525,000, including
rent savings of approximately $425,000.
The severance activities relate to a reduction in force resulting from our
transfer of certain production capabilities from the US to our facility in
Shanghai, China and consisted primarily of payments to 30 direct labor
manufacturing personnel. Payments of the severance costs of $209,000 were
completed in July 2002.
Inventory write-downs of $3.4 million were unrelated to our restructuring
activities mentioned above. These write-downs primarily consisted of
inventory associated with specific customers who had postponed and or
cancelled orders with us, including approximately $1.3 million associated
with Nortel-related business. Demand from such telecommunications
infrastructure customers eroded quickly during the early stages of the
telecommunications industry decline. Although we recorded initial reserves
in 2001, with no recovery in this market during 2002, we were then forced
to write-down the balance of any remaining inventory associated with
specific customers, as such inventory is produced to customer
specifications and its resale value is limited. During 2003, we sold
approximately $369,000 of this inventory to our original customers. The
impact on our gross margins was not, and is not expected to be, material.
Additional inventory write-downs were also recorded for year-end physical
inventory adjustments ($1.3 million) and excess and obsolete inventory
reserves ($475,000). Salvage value of such inventory is not considered
material. We are not currently aware of any additional significant adverse
trends as experienced within the telecommunications market.
In addition, the Methuen operation continued to experience low capacity
utilization in 2002 and correspondingly, significant unfavorable
manufacturing variances. In 2000, the Methuen operation generated revenues
of approximately $56 million primarily for the telecommunications market.
Nortel was its single largest customer accounting for approximately $27
million in revenues in 2000. In the fourth quarter of 2002, our Methuen
operation no longer produced any product for Nortel. The loss of this
business resulted in significant excess capacity in our Methuen facility.
Unfavorable manufacturing variances are the result of our actual production
costs, namely overhead costs consisting of utilities, waste treatment,
depreciation, indirect labor, and repair and maintenance costs being
substantially higher than our planned or standard costs. Variances were
determined based upon an analysis of manufacturing overhead at planned
production capacity versus actual product manufactured during the prior
twelve-month period. Our policy has always been to expense manufacturing
variances. In 2002, these variances totaled approximately $11 million and
have been charged to cost of products sold. To improve utilization in 2003,
we relocated our Salem, New Hampshire laminated cable business to Methuen.
In 2002, a reduction in force eliminated approximately 82 employees,
primarily in the United States, through proactive cost controls, improved
operational efficiency and reduced manufacturing volume.
22
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.0 million in 2002, or 16% of total
revenues, and $17.7 million, or 17% of total revenues in the prior year.
The decreases were primarily the result of continued cost controls mandated
by current economic conditions. These reductions however, were partially
offset by an investment in a new corporate sales organization with a
regional focus replacing a sales force that was directly aligned with each
manufacturing operation. More experienced sales staff coupled with a twenty
percent increase in headcount has resulted in approximately $300,000 per
quarter increase in selling expense.
Interest Income. Interest income was $207,000 in 2002 and $519,000 in 2001
and primarily consists of interest income on short-term investments. The
reduction in interest income is due to lower average investment balances
and to lower interest rates.
Interest Expense. Interest expense was $644,000 in 2002 and $472,000 in
2001. The interest expense represents interest incurred on our short and
long-term borrowings for working capital needs and interest expense
associated with deferred compensation. The increase in 2002 is due to
higher average borrowing levels.
Non operating income. Non operating income was $105,000 in 2002 and
$168,000 in 2001. Non operating income in 2002 primarily represents
currency exchange rate gains. Non operating income in 2001 primarily
consists of $110,000 received from the settlement of legal claims against a
general contractor who constructed an addition to the Methuen Facility. We
filed a lawsuit against the general contractor and received the sum of
$110,000 as a settlement, which was recorded when the payment was received.
Non operating expense. Non operating expense was $105,000 in 2002 and
$187,000 in 2001. Other expense primarily represents currency exchange rate
losses.
Our loss before income taxes and the minority interest in Parlex Shanghai,
was $17.7 million in 2002 compared to $11.5 million in 2001.
Income Taxes. Our effective tax rate benefit was approximately 39% in 2002
and 47% in 2001. The decrease in the effective tax benefit resulted from
the net operating losses generated in lower tax jurisdictions and a
decreased amount of available tax credits.
Liquidity and Capital Resources
As of June 30, 2003, we had approximately $1.5 million in cash and short-
term investments.
Net cash provided by operations during 2003 was $180,000. Net losses of
$19.5 million adjusted for non-cash items (depreciation, deferred income
taxes, amortization, loss on sales of assets and minority interest) used
$6.3 million of operating cash. This was offset by $6.5 million generated
from a reduction in our working capital requirements.
Net cash provided by investing activities was $683,000 in 2003. On June 12,
2003, we entered into a sale-leaseback of our subsidiary's manufacturing
facility in Cranston, Rhode Island (the "Poly-Flex Facility"). We received
net proceeds of approximately $2.9 million in connection with the sale and
agreed to lease the facility back for 5 years with options to extend the
lease for two additional 5-year periods (see Sale and Leaseback
Transactions below for more information). Approximately $2.2 million were
used to purchase capital equipment primarily relating to equipment
necessary to complete our smart card production line for Infineon in China.
Cash used for financing activities was $1.2 million during 2003, and
represented bank borrowings and proceeds received from the sale-leaseback
of the Methuen Facility, offset by repayments on our bank
23
debt. On June 11, 2003, we replaced our Fleet Bank line of credit with a
two-year, $10 million Loan and Security Agreement with Silicon Valley Bank.
This transaction was completed in conjunction with the sale and leaseback
of our Methuen Facility and Poly-Flex Facility. The proceeds from the sale
of the properties were used to pay down the Fleet loan. In addition, on
July 28, 2003, we entered into a Security Purchase Agreement to sell $6
million of 7% convertible subordinated notes and related warrants. Net
proceeds, after deduction for fees and transaction costs were approximately
$5.5 million. Additional information on the terms of the Sale and Leaseback
Transactions, Loan and Security Agreement, and the Sale of Our 7%
Convertible Subordinated Notes and Related Warrants are detailed below.
Sale and Leaseback Transactions - On June 12, 2003, we entered into the
following financing transactions: 1) the sale and immediate leaseback of
our Methuen Facility, consisting of a 172,216 square foot building and 2)
the sale and immediate leaseback of Poly-Flex Facility, consisting of a
54,580 square foot building. Each transaction was entered into with limited
liability companies established by Taurus New England Investments Corp., an
unrelated third-party real estate investment firm. We entered into the
transactions in order to repay existing bank debt and to provide working
capital needed to continue to fund operations.
Methuen Facility - Sale: The Methuen Facility was sold for a total maximum
purchase price of $9,000,000 that was determined as follows:
* $5,350,000 in cash at closing;
* $2,650,000 evidenced by a promissory note described as the
"Financed Earn Out Amount" in the Methuen purchase and sale
agreement (the "Agreement") which is to be paid to us only
if no "Special Defaults" (as defined in the Agreement) occur
at any time on or before the maturity date of the promissory
note. Upon the occurrence of a "Special Default" no further
payments or obligations of any kind shall be due from buyer
to us under the promissory note; and
* Amounts earned, up to $1,000,000, under the Earn Out Clause.
The Financed Earn Out Amount of $2,650,000 is being paid to us in the form
of a promissory note from the buyer (the "Note"). The Note matures in three
years, with a one-year extension at the sole option of the buyer. The
interest rate on the note increases one percent each year from five percent
to a maximum of eight percent if the extension to the maturity date is
requested. The Note is secured by a pledge of 100% of the ownership
interest in the buyer that is a Delaware limited liability company whose
only asset is the Methuen Facility.
The Earn Out Clause represents additional amounts to be paid by the buyer
under the following conditions:
* As of June 30, 2004, and on each June 30th thereafter through
and including June 30, 2009, the Purchase Price shall be
increased by Two Hundred Thousand Dollars ($200,000) (up to
a maximum aggregate increase of $1,000,000) if and only for
the immediately preceding twelve month period we have met
the Financial Milestones (defined below) and other
conditions set forth below. In the event that we do not
achieve the Financial Milestones, then the $200,000
installment of the Earn Out Clause that would have been due
if such conditions were met, shall be deferred. The unpaid
portions of all deferrals will terminate on June 30, 2009.
The Financial Milestones are:
> We shall have gross revenues for each fiscal year
beginning in fiscal year 2003 on a consolidated basis of
at least $100 million and earnings before taxes for each
such fiscal year shall not be less than $1.00;
24
> The current ratio of our current assets to its current
liabilities, determined on a consolidated basis, shall be
not less than 1.05 to 1;
> Our current debt to equity ratio shall not be greater
than 0.5 to 1.0; and
> No material defaults shall exist under our then current
loan agreements with our lending institutions and we
shall certify the same to the buyer.
The sale included the land, land improvements, building and building
improvements of the Methuen Facility.
Methuen Facility - Leaseback: We are leasing the Methuen Facility from the
buyer for a term of 15 years, with the option to extend the lease for two,
five-year terms. The initial base rent is $1,050,000 per year and increases
every two years up to $1,400,000 for each of the last four years. We are
responsible for the payment of all real estate taxes, utilities,
maintenance and repair costs in the form of additional rent. The total base
rent for the 15 year term (excluding the extension options) is $19,000,000.
We have the option to repurchase the property during the Purchase Option
Period which commences at the beginning of the sixth year of the lease and
terminates at the end of the twelfth year of the lease at a purchase price
equal to the then fair market value of the property; however both parties
agreed that the purchase price would not be less than $12,000,000.
We are required to maintain a $750,000 irrevocable standby letter of credit
in favor of the buyer in lieu of a cash security deposit.
As the repurchase option contained in the lease and the receipt of a
promissory note from the buyer provide us with a continuing involvement in
the Methuen Facility, we accounted for the sale-leaseback of the Methuen
Facility as a finance transaction. Accordingly, we continue to report the
Methuen Facility as an asset and continue to record depreciation expense.
We record all cash received under the transaction as a finance obligation.
Accordingly, we recorded the $5,350,000 payment received during fiscal 2003
as a finance obligation at June 30, 2003 (see Note 7 to the Consolidated
Financial Statements). The $2,650,000 note receivable and related interest
thereon, and the $1,000,000 under the Earn Out Clause will be recorded as
an increase to the finance obligation as the cash payments are received.
The principal portion of the future monthly lease payments will be recorded
as a reduction to the finance obligation. The interest portion of the
future monthly lease payments will be recorded as interest expense. The
closing costs for the transaction have been capitalized and are being
amortized as interest expense over the initial 15-year lease term. Upon
expiration of the repurchase option (June 30, 2015), we will reevaluate our
accounting to determine whether a gain or loss should be recorded on this
sale-leaseback transaction.
Poly-Flex Facility - Sale: The Poly-Flex Facility was sold for a total
purchase price of $3,000,000, which was paid in cash at the closing.
Poly-Flex Facility - Leaseback: Poly-Flex is leasing the Poly-Flex Facility
for a term of five years with the option to extend for two, five-year
terms. The initial base rent is $436,640 per year and increases two and one
half percent per year in each subsequent year. The total base rent for the
five-year term (excluding the extension options) is $2,295,124.
The lease contains a one-time early termination clause that allows Poly-
Flex to terminate the lease as of the last day of the third lease year. In
order to exercise this one time option, Poly-Flex must pay a termination
payment of $352,600. Poly-Flex does not have the option to purchase the
Poly-Flex Facility.
Poly-Flex is required to maintain a $250,000 irrevocable standby letter of
credit in favor of the buyer in lieu of a cash security deposit.
25
The sale included the land, land improvements, building and building
improvements of the Poly-Flex Facility.
Since we do not have any continuing involvement in the Poly-Flex Facility
after the sale, the transaction has been accounted for using sale-leaseback
accounting. Accordingly, we recorded no immediate loss as the fair value of
the facility exceeds the net book value at the time of sale. However,
approximately $1,386,000 of excess net book value over the sales price has
been recorded as a deferred loss and included in Other Assets. The deferred
loss will be amortized to lease expense over the initial five-year lease
term.
Loan and Security Agreement - We executed a Loan and Security Agreement
(the "Loan Agreement") with a bank on June 11, 2003. The Loan Agreement
provided our bank with a secured interest in substantially all of our
assets. We may borrow up to $10,000,000, based on a borrowing base of
eligible accounts receivable. Borrowings may be used for working capital
purposes only. The Loan Agreement carries interest at the bank's prime rate
(4.25% at June 30, 2003) plus 0.75% per annum and a maturity date of June
10, 2005. The bank's prime rate is equal to the greater of (a) 4.0% or (b)
the rate announced from time to time by the bank as its prime rate. Upon
our achievement of two (2) consecutive quarters of net income, the interest
rate shall be reduced to the bank's prime rate plus 0.25% per annum.
Interest is payable monthly. The Loan Agreement allows us to issue letters
of credit, enter into foreign exchange forward contracts and incur
obligations using the bank's cash management services up to an aggregate
limit of $1,000,000, which reduces our availability for borrowings under
the Loan Agreement. The Loan Agreement contains certain restrictive
covenants, including but not limited to, limitations on debt incurred by
our foreign subsidiaries, acquisitions, sales and transfers of assets, and
prohibitions against cash dividends, mergers and repurchases of stock
without prior bank approval. The Loan Agreement also has financial
covenants related to maintenance of a minimum fixed charge ratio and
maintenance of $750,000 in minimum cash balances or excess availability
under the Loan Agreement.
At June 30, 2003, we were not in compliance with certain financial
covenants. On September 23, 2003, we executed a Loan Modification Agreement
(the "Modification Agreement") with our bank. The Modification Agreement
increases the interest rate on borrowings to the bank's prime rate (as
defined above) plus 1.5% (decreasing to prime plus 0.75% after one quarter
of positive operating income and to prime plus 0.25% after two quarters of
positive net income, respectively) and amends the financial covenants. We
have been in compliance and expect to be in compliance following the
execution of the Loan Modification Agreement.
Upon execution of the Loan Agreement, we also issued warrants to the bank
for the purchase of 25,000 shares of our common stock at an initial
exercise price of $6.885 per share. The exercise price is subject to future
adjustment under certain conditions, including but not limited to, stock
splits and stock dividends. The warrants are currently exercisable and
expire on June 10, 2008. The fair market value of the warrants issued to
the lender on June 10, 2003 was estimated to be $100,581, which has been
recorded as deferred financing costs and is being amortized to interest
expense over the life of the debt. Total amortization in 2003 was $838.
At June 30, 2003, we had $3,306,150 in outstanding borrowings under the
Loan Agreement and had available borrowing capacity of $4,663,943, after
reduction for $1,000,000 of outstanding letters of credit. Since the
available borrowing capacity exceeded $750,000 at June 30, 2003, none of
our cash balance was subject to restriction at June 30, 2003.
Parlex Shanghai Term Notes - On February 25, 2003, Parlex Shanghai entered
into a short-term bank note, due August 22, 2003, bearing interest at
5.544%. Shanghai Jinling Co., Ltd ("Jinling"), a former minority interest
partner in Parlex Shanghai, guarantees the short-term note (see Note 18 to
the Consolidated Financial Statements). Amounts outstanding under this
short-term note total $845,000 at June 30, 2003 and are included within the
current portion of long-term debt on the consolidated balance sheet based
upon its scheduled repayment terms. We provide a cross guarantee to Jinling
for 100% of the term note. On March 7, 2003, Parlex Shanghai entered into a
short-term bank note, due February 25,
26
2004, bearing interest at 5.841%. Amounts outstanding under this short-term
note total $1,330,000 at June 30, 2003 and are included within the current
portion of long-term debt on the consolidated balance sheet based upon its
scheduled repayment terms. The notes replaced a similar short-term note
that terminated on February 26, 2003.
