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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 28, 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
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2464749
------------------------ -----------
(State of incorporation) (I.R.S. ID)
One Parlex Place, Methuen, Massachusetts 01844
(Address of Principal Executive Offices) (Zip Code)
978-685-4341
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of
February 9, 2004 was 6,409,687 shares.
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PARLEX CORPORATION
------------------
INDEX
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Part I - Financial Information Page
----
Item 1. Unaudited Condensed Consolidated Financial Statements:
Consolidated Balance Sheets - December 28, 2003 and June 30, 2003 3
Consolidated Statements of Operations - For the Three and Six Months
Ended December 28, 2003 and December 29, 2002 4
Consolidated Statements of Cash Flows - For the Six Months Ended
December 28, 2003 and December 29, 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
Part II - Other Information
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission Of Matters To A Vote Of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
Exhibit Index 35
2
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
- ---------------------------------------------------------------------------
ASSETS December 28, 2003 June 30, 2003
CURRENT ASSETS:
Cash and cash equivalents $ 1,614,150 $ 1,513,523
Accounts receivable - net 18,411,357 13,835,589
Inventories - net 19,854,242 17,082,878
Refundable income taxes 134,605 279,381
Deferred income taxes 313,109 313,109
Other current assets 2,097,052 2,077,409
------------ ------------
Total current assets 42,424,515 35,101,889
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 45,115,352 46,893,216
INTANGIBLE ASSETS - NET 34,210 1,130,005
GOODWILL - NET 1,157,510 1,157,510
OTHER ASSETS 2,434,606 1,750,061
------------ ------------
TOTAL $ 91,166,193 $ 86,032,681
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 10,672,263 $ 3,813,117
Accounts payable 14,829,955 13,396,274
Accrued liabilities 4,609,170 5,170,608
------------ ------------
Total current liabilities 30,111,388 22,379,999
------------ ------------
LONG-TERM DEBT 9,040,867 10,802,275
------------ ------------
OTHER NONCURRENT LIABILITIES 1,162,242 1,187,280
------------ ------------
MINORITY INTEREST IN PARLEX SHANGHAI 525,341 415,583
------------ ------------
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; issued 6,606,564 and
6,522,216 shares at December 28, 2003 and
June 30, 2003, respectively 660,656 652,221
Accrued interest payable in common stock 101,703 -
Additional paid-in capital 63,888,514 61,049,486
Accumulated deficit (13,619,645) (9,605,380)
Accumulated other comprehensive income 332,752 188,842
Less treasury stock, at cost (1,037,625) (1,037,625)
------------ ------------
Total stockholders' equity 50,326,355 51,247,544
------------ ------------
TOTAL $ 91,166,193 $ 86,032,681
============ ============
See notes to unaudited condensed consolidated financial statements.
3
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 28, 2003 December 29, 2002 December 28, 2003 December 29, 2002
----------------- ----------------- ----------------- -----------------
REVENUES $23,559,093 $22,897,250 $43,263,524 $ 44,589,538
COSTS AND EXPENSES:
Cost of products sold 20,857,729 22,025,905 38,329,975 42,710,310
Selling, general and administrative expenses 3,959,374 3,674,417 7,699,740 6,593,933
----------- ----------- ----------- ------------
Total costs and expenses 24,817,103 25,700,322 46,029,715 49,304,243
----------- ----------- ----------- ------------
OPERATING LOSS (1,258,010) (2,803,072) (2,766,191) (4,714,705)
INTEREST AND NON OPERATING INCOME (EXPENSE)
Interest income 2,427 3,849 7,021 10,978
Interest expense (664,855) (223,138) (1,197,505) (427,421)
Non operating income 40,643 4,935 52,386 5,400
Non operating expense - (37,416) (218) (65,192)
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST (1,879,795) (3,054,842) (3,904,507) (5,190,940)
BENEFIT FROM INCOME TAXES - (6,860,081) - (6,133,807)
----------- ----------- ----------- ------------
LOSS BEFORE MINORITY INTEREST (1,879,795) (9,914,923) (3,904,507) (11,324,747)
MINORITY INTEREST (47,439) 14,878 (109,758) 33,587
----------- ----------- ----------- ------------
NET LOSS $(1,927,234) $(9,900,045) $(4,014,265) $(11,291,160)
=========== =========== =========== ============
BASIC AND DILUTED LOSS PER SHARE $ (0.30) $ (1.57) $ (0.63) $ (1.79)
=========== =========== =========== ============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 6,331,148 6,306,579 6,321,734 6,304,897
=========== =========== =========== ============
See notes to unaudited condensed consolidated financial statements.