Parlex Interconnect Term Notes - In June 2002, our subsidiary, Parlex
Interconnect executed a $5,000,000 Loan Agreement (the "CITIC Loan Agreement")
with CITIC Ka Wah Bank Limited ("CITIC"), a Hong Kong Bank. Proceeds received
under the CITIC Loan Agreement are to be used exclusively for financing land,
building, plant and machinery and other working capital requirements and to
prepay Parlex Interconnect's two local short-term bank notes. Borrowings
under the CITIC Loan Agreement accrue interest at a fixed rate equal to LIBOR
plus a margin of 2.2%. Interest is payable at the end of each interest period
which varies from one to six months. As of June 30, 2003, total borrowings
were $3,800,000. These borrowings were used to repay local short-term bank
notes of $1,200,000 and fund equipment purchases and working capital
requirements. The CITIC Loan Agreement contains certain restrictive covenants
and a cross default provision that would permit the lender to accelerate the
repayment of Parlex Interconnect's obligation under the CITIC Loan Agreement
in the event of our default on other financing arrangements. As a condition
of the approval of this CITIC Loan Agreement, our subsidiary, Parlex Asia
Pacific Ltd., and we have provided a guarantee of the payment of this loan.
Under the provisions of our guarantee, we are required to comply with certain
financial covenants. At June 30, 2003, we were not in compliance with certain
of our financial covenants.
Effective October 8, 2003, CITIC entered into a Supplemental Deed with Parlex
Interconnect relating to the CITIC Loan Agreement (the "CITIC Loan Agreement
Amendment"), and with us (the "Guarantee Agreement Amendment"). Among other
matters, the CITIC Loan Agreement Amendment reduced Parlex Interconnect's
total borrowing capacity from $5,000,000 to $3,800,000, established a new
repayment schedule and added a restrictive financial covenant regarding
EBITDA as of December 31, 2003 for Parlex Interconnect. Under the new
repayment schedule $1,300,000 is due in 2004, $1,500,000 is due in 2005 and
$1,000,000 is due in 2006. The Guarantee Agreement Amendment modified the
restrictive financial covenants relating to our Current Ratio, Tangible Net
Worth and Total Liabilities to Tangible Net Worth. We are and expect to
remain in compliance with the financial covenants, as amended.
Loan Agreement Dated March 1, 2000 with Fleet National Bank ("Revolving
Credit Agreement") - The Revolving Credit Agreement was repaid in full on
June 11, 2003 utilizing approximately $7.9 million of proceeds from the two
sale-leaseback transactions and $3.3 million of borrowings under the Loan
Agreement. Upon the repayment, we terminated the Revolving Credit
Agreement. At June 30, 2002 and during fiscal 2003, we were not in
compliance with certain restrictive covenants under the Revolving Credit
Agreement. We received a waiver of the certain restrictive covenants at
June 30, 2002 and renegotiated the terms of our existing Revolving Credit
Agreement (the "Third Amendment"). Among other provisions, the Third
Amendment reduced the borrowing availability and amended the restrictive
covenants for periods subsequent to June 30, 2002.
Subsequent Events - Subsequent to June 30, 2003, we entered into several
transactions to provide additional sources to fund our operations, as
follows:
Sale of Our 7% Convertible Subordinated Notes and Related Warrants - On
July 28, 2003, we entered into a Securities Purchase Agreement (the
"Agreement") pursuant to which we sold an aggregate $6,000,000 of our 7%
convertible subordinated notes (the "Notes") with attached warrants (the
"Warrants") to several institutional investors. We issued these notes to
support our current working capital needs. We received net proceeds of
approximately $5.5 million from the transaction, after deduction for
approximately $500,000 in finders' fees and other transaction expenses. The
Notes bear interest at a fixed rate of 7%, payable quarterly in shares of
our common stock. The Notes are junior to the indebtedness due to Silicon
Valley Bank, Shanghai Jingling Co., Ltd. and the CITIC Ka Wah Bank Limited.
The Notes mature on July 28, 2007.
As specified in the Agreement, we will determine the number of shares of
common stock to be issued as payment for the interest by dividing the
monetary value of the accrued interest by the then current conversion
price, initially at $8.00 per common share. Interest expense will be
recorded quarterly based
27
on the fair value of the common shares issued. Accordingly, interest
expense may fluctuate from quarter to quarter. No principal payments are
due until maturity on July 28, 2007. The Notes are unsecured.
The Notes are convertible immediately by the investors, in whole or in
part, into shares of our common stock at an initial conversion price equal
to $8.00. After two years from the date of issuance, we have the right to
redeem all, but not less than all, of the Notes at 100% of the remaining
principal of Notes then outstanding, plus all accrued and unpaid interest
under certain conditions. After three years from the date of issuance, the
holder of any Notes may require us to redeem the Notes in whole, but not in
part. Such redemption shall be at 100% of the remaining principal of such
Notes, plus all accrued and unpaid interest. In the event of a Change in
Control (as defined therein), the holder has the option to require that the
Notes be redeemed in whole (but not in part), at 120% of the outstanding
unpaid principal amount, plus all unpaid interest accrued.
In connection with the sale of the Notes, the investors also received
common stock purchase warrants for an aggregate of 300,000 shares of our
common stock at an initial exercise price of $8.00 per share. The Warrants
are immediately exercisable and expire on July 28, 2007. The conversion
price of the Notes and the exercise price of the Warrants are subject to
adjustment in the event of stock splits, dividends and certain
combinations. The relative fair value of the Warrants on July 28, 2003 was
estimated to be approximately $1,035,000. Furthermore, the Notes contained
a beneficial conversion feature representing an effective initial
conversion price that was less than the fair market value of the underlying
common stock on July 28, 2003. The fair value of the beneficial conversion
feature was estimated to be approximately $1,035,000. Both the relative
fair value of the Warrants and the fair value of the beneficial conversion
feature will be recorded as an increase in additional paid-in capital and
as original issuance discount on the underlying debt. The original issue
discount will be amortized to interest expense over the 4-year life of the
Notes.
Land Use Rights - In July 2003, one of our subsidiaries, Parlex
Interconnect, executed an agreement to sell its land use rights relating to
a parcel of land located in the People's Republic of China (see Note 4 to
the Consolidated Financial Statements) for approximately $1.2 million. We
received approximately $1.0 million in cash in August 2003 and the balance
will be paid at closing.
Parlex Shanghai Term Note - On August 20, 2003, Parlex Shanghai entered
into a short-term bank note, due August 20, 2004, bearing interest at
5.841%. Amounts outstanding under this short-term note total $1.2 million
as of September 30, 2003. The note replaced a similar short-term note that
terminated on August 22, 2003.
Payments Due Under Contractual Obligations
- ------------------------------------------
The following table summarizes the payments due under our contractual
obligations at June 30, 2003, adjusted to include the cash commitments
associated with the 7% convertible subordinated notes, and the effect such
obligations are expected to have on liquidity and cash flow in future
periods:
28
Payments due by period
----------------------------------------------------------------------
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
----------- ----- --------- ----- ----- ---------
Long-term debt
obligations $ 9,281,795 $3,474,543 $ 5,807,252 $ - $ -
Capital leases, including
Methuen facility
finance obligation 18,941,667 1,079,167 2,181,250 2,331,250 13,350,000
Operating leases,
including Poly-Flex
Facility 5,300,352 1,439,327 1,896,714 1,818,525 145,786
Deferred compensation 1,015,458 182,000 531,351 302,107 -
7% convertible sub-
ordinated notes 6,000,000 - - 6,000,000 -
----------- ---------- ----------- ----------- -----------
Total $40,539,272 $6,175,037 $10,416,567 $10,451,882 $13,495,786
=========== ========== =========== =========== ===========
Throughout fiscal 2003, we took a series of steps to reduce operating
expenses and to restructure operations, which consisted primarily of
reductions in workforce and consolidating manufacturing operations.
Moreover, we continue to implement plans to control operating expenses,
inventory levels, and capital expenditures as well as plans to manage
accounts payable and accounts receivable to enhance cash flows and return
to profitability. Our plans include the following actions: 1) continuing to
consolidate some of our manufacturing facilities; 2) continuing to transfer
certain manufacturing processes from our domestic operations to our lower
cost international manufacturing operations, particularly those in the
People's Republic of China; 3) expanding our products in the home
appliance, laptop computer, and electronic identification markets; 4)
continuing to monitor and reduce selling, general and administrative
expenses; and 5) completing sales of non-essential assets such as our land
use rights in China (see Note 18 to the Consolidated Financial Statements).
Furthermore, we are exploring additional and / or alternative financing
arrangements to partially replace or supplement our financing arrangements
currently in place to provide us with long-term financing to support our
current working capital needs.
We believe that our cash on hand after the above described financing
transactions, and cash expected to be generated during fiscal 2004 will be
sufficient to enable us to meet our financing and operating obligations
through at least December 2004. If we require additional and / or
alternative external financing to repay or refinance our existing financing
obligations or fund our working capital requirements, we believe that we
will be able to obtain new external financing. However, there can be no
assurance that we will be successful in obtaining such new financing.
Recent Accounting Pronouncements
On July 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, " and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 specifies accounting for long-lived assets to
be disposed of by
29
sale, and broadens the presentation of discontinued operations to include
more disposal transactions than were included under the previous standards.
On July 1, 2002, the Company adopted SFAS No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). This statement amends, among
others, the classification on the statement of operations for gains and
losses from the extinguishment of debt. Previously such gains and losses were
reported as extraordinary items, however, the adoption of SFAS No. 145 may
require the classification of gains and losses from the extinguishment of
debt within income or loss from continuing operations unless the
transactions meet the criteria for extrraordinasry treatment as infrequent
and unusual as desctibed in APB Opinion No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
In January 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
statement supersedes Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity". Under this statement, a liability for a cost
associated with a disposal or exit activity is recognized at fair value
when the liability is incurred rather than at the date an entity's
commitment to an exit plan as required under EITF 94-3.
On March 30, 2003, the Company adopted the disclosure provisions of SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure, an amendment of FASB Statement No. 123." This Statement amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change in the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosures Requirements for Guarantees, Including Indirect
Guarantees" ("FIN No. 45"). This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Interpretation does not
prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. This
Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtness of
Others", which is being superseded. The Company adopted FIN No. 45 on a
prospective basis for guarantees issued or modified after December 15,
2002. The Company has disclosed certain inter-company loan guarantees in
Note 7 to the Consolidated Financial Statements.
The adoption of SFAS Nos. 144, 145, 146, 148, and FIN No. 45 did not have a
material effect on the Company's financial statements.
Future Adoption of Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. SFAS No. 150 requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances). The requirements of this statement apply
to an issuers' classification and measurement of freestanding financial
instruments, including those that comprise more than one option or forward
contract. SFAS No. 150 is effective for financial instruments
30
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The Company is currently evaluating the impact resulting from the adoption
of SFAS No. 150 on the Company's consolidated financial position and
results of operations, but does not expect a material impact.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our prospects are subject to certain uncertainties and risks. Our future
results may differ materially from the current results and actual results
could differ materially from those projected in the forward-looking
statements as a result of certain risk factors, including but not limited to
those set forth below, other one-time events and other important factors
disclosed previously and from time to time in our other filings with the
Securities and Exchange Commission.
Our business has been, and could continue to be, materially adversely
affected as a result of general economic and market conditions.
We are subject to the effects of general global economic and market
conditions. Our operating results have been materially adversely affected as
a result of recent unfavorable economic conditions and reduced electronics
industry spending on both a domestic and worldwide basis. If economic and
market conditions do not improve, our business, results of operations or
financial condition could continue to be materially adversely affected.
We have at times relied upon waivers from our lenders and amendments or
modifications to our financing agreements to avoid any acceleration of our
debt payments. In the event we are not in compliance with our financial
covenants in the future, we cannot be certain our lenders will continue to
grant us future waivers or execute amendments or modifications on terms
which are satisfactory to us. If such waivers are not received, our debt
will be immediately callable.
At June 30, 2003, we were not in compliance with certain financial
covenants of our principal external financing agreement with Silicon Valley
Bank, or our guarantee of $3.8 million of debt owed by our subsidiary,
Parlex Interconnect, to CITIC Ka Wah Bank ("CITIC"), Limited, a Hong Kong bank.
On September 23, 2003, we executed a Loan Modification Agreement (the
"Modification Agreement") with Silicon Valley Bank. The Modification
Agreement increases the interest rate on borrowings to the bank's prime
rate (as defined therein) plus 1.5% (decreasing to prime plus 0.75% after
one quarter of positive operating income and to prime plus 0.25% after two
quarters of positive net income, respectively) and amends the financial
covenants. Effective October 8, 2003, CITIC entered into a Supplemental Deed
with Parlex Interconnect relating to the CITIC Loan Agreement (the "CITIC
Loan Agreement Amendment"), and with us (the "Guarantee Agreement Amendment").
Among other matters, the Modification Agreement, the CITIC Loan Agreement
Amendment and the Guarantee Agreement Amendment modified certain restrictive
financial covenants such as EBITDA, Current Ratio, Tangible Net Worth and
Total Liabilities to Tangible Net Worth. We are and expect to remain in
compliance with all of our financial covenants, as amended.
At June 30, 2002 and during the third and fourth quarters of fiscal 2003, we
were not in compliance with certain financial covenants of our prior
principal external financing agreement with Fleet Bank (the "Revolving Credit
Agreement"). On September 27, 2002, we executed a Third Amendment to the
Revolving Credit Agreement, which amended the financial covenants. Following
the execution of the Third Amendment, we were in compliance with the
financial covenants at June 30, 2002. The Revolving Credit Agreement was
repaid in June 2003 with proceeds from two sale-leaseback transactions and
borrowings under the new loan agreement with Silicon Valley Bank.
31
The issuance of our shares upon conversion of outstanding convertible notes
and upon exercise of outstanding warrants may cause significant dilution to
our stockholders and may have an adverse impact on the market price of our
common stock.
On July 28, 2003, we completed a private placement of our 7% convertible
subordinated notes (and accompanying warrants) in an aggregate subscription
amount of $6 million. The conversion price of the convertible notes and the
exercise price of the warrants was $8.00 per share. The issuance of our
shares upon conversion of the convertible notes, and exercise of the
warrants, and their resale by the holders thereof will increase our publicly
traded shares. These re-sales could also depress the market price of our
common stock. We will not control whether or when the note and warrant
holders elect to convert their shares.
The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of
our common stock. Moreover, the perceived risk of dilution and the
resulting downward pressure on our stock price could encourage investors to
engage in short sales of our common stock. By increasing the number of
shares offered for sale, material amounts of short selling could further
contribute to progressive price declines in our common stock. For
additional information relating to the sale of notes and warrants
transaction, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Sale of Our 7% Convertible Subordinated Notes and Related Warrants"
Our recently completed private placement has substantially increased our
indebtedness.
As a result of our recently completed private placement of $6.0 million
aggregate principal amount of convertible subordinated notes, we have
substantially increased our indebtedness. Although the convertible notes
provide for the payment of interest in shares of our common stock under
certain conditions, we cannot guarantee that such conditions shall exist
and, in the event they do not exist, interest payments must be made in
cash. The convertible notes may become immediately due and payable in the
event of a default by us of certain covenants. We cannot guarantee that we
will be able to meet our obligations under the terms of the convertible
notes, or that we will have sufficient funds to repay the convertible notes
in the event of a redemption or an event of default. For additional
information relating to this transaction, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Sale of Our 7% Convertible Subordinated
Notes and Related Warrants"
Servicing our existing debt may constrain our future operations.
Our ability to satisfy our obligations to pay interest and to repay debt is
dependent on our future performance. Our performance depends, in part, on
prevailing economic conditions and financial, business and other factors,
including factors beyond our control. To the extent that we use a
substantial portion of our cash flow from operations to pay the principal
and interest on our indebtedness, that cash flow will not be available to
fund our future operations and capital expenditures. We cannot be sure our
operating cash flow will be sufficient to fund our future capital
expenditures and debt service requirements or to fund future operations.
Our credit agreement contains restrictive covenants that could adversely
affect our business by limiting our flexibility.
Our credit agreement imposes restrictions that affect, among other things,
our ability to incur debt, pay dividends, sell assets, create liens, make
capital expenditures and investments, merge or consolidate, enter into
transactions with affiliates, and otherwise enter into certain transactions
outside the ordinary course of business. Our credit agreement also requires
us to maintain specified financial ratios and meet certain financial tests.
Our ability to continue to comply with these covenants and restrictions may
be affected by events beyond our control. A breach of any of these
covenants or restrictions would result in an event of default under our
credit agreement. Upon the occurrence of a breach, the lender under our
credit
32
agreement could elect to declare all amounts borrowed thereunder, together
with accrued interest, to be due and payable, foreclose on the assets
securing our credit agreement and/or cease to provide additional revolving
loans or letters of credit, which would have a material adverse effect on
us.
We have incurred losses in each of the last three years and we may continue
to incur losses.
We incurred net losses in the recently completed fiscal year 2003, as well
as in fiscal years 2002 and 2001. We had net losses of $19.5 million for
2003, $10.4 million for 2002 and $6.2 million for 2001. Our operations may
not be profitable in the future.
If we cannot obtain additional financing when needed, we may not be able to
expand our operations and invest adequately in research and development,
which could cause us to lose customers and market share.
The development and manufacturing of flexible interconnects is capital
intensive. To remain competitive, we must continue to make significant
expenditures for capital equipment, expansion of operations and research and
development. We expect that substantial capital will be required to expand
our manufacturing capacity and fund working capital for anticipated growth.
We may need to raise additional funds either through borrowings or further
equity financings. We may not be able to raise additional capital on
reasonable terms, or at all. If we cannot raise the required funds when
needed, we may not be able to satisfy the demands of existing and prospective
customers and may lose revenue and market share.
Our operating results fluctuate and may fail to satisfy the expectations of
public market analysts and investors, causing our stock price to decline.
Our operating results have fluctuated significantly in the past and we expect
our results to continue to fluctuate in the future. Our results may fluctuate
due to a variety of factors, including the timing and volume of orders from
customers, the timing of introductions of and market acceptance of new
products, changes in prices of raw materials, variations in production yields
and general economic trends. It is possible that in some future periods our
results of operations may not meet or exceed the expectations of public
market analysts and investors. If this occurs, the price of our common stock
is likely to decline.
Our quarterly results depend upon a small number of large orders received in
each quarter, so the loss of any single large order could harm quarterly
results and cause our stock price to drop.
A substantial portion of our sales in any given quarter depends on obtaining
a small number of large orders for products to be manufactured and shipped in
the same quarter in which the orders are received. Although we attempt to
monitor our customers' needs, we often have limited knowledge of the
magnitude or timing of future orders. It is difficult for us to reduce
spending on short notice on operating expenses such as fixed manufacturing
costs, development costs and ongoing customer service. As a result, a
reduction in orders, or even the loss of a single large order, for products
to be shipped in any given quarter could have a material adverse effect on
our quarterly operating results. This, in turn, could cause our stock price
to decline.
Because we sell a substantial portion of our products to a limited number of
customers, the loss of a significant customer or a substantial reduction in
orders by any significant customer would harm our operating results.
Historically we have sold a substantial portion of our products to a limited
number of customers. Our 20 largest customers based on sales accounted for
approximately 50% of total revenues in fiscal 2003, 44% in fiscal 2002 and
55% in fiscal 2001.
We expect that a limited number of customers will continue to account for a
high percentage of our total revenues in the foreseeable future. As a result,
the loss of a significant customer or a substantial reduction in orders by
any significant customer would cause our revenues to decline and have an
adverse effect on our operating results.
33
If we are unable to respond effectively to the evolving technological
requirements of customers, our products may not be able to satisfy the
demands of existing and prospective customers and we may lose revenues and
market share.
The market for our products is characterized by rapidly changing technology
and continuing process development. The future success of our business will
depend in large part upon our ability to maintain and enhance our
technological capabilities. We will need to develop and market products that
meet changing customer needs, and successfully anticipate or respond to
technological changes on a cost-effective and timely basis. There can be no
assurance that the materials and processes that we are currently developing
will result in commercially viable technological processes, or that there
will be commercial applications for these technologies. In addition, we may
not be able to make the capital investments required to develop, acquire or
implement new technologies and equipment that are necessary to remain
competitive. If we fail to keep pace with technological change, our products
may become less competitive or obsolete and we may lose customers and
revenues.
Competing technologies may reduce demand for our products.
Flexible circuit and laminated cable interconnects provide electrical
connections between components in electrical systems and are used as a
platform to support the attachment of electronic devices. While flexible
circuits and laminated cables offer several advantages over competing printed
circuit board and ceramic hybrid circuit technologies, our customers may
consider changing their designs to use these alternative technologies in
future applications. If our customers switch to alternative technologies, our
business, financial condition and results of operations could be materially
adversely affected. It is also possible that the flexible interconnect
industry could encounter competition from new technologies in the future that
render existing flexible interconnect technology less competitive or
obsolete.
We are heavily dependent upon certain target markets for domestic
manufacturing. A slowdown in these markets could have a material impact on
domestic capacity utilization resulting in lower sales and gross margins.
We manufacture our products in six facilities worldwide, including lower cost
offshore locations in China. However, a significant portion of our
manufacturing is still performed domestically. Domestic manufacturing may be
at a competitive disadvantage with respect to price when compared to lower
cost facilities in Asia and other locations. While historically our
competitors in these locations have produced less technologically advanced
products, they continue to expand their capabilities. Further, we have
targeted markets that have historically sought domestic manufacturing,
including the military and aerospace markets. Should we be unsuccessful in
maintaining our competitive advantage or should certain target markets also
move production to lower cost offshore locations, our domestic sales will
decline resulting in significant excess capacity and reduced gross margins.
A significant downturn in any of the sectors in which we sell products could
result in a revenue shortfall.
We sell our flexible interconnect products principally to the automotive,
telecommunications and networking, diversified electronics, military, home
appliance, electronic identification and computer markets. The worldwide
electronics industry has seen a substantial downturn since 2001 impacting a
number of our target markets. Although we serve a variety of markets to avoid
a dependency on any one sector, a significant further downturn in any of
these market sectors could cause a material reduction in our revenues, which
could be difficult to replace.
We rely on a limited number of suppliers, and any interruption in our primary
sources of supply, or any significant increase in the prices of materials,
chemicals or components, would have an adverse effect on our short-term
operating results.
34
We purchase the bulk of our raw materials, process chemicals and components
from a limited number of outside sources. In fiscal 2003, we purchased
approximately 17% of our materials from DuPont and Northfield Acquisition
Co., doing business as Sheldahl, our two largest suppliers. We operate under
tight manufacturing cycles with a limited inventory of raw materials. As a
result, although there are alternative sources of the materials that we
purchase from our existing suppliers, any unanticipated interruption in
supply from DuPont or Sheldahl, or any significant increase in the prices of
materials, chemicals or components, would have an adverse effect on our
short-term operating results.
If we acquire additional businesses, these acquisitions will involve
financial uncertainties as well as personnel contingencies, and may be risky
and difficult to integrate.
We have completed two acquisitions in the past four years and we may acquire
additional businesses that could complement or expand our business. Acquired
businesses may not generate the revenues or profits that we expect and we may
find that they have unknown or undisclosed liabilities. In addition, if we do
make acquisitions, we will face a number of other risks and challenges,
including: the difficulty of integrating dissimilar operations or assets;
potential loss of key employees of the acquired business; assimilation of new
employees who may not contribute or perform at the levels we expect;
diversion of management time and resources; and additional costs associated
with obtaining any necessary financing.
These factors could hamper our ability to receive the anticipated benefits
from any acquisitions we may pursue, and could adversely affect our financial
condition and our stock price.
The additional expenses and risks related to our existing international
operations, as well as any expansion of our global operations, could
adversely affect our business.
We own a 90.1% equity interest in our joint venture in China, Parlex
Shanghai, which manufactures and sells flexible circuits. We also operate a
facility in Mexico for use in the finishing, assembly and testing of flexible
circuit and laminated cable products. We have a facility in the United
Kingdom where we manufacture polymer thick film flexible circuits and polymer
thick film flexible circuits with surface mounted components and intend to
introduce production of laminated cable within the next year. We will
continue to explore appropriate expansion opportunities as demand for our
products increases.
Manufacturing and sales operations outside the United States carry a number
of risks inherent in international operations, including: imposition of
governmental controls, regulatory standards and compulsory licensure
requirements; compliance with a wide variety of foreign and U.S. import and
export laws; currency fluctuations; unexpected changes in trade restrictions,
tariffs and barriers; political and economic instability; longer payment
cycles typically associated with foreign sales; difficulties in administering
business overseas; labor union issues; and potentially adverse tax
consequences. Although these issues have not materially impacted our revenues
or operations to date, we cannot guarantee that they will not impact our
revenues or operations in the future.
International expansion may require significant management attention, which
could negatively affect our business. We may also incur significant costs to
expand our existing international operations or enter new international
markets, which could increase operating costs and reduce our profitability.
We face significant competition, which could make it difficult for us to
acquire and retain customers.
We face competition worldwide in the flexible interconnect market from a
number of foreign and domestic providers, as well as from alternative
technologies such as rigid printed circuits. Many of our competitors are
larger than we are and have greater financial resources. New competitors
could also enter our markets. Our competitors may be able to duplicate our
strategies, or they may develop enhancements to, or future generations of,
products that could offer price or performance features that are superior to
our products. Competitive pressures could also necessitate price reductions,
which could adversely affect our operating results. In addition, some of our
competitors are based in foreign countries and have cost structures and
35
prices based on foreign currencies. Accordingly, currency fluctuations could
cause our dollar-priced products to be less competitive than our competitors'
products priced in other currencies.
We will need to make a continued high level of investment in product research
and development and research, sales and marketing and ongoing customer
service and support in order to remain competitive. We may not have
sufficient resources to be able to make these investments. Moreover, we may
not be able to make the technological advances necessary to maintain our
competitive position in the flexible interconnect market.
If we are unable to attract, retain and motivate key personnel, we may not be
able to develop, sell and support our products and our business may lack
strategic direction.
We are dependent upon key members of our management team. In addition, our
future success will depend in large part upon our continuing ability to
attract, retain and motivate highly qualified managerial, technical and sales
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be successful in hiring or retaining such personnel.
We currently maintain a key person life insurance policy in the amount of
$1.0 million on Peter J. Murphy. If we lose the services of Mr. Murphy or one
or more other key individuals, or are unable to attract additional qualified
members of the management team, our ability to implement our business
strategy may be impaired. If we are unable to attract, retain and motivate
qualified technical and sales personnel, we may not be able to develop, sell
and support our products.
If we are unable to protect our intellectual property, our competitive
position could be harmed and our revenues could be adversely affected.
We rely on a combination of patent and trade secret laws and non-disclosure
and other contractual agreements to protect our proprietary rights. We own 21
patents issued and have 17 patent applications pending in the United States
and have several corresponding foreign patent applications pending. Our
existing patents may not effectively protect our intellectual property and
could be challenged by third parties, and our future patent applications, if
any, may not be approved. In addition, other parties may independently
develop similar or competing technologies. Competitors may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. If we fail to adequately protect our proprietary rights, our
competitors could offer similar products using materials, processes or
technologies developed by us, potentially harming our competitive position
and our revenues.
If we become involved in a protracted intellectual property dispute, or one
with a significant damages award or which requires us to cease selling some
of our products, we could be subject to significant liability and the time
and attention of our management could be diverted.
Although no claims have been asserted against us for infringement of the
proprietary rights of others, we may be subject to a claim of infringement in
the future. An intellectual property lawsuit against us, if successful, could
subject us to significant liability for damages and could invalidate our
proprietary rights. A successful lawsuit against us could also force us to
cease selling, or redesign, products that incorporate the infringed
intellectual property. We could also be required to obtain a license from the
holder of the intellectual property to use the infringed technology. We might
not be able to obtain a license on reasonable terms, or at all. If we fail to
develop a non-infringing technology on a timely basis or to license the
infringed technology on acceptable terms, our revenues could decline and our
expenses could increase.
We may, in the future, be required to initiate claims or litigation against
third parties for infringement of our proprietary rights or to determine the
scope and validity of our proprietary rights or the proprietary rights of
competitors. Litigation with respect to patents and other intellectual
property matters could result in substantial costs and divert our
management's attention from other aspects of our business.
Market prices of technology companies have been highly volatile, and our
stock price may be volatile as well.
36
From time to time the U.S. stock market has experienced significant price and
trading volume fluctuations, and the market prices for the common stock of
technology companies in particular have been extremely volatile. In the past,
broad market fluctuations that have affected the stock price of technology
companies have at times been unrelated or disproportionate to the operating
performance of these companies. Any significant fluctuations in the future
might result in a material decline in the market price of our common stock.
Following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. If we were to become involved in this type of litigation, we
could incur substantial costs and diversion of management's attention, which
could harm our business, financial condition and operating results.
The costs of complying with existing or future environmental regulations, and
of curing any violations of these regulations, could increase our operating
expenses and reduce our profitability.
We are subject to a variety of environmental laws relating to the storage,
discharge, handling, emission, generation, manufacture, use and disposal of
chemicals, solid and hazardous waste and other toxic and hazardous materials
used to manufacture, or resulting from the process of manufacturing, our
products. We cannot predict the nature, scope or effect of future regulatory
requirements to which our operations might be subject or the manner in which
existing or future laws will be administered or interpreted. Future
regulations could be applied to materials, product or activities that have
not been subject to regulation previously. The costs of complying with new or
more stringent regulations, or with more vigorous enforcement of these
regulations, could be significant.
Environmental laws require us to maintain and comply with a number of
permits, authorizations and approvals and to maintain and update training
programs and safety data regarding materials used in our processes.
Violations of these requirements could result in financial penalties and
other enforcement actions. We could also be required to halt one or more
portions of our operations until a violation is cured. Although we attempt to
operate in compliance with these environmental laws, we may not succeed in
this effort at all times. The costs of curing violations or resolving
enforcement actions that might be initiated by government authorities could
be substantial.
Undetected problems in our products could directly impair our financial
results.
If flaws in design, production, assembly or testing of our products were to
occur by us or our suppliers, we could experience a rate of failure in our
products that would result in substantial repair or replacement costs and
potential damage to our reputation. Continued improvement in manufacturing
capabilities, control of material and manufacturing quality and costs and
product testing, are critical factors in our future growth. There can be no
assurance that our efforts to monitor, develop, modify and implement
appropriate test and manufacturing processes for our products will be
sufficient to permit us to avoid a rate of failure in our products that
results in substantial delays in shipment, significant repair or replacement
costs or potential damage to our reputation, any of which could have a
material adverse effect on our business, results of operations or financial
condition.
Our stock is thinly traded.
Our stock is thinly traded and you may have difficulty in reselling your
shares quickly. The low trading volume of our common stock is outside of our
control, and we cannot guarantee that trading volume will increase in the
near future.
We do not expect to pay dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to
pay cash dividends on our common stock any time in the foreseeable future.
Our current financing agreements prohibit the payment of dividends. The future
payment of dividends directly depends upon our future earnings, capital
requirements, financial requirements and other factors that our board of
37
directors will consider. For the foreseeable future, we will use earnings
from operations, if any, to finance our growth, and we will not pay
dividends to our common stockholders. You should not rely on an investment
in our common stock if you require dividend income. The only return on your
investment in our common stock, if any, would most likely come from any
appreciation of our common stock.
We may have exposure to additional income tax liabilities.
As a multinational corporation, we are subject to income taxes in both the
United States and various foreign jurisdictions. Our domestic and
international tax liabilities are subject to the allocation of revenues and
expenses in different jurisdictions and the timing of recognizing revenues
and expenses. Additionally, the amount of income taxes paid is subject to our
interpretation of applicable tax laws in the jurisdictions in which we file.
From time to time, we are subject to income tax audits. While we believe we
have complied with all applicable income tax laws, there can be no assurance
that a governing tax authority will not have a different interpretation of
the law and assess us with additional taxes. Should we be assessed with
significant additional taxes, there could be a material adverse affect on our
results of operations or financial condition.