4
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- ---------------------------------------------------------------------------
Six Months Ended
December 28, 2003 December 29, 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,014,265) $(11,291,160)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property, plant and
equipment and intangible assets 2,724,925 3,423,921
Amortization of deferred financing costs and deferred loss 479,891 -
Minority interest 109,758 (33,587)
Deferred income taxes - 6,133,425
Interest payable in common stock 174,898 -
Gain on sale of China land use rights (86,531) -
Changes in current assets and liabilities:
Accounts receivable - net (4,475,237) (526,706)
Inventories (2,651,412) 967,846
Refundable taxes 144,776 1,488,578
Other assets (378,917) 254,627
Accounts payable and accrued liabilities 112,729 (1,489,679)
------------ ------------
Net cash used in operating activities (7,859,385) (1,072,735)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of China land use rights 1,179,145 -
Additions to property, plant and equipment and other assets (208,314) (1,193,856)
------------ ------------
Net cash provided by (used in) investing activities 970,831 (1,193,856)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 52,530
Exercise of warrants 600,000 -
Proceeds from bank loans 24,352,824 9,842,240
Payment of bank loans (23,370,212) (7,764,457)
Payment of Methuen sale-leaseback financing obligation (151,440) -
Cash received for interest on Methuen sale-leaseback note receivable 66,252 -
Proceeds from convertible note, net of costs 5,480,416 -
------------ ------------
Net cash provided by financing activities 6,977,840 2,130,313
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 11,341 28,485
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 100,627 (107,793)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,513,523 1,785,025
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,614,150 $ 1,677,232
============ ============
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property, plant, equipment and other asset purchases financed
under capital lease, long-term debt and accounts payable $ 549,913 $ 756,157
============ ============
Issuance of warrants in connection with issuance of convertible debt $ 1,139,252 $ -
============ ============
Beneficial conversion feature associated with convertible debt $ 1,035,016 $ -
============ ============
Interest payable in common stock $ 73,195 $ -
============ ============
See notes to unaudited condensed consolidated financial statements.
5
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Parlex
Corporation, its wholly owned subsidiaries ("Parlex" or the
"Company") and its 90.1% investment in Parlex (Shanghai) Circuit Co.,
Ltd. ("Parlex Shanghai"). The financial statements as reported in
Form 10-Q reflect all adjustments which are, in the opinion of
management, necessary to present fairly the financial position as of
December 28, 2003 and the results of operations and cash flows for
the six months ended December 28, 2003 and December 29, 2002. All
adjustments made to the interim financial statements included all
those of a normal and recurring nature. The results for interim
periods are not necessarily indicative of results which may be
expected for any other interim period or for the full year.
This filing should be read in conjunction with the Company's annual
report on Form 10-K for the year ended June 30, 2003.
As shown in the consolidated financial statements, the Company
incurred net losses of $4,014,265 and $11,291,160 and used $7,859,385
($600,000 which funded losses net of non-cash items and $7.3 million
for working capital) and $1,072,735 of cash in operations for
the six months ended December 28, 2003 and December 29, 2002,
respectively. In addition, the Company had an accumulated deficit of
$13,619,645 at December 28, 2003. At December 28, 2003, the Company
was not in compliance with certain financial covenants under its Loan
and Security Agreement (the "Loan Agreement") with Silicon Valley
Bank. The Company has received a waiver from the bank for its non-
compliance at December 28, 2003 and is currently negotiating an
amendment to the terms of the Loan Agreement to modify certain of the
Loan Agreement's restrictive covenants. In addition, due to the
cross-default provisions contained in its Citic Ka Wah Bank Loan
Agreement, the Company has also classified such debt as current until
such time as the defaults under the Silicon Valley Bank Loan
Agreement are cured.