We could use preferred stock to resist takeovers, and the issuance of
preferred stock may cause additional dilution.
Our Articles of Organization authorizes the issuance of up to 1,000,000
shares of preferred stock, of which no shares are issued and outstanding.
Our Articles of Organization gives our board of directors the authority to
issue preferred stock without approval of our stockholders. We may issue
additional shares of preferred stock to raise money to finance our
operations. We may authorize the issuance of the preferred stock in one or
more series. In addition, we may set the terms of preferred stock, including:
* dividend and liquidation preferences;
* voting rights;
* conversion privileges;
* redemption terms; and
* other privileges and rights of the shares of each authorized series.
The issuance of large blocks of preferred stock could possibly have a
dilutive effect to our existing stockholders. It can also negatively impact
our existing stockholders' liquidation preferences. In addition, while we
include preferred stock in our capitalization to improve our financial
flexibility, we could possibly issue our preferred stock to friendly third
parties to preserve control by present management. This could occur if we
become subject to a hostile takeover that could ultimately benefit Parlex
and Parlex's stockholders.
Item 7A. Quantitative and Qualitative Disclosures About 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 U.S. and foreign interest rates and fluctuations in
exchange rates. We do not use derivative financial instruments.
We also have a $10,000,000 Loan and Security Agreement that bears interest at
our lender's prime rate plus 1.5%. The prime rate is affected by changes in
market interest rates. As of June 30, 2003, we have an outstanding balance
under our Loan and Security Agreement of $3,306,000. We have the option to
repay
38
borrowings at anytime without penalty and therefore believe that our market
risk is not material. A 10% change in interest rates would impact interest
expense by approximately $20,000. We do not consider this to be material or
significant.
The remainder of our long-term debt bears interest at fixed rates and is
therefore not subject to market risk.
Sales of Parlex Shanghai, Parlex Interconnect, Poly-Flex Circuits Limited and
Parlex Europe are typically denominated in the local currency, which is also
each company's functional currency. This creates exposure to changes in
exchange rates. The changes in the Chinese/U.S. and U.K./U.S. exchange rates
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 and Parlex
Interconnect had combined net assets as of June 30, 2003, of approximately
$13.8 million. Poly-Flex Circuits Limited and Parlex Europe had combined net
assets as of June 30, 2003 of approximately $5.2 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 June 30, 2003, Parlex Shanghai and
Parlex Interconnect had combined outstanding debt of approximately
$6.0 million. As of June 30, 2003, Poly-Flex Circuits Limited had no
outstanding debt.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Parlex Corporation
Methuen, Massachusetts
We have audited the accompanying consolidated balance sheets of Parlex
Corporation and subsidiaries (the "Company") as of June 30, 2003 and 2002,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June
30, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Parlex Corporation and
subsidiaries at June 30, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 2003, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other
intangible assets.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
September 29, 2003
(October 8, 2003 as to the fourth paragraph of Note 1 and the seventh
paragraph of Note 7)
F-1
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
- ---------------------------------------------------------------------------
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $ 1,513,523 $ 1,785,025
Accounts receivable - less allowance
for doubtful accounts of $949,261
in 2003 and $1,215,178 in 2002 13,835,589 17,665,808
Inventories - net 17,082,878 17,588,589
Refundable income taxes 279,381 1,810,102
Deferred income taxes 313,109 3,595,659
Other current assets 2,077,409 2,030,210
----------- ------------
Total current assets 35,101,889 44,475,393
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 589,872 1,018,822
Buildings 18,543,295 22,209,273
Machinery and equipment 59,625,945 58,267,902
Leasehold improvements and other 6,321,658 7,499,054
Construction in progress 4,591,458 6,467,541
----------- ------------
Total 89,672,228 95,462,592
Less accumulated depreciation and
amortization (42,779,012) (39,480,757)
----------- ------------
Property, plant and equipment - net 46,893,216 55,981,835
----------- ------------
INTANGIBLE ASSETS - NET 1,130,005 1,155,827
GOODWILL - NET 1,157,510 1,157,510
DEFERRED INCOME TAXES - 2,850,876
OTHER ASSETS 1,750,061 432,488
----------- ------------
TOTAL $86,032,681 $106,053,929
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,813,117 $ 3,560,855
Accounts payable 13,396,274 13,729,201
Accrued liabilities 5,170,608 4,865,058
----------- ------------
Total current liabilities 22,379,999 22,155,114
----------- ------------
LONG-TERM DEBT 10,802,275 12,000,000
----------- ------------
OTHER NONCURRENT LIABILITIES 1,187,280 1,327,490
----------- ------------
MINORITY INTEREST IN PARLEX SHANGHAI 415,583 430,204
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
authorized, 1,000,000 shares; none
issued - -
Common stock, $.10 par value -
authorized, 30,000,000 shares in
2003 and 2002; issued 6,522,216
and 6,513,216 shares in 2003 and
2002, respectively 652,221 651,321
Additional paid-in capital 61,049,486 60,897,275
Retained earnings (9,605,380) 9,911,794
Accumulated other comprehensive income
(loss) 188,842 (281,644)
Less treasury stock, at cost - 210,000
shares in 2003 and 2002 (1,037,625) (1,037,625)
----------- ------------
Total stockholders' equity 51,247,544 70,141,121
----------- ------------
TOTAL $86,032,681 $106,053,929
=========== ============
See notes to consolidated financial statements.
F-2
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- ---------------------------------------------------------------------------
2003 2002 2001
REVENUES:
Product sales $ 82,780,243 $ 87,005,253 $103,426,642
License fees and royalty income 40,908 50,311 193,547
------------ ------------ ------------
Total revenues 82,821,151 87,055,564 103,620,189
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 80,803,104 90,293,843 97,460,179
Selling, general and administrative expenses 14,484,036 14,049,040 17,706,049
------------ ------------ ------------
Total costs and expenses 95,287,140 104,342,883 115,166,228
------------ ------------ ------------
OPERATING LOSS (12,465,989) (17,287,319) (11,546,039)
INTEREST AND NON OPERATING INCOME (EXPENSE)
Interest income 36,338 206,505 519,416
Interest expense (900,496) (643,722) (471,882)
Non operating income 3,343 105,205 168,316
Non operating expense (84,327) (104,715) (186,696)
------------ ------------ ------------
LOSS FROM OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST (13,411,131) (17,724,046) (11,516,885)
(PROVISION) BENEFIT FOR INCOME TAXES (6,120,664) 6,855,127 5,453,245
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (19,531,795) (10,868,919) (6,063,640)
MINORITY INTEREST 14,621 481,091 (135,845)
------------ ------------ ------------
NET LOSS $(19,517,174) $(10,387,828) $ (6,199,485)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (3.09) $ (1.65) $ (0.99)
============ ============ ============
WEIGHTED AVERAGE SHARES 6,308,542 6,303,216 6,289,117
============ ============ ============
See notes to consolidated financial statements.
F-3
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- ---------------------------------------------------------------------------
Accumulated
Additional Other Comprehensive
Common Stock Paid-in Retained Treasury Comprehensive Income
Shares Amount Capital Earnings Stock Income (Loss) (Loss) Total
BALANCE, JULY 1, 2000 6,485,884 $648,588 $60,678,009 $ 27,623,632 $(1,037,625) $(123,028) $ 87,789,576
Comprehensive income
(loss):
Net loss - - - (6,199,485) - - $ (6,199,485) (6,199,485)
------------
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation
adjustment - - - - - - (539,149) (539,149)
Unrealized loss on
short-term
investments - - - - - - 34,752 34,752
------------
Other comprehensive
income (loss) - - - - - (504,397) (504,397)
------------
Comprehensive income
(loss) $ (6,703,882)
============
Exercise of stock
options and other 27,332 2,733 147,493 - - - 150,226
Tax benefit arising
from the exercise of
stock options - - 71,773 - - - 71,773
Effect of subsidiary
accounting period
change - - - 43,438 - - 43,438
--------- -------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 2001 6,513,216 651,321 60,897,275 21,467,585 (1,037,625) (627,425) 81,351,131
Comprehensive income
(loss):
Net loss - - - (10,387,828) - - $(10,387,828) (10,387,828)
------------
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation
adjustment - - - - - - 380,533 380,533
Unrealized gain on
short-term
investments - - - - - - (34,752) (34,752)
------------
Other comprehensive
income (loss) - - - - - 345,781 345,781
------------
Comprehensive income
(loss) $(10,042,047)
============
Distribution of
earnings in
consideration for 40%
interest in Parlex
Shanghai Circuits Corp. - - - (1,167,963) - - (1,167,963)
--------- -------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 2002 6,513,216 651,321 60,897,275 9,911,794 (1,037,625) (281,644) 70,141,121
Comprehensive loss:
Net loss - - - (19,517,174) - - $(19,517,174) (19,517,174)
------------
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustment - - - - - 470,486 470,486 470,486
------------
Comprehensive income
(loss) $(19,046,688)
============
Issuance of stock
warrants - - 100,581 - - - 100,581
Exercise of stock
options 9,000 900 51,630 - - - 52,530
--------- -------- ----------- ------------ ----------- --------- ------------
BALANCE, JUNE 30, 2003 6,522,216 $652,221 $61,049,486 $ (9,605,380) $(1,037,625) $ 188,842 $ 51,247,544
========= ======== =========== ============ =========== ========= ============
See notes to consolidated financial statements.
F-4
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- ---------------------------------------------------------------------------
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,517,174) $(10,387,828) $ (6,199,485)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Non-cash operating items:
Depreciation of property, plant and equipment 6,462,860 6,422,514 6,260,344
Deferred income taxes 6,136,006 (4,593,804) (2,826,730)
Amortization of deferred loss on sale-
leaseback, deferred financing costs
and intangible assets 50,290 - -
Facility exit costs - 1,480,000 -
Loss on property, plant and equipment 621,052 173,828 74,369
Tax benefit arising from the exercise
of stock options - - 71,773
Minority interest (14,621) (481,091) 135,845
Changes in current assets and liabilities:
Accounts receivable - net 3,929,857 (115,019) 1,664,805
Inventories 594,604 1,771,999 1,729,045
Refundable income taxes 1,530,721 1,111,043 (2,921,145)
Other assets 488,248 (1,107,309) 694,530
Accounts payable and accrued liabilities (101,863) 3,195,360 (4,215,370)
------------ ------------ ------------
Net cash provided by (used in) operating activities 179,980 (2,530,307) (5,532,019)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Poly-Flex subsidiary - 525,000 525,000
Acquisition of minority interest in Parlex Shanghai - (4,485,095) -
Sale and maturity of available for sale securities - 5,498,951 738,010
Purchase of available for sale securities - - (6,236,961)
Net proceeds from sale-leaseback of Poly-Flex facility 2,927,213 - -
Additions to property, plant, equipment and other assets (2,244,008) (5,243,605) (7,311,625)
------------ ------------ ------------
Net cash provided by (used for) investing activities 683,205 (3,704,749) (12,285,576)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 23,063,796 28,975,378 23,580,184
Net proceeds from sale-leaseback of Methuen facility 5,019,219 - -
Payment of bank loans (29,305,450) (24,243,584) (14,594,033)
Exercise of stock options and other 52,530 - 150,226
------------ ------------ ------------
Net cash (used for) provided by financing activities (1,169,905) 4,731,794 9,136,377
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 35,218 84,297 (64,650)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (271,502) (1,418,965) (8,745,868)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,785,025 3,203,990 11,949,858
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,513,523 $ 1,785,025 $ 3,203,990
============ ============ ============
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property, plant, equipment and other asset purchases
financed under capital lease obligations, long-term
debt, and accounts payable $ 148,806 $ 1,474,311 $ 293,530
============ ============ ============
Issuance of stock warrants $ 100,581 $ - $ -
============ ============ ============
See notes to consolidated financial statements.
F-5
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
- ---------------------------------------------------------------------------
1. BUSINESS AND BASIS OF PRESENTATION
Business - Parlex Corporation ("Parlex" or the "Company") is a world
leader in the design and manufacture of flexible interconnect
products. Parlex produces flexible circuits, laminated cables,
flexible interconnect hybrid circuits and flexible interconnect
assemblies utilizing proprietary processes and patented technologies,
which are designed to satisfy the unique requirements of a wide range
of customers. Parlex provides its products and engineering services
to a variety of markets including automotive, telecommunications and
networking, diversified electronics, military, home appliance,
electronic identification and computer.
Basis of Presentation - As shown in the consolidated financial
statements, the Company incurred net losses of $19,517,174 and
$10,387,828 and only provided $179,980 and used $2,530,307 of cash in
operations for the fiscal years ended June 30, 2003 and 2002,
respectively. In addition the Company had an accumulated deficit of
$9,605,380 at June 30, 2003. Moreover, at June 30, 2003, the Company was
not in compliance with certain financial covenants of its principal
external financing agreement with Silicon Valley Bank and with its
guarantee of $3.8 million of debt owed by its subsidiary, Parlex
(Shanghai) Interconnect Products Co., Ltd. ("Parlex Interconnect"),
to CITIC Ka Wah Bank, Limited ("CITIC"), a Hong Kong bank. Management
believes that these results are primarily attributable to the
worldwide downturn in the electronics industry.
Throughout fiscal 2003, management has taken a series of actions to
reduce operating expenses and to restructure operations, which
consisted primarily of reductions in workforce and consolidating
manufacturing operations. Moreover, management continues to implement
plans to control operating expenses, inventory levels, and capital
expenditures as well as manage accounts payable and accounts
receivable to enhance cash flow and return the Company to
profitability. Management's plans include the following actions: 1)
continuing to consolidate manufacturing facilities; 2) continuing to
transfer certain manufacturing processes from its domestic operations
to lower cost international manufacturing locations, primarily those
in the People's Republic of China; 3) expanding its products in the
home appliance, laptop computer, and electronic identification
markets; 4) continuing to monitor and reduce selling, general and
administrative expenses; and 5) completing sales of non-essential
assets such as its land use rights in China (see Note 18).
On September 23, 2003, the Company executed a Loan Modification
Agreement (the "Modification Agreement") to its principal external
financing agreement with the bank. Effective October 8, 2003,
CITIC entered into a Supplemental Deed with Parlex Interconnect relating
to the CITIC Loan Agreement (the "CITIC Loan Agreement Amendment"), and
with Parlex (the "Guarantee Agreement Amendment"). Among other matters,
the Modification Agreement, the CITIC Loan Agreement Amendment and the
Guarantee Agreement Amendment modified certain restrictive financial
covenants. The Company is and expects to remain in compliance with all
of its financial covenants, as amended - see Note 7.
Furthermore, in June 2003 and subsequent to year end, management
entered into a series of alternative financing arrangements to
partially replace or supplement those currently in place in order to
provide the Company with long-term financing to support its current
working capital needs. Based on current credit agreements and the
financings completed subsequent to year end (see Note 18) management
believes it has sufficient cash to fund operations through at least
December 2004.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements
include the accounts of Parlex, its wholly owned subsidiaries and its
90.1% investment in Parlex (Shanghai) Circuit Co., Ltd. ("Parlex
Shanghai") (see Note 13). Prior to October 2, 2000, the Company
consolidated Parlex Shanghai and its wholly owned subsidiary, Parlex
Asia Pacific Limited ("PAPL") on a three-month time lag. Beginning
with the quarter ended December 31, 2000, the Company conformed the
reporting of Parlex Shanghai and PAPL with its December quarter
financial results. Accordingly, the Parlex Shanghai and PAPL net
income for the quarter ended September 26, 2000 is reported as an
adjustment to retained earnings in the amount of $43,000.
Intercompany transactions have been eliminated.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the balance sheet dates.
Management's estimates are primarily based on historical experience.
Estimates include reserves for accounts receivables, inventory and
deferred taxes, useful lives of property, plant, and equipment,
certain variables used to value stock options and warrants, certain
accrued liabilities including self-insured health insurance claims,
and the Company's effective tax rate. The self-insured health claims
are subject to certain individual and aggregate stop loss limits.
Actual results could differ from those estimates.
Foreign Currency Translation - The functional currency of foreign
operations is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated
into United States dollars using current exchange rates at the
balance sheet date. Results of operations are translated at average
exchange rates prevailing during each period. Gains or losses on
translation are accumulated as a component of other comprehensive
income or loss.
Cash and Cash Equivalents - Cash and cash equivalents include short-
term highly liquid investments purchased with remaining maturities of
three months or less.
Short-Term Investments - The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At June 30, 2001, the
Company had categorized all securities as "available-for-sale", since
the Company could liquidate those investments currently. In
calculating realized gains and losses, cost is determined using the
specific-identification method. SFAS No. 115 requires that unrealized
gains and losses on available-for-sale securities be excluded from
earnings and reported in a separate component of stockholders'
equity. The purchase and sale of available-for-sale securities'
activity in 2002 and 2001 primarily consisted of corporate bond
securities.
Inventories - Inventories of raw materials are stated at the lower of
cost, (first-in, first-out) or market. Work in process and finished
goods are valued as a percentage of completed cost, not in excess of
net realizable value. Raw material, work in process and finished
goods inventory associated with programs cancelled by customers are
fully reserved for as obsolete. Reductions in obsolescence reserves
are recognized when the underlying products are disposed of or sold.
At June 30, inventories consisted of:
2003 2002
Raw materials $ 7,736,473 $ 7,904,646
Work in process 8,285,396 8,388,378
Finished goods 4,034,733 4,817,266
----------- -----------
Total cost 20,056,602 21,110,290
Reserve for obsolescence (2,973,724) (3,521,701)
----------- -----------
Inventory, net $17,082,878 $17,588,589
=========== ===========
F-7
Property, Plant and Equipment - Property, plant and equipment are
stated at cost and are depreciated using the straight-line method
over their estimated useful lives: buildings - 30-40 years; machinery
and equipment - 2-15 years; and leasehold improvements over the terms
of the lease. The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that
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.
Goodwill and Other Intangible Assets - The Company recorded goodwill
in connection with its acquisition of a 40% interest in Parlex
Shanghai (see Note 13), and its 1999 acquisition of Parlex-Dynaflex
("Dynaflex"). Effective July 1, 2001, the Company adopted the
provisions of SFAS No.142, "Goodwill and Other Intangible Assets".
Under the provisions of SFAS No. 142, if an intangible asset is
determined to have an indefinite useful life, it shall not be
amortized until its useful life is determined to be no longer
indefinite. An intangible asset that is not subject to amortization
shall be tested for impairment annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired. Goodwill is not amortized but is tested for impairment, for
each reporting unit, on an annual basis and between annual tests in
certain circumstances. In accordance with the guidelines in SFAS No.
142, the Company determined it has one reporting unit. The Company
evaluates goodwill for impairment by comparing Parlex's market
capitalization, as adjusted for a control premium, to its recorded
net asset value. If the Company's market capitalization, as adjusted
for a control premium, is less than our recorded net asset value, the
Company will further evaluate the implied fair value of our goodwill
with the carrying amount of the goodwill, as required by SFAS No. 142,
and the Company will record an impairment charge against the goodwill,
if required, in our results of operations in the period such
determination was made. Since Parlex's market capitalization, as
adjusted, exceeded its recorded net asset value upon adoption of SFAS
No. 142 and at the subsequent annual impairment analysis dates, the
Company has concluded that no impairment adjustments were required at
the time of adoption or at the annual impairment analysis date. The
carrying value of the goodwill was $1,157,510 at June 30, 2003 and 2002.
The accumulated amortization of goodwill totaled $234,477 at June 30,
2003 and June 30, 2002.
If SFAS 142 had been adopted on July 1, 2000, the adjusted net loss
and adjusted net loss per share would be as follows:
Year Ended June 30,
2003 2002 2001
---------------------------------------------
Reported net loss $(19,517,174) $(10,387,828) $(6,199,485)
Add back: Goodwill amortization - - 250,284
------------ ------------ -----------
Adjusted net loss $(19,517,174) $(10,387,828) $(5,949,201)
============ ============ ===========
Basic and diluted net loss per share:
Reported net loss $ (3.09) $ (1.65) $ (0.99)
Goodwill amortization - - 0.04
------------ ------------ -----------
Adjusted net loss $ (3.09) $ (1.65) $ (0.95)
============ ============ ===========
Revenue Recognition - Revenue on product sales is recognized when
persuasive evidence of an agreement exists, the price is fixed or
determinable, delivery has occurred and there is reasonable assurance
of collection of the sales proceeds. The Company generally obtains
written purchase authorizations from its customers for a specified
amount of product, at a specified price and considers
F-8
delivery to have occurred at the time title to the product passes to
the customer. Title passes to the customer according to the shipping
terms negotiated between the Company and the customer, at the time of
shipment, unless otherwise specified by the customer. License fees and
royalty income are recognized when earned.
Research and Development - Research and development costs are
expensed as incurred and amounted to $5,500,000, $6,145,000 and
$6,906,000 for the years ended June 30, 2003, 2002 and 2001,
respectively. These amounts are reflected in the Company's cost of
products sold.
Stock-Based Compensation - The Company accounts for stock-based
compensation to employees and nonemployee directors in accordance
with Accounting Principles Board ("APB") Opinion No. 25 using the
intrinsic-value method as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages, but does not
require, the recognition of compensation expense for the fair value
of stock options and other equity instruments issued to employees and
nonemployee directors.
Had the Company used the fair-value method to measure compensation,
the Company's net loss and basic and diluted loss per share would have
been as follows at June 30:
2003 2002 2001
Net loss - as reported $(19,517,174) $(10,387,828) $(6,199,485)
Add stock-based compensation expense
included in reported net loss - - -
Deduct stock-based compensation expense
determined under the fair-value method (717,683) (845,172) (908,515)
------------ ------------ -----------
Net loss - pro forma $(20,234,856) $(11,233,000) $(7,108,000)
============ ============ ===========
Basic and diluted loss per share - as reported $ (3.09) $ (1.65) $ (0.99)
Basic and diluted loss per share - pro forma (3.21) (1.78) (1.13)
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model. Key assumptions used to
apply this option-pricing model are as follows:
2003 2002 2001
Average risk-free interest rate 2.6% 4.1% 5.6%
Expected life of option grants 3.5 years 3.5 years 2.5 years
Expected volatility of underlying stock 67% 74% 88%
Expected dividend rate None None None
The weighted-average fair value of options granted in 2003, 2002 and
2001 was $5.53, $6.72, and $6.46, respectively.
The option-pricing model was designed to value readily tradable stock
options with relatively short lives. The options granted to employees
are not tradable and have contractual lives of 10 years. However,
management believes that the assumptions used and the model applied
to value the awards yield a reasonable estimate of the fair value of
the grants made under the circumstances.
Income Taxes - The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." This statement
requires an asset and liability approach to accounting
F-9
for income taxes based upon the future expected values of the related
assets and liabilities. Deferred income taxes are provided for basis
differences between assets and liabilities for financial reporting
and tax purposes and for tax loss and credit carryforwards. Valuation
allowances are established, if necessary, to reduce the deferred tax
asset to the amount that will more likely than not be realized.
Loss Per Share - Basic loss per share is calculated on the weighted-
average number of common shares outstanding during the year. Diluted
loss per share is calculated on the weighted-average number of common
shares and common share equivalents resulting from outstanding
options and warrants except where such items would be antidilutive.
The loss utilized to calculate loss per share for the years ended
June 30, 2003, 2002 and 2001 was equal to the reported net loss for
each period.
A reconciliation between shares used for computation of basic and
dilutive income per share is as follows:
2003 2002 2001
Shares for basic computation 6,308,542 6,303,216 6,289,117
Effect of dilutive stock options and warrants - - -
--------- --------- ---------
Shares for dilutive computation 6,308,542 6,303,216 6,289,117
========= ========= =========
Antidilutive shares were not included in the per-share calculations
for the years ended 2003, 2002 and 2001 due to the reported net
losses for those years. Antidilutive shares totaled approximately
533,000, 471,000 and 320,000 in 2003, 2002 and 2001, respectively.
All antidilutive shares relate to outstanding stock options except
for 25,000 antidilutive shares in 2003 relating to warrants issued to
a lender in connection with a refinancing (see Note 7).
Fair Value of Financial Instruments - SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of
the fair value of certain financial instruments. The carrying amounts
of cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses approximate fair value because of their short-
term nature. The carrying amounts of the Company's debt instruments
approximate fair value since the majority of long-term debt bears
interest at a rate similar to the prevailing market rate.
Reclassifications - Certain prior period amounts have been
reclassified to conform to the current year presentation.
Recent Adoption of Accounting Pronouncements - On July 1, 2002, the
Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, " and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 specifies accounting
for long-lived assets to be disposed of by sale, and broadens the
presentation of discontinued operations to include more disposal
transactions than were included under the previous standards.
On July 1, 2002, the Company adopted SFAS No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). This statement amends, among
others, the classification on the statement of operations for gains
and losses from the extinguishment of debt. Previously such gains and
losses were reported as extraordinary items, however, the adoption of
SFAS No. 145 may require the classification of gains and losses from
the extinguishment of debt within income or loss from continuing
operations unless the transactions meet the
F-10
criteria for extrraordinasry treatment as infrequent and unusual as
desctibed in APB Opinion No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146").
This statement supersedes Emerging Issues Task Force ("EITF") No. 94-
3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity". Under this statement, a
liability for a cost associated with a disposal or exit activity is
recognized at fair value when the liability is incurred rather than
at the date an entity is committed to an exit plan as required under
EITF 94-3.
On March 30, 2003, the Company adopted the disclosure provisions of
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure, an amendment of FASB Statement No. 123." This
Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a
voluntary change in the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosures Requirements for Guarantees,
Including Indirect Guarantees" ("FIN No. 45"). This Interpretation
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Interpretation does not
prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related
guarantee. This Interpretation also incorporates, without change, the
guidance in FASB Interpretation No. 34, "Disclosure of Indirect
Guarantees of Indebtness of Others", which is being superseded. The
Company adopted FIN No. 45 on a prospective basis for guarantees
issued or modified after December 15, 2002. The Company has disclosed
certain inter-company loan guarantees in Note 7.
The adoption of SFAS Nos. 144, 145, 146, 148, and FIN No. 45 did not
have a material effect on the Company's financial statements.
Future Adoption of Accounting Pronouncements - In May 2003, the FASB
issued SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires
that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). The
requirements of this statement apply to issuers' classification and
measurement of freestanding financial instruments, including those
that comprise more than one option or forward contract. SFAS No. 150
is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003.
The Company is currently evaluating the impact resulting from the
adoption of SFAS No. 150 on the Company's consolidated financial
position and results of operations, but does not expect a material
impact.
3. SALES-LEASEBACK OF PROPERTY, PLANT AND EQUIPMENT
On June 12, 2003, the Company entered into two sale-leaseback
transactions with an unrelated party as follows:
F-11
Parlex Corporate Headquarters and Manufacturing Facility
--------------------------------------------------------
("Methuen Facility")
--------------------
Parlex sold its 172,216 square foot corporate headquarters and
manufacturing facility in Methuen, Massachusetts, consisting of land,
land improvements, building and building improvements for a total
maximum purchase price of $9,000,000 which consisted of $5,350,000 in
cash at the closing, a promissory note in the amount of $2,650,000
("Note") and up to $1,000,000 in additional cash under the terms of
an Earn Out Clause. The Note is due on June 30, 2006, with a one-year
extension at the sole option of the buyer. The Note is payable to
Parlex only if no "Special Defaults" (as defined in the Purchase and
Sale Agreement) occur on or before the maturity date of the Note. The
interest rate on the Note increases one percent each year from five
percent in the first year to a maximum of eight percent if the buyer
exercises the extension option. The Note is secured by a pledge of
100% of the ownership interest in the Delaware limited liability
company that owns the Methuen Facility. Under the Earn Out Clause,
Parlex will receive $200,000 on June 30, 2004 and on each June 30th
thereafter through and including June 30, 2009, up to a maximum of
$1,000,000, if and only if for the immediately preceding 12-month
period Parlex has met certain financial milestones (as defined
therein). In the event that Parlex does not meet the financial
milestones as of the end of a particular fiscal year, then the
$200,000 installment shall be deferred without interest until the end
of the next fiscal year. The buyer's obligations to pay any and all
unpaid portions of the Earn Out including all deferrals terminates on
June 30, 2009. The net proceeds received in fiscal 2003 of
approximately $5.0 million from the sale were used to repay existing
bank debt and provide additional working capital to fund its
operations.
Under the terms of the Purchase and Sale Agreement, Parlex
simultaneously entered into a written lease for a period of 15 years
for the Methuen Facility. The lease may be extended, at Parlex's
option, for two additional five-year periods upon 12 months written
notice prior to the applicable lease expiration date. The annual base
rent for each five-year extension is equal to the greater of (a) the
annual base rent then being paid under the lease or (b) 95% of the
then prevailing market rate for a five-year lease of similar space in
the same market. In addition to the base rent, Parlex is responsible
for the payment of all real estate taxes and other operating costs of
the Methuen Facility. Beginning on July 1, 2009 and continuing
through June 30, 2015, Parlex has the option to purchase the Methuen
Facility for its then fair market value, subject to a minimum agreed
fair market value of $12,000,000.
As the repurchase option contained in the lease and the receipt of a
promissory note from the buyer provide Parlex with a continuing
involvement in the Methuen Facility, Parlex has accounted for the
sale-leaseback of the Methuen Facility as a financing transaction.
Accordingly, the Company continues to report the Methuen Facility as
an asset and continues to record depreciation expense. The Company
records all cash received under the transaction as a finance
obligation. Accordingly, the Company recorded the $5,350,000 payment
received during 2003 as a finance obligation at June 30, 2003 (see
Note 7). The $2,650,000 promissory note and related interest thereon,
and the $1,000,000 under the Earn Out Clause will be recorded as an
increase to the finance obligation as the cash payments are received.
The monthly lease payments will be recorded as a reduction to the
finance obligation. The interest portion of the future monthly lease
payments, determined based upon the Company's cost of borrowing, will
be recorded as interest expense. The closing costs for the
transaction have been capitalized and are being amortized as interest
expense over the initial 15-year lease term. Upon expiration of the
repurchase option (June 30, 2015), the Company will reevaluate its
accounting to determine whether a gain or loss should be recorded on
this sale-leaseback transaction.
Poly-Flex Circuits, Inc. ("Poly-Flex") Operating Facility ("Poly-Flex
---------------------------------------------------------------------
Facility")
----------
Poly-Flex sold its 54,580 square foot operating facility in Cranston,
Rhode Island, consisting of land, land improvements, building and
building improvements for a total purchase price of $3,000,000 in
cash. The net proceeds of approximately $2,927,000 from the sale were
used to repay existing bank debt and provide additional working
capital to fund operations. At the time of sale, the Poly-Flex
Facility had a fair market value of approximately $4,440,000, based
on an April 2003 independent third party appraisal, and a net book
value of approximately $4,313,000. Under the terms of the Purchase
and Sale Agreement,
F-12
Poly-Flex entered into a five-year lease of the Poly-Flex Facility
with the buyer. The lease may be extended, at Poly-Flex's option, for
two additional five-year periods upon 12 months written notice prior
to the applicable lease expiration date. The annual base rent for
each five-year extension is equal to 102.5% of the annual base rent
for the immediately preceding lease year. In addition to the base
rent, Poly-Flex is responsible for the payment of all real estate
taxes and other operating costs of the Poly-Flex Facility. Parlex
guarantees all payments under the Poly-Flex lease. Poly-Flex may
terminate the lease early by delivery of written notice on or before
September 30, 2004 and the payment of an early termination fee of
approximately $353,000. In the event Poly-Flex exercises its early
termination rights, the lease term shall terminate on June 30, 2006.