In response to the worldwide downturn in the electronics industry,
management has taken a series of actions to reduce operating expenses
and to restructure operations, consisting primarily of reductions in
workforce and consolidation of 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, medical, military and aerospace, and electronic
identification markets; 4) continuing to monitor and reduce selling,
general and administrative expenses; 5) completing sales of non-
essential assets such as its land use rights in China (see Note 4);
and 6) evaluating opportunities to acquire new multilayer business in
our effort to significantly improve capacity utilization.
Furthermore, in June and July 2003, 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. Working capital consumed $7.3 million of a total $7.9 million
used by operations during the first six months of fiscal 2004. Growth
in our China operations (58% revenue growth in the second quarter
year over year) continues to require working capital. The Company is
pursuing standalone financing for its China operations. This will
likely include alternative term financing for equipment and a working
capital line to support continued growth. In addition, management
continues to evaluate alternative opportunities to improve its
liquidity. Management believes that its cash on hand and cash
expected to be generated during fiscal 2004 will be sufficient to
enable it to meet its financing and operating obligations through at
least December 2004.
6
2. 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.
Inventories consisted of:
December 28, June 30,
2003 2003
Raw materials $ 8,853,908 $ 7,736,473
Work in process 9,337,455 8,285,396
Finished goods 4,417,573 4,034,733
----------- -----------
Total cost 22,608,936 20,056,602
Reserve for obsolescence (2,754,694) (2,973,724)
----------- -----------
Inventory, net $19,854,242 $17,082,878
=========== ===========
3. 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.
Property, plant and equipment consisted of:
December 28, June 30,
2003 2003
Land and land improvements $ 589,872 $ 589,872
Buildings 18,543,295 18,543,295
Machinery and equipment 63,398,176 59,625,945
Leasehold improvements and other 6,500,049 6,321,658
Construction in progress 1,899,597 4,591,458
------------ ------------
Total cost 90,930,989 89,672,228
Less: accumulated depreciation (45,815,637) (42,779,012)
------------ ------------
Property, plant and equipment, net $ 45,115,352 $ 46,893,216
============ ============
4. Intangible Assets
-----------------
Intangible assets consisted of:
December 28, June 30,
2003 2003
Land use rights $ - $1,145,784
Patents 58,560 58,560
-------- ----------
Total cost 58,560 1,204,344
Accumulated amortization (24,350) (74,339)
-------- ----------
Intangible assets, net $ 34,210 $1,130,005
======== ==========
7
In July 2003, Parlex Interconnect executed an agreement to sell its
land use rights in China for approximately $1.2 million. The Company
received a deposit of approximately $1.0 million in August 2003 and
the balance in December 2003. The sale was recorded in the quarter
ending December 28, 2003, and resulted in a gain of approximately
$87,000 which is included in operating loss for the six months ending
December 28, 2003.
The Company has reassessed the remaining useful lives of the
intangible assets at December 28, 2003 and determined the useful
lives are appropriate in determining amortization expense.
Amortization expense for the six months ended December 28, 2003 and
December 29, 2002 was $3,181 and $15,202, respectively.
5. Other Assets
------------
Other assets consisted of:
December 28, June 30,
2003 2003
Deferred loss on sale-leaseback of Poly-Flex Facility, net $1,224,988 $1,362,370
Deferred financing costs on sale-leaseback of Methuen facility (see Note 7) 361,700 203,353
Deferred financing costs on the Loan Security Agreement (see Note 7) 192,269 138,081
Deferred financing costs on Convertible Subordinated Note (see Note 7) 623,821 -
Other 160,470 48,019
---------- ----------
Total cost 2,563,248 1,751,823
Less accumulated amortization (128,642) (1,762)
---------- ----------
Total, net $2,434,606 $1,750,061
========== ==========
Deferred Loss on Sale Leaseback of Poly-Flex Facility - In June 2003,
Poly-Flex sold its operating facility in Cranston, Rhode Island for a
total purchase price of $3,000,000 in cash. Under the terms of the
Purchase and Sale Agreement, Poly-Flex entered into a five-year lease
of the Poly-Flex Facility with the buyer. The Company recorded no
immediate loss on the transaction since the fair value of the Poly-
Flex Facility exceeded the net book value of the facility at the time
of sale. However, approximately $1,374,000 of excess net book value
over the sales price was recorded as a deferred loss and included in
Other Assets on the consolidated balance sheets. The deferred loss is
being amortized to lease expense over the five-year lease term.
Amortization of the deferred loss, reported as a component of rent
expense, was $137,000 for the six months ended December 28, 2003.
Amortization of deferred financing costs was $127,000 for the six
months ended December 28, 2003.
6. Accrued Liabilities - Facility Exit Costs
-----------------------------------------
The following is a summary of the facility exit costs activity during
the six months ended December 28, 2003:
Facility
Facility FY 2004 Activity Exit Costs
Exit Costs ---------------------------------------- Accrued
Accrued Cash Asset Change December 28,
June 30, 2003 Payments Write-offs in Estimates 2003
------------- -------- ---------- ------------ ------------
Lease costs $439,855 $(229,644) $ - $13,499 $223,710
Facility refurbishment costs 143,666 - - - 143,666
-------- --------- ------ ------- --------
Total $583,521 $(229,644) $ - $13,499 $367,376
======== ========= ====== ======= ========
Lease costs of $229,644 for the Salem, New Hampshire facility,
consisting of rent expense and utilities for the period July 1, 2003
through December 28, 2003, were paid and charged to the facility exit
costs accrual. The accrued facility exit costs at December 28, 2003
represent six months of lease payments and the
8
estimated costs to refurbish the facility at the early lease
termination date. The Company expects the balance of accrued
facility exit costs at December 28, 2003 to be paid within the next
six months.
7. Indebtedness
------------
Long-term debt consisted of:
December 28, June 30,
2003 2003
Loan and security agreement $ 4,176,726 $ 3,306,150
Parlex Shanghai term notes 3,142,397 2,175,645
Parlex Interconnect term note 3,000,000 3,800,000
Finance obligation on sale-leaseback of Methuen Facility 5,248,410 5,333,597
Convertible subordinated notes 4,145,597 -
----------- -----------
Total long-term debt 19,713,130 14,615,392
Less current portion 10,672,263 3,813,117
----------- -----------
Long-term debt - net $ 9,040,867 $10,802,275
=========== ===========
Loan and Security Agreement (the "Loan Agreement") - The Company
executed a Loan Agreement with Silicon Valley Bank on June 11, 2003.
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 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 the Company's availability for borrowings
under the Loan Agreement. The Loan Agreement contains certain
restrictive covenants, including but not limited to, limitations on
debt incurred by its 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 which, among other things,
require the Company to maintain $750,000 in minimum cash balances or
excess availability under the Loan Agreement.
On September 23, 2003, the Company executed a Modification Agreement
(the "Modification Agreement") with Silicon Valley Bank. The
Modification Agreement increased the interest rate on borrowings to
the bank's prime rate (4.0% at December 28, 2003) 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 amended the financial
covenants. At December 28, 2003, the Company had available borrowing
capacity under the Loan Agreement of $2,566,000. Since the available
borrowing capacity exceeded $750,000 at December 28, 2003, none of
the Company's cash balance was subject to restriction at December 28,
2003. As of December 28, 2003, the Company was not in compliance with
certain Loan Agreement financial covenants. The Company has received
a waiver from the bank for its non-compliance at December 28, 2003.
The bank has continued to allow the Company to borrow against the
Loan Agreement. The Company is currently negotiating an amendment to
the terms of the Loan Agreement to modify certain of the Loan
Agreement's restrictive covenants. The proposed amendment shall
remove the fixed charge coverage ratio from the Loan Agreement and
shall require us to report EBITDA of at least $50,000 on a three
month trailing basis, beginning January 31, 2004. The minimum EBITDA
requirement will be increased to $250,000 at June 30, 2004. The
interest rate on all obligations due to Silicon Valley Bank shall be
increased to Prime (as defined in the Loan Agreement) plus 2%, but
may be subsequently decreased upon the Company reporting positive
operating or net income. The Company expects to execute the
amendment during the third quarter of fiscal 2004. In addition, due
to the cross-default provisions contained in its Citic Ka Wah Bank
Loan Agreement, the Company has classified such debt as current until
such time as the defaults under the Silicon Valley Bank Loan
Agreement are cured.