Since neither Poly-Flex nor the Company has any continuing
involvement in the Poly-Flex Facility after the sale, the transaction
has been accounted for using sale-leaseback accounting. The Company
has recorded no immediate loss on the transaction since the fair
value of the Poly-Flex Facility exceeds the net book value of the
facility at the time of sale. However, approximately $1,386,000 of
excess net book value over the sales price has been recorded as a
deferred loss and included in Other Assets on the consolidated
balance sheets. The deferred loss will be amortized to lease expense
over the initial five-year lease term.
4. INTANGIBLE ASSETS, NET
Intangible assets at June 30 consisted of:
2003 2002
Land use rights $1,145,784 $1,145,784
Patents 58,560 58,560
---------- ----------
Total cost 1,204,344 1,204,344
Accumulated amortization (74,339) (48,517)
---------- ----------
Intangible assets, net $1,130,005 $1,155,827
========== ==========
In December 2001, Parlex (Shanghai) Interconnect Products Co., Ltd.,
the Company's second tier subsidiary, purchased land use rights for a
parcel of land located in the People's Republic of China to
potentially expand its operations within China. The rights are being
amortized over their maximum life of 50 years as allowed by Chinese
law. In July 2003, Parlex (Shanghai) Products Co., Ltd., executed
an agreement to sell the land use rights for approximately $1.2
million. The Company received approximately $1.0 million in cash in
August 2003 and the balance will be paid at closing.
The Company has reassessed the useful lives of the intangible assets
at June 30, 2003 and determined the useful lives are appropriate in
determining amortization expense. Amortization expense for the years
ended June 30, 2003, 2002 and 2001 was $25,822, $14,376 and $2,928,
respectively.
The estimated amortization expense, for assets other than the land use
rights, for each of the fiscal years subsequent to June 30, 2003 is as
follows:
F-13
Amortization Expense
--------------------
Patents
-------
2004 $ 2,928
2005 2,928
2006 2,928
2007 2,928
2008 2,928
Thereafter 21,034
-------
Total $35,674
=======
5. OTHER ASSETS
Other assets at June 30 consisted of:
2003 2002
Deferred loss on sale-leaseback of Poly-Flex Facility (see Note 3) $1,362,370 $ -
Deferred financing costs on sale-leaseback of Methuen facility 241,691 -
Deferred financing costs on the Loan Security Agreement (see Note 7) 97,981 -
Insurance cash surrender value - 326,762
Other 48,019 105,726
---------- --------
Total $1,750,061 $432,488
========== ========
6. ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of:
2003 2002
Payroll and related expenses $1,573,551 $1,650,825
Professional fees 737,698 222,906
Facility exit costs 583,521 1,480,000
Accrued health insurance 553,521 375,819
Commissions 412,302 400,411
Other 1,310,015 735,097
---------- ----------
Total $5,170,608 $4,865,058
========== ==========
In June 2002, management committed to a plan to consolidate, exit and
relocate certain of its manufacturing operations. At June 30, 2002,
Parlex had accrued facility exit costs of $1,480,000 relating to
these exit activities. Such amount included $656,000 in future rental
costs, $574,000 for the
F-14
abandonment of leasehold improvements, $141,000 in facility
refurbishment expenses and $109,000 in early lease termination
penalty fees, all of which are reported (as cost of sales) in the
consolidated statements of operations. No amounts were paid as of
June 30, 2002.
The following is a summary of the facility exit costs activity during
2003:
Facility 2003 Activity Facility
Exit Costs --------------------------------------- Exit Costs
Accrued Cash Asset Change in Accrued
June 30, 2002 Payments Write-offs Estimates June 30, 2003
------------- -------- ---------- --------- -------------
Lease costs $ 656,000 $(216,145) $ - $ - $439,855
Leasehold improvements 573,767 - (573,767) - -
Facility refurbishment costs 141,233 - - 2,433 143,666
Lease termination penalty 109,000 (106,567) - (2,433) -
---------- --------- --------- -------- --------
Total $1,480,000 $(322,712) $(573,767) $ - $583,521
========== ========= ========= ======== ========
During 2003, lease costs of $216,145 for the Salem, New Hampshire
facility, consisting of rent expense and utilities for the period
January 1, 2003 through June 30, 2003, were paid and charged to the
facility exit costs accrual. In January 2003, upon exiting the
facility, the Company wrote-down the value of the leasehold
improvements at its Salem, New Hampshire facility to zero to reflect
its abandonment of such assets. The Company's lease agreement, for
which certain costs were accrued under this plan, was scheduled to
terminate on June 30, 2007. However, in June 2003, the Company
exercised its right to terminate the lease early as of June 30, 2004
and paid the related lease early termination fee of $106,567. The
accrued facility exit costs at June 30, 2003 represent twelve months
of lease payments and the estimated costs to refurbish the facility
at the early lease termination date. The Company expects the accrued
facility exit costs at June 30, 2003 of $583,521 to be paid within
the next twelve months.
7. INDEBTEDNESS
Long-term debt at June 30 consisted of:
2003 2002
Loan and security agreement $ 3,306,150 $ 0
Term notes 5,975,645 3,310,378
Finance obligation on sale-leaseback of Methuen Facility (Note 3) 5,333,597 -
Other capital lease obligations - 90,477
Revolving credit agreement - 12,160,000
----------- -----------
Total long-term debt 14,615,392 15,560,855
Less current portion 3,813,117 3,560,855
----------- -----------
Long-term debt - net $10,802,275 $12,000,000
=========== ===========
F-15
Loan and Security Agreement - On June 10, 2003, Parlex and its two
wholly-owned U.S. subsidiaries, Parlex DynaFlex Corporation and Poly-
Flex Circuits, Inc., (together the "Borrowers") executed a Loan and
Security Agreement (the "Loan Agreement") with a bank. The Loan
Agreement provided the Company's bank with a secured interest in
substantially all of its assets. The Company may borrow up to
$10,000,000, based on a borrowing base of eligible accounts
receivable. Borrowings may be used for working capital purposes only.
The Loan Agreement carries interest at the bank's prime rate (4.25%
at June 30, 2003) plus 0.75% per annum and a maturity date of June
10, 2005. The bank's prime rate is equal to the greater of (a) 4.0%
or (b) the rate announced from time to time by the bank as its prime
rate. Upon the Borrower's achievement of two (2) consecutive quarters
of net income, the interest rate shall be reduced to the bank's prime
rate plus 0.25% per annum. Interest is payable monthly. The Loan
Agreement allows the Company to issue letters of credit, enter into
foreign exchange forward contracts and incur obligations using the
bank's cash management services up to an aggregate limit of
$1,000,000, which reduces its availability for borrowings under the
Loan Agreement. The Loan Agreement contains certain restrictive
covenants, including but not limited to, limitations on debt incurred
by the Company's foreign subsidiaries, acquisitions, sales and
transfers of assets, and prohibitions against cash dividends, mergers
and repurchases of stock without prior bank approval. The Loan
Agreement also has financial covenants related to maintenance of a
minimum fixed charge ratio and maintenance of $750,000 in minimum
cash balances or excess availability under the Loan Agreement.
At June 30, 2003, the Company was not in compliance with certain
financial covenants. On September 23, 2003, the Company executed a
Loan Modification Agreement (the "Modification Agreement") with its
bank. The Modification Agreement increases the interest rate on
borrowings to the bank's prime rate (as defined above) plus 1.5%
(decreasing to prime plus 0.75% after one quarter of positive
operating income and to prime plus 0.25% after two quarters of
positive net income, respectively) and amends the financial
covenants. The Company has been in compliance and expects to be in
compliance following the execution of the Loan Modification
Agreement.
The Company also issued warrants to the bank for the purchase of
25,000 shares of its common stock at an initial exercise price of
$6.885 per share upon execution of the Loan Agreement. The exercise
price is subject to future adjustment under certain conditions,
including but not limited to, stock splits and stock dividends. The
warrants are currently exercisable and expire on June 10, 2008. The
fair value of the warrants issued to the lender on June 10, 2003 was
estimated to be $100,581, which has been recorded as deferred
financing costs and is being amortized to interest expense over the
life of the debt. Total amortization in 2003 was $2,800.
At June 30, 2003, the Company had $3,306,150 in outstanding
borrowings under the Loan Agreement and had available borrowing
capacity of $4,663,943, after reduction for $1,000,000 of outstanding
letters of credit. Since the available borrowing capacity exceeded
$750,000 at June 30, 2003, none of the Company's cash balance was
subject to restriction at June 30, 2003.
Parlex Shanghai Term Notes - On February 25, 2003, Parlex Shanghai
entered into a short-term bank note, due August 22, 2003, bearing
interest at 5.544%. Shanghai Jinling Co., Ltd ("Jinling"), a former
minority interest partner in Parlex Shanghai, guarantees the short-
term note (see Note 18). Amounts outstanding under this short-term
note total $845,000 at June 30, 2003 and are included within the
current portion of long-term debt on the consolidated balance sheet
based upon its scheduled repayment terms. The Company provides a
cross guarantee to Jinling for 100% of the term note. On March 7,
2003, Parlex Shanghai entered into a short-term bank note, due
February 25, 2004, bearing interest at 5.841%. Amounts outstanding
under this short-term note total $1,330,000 at June 30, 2003 and are
included within the current portion of long-term debt on the
consolidated balance sheet based upon its scheduled repayment terms.
The notes replaced a similar short-term note that terminated on
February 26, 2003.
Parlex Interconnect Term Notes - In June 2002, the Company's
subsidiary, Parlex Interconnect executed a $5,000,000 Loan Agreement
(the "CITIC Loan Agreement") with CITIC. Proceeds received under the
CITIC Loan Agreement are to be used exclusively for financing land,
building, plant and machinery and other working
F-16
capital requirements and to prepay Parlex Interconnect's two local
short-term bank notes. Borrowings under the CITIC Loan Agreement accrue
interest at a fixed rate equal to LIBOR plus a margin of 2.2%. Interest
is payable at the end of each interest period which varies from one to
six months. As of June 30, 2003, total borrowings were $3,800,000.
These borrowings were used to repay local short-term bank notes of
$1,200,000 and fund equipment purchases and working capital
requirements. The CITIC Loan Agreement contains certain restrictive
covenants and a cross default provision that would permit the lender to
accelerate the repayment of Parlex Interconnect's obligation under the
CITIC Loan Agreement in the event of the Company's default on other
financing arrangements. As a condition of the approval of this CITIC
Loan Agreement, the Company's subsidiary, Parlex Asia Pacific Ltd., and
the Company have provided a guarantee of the payment of this loan. Under
the provisions of its guarantee, the Company is required to comply with
certain financial covenants. At June 30, 2003, the Company was not in
compliance with certain of its financial covenants.
Effective October 8, 2003, CITIC entered into an Amendment to the Loan
Agreement with Parlex Interconnect (the "CITIC Loan Agreement
Amendment"), and an Amendment to the Guarantee Agreement with Parlex
(the "Guarantee Agreement Amendment"). Among other matters, the CITIC
Loan Agreement Amendment reduced Parlex Interconnect's total borrowing
capacity from $5,000,000 to $3,800,000, established a new repayment
schedule and added a restrictive financial covenant regarding EBITDA as
of December 31, 2003 for Parlex Interconnect. Under the new repayment
schedule, $1,300,000 is due in 2004, $1,500,000 is due in 2005 and
$1,000,000 is due in 2006. The Guarantee Agreement Amendment modified
the restrictive financial covenants with Parlex consisting of Current
Ratio, Tangible Net Worth and Total Liabilities to Tangible Net Worth.
The Company is and expects to remain in compliance with its financial
covenants, as amended.
Loan Agreement Dated March 1, 2000 with Fleet National Bank
("Revolving Credit Agreement") - The Revolving Credit Agreement was
repaid in full on June 11, 2003 utilizing proceeds from the two sale-
leaseback transactions, and was then terminated and replaced by the
Loan Agreement. At June 30, 2002 and during fiscal 2003, the Company
was not in compliance with certain restrictive covenants under the
Revolving Credit Agreement. The Company received a waiver of the
certain restrictive covenants at June 30, 2002 and renegotiated the
terms of its existing Revolving Credit Agreement (the "Third
Amendment").
The scheduled maturities for long-term debt, excluding lease
obligations, at June 30, 2003 are $3,474,543 in fiscal year 2004 and
$4,806,150 in fiscal 2005 and $1,001,102 in fiscal 2006.
Interest paid during the years ended June 30, 2003, 2002 and 2001 was
approximately $767,000, $625,000 and $454,000, respectively.
The weighted average interest rate on the Company's short-term
borrowings as of June 30, 2003 and 2002 is 4.826% and 6.201%
respectively.
8. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at June 30 consisted of:
2003 2002
Deferred income taxes (Note 9) $ 353,822 $ 350,919
Deferred compensation 833,458 976,571
---------- ----------
$1,187,280 $1,327,490
========== ==========
F-17
Deferred compensation of $182,000 is to be paid within one year and
is included within accrued liabilities in the consolidated balance
sheet at June 30, 2003.
9. INCOME TAXES
Loss before income taxes consisted of:
2003 2002 2001
Domestic $(13,336,692) $(16,345,891) $(13,537,847)
Foreign (74,439) (1,378,155) 2,020,962
------------ ------------ ------------
Total $(13,411,131) $(17,724,046) $(11,516,885)
============ ============ ============
The benefit (provision) for income taxes consisted of:
2003 2002 2001
Current:
State $ - $ - $ -
Federal 37,450 2,288,093 2,821,486
Foreign (22,108) (17,771) (194,971)
------------ ----------- ----------
15,342 2,270,322 2,626,515
Deferred Tax:
State (309,118) 83,844 7,442
Federal (1,064,739) 475,116 129,358
Foreign - (41,919) -
------------ ----------- ----------
(1,373,857) 517,041 136,800
Tax Credits:
State 219,717 451,712 141,841
Federal (74,057) 1,408,981 616,303
------------ ----------- ----------
145,660 1,860,693 758,144
Effect on Tax Benefit (Expense)
from Exercise of Stock Options:
State - - 7,555
Federal - - 64,218
------------ ----------- ----------
- - 71,773
Tax Benefit from Operating
Losses Carryforwards:
State 783,503 327,262 733,865
Federal 5,763,269 2,066,700 1,326,148
Foreign - 313,109 -
------------ ----------- ----------
6,546,772 2,707,071 2,060,013
Valuation Allowance (11,454,581) (500,000) (200,000)
------------ ----------- ----------
Total $ (6,120,664) $ 6,855,127 $5,453,245
============ =========== ==========
A reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
F-18
2003 2002 2001
Statutory federal income tax rate (34)% (34)% (34)%
State income taxes, net of federal tax benefit (4) (3) (4)
Tax credits (4) (5) (7)
Valuation allowance on U.S. net deferred tax assets 85 3 2
Other 3 - (4)
--- --- ---
Effective income tax rate 46 % (39)% (47)%
=== === ===
No provision for U.S. income taxes has been recorded on undistributed
earnings of the Company's subsidiary Poly-Flex Circuits Limited
(approximately $115,000 at June 30, 2003) because such amounts are
considered permanently invested.
Deferred income tax assets and liabilities at June 30 are
attributable to the following:
2003 2002
Deferred tax assets:
Inventories $ 1,158,285 $ 1,488,945
Allowance for doubtful accounts 209,073 431,496
Goodwill - 29,099
Accruals 1,068,666 1,462,535
Deferred compensation 395,528 451,271
Net operating loss carryforwards 11,313,856 4,767,084
Valuation allowance (12,154,581) (700,000)
Tax credit carryforwards 3,166,747 3,021,087
Other 157,742 -
------------ -----------
5,315,316 10,951,517
------------ -----------
Deferred tax liabilities:
Depreciation 4,706,771 4,761,141
Deferred loss on sale leaseback 530,652 -
Other 857 -
Prepaid expenses 117,749 94,760
------------ -----------
5,356,029 4,855,901
------------ -----------
Net deferred tax asset (liability) $ (40,713) $ 6,095,616
============ ===========
As a result of its recent history of operating losses, uncertain
future operating results, and current non-compliance with certain of
its debt covenant requirements, the Company determined that it is
more likely than not that certain historic and current year income
tax benefits will not be realized. Consequently, the Company
established a valuation allowance against all of its U.S. deferred
tax assets and has not given recognition to these tax assets in the
accompanying financial statements at June 30, 2003. Upon a favorable
change in the operations and financial condition of the Company that
results in a determination that it is more likely than not that all
or a portion of the net deferred tax assets will be utilized, all or
a portion of the valuation allowance previously provided for will be
eliminated.