The Loan Agreement includes both a subjective acceleration clause and
a lockbox arrangement that requires all lockbox receipts to be used
to pay down the revolving credit borrowings. Accordingly, borrowings
under the Loan Agreement should be classified as current liabilities
in the accompanying condensed consolidated balance sheet as of
December 28, 2003 as required by Emerging Issues Task Force Issue No.
95-22, "Balance Sheet Classification of Borrowings Outstanding Under
Revolving Credit Agreements that include both a Subjective
Acceleration Clause and a Lockbox Arrangement". However, such
borrowings will be excluded from current liabilities in future
periods and considered long-term obligations if such borrowings are:
1) refinanced on a long-term basis, 2) the subjective acceleration
terms of the Loan Agreement are modified, or 3) will not require the
use of working capital within one year. At June 30, 2003, the
balance outstanding under the Loan Agreement was properly classified
as long-term debt as a result of the refinancing of such debt on a
long-term basis with the proceeds of the 7% Convertible Notes.
Parlex Shanghai Term Notes - 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 December 28, 2003. The note replaced a
similar short-term note that terminated on August 22, 2003. 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 $1.3 million at December 28, 2003.
On December 15, 2003, Parlex Shanghai entered into a short-term bank
note, due December 15, 2004, bearing interest at 5.31%. Amounts
outstanding under this note short-term note total $605,000 as of
December 28, 2003. On
9
January 14, 2004, Parlex Shanghai entered into two short-term bank
notes, due October 12, 2004 and November 10, 2004, totaling $1.8
million and bearing interest at 5.31%.
Parlex Interconnect Term Note - In June 2002, Parlex Interconnect
executed a $5,000,000 Loan Agreement (the "CITIC Loan Agreement") with
CITIC. 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 the Company defaults 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 September 28, 2003, the
Company was not in compliance with the financial covenants of the
guarantee.
Effective October 8, 2003, CITIC executed the CITIC Loan Agreement
Amendment and 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. Amounts outstanding as of December
28, 2003 totaled $3,000,000. 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 was in compliance with its amended financial
covenants under the CITIC Loan Agreement, as amended, as of December
28, 2003. Certain cross-default provisions contained in the CITIC
Loan Agreement, however, have required the Company to classify the
outstanding amounts under this loan agreement as current, until such
time as the default under the Silicon Valley Loan Agreement is cured.
Finance Obligation on Sale Leaseback of Methuen Facility - In June
2003, Parlex sold its Methuen Facility 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. Under the terms of the Purchase and Sale Agreement, Parlex
simultaneously entered into a lease agreement relating to the Methuen
Facility with a minimum lease term of 15 years.
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. 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 cash payments
are received. The Company records the principal portion of the
monthly lease payments as a reduction to the finance obligation and
the interest portion of the monthly lease payments is 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.
Convertible Subordinated Notes - On July 28, 2003, Parlex sold an
aggregate $6,000,000 of its 7% convertible subordinated notes (the
"Notes") with attached warrants to several institutional investors.
The Company received net proceeds of approximately $5.5 million from
the transaction, after deducting approximately $500,000 in finders'
fees and other transaction expenses. Net proceeds were used to
refinance amounts borrowed under the Company's Loan and Security
Agreement and utilized for working capital needs. No principal
payments are due until maturity on July 28, 2007. The Notes are
unsecured.
The Notes bear interest at a fixed rate of 7%, payable quarterly in
shares of Parlex common stock. The number of shares of common stock
to be issued is calculated by dividing the accrued interest by the
'Initial Conversion Price' (a defined term) which was established at
$8.00 per share.
10
Interest expense is recorded quarterly based on the fair value of the
common shares issued. Accordingly, interest expense may fluctuate
from quarter to quarter. The Company has concluded that the interest
feature does not constitute an embedded derivative as it does not
currently meet the criteria for classification as a derivative.
The Company recorded accrued interest payable on the Notes of
$101,703 within stockholders' equity at December 28, 2003, as the
interest is required to be paid quarterly in the form of common
stock. Based on the conversion price of $8.00 per common share at
December 28, 2003, the Company issued 9,348 shares of common stock in
October 2003 in satisfaction of previously recorded interest and
issued 13,123 shares of common stock in January 2004 as payment for
interest accrued in the second quarter.
The Notes are convertible immediately by the investors, in whole or
in part, into shares of common stock at an initial conversion price
equal to $8.00. The conversion price is subject to adjustment in the
event of stock splits, dividends and certain combinations.
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, which has been recorded as an increase to
additional paid-in capital and as an original issue discount on the
Notes which is being amortized to interest expense over the 4-year
life of the Notes.
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.
8. Stockholders' Equity
--------------------
The Company issued common stock warrants in connection with certain
financings. All warrants are currently exercisable and the following
table summarizes information about common stock warrants outstanding
to lenders and investors at December 28, 2003:
Weighted-Average
Fiscal Year Number Exercise Expiration
Granted Outstanding Price Date
----------- ----------- ---------------- ----------
2003 25,000 $6.89 June 10, 2008
2004 225,000 8.00 July 28, 2007
2004 22,500 8.00 July 28, 2008
------- -----
Total 272,500 $7.90
======= =====
Upon execution of the Loan Agreement on June 10, 2003, the Company
issued warrants for the purchase of 25,000 shares of its common stock
to the bank at an initial exercise price of $6.89 per share. The
exercise price is subject to future adjustment under certain
conditions, including but not limited to, stock splits and stock
dividends. The fair value of the warrants on June 10, 2003 was
approximately $100,600, which has been recorded as deferred financing
costs and is being amortized to interest expense over the life of the
Loan Agreement. Amortization expense for the three and six months
ended December 28, 2003 was $12,600 and $25,100, respectively.
In connection with the sale of the Convertible Subordinated Notes,
the investors and the investment adviser received warrants to
purchase an aggregate of 322,500 shares of common stock, at an
initial exercise price of $8.00 per share. The exercise price of the
warrants is subject to adjustment in the event of stock splits,
dividends and certain combinations. In December 2003, one of the
investors exercised their warrants to purchase 75,000 shares of
Parlex common stock and the Company received proceeds of $600,000.
The relative fair value of the warrants issued to the
11
investors and to the investment adviser on July 28, 2003 was
approximately $1,035,000 and $104,000, respectively. The relative
fair value of the warrants was recorded as an increase in additional
paid-in capital and as original issuance discount recorded against
the carrying value of the Notes. The original issue discount is
being amortized to interest expense over the 4-year life of the
Notes. Amortization expense for the three and six months ended
December 28, 2003 was $69,900 and $116,500, respectively.
9. 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 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. License fees and royalty income are
recognized when earned.
10. 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 "Accounting for Stock Issued to Employees"
using the intrinsic-value method as permitted by Statement of
Financial Accounting Standards ("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:
Three Months Ended Six Months Ended
December 28, 2003 December 29, 2002 December 28, 2003 December 28, 2002
Net loss - as reported (1,927,234) (9,900,045) (4,014,265) (11,291,160)
Add stock-based compensation expense
included in reported net loss - - - -
Deduct stock-based compensation expense
determined under the fair-value method (171,000) (191,600) (362,000) (383,600)
Net loss - pro forma (2,098,234) (10,091,645) (4,376,265) (11,674,760)
---------- ----------- ---------- -----------
Basic and diluted loss per share - as reported $ (0.30) $ (1.57) $ (0.63) $ (1.79)
Basic and diluted loss per share - pro forma $ (0.33) $ (1.60) $ (0.69) $ (1.85)
The fair values of the options at the date of grant were estimated
using the Black-Scholes option pricing model with the following
assumptions:
Three Months Ended Three Months Ended
December 28, 2003 December 29, 2002
Average risk-free interest rate 2.5% 2.6%
Expected life of option grants 3.5 years 3.5 years
Expected volatility of underlying stock 72% 67%
Expected dividend rate None None
12