F-19
At June 30, 2003, the Company has recorded net deferred tax assets of
$313,109 related to foreign net operation loss carryforwards and net
deferred tax liabilities of $353,822 related to depreciation timing
differences related to foreign jurisdictions.
Tax credit carryforwards consist primarily of research and
development, and investment tax credits available for state and
federal purposes. To the extent the credits are not currently
utilized on the Company's tax returns, deferred tax assets, subject
to the considerations about the need for a valuation allowance, are
recognized for the carryforward amounts. Research and development tax
credits, if not utilized, will expire in the years 2008 through 2023.
The Company's investment credits do not expire and can be carried
forward indefinitely.
At June 30, 2003, the Company has available federal and state net
operating loss carryforwards of approximately $27,000,000 and
$38,766,000, respectively, expiring beginning in 2022 and 2006,
respectively. A valuation allowance has been established to reduce
the deferred tax asset recorded for certain state net operating loss
carryforwards that may expire unutilized through 2007. The Company
has available foreign net operating losses carryforwards of
$2,087,000, which do not expire.
Income tax payments of approximately $600,000 were made in 2001.
Income tax refunds of approximately $1,489,000 and $3,348,000 were
received in 2003 and 2002, respectively. The income tax refunds are
primarily due to the carryback of the Company's 2003 and 2002 state
and federal net operating losses to prior years' tax periods.
10. STOCKHOLDERS' EQUITY
Preferred Stock - The Board of Directors is authorized to establish
one or more series of preferred stock and to fix and determine the
number and conditions of preferred shares, including dividend rates,
redemption and/or conversion provisions, if any, preference and
voting rights. At June 30, 2003, the Board of Directors has not
authorized the issuance of any series of preferred stock.
Stock Option Plans - The Company has incentive and nonqualified stock
option plans covering officers, key employees and non-employee
directors. The options are generally exercisable commencing one year
from the date of grant and typically expire in either five or ten
years, depending on the plan. The option price for the incentive
stock options and for the directors' plan is fair market value at the
date of grant. Non-employee directors receive an automatic grant of
1,500 options annually. Additionally, grants of up to 2,250 options
annually, per director, may also be made at the discretion of the
Board of Directors. During 2002, the Board of Directors granted 500
options to one member based on his participation on several Board
committees. No other discretionary grants were made to the directors
in 2003, 2002 or 2001. Nonqualified stock options may be granted at
fair market value or at a price determined by the Board of Directors,
depending on the plan. No options awarded to date by the Board of
Directors have been granted at an exercise price that is less than
the fair market value of the common stock at the date of grant.
On December 4, 2001 the stockholders approved the adoption of the
2001 Employees' Stock Option Plan (the "2001 Plan"). A total of
600,000 shares of common stock (subject to adjustment for capital
charges) in the aggregate may be issued under the 2001 Plan.
On November 28, 2000, the Board of Directors approved a proposal to
offer certain employees a choice to cancel approximately 45,000 stock
options granted to them in February and March 2000 in exchange for
new options to purchase 75% of the original number of shares of
stock. The new options were granted six months and one day from the
date the old options were cancelled. The exercise price of the new
options was the market price on the grant date. The exchange offer
was not available to members of the Board of Directors or executive
officers.
F-20
At June 30, 2003, there were 800,418 shares reserved for future
issuance upon exercise of grants for all of the above-mentioned plans.
The following is a summary of activity for all of the Company's stock
option plans:
Weighted-
Average
Shares Exercise
Under Price Per Shares
Option Share Exercisable
July 1, 2000 362,957 $11.97 118,832
Granted 59,250 11.81
Surrendered (66,875) 29.71
Exercised (27,332) 6.18
------- ------
June 30, 2001 328,000 15.76 154,562
Granted 160,800 12.30
Exercised (18,050) 14.53
------- ------
June 30, 2002 470,750 14.63 229,370
Granted 126,150 11.21
Surrendered (80,125) 18.90
Exercised (9,000) 5.84
------- ------
June 30, 2003 507,775 $13.26 253,115
======= ====== =======
The following table sets forth information regarding options
outstanding at June 30, 2003:
Options Outstanding Options Exercisable
---------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
$ 5.67 - $ 6.67 12,000 1.9 $ 6.05 12,000 $ 6.05
10.00 - 10.48 51,500 8.5 10.25 17,000 10.25
11.55 - 13.25 307,525 7.9 12.16 103,615 12.53
15.50 - 16.25 68,750 6.0 16.17 53,000 16.15
18.75 - 19.13 66,000 4.3 18.78 66,000 18.78
22.00 2,000 6.9 22.00 1,500 22.00
------- --- ------ ------- ------
$ 5.67 - $22.00 507,775 7.1 $13.26 253,115 $14.51
======= === ====== ======= ======
Accumulated Other Comprehensive Income (Loss) - The Company reports
comprehensive income (loss) in accordance with the provisions of SFAS
No. 130, "Reporting Comprehensive Income." 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.
The following components and changes in balances of accumulated other
comprehensive income (loss) are as follows:
F-21
Foreign Accumulated
Currency Unrealized Other
Translation Gains (Losses) Comprehensive
Adjustments on Investments Income (Loss)
Balance, July 1, 2000 $(123,028) $ - $(123,028)
Change in balance (539,149) 34,752 (504,397)
--------- -------- ---------
Balance, June 30, 2001 (662,177) 34,752 (627,425)
Change in balance 380,533 (34,752) 345,781
--------- -------- ---------
Balance, June 30, 2002 (281,644) - (281,644)
Change in balance 470,486 - 470,486
--------- -------- ---------
Balance, June 30, 2003 $ 188,842 $ - $ 188,842
========= ======== =========
A summary of the changes in unrealized gains (loss) in short-term
investments is as follows for the years ended June 30:
2003 2002 2001
Unrealized gains on short-term investments:
Unrealized holding gains arising during the year $ - $ - $34,752
Less reclassification adjustment for (loss) gains
realized in net income - (34,752) -
---- -------- -------
Net unrealized gains (losses) on short-term investments $ - $(34,752) $34,752
==== ======== =======
11. RELATED PARTY TRANSACTION
The Company purchased $580,000, $822,000 and $398,000 of equipment in
fiscal 2003, 2002 and 2001, respectively from a company in which a then
executive officer of Parlex had a financial interest. At June 30, 2003
and 2002, the Company had recorded within accounts payable and accrued
expenses $200,000 and $506,000, respectively for equipment purchases
from this party.
12. POLY-FLEX ACQUISITION
The Company received $525,000 in cash prior to June 30, 2001 and an
additional $525,000 in cash during fiscal 2002 as a final settlement
in connection with the Company's acquisition of Poly-Flex in March
2000. The $1,050,000 settlement was recorded as a reduction to
goodwill at June 30, 2001. Since the final purchase price equaled the
fair value of the net assets acquired, no goodwill was ultimately
recorded in connection with this acquisition.
13. JOINT VENTURE
On October 22, 2001, the Company executed an agreement (the
"Agreement") to purchase Jinling's 40% joint venture interest in
Parlex Shanghai, bringing the Company's interest to 90.1%. The
Agreement required the Company to pay Jinling the sum of $2.2
million. The purchase price was allocated to
F-22
acquired accounts receivable, inventory, property, plant and
equipment, accounts payable, accrued liabilities and debt, and
resulted in goodwill of approximately $251,000. Prior to the
acquisition, a distribution of retained earnings was declared based
upon each joint venture partners' proportional share of Parlex
Shanghai's registered capital as of December 30, 2000. Jinling's
distribution approximated $2.3 million and was payable in cash. As of
June 30, 2003, all amounts due Jinling have been paid. Minority
interest in the consolidated statements of operations represents the
minority shareholder's share of the income or loss of Parlex
Shanghai. The minority interest in the consolidated balance sheets
reflect the original investment, net of any distributions, by these
minority shareholders in Parlex Shanghai, along with their
proportional share of the earnings or losses of Parlex Shanghai.
14. BENEFIT PLAN
The Company sponsors a 401(k) Savings Plan (the "Plan") covering all
domestic employees of the Company who have three consecutive months
of service and have attained the age of 21. Matching employer
contributions equal 50% of the first 8% of employee contributions and
vest 100% after three complete years of service. Effective September
1, 2001, the Company suspended the employer matching contribution.
The Company contributed approximately $0, $70,000 and $492,000 to the
Plan for the years ended June 30, 2003, 2002 and 2001, respectively.
15. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain property and equipment under
agreements generally with initial terms from three to five years with
renewal options. As discussed in Note 3, the Company entered into two
sale-leaseback transactions where the Company sold two facilities on
June 10, 2003 and leased them back. As a result of provisions in the
sale and leaseback agreement for the Methuen facility that provides
for continuing involvement by the Company, the Company will account
for the sale-leaseback as a finance obligation. Since the Company has
no continuing involvement in the leaseback of the Poly-Flex facility,
the Company has accounted for the leaseback utilizing sale-leaseback
accounting. Accordingly, the Company has recorded a deferred loss on
the sale and will account for all of its payments as an operating
lease. The deferred loss will be amortized to lease expense over the
initial 5-year lease term.
Rental expense approximated $1,198,000, $1,458,000 and $1,378,000 for
the years ended June 30, 2003, 2002 and 2001, respectively. Future
payments under noncancelable leases as of June 30, 2003, including
payments related to the two sale-leasebacks and to the Salem, New
Hampshire lease which was terminated effective June 30, 2004, are:
F-23
Finance Operating Leases
Obligation (Poly-Flex Facility
(Methuen Facility) and other leases)
2004 $ 1,079,167 $1,439,327
2005 1,056,250 1,000,204
2006 1,125,000 896,510
2007 1,131,250 923,415
2008 1,200,000 895,110
Thereafter 13,350,000 145,786
------------ ----------
Total minimum lease payments 18,941,667 5,300,352
==========
Less amounts representing interest (10,481,070)
-------------
Present value of net minimum lease payments $ 8,460,597
=============
Litigation - From time to time, the Company is subject to various
legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these
claims cannot be predicted with certainty, management is not aware of
any current legal matters that would have a material adverse effect
on the Company's consolidated financial position, results of
operations, or cash flows.
Executive Employment Agreements - Three executives of the Company have
entered into employment agreements with the Company which require,
among others, that the Company continue to pay a portion of the
executive's salary to the executive's designated beneficiary for a
specified period of time in the event of the death of the executive.
The Company maintains key man life insurance for only one of the three
executives. The Company has not accrued or paid any amounts related to
this benefit in any year in the three years ended June 30, 2003.
16. BUSINESS SEGMENT, MAJOR CUSTOMER AND INTERNATIONAL OPERATIONS
The Company operates within a single segment of the electronics
industry as a specialist in the interconnection and packaging of
electronic equipment with its product lines of flexible printed
circuits, laminated cable, and related assemblies. The Company
organizes itself as one segment reporting to the chief operating
decision maker, the Chief Executive Officer. Revenue consists of
product sales, and license fees and royalty income.
The Company had no customers which individually accounted for 10% or
more of the Company's revenues in 2003, 2002 or 2001.
The Company had two customers which individually accounted for more
than 10% of the Company's accounts receivables in 2002. No other
customers accounted for more than 10% of accounts receivable in 2003
or 2001.
Summarized information relating to international operations is as
follows:
F-24
2003 2002 2001
Revenues:
United States $51,130,807 $56,138,749 $ 62,803,825
Canada 109,913 1,972,938 5,888,696
China 6,122,757 3,614,000 6,576,148
Europe 14,586,452 15,871,637 19,585,733
Other 10,871,222 9,458,240 8,765,787
----------- ----------- ------------
Total revenues $82,821,151 $87,055,564 $103,620,189
=========== =========== ============
The principal product group sales were:
Flexible circuits $67,954,482 $70,046,402 $ 81,288,991
Laminated cables 14,866,669 16,958,851 22,137,651
----------- ----------- ------------
Product sales $82,821,151 $87,005,253 $103,426,642
=========== =========== ============
Long-lived assets:
United States $33,537,752 $47,600,687 $ 47,938,826
=========== =========== ============
China $14,466,382 $10,738,185 $ 5,623,713
=========== =========== ============
United Kingdom $ 2,943,770 $ 3,275,430 $ 3,354,652
=========== =========== ============
F-25
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (in thousands
except per share amounts):
First Second Third Fourth (A)
2003 Quarters
Revenues $21,692 $22,897 $19,439 $18,793
Gross profit (loss) 1,008 816 (1,786) 1,980
Net (loss) (1,391) (9,900) (5,929) (2,297)
Net (loss) per share:
Basic (0.22) (1.57) (0.94) (0.36)
Diluted (0.22) (1.57) (0.94) (0.36)
2002 Quarters
Revenues $21,636 $20,684 $21,278 $23,458
Gross profit (loss) 569 (140) (7) (3,660)
Net (loss) (1,161) (2,682) (1,667) (4,878)
Net (loss) per share:
Basic (0.18) (0.43) (0.26) (0.77)
Diluted (0.18) (0.43) (0.26) (0.77)
(A) Fourth quarter 2002 net loss includes a pretax charge of $1.5 million
related to a reserve for relocating the Salem, New Hampshire
operations to Methuen, Massachusetts, $.5 million increase in
inventory reserves and $2.9 million in inventory write-downs. The
inventory write-downs were due to a customer's cancellation of a
customer-specific order ($1.3 million) and to a year end physical
inventory adjustment ($1.6 million).
17. SUPPLEMENTAL INFORMATION
Information with regard to certain valuation and qualifying accounts
is as follows:
F-26
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2003, 2002 and 2001
Additions
Balance at Charges to Charges to Balance at
Beginning Cost and Other End of
of Year Expenses Accounts Deductions Year
Allowance for Bad Debts ---------- ---------- ---------- ---------- ----------
June 30, 2003 $ 1,215,178 $ 527,598 $ - $ (793,515) $ 949,261
June 30, 2002 1,896,615 355,490 - (1,036,927) 1,215,178
June 30, 2001 404,000 1,877,743 249 (385,377) 1,896,615
-------------------------------------------------------------------------------------------------------------
Accumulated Amortization of Goodwill
June 30, 2003 234,477 - - - 234,477
June 30, 2002 234,477 - - - 234,477
June 30, 2001 220,100 250,284 - (235,907) 234,477
-------------------------------------------------------------------------------------------------------------
Accumulated Depreciation
June 30, 2003 39,480,757 6,488,682 - (3,190,427) 42,779,012
June 30, 2002 34,379,848 6,408,138 - (1,307,229) 39,480,757
June 30, 2001 28,114,968 5,919,839 345,041 - 34,379,848
-------------------------------------------------------------------------------------------------------------
Inventory Obsolescence
June 30, 2003 3,521,701 1,240,208 - (1,788,185) 2,973,724
June 30, 2002 3,494,094 643,942 - (616,335) 3,521,701
June 30, 2001 711,709 2,782,385 - - 3,494,094
18. SUBSEQUENT EVENTS
Convertible Subordinated Note - On July 28, 2003, Parlex entered into
a Securities Purchase Agreement (the "Agreement") pursuant to which
the Company sold an aggregate $6,000,000 of its 7% convertible
subordinated notes (the "Notes") with attached warrants (the
"Warrants") to several institutional investors. The Company received
net proceeds of approximately $5.5 million from the transaction,
after deduction for approximately $500,000 in finders' fees and other
transaction expenses. The Notes bear interest at a fixed rate of 7%,
payable quarterly in shares of Parlex common stock. The Notes are
junior to the indebtedness due to Silicon Valley Bank, Shanghai
Jingling Co., Ltd. and the CITIC Ka Wah Bank Limited. The Notes
mature on July 28, 2007.