The following table presents combined activity for stock options for
the three and six months ended December 28, 2003:
Three Months Ended December 28, 2003 Six Months Ended December 28, 2003
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
Outstanding options at beginning of period 580,275 $12.60 507,775 $13.26
Granted 3,000 8.62 85,000 8.40
Surrendered (18,250) 13.08 (27,750) 12.70
Exercised - - - -
------- ------ ------- ------
Outstanding options at end of period 565,025 $12.56 565,025 $12.56
======= ====== ======= ======
Exercisable options at end of period 343,025 $13.84 343,025 $13.84
Weighted average fair value of options
granted during the period $ 4.49 $ 4.45
The following table presents weighted average price and life
information about significant option groups outstanding and
exercisable at December 28, 2003:
Options Outstanding Options Exercisable
---------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
$ 3.60 - $ 7.20 12,000 1.4 $ 6.05 12,000 $ 6.05
7.21 - 10.80 132,000 9.1 9.06 41,250 10.23
10.81 - 14.40 289,275 7.3 12.17 158,525 12.34
14.41 - 18.00 66,250 5.5 16.18 66,250 16.18
18.01 - 21.60 63,500 3.8 18.78 63,500 18.78
21.61 - 25.20 2,000 6.4 22.00 1,500 22.00
------- --- ------ ------- ------
$ 3.60 - $25.20 565,025 7.0 $12.56 343,025 $13.84
======= === ====== ======= ======
11. Income Taxes
------------
Income taxes are recorded for interim periods based upon an estimated
annual effective tax rate. The Company's effective tax rate is
impacted by the proportion of its estimated annual income being
earned in domestic versus foreign tax jurisdictions, the generation
of tax credits and the recording of a valuation allowance.
The Company performs an ongoing evaluation of the realizability of
its net deferred tax assets. As a result of its recent history of
operating losses, uncertain future operating results, and past non-
compliance with certain of its debt covenant requirements, the
Company determined during fiscal 2003 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. net deferred tax assets and has not given
recognition to these net tax assets in the accompanying financial
statements at December 28, 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.
13
12. 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 three months
ended December 28, 2003 and December 29, 2002 was equal to the
reported net loss for each period.
The reconciliation between shares used for computation of basic and
dilutive income per share is as follows:
Three Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Shares for basic computation 6,331,148 6,306,579 6,321,734 6,304,897
Effect of dilutive stock options and warrants - - - -
--------- --------- --------- ---------
Shares for dilutive computation 6,331,148 6,306,579 6,321,734 6,304,897
========= ========= ========= =========
Antidilutive shares were not included in the per-share calculations
for the six months ended December 28, 2003 and December 29, 2002 due
to the reported net losses for those periods. Antidilutive shares
totaled approximately 838,000 and 573,000 for the six months ended
December 28, 2003 and December 29, 2002, respectively. All
antidilutive shares relate to outstanding stock options except for
272,500 anti-dilutive shares at December 28, 2003 relating to
warrants issued in connection with certain debt financings (see Note
8).
13. Comprehensive Loss
------------------
Comprehensive loss for the three and six months ended December 28,
2003 and December 29, 2002 is as follows:
Three Months Ended Six Months Ended
December 28, 2003 December 29, 2002 December 28, 2003 December 29, 2002
----------------- ----------------- ----------------- ------------------
Net loss $(1,927,234) $(9,900,045) $(4,014,265) $(11,291,160)
Other comprehensive (loss) income:
Foreign currency translation adjustments 201,486 85,932 143,911 189,521
----------- ----------- ----------- ------------
Total comprehensive loss $(1,725,748) $(9,814,113) $(3,870,354) $(11,101,639)
=========== =========== =========== ============
At December 28, 2003 and December 29, 2002, the Company's accumulated
other comprehensive loss pertains entirely to foreign currency
translation adjustments.
14
14. Related Party Transactions
--------------------------
The Company purchased $886,000 of equipment during the six months
ended December 29, 2002 from a company in which a then executive
officer of Parlex had a financial interest. Effective February 24,
2003, the executive officer was no longer employed by the Company. As
of December 28, 2003, all amounts owed for equipment purchases from
this party had been paid.
15. Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform to the
current year presentation.
16. Recent Adoption of Accounting Pronouncements
--------------------------------------------
On July 1, 2003, the Company adopted 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.