As specified in the Agreement, we will determine the number of shares
of common stock to be issued as payment for the interest by dividing
the monetary value of the accrued interest by the then current
conversion price, initially at $8.00 per common share. Interest
expense will be recorded quarterly based on the fair value of the
common shares issued. Accordingly, interest expense may fluctuate
from quarter to quarter. No principal payments are due until maturity
on July 28, 2007. The Notes are unsecured.
F-27
The Notes are convertible immediately by the investors, in whole or
in part, into shares of our common stock at an initial conversion
price equal to $8.00. After two years from the date of issuance, the
Company has the right to redeem all, but not less than all, of the
Notes at 100% of the remaining principal of Notes then outstanding,
plus all accrued and unpaid interest under certain conditions. After
three years from the date of issuance, the holder of any Notes may
require the Company to redeem the Notes in whole, but not in part.
Such redemption shall be at 100% of the remaining principal of such
Notes, plus all accrued and unpaid interest. In the event of a Change
in Control (as defined therein), the holder has the option to require
that the Notes be redeemed in whole (but not in part), at 120% of the
outstanding unpaid principal amount, plus all unpaid interest
accrued.
In connection with the sale of the Notes, the investors also received
common stock purchase warrants for an aggregate of 300,000 shares of
our common stock at an initial exercise price of $8.00 per share. The
Warrants are immediately exercisable and expire on July 28, 2007. The
conversion price of the Notes and the exercise price of the Warrants
are subject to adjustment in the event of stock splits, dividends and
certain combinations. The relative fair value of the Warrants on
July 28, 2003 was approximately $1,035,000. Furthermore, the Notes
contained a beneficial conversion feature representing an effective
initial conversion price that was less than the fair market value of
the underlying common stock on July 28, 2003. The fair value of the
beneficial conversion feature was approximately $1,035,000. Both the
relative fair value of the Warrants and the fair value of the
beneficial conversion feature will be recorded as an increase in
additional paid-in capital and as original issuance discount on the
underlying debt. The original issue discount will be amortized to
interest expense over the 4-year life of the Notes.
Parlex Shanghai Term Note - On August 20, 2003, Parlex Shanghai
entered into a short-term bank note, due August 20, 2004, bearing
interest at 5.841%. Amounts outstanding under this short-term note
total $1.2 million as of September 20, 2003. The note replaced a
similar short-term note that terminated on August 22, 2003.
Land Use Rights - In July 2003, Parlex (Shanghai) Interconnect
Products Co., Ltd., the Company's second tier subsidiary, executed an
agreement to sell its land use rights relating to a parcel of land
located in the People's Republic of China for approximately $1.2
million (see Note 4). The Company received approximately $1.0 million
in cash in August and the balance will be paid at closing.
F-28
Item 9. Changes In and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
- --------------------------------
In accordance with Securities Exchange Act of 1934 Rules 13a - 15 and
15d - 15, we carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, as
well as other key members of our management, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation and in consultation with our
independent accountants, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
contained deficiencies, as of the end of the period covered by this report,
that effected our ability to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules
and forms. Such deficiencies constitute a "Reportable Condition" under
standards established by the American Institute of Certified Public
Accountants. Management believes that this matter has not had any material
impact on our consolidated financial statements. The deficiencies related
to certain corporate policy and procedures, specifically relating to the
shipment of product, under certain conditions, by different geographic
locations, not understood by employees or not being adhered to. As a result,
revenue on certain product shipments was being prematurely recognized. We
believe such deficiencies resulted from a deficiency in the design and
operation of the internal controls over revenue recognition related to
product shipments, namely the establishment and appropriate level of
communication regarding the context and specifics of such procedures. We
have communicated to our employees the changes we have made to our policies
and procedures relating to shipment of product, including the discontinuation
of certain shipping practices. We are also considering the following changes
to our internal controls over the shipment of product.
* Implementation of a comprehensive policy addressing revenue
recognition and specifying the accounting treatment for specific
shipping terms, including but not limited to Incoterms.
* A review and approval process for all significant and non-standard
sales transactions by a knowledgeable financial executive to
identify the financial reporting implications prior to execution
and recording.
* A review by the corporate controller of end of accounting period
transactions to ensure proper sales cutoff.
Other than the steps we have or will take to correct certain weaknesses in
our communication of and adherence to corporate policies noted above, no
change in our internal control over financial reporting (as defined in Rules
13a - 15(f) and 15d - 15(f) under the Exchange Act) occurred during the fiscal
quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required by this Item is incorporated by reference from the
information under the captions "Election of Directors", "Board of Directors
Meetings and Committees of the Board", "Executive Officers" and "Security
Ownership of Certain Beneficial Owners and Management" in our 2003 Proxy
Statement.
Item 11. Executive Compensation
- -------------------------------
The information required by this Item is incorporated by reference from the
information under the captions "Compensation of Executive Officers" and
"Board of Directors Meetings and Committees of the Board" in our 2003 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
Information regarding the security ownership of certain beneficial owners
and management is incorporated by reference from the information under the
caption "Security Ownership of Certain Beneficial Owners and Management" in
our 2003 Proxy Statement.
The following table sets forth certain information with respect to the
number of securities issued and issuable under our equity compensation
plans at June 30, 2003:
40
Number of securities
remaining available for
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column(a))
Equity compensation plans
approved by security holders 507,775 $13.26 800,418
Equity compensation plans
not approved by security
holders - - -
------- -------
Total 507,775 800,418
======= =======
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
We retain as our general counsel the law firm of Kutchin & Rufo, P.C. to
perform legal services on our behalf. Payments made by us to Kutchin &
Rufo, P.C. in 2003 were approximately $207,000. Edward D. Kutchin, a
shareholder in the professional corporation of Kutchin & Rufo, P.C., was
elected to the position of Clerk on August 27, 2002 and is the son-in-law
of Herbert W. Pollack, the Chairman of the Board of Directors.
We purchased $580,000, $822,000 and $398,000 of equipment in 2003, 2002 and
2001, respectively from a company in which Mr. Darryl McKenney, an
executive officer of Parlex at the time, had a financial interest. At June
30, 2003 and 2002, we had recorded $200,000 and $506,000, respectively,
within accounts payable and accrued expenses in the accompanying
consolidated balance sheets for equipment purchases from this party. At
June 30, 2002, we had no knowledge of the relationship. Information related
to this relationship was disclosed in our interim report immediately
following our discovery of the existence of the relationship. We conducted
an investigation related to this relationship with the support and input of
the Audit Committee. Effective February 24, 2003, Mr. McKenney was no
longer employed by us.
Item 14. Principal Accountant Fees and Services.
- ------------------------------------------------
The information required by this item is incorporated by reference from the
information under the caption "Audit Fees" in our 2003 Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)
1. Consolidated Financial Statements
41
The Consolidated Financial Statements are filed as part of
this report.
2. Consolidated Financial Statement Schedules
All schedules are omitted because of the absence of
conditions under which they are required or because the
required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits
An index of exhibits that are a part of this Form 10-K
appears following the signature page and is incorporated
herein by reference.
(b) Reports on Form 8-K
On May 13, 2003, we filed a Current Report on Form 8-K under
Items 7, 9 and 12 to report the issuance of a press release
setting forth our results of operations and financial condition
for our third quarter ended March 31, 2003.
On June 11, 2003, we filed a Current Report on Form 8-K under
Items 2, 5 and 7 to report the completion of two sale-leaseback
transactions and the refinancing of our outstanding revolving
credit indebtedness by entering into a revolving loan facility
with Silicon Valley Bank.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
October 10, 2003.
Parlex Corporation
By /s/ Peter J. Murphy
-------------------
Peter J. Murphy, Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Herbert
W. Pollack, Peter J. Murphy, and Jonathan R. Kosheff, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them, for him and in his name,
place, and stead, and in any and all capacities, to sign this annual report
on Form 10-K of Parlex Corporation and any amendments thereto, and to file
the same, with all exhibits thereto and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Herbert W. Pollack Chairman of the Board October 10, 2003
- --------------------------
Herbert W. Pollack
/s/ Peter J. Murphy Director and Chief Executive October 10, 2003
- -------------------------- Officer (Principal Executive
Peter J. Murphy Officer)
/s/ Jonathan R. Kosheff Treasurer and Chief October 10, 2003
- -------------------------- Financial Officer (Principal
Jonathan R. Kosheff Financial and Accounting
Officer)
/s/ Sheldon A. Buckler Director October 10, 2003
- --------------------------
Sheldon A. Buckler
/s/ Richard W. Hale Director October 10, 2003
- --------------------------
Richard W. Hale
/s/ Lester Pollack Director October 10, 2003
- --------------------------
Lester Pollack
/s/ Benjamin M. Rabinovici Director October 10, 2003
- --------------------------
Benjamin M. Rabinovici
/s/ Russell D. Wright Director October 10, 2003
- --------------------------
Russell D. Wright
43
EXHIBIT INDEX
The exhibits listed below are filed with or incorporated by reference in
the Annual Report on Form 10-K.
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Organization as amended (dated August 2,
1983) (filed as Exhibits 3-A and 3-B to our Registration
Statement on Form S-1, file No. 2-85588, and incorporated herein
by reference).
3.2 Articles of Amendment to Restated Articles of Organization,
dated December 1, 1987 (filed as Exhibit 10-Q to our Annual
Report on Form 10-K for the fiscal year ended June 30, 1988).
3.3 Bylaws (filed as Exhibit 3-C to our Registration Statement on
Form S-1, file No. 2-85588, and incorporated herein by
reference).
3.4 Articles of Amendment to Restated Articles of Organization,
dated October 21, 1997 (filed as Exhibit 3-D to our Quarterly
Report on Form 10-Q for the quarter ended December 28, 1997).
3.5 Articles of Amendment to Restated Articles of Organization,
dated August 30, 2000 (filed herewith).
4.1 Warrant, dated June 11, 2003, issued to Silicon Valley Bank
(filed as Exhibit 4-A to our Current Report on Form 8-K dated
June 11, 2003).
4.2 Registration Rights Agreement, dated June 11, 2003, by and
between Silicon Valley Bank and Parlex Corporation (filed as
Exhibit 4-B to our Current Report on Form 8-K dated June 11,
2003).
4.3 Securities Purchase Agreement dated July 28, 2003 between Parlex
Corporation and the Investors (filed as Exhibit 4-C to our
Current Report on Form 8-K dated June 28, 2003).
4.4 Form of 7% Convertible Subordinated Note (filed as Exhibit 4-D
to our Current Report on Form 8-K dated June 28, 2003).
4.5 Form of Stock Purchase Warrant to Purchase Shares of Common
Stock (filed as Exhibit 4-E to our Current Report on Form 8-K
dated June 28, 2003).
4.6 Registration Rights Agreement dated July 28, 2003 between Parlex
Corporation and the Investors (filed as Exhibit 4-F to our
Current Report on Form 8-K dated June 28, 2003).
10.1 1985 Employees' Nonqualified Stock Option Plan dated December 2,
1985* (filed as Exhibit 10-L to our Annual Report on Form 10-K
for the fiscal year ended June 30, 1986).
10.2 1989 Outside Directors' Stock Option Plan* (filed as Exhibit
10-Z to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1991).
10.3 1989 Employees' Stock Option Plan* (filed as Exhibit 10-AA to
our Annual Report on Form 10-K for the fiscal year ended June
30, 1991).
10.4 Chinese Joint Venture Contract, Articles of Association, and
Agreement of Technology
44
License and Technical Service dated May 29, 1995 (filed as
Exhibit 10-AH to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1995). Confidential treatment has been
granted for portions of this exhibit.
10.5 Agreement of Lease between PVP-Salem Associates, L.P. and Parlex
Corporation dated August 12, 1997 (filed as Exhibit 10-L to our
Annual Report on Form 10-K for the fiscal year ended June 30,
1997).
10.6 Patent Assignment Agreement between Parlex Corporation and
Polyonics, Inc. dated June 16, 1997 (filed as Exhibit 10-N to
our Annual Report on Form 10-K for the fiscal year ended June
30, 1997).
10.7 1996 Outside Directors' Stock Option Plan* (filed as Exhibit
10-O to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1997).
10.8 Shelter Service Agreement between Parlex Corporation and
Offshore International Inc. dated March 6, 1998 (filed as
Exhibit 10-O to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1998).
10.9 Patent Assignment Agreement between Parlex Corporation and
Polyclad Laminates, Inc., dated January 20, 2000 (filed as
Exhibit 10-T to our Annual Report on Form 10-K for the fiscal
year ended June 30, 2000).
10.10 Parlex Corporation 2001 Employees' Stock Option Plan* (filed as
Exhibit 10-V to our Quarterly Report on Form 10-Q for the
quarter ended December 30, 2001 ).
10.11 Employment Agreement between Parlex Corporation and Peter J.
Murphy dated September, 2002* (filed herewith).
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10.12 Purchase and Sale Agreement, dated May 8, 2003, by and between
Taurus Methuen LLC, as buyer, and Parlex Corporation, as seller
(filed as Exhibit 10-AA to our Current Report on Form 8-K dated
June 11, 2003).
10.13 First Amendment to Purchase and Sale Agreement, dated May 23,
2003, by and between Taurus Methuen LLC, as buyer, and Parlex
Corporation, as seller (filed as Exhibit 10-BB to our Current
Report on Form 8-K dated June 11, 2003).
10.14 Second Amendment to Purchase and Sale Agreement, dated June 3,
2003, by and between Taurus Methuen LLC, as buyer, and Parlex
Corporation, as seller (filed as Exhibit 10-CC to our Current
Report on Form 8-K dated June 11, 2003).
10.15 Purchase and Sale Agreement, dated May 8, 2003, by and between
Taurus Cranston LLC, as buyer, and Poly-Flex Circuits, Inc., as
seller (filed as Exhibit 10-DD to our Current Report on Form 8-K
dated June 11, 2003).
10.16 First Amendment to Purchase and Sale Agreement, dated May 23,
2003, by and between Taurus Cranston LLC, as buyer, and Poly-
Flex Circuits, Inc., as seller (filed as Exhibit 10-EE to our
Current Report on Form 8-K dated June 11, 2003).
10.17 Second Amendment to Purchase and Sale Agreement, dated June 3,
2003, by and between Taurus Cranston LLC, as buyer, and Poly-
Flex Circuits, Inc., as seller (filed as Exhibit 10-FF to our
Current Report on Form 8-K dated June 11, 2003).
10.18 Lease, dated June 12, 2003, by and between Taurus Methuen, LLC,
as landlord, and Parlex Corporation, as tenant, for the premises
located at One Parlex Place, Methuen, Massachusetts (filed as
Exhibit 10-GG to our Current Report on Form 8-K dated June 11,
2003).
10.19 Lease, dated June 12, 2003, by and between Taurus Cranston, LLC,
as landlord, and Poly-Flex Circuits, Inc., as tenant, for the
premises located at 28 Kenney Drive, Cranston, Rhode Island
(filed as Exhibit 10-HH to our Current Report on Form 8-K dated
June 11, 2003).
10.20 Loan and Security Agreement, dated June 11, 2003, by and among
Silicon Valley Bank, as lender, and Parlex Corporation, Poly-
Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed as Exhibit 10-II to our Current Report on Form
8-K dated June 11, 2003).
10.21 Loan Modification Agreement, dated September 23, 2003, by and
among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed herewith).
10.22 Employment Agreement between Parlex Corporation and Herbert W.
Pollack dated October 1, 2003* (filed herewith).
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Independent Auditors (filed herewith).
24.1 Powers of Attorney (filed herewith as part of the signature page
hereto).
31.1 Certification of Registrant's Chief Executive Officer required
by Rule 13a-14(a) (filed herewith).
31.2 Certification of Registrant's Chief Financial Officer required
by Rule 13a-14(a) (filed herewith).
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32.1 Certification of Registrant's Chief Executive Officer pursuant
to 18 U.S.C. 1350 (furnished herewith).
32.2 Certification of Registrant's Chief Financial Officer pursuant
to 18 U.S.C. 1350 (furnished herewith).
* Denotes management contract or compensatory plan or arrangement.
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