The adoption of SFAS No. 150 did not have a material effect on the
Company's financial statements.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
information included in this Quarterly Report on Form 10-Q and with
"Factors That May Affect Future Results" set forth on page 24. 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 Quarterly Report on Form 10-Q.
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements, and Part IV, Item 15 "Exhibits,
Financial Statement Schedules and Reports on Form 8-K" of our Annual Report
on Form 10-K for the year ended June 30, 2003. 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 judgment by our management which subjects them to an inherent
degree of uncertainty. In applying our accounting policies, our management
uses its best judgment 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 judgment 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 fiscal 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, exiting unprofitable markets, and transfer
of manufacturing operations to lower cost locations, such as the People's
Republic of China. In addition to transferring certain domestic
manufacturing processes to lower cost international manufacturing
locations, as part of our business strategy, we continue to pursue markets
and customer opportunities requiring domestic manufacturing support. We
believe there are strategic prospects available in the military/aerospace
and medical markets that would represent a significant domestic
manufacturing opportunity.
16
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
fiscal 2004 through sale leaseback transactions of selected corporate assets
and the issuance of convertible subordinated 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. At December 28, 2003, we were not in compliance with certain
financial covenants under our Loan and Security Agreement ("the Loan
Agreement") with Silicon Valley Bank. We have received a waiver from the
bank for our non-compliance at December 28, 2003, and we are currently
negotiating an amendment to modify certain of the Loan Agreement's
restrictive covenants. We believe we will be successful in obtaining
reasonable amendment terms. In addition, due to cross-default provisions
contained in our Citic Ka Wah Bank Loan Agreement, we have classified such
debt as current until such time as defaults under the Silicon Valley Bank
Loan Agreement are cured. For additional information relating to the
proposed amendment, please see "Liquidity and Capital Resources", below.
Critical Accounting Policies
The preparation of condensed consolidated financial statements requires that
we make estimates and judgments 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 judgments 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. 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
17
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 net deferred tax assets for which we
previously provided a valuation allowance, an adjustment would be 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
Unaudited Condensed Consolidated Financial Statements and the Notes thereto.
Three Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 88.5 % 96.2 % 88.6 % 95.8 %
----- ----- ----- -----
Gross profit 11.5 % 3.8 % 11.4 % 4.2 %
Selling, general and administrative expenses 16.8 % 16.0 % 17.8 % 14.8 %
----- ----- ----- -----
Operating loss (5.3)% (12.2)% (6.4)% (10.6)%
Loss from operations before income taxes
and minority interest (8.0)% (13.3)% (9.0)% (11.6)%
----- ----- ----- -----
Net loss (8.2)% (43.2)% (9.3)% (25.3)%
===== ===== ===== =====
Three Months Ended December 28, 2003 Compared to Three Months Ended
- -------------------------------------------------------------------
December 29, 2002
- -----------------
Total Revenues. Total revenues for the three months ended December 28,
2003 were $23.6 million versus $22.9 million for the three months ended
December 29, 2002. This represents an increase of $700,000 or 3%. Revenues
from our China operations increased 58% year over year. These increases
were brought about by continued strong revenues in the computer and
peripheral market. Hewlett Packard remains our single largest customer with
flex circuits for inkjet printers the primary application. Initial volume
production from our new Smartcard line was completed in the quarter.
Smartcard revenue for the quarter totaled approximately $400,000 with
approximately 10 million circuits delivered in the month of December. We
believe the electronic identification market will grow significantly over
the next several quarters and as such we continue to ramp production. Year
over year increases were in part offset by decreases in domestic PALFlex
revenues. In February 2003 we discontinued our unprofitable domestic
PALFlex business. Revenues generated from our PALFlex operations in the
second quarter of fiscal 2003 were $2 million. Excluding PALFlex revenues
from the prior year, total revenues for the quarter increased $2.7 million
or 12%.
Second quarter revenues from our Multilayer operations continued to be
disappointing. Total revenues were $800,000 lower than the same quarter of
the prior year. During the quarter we completed a series of management
changes which we believe will significantly strengthen our operational
execution. We continue to see strong opportunities for growth in Multilayer
sales particularly in the military and aerospace, medical and re-emerging
telecom sectors.
18
Further, we believe opportunities exist for consolidation in this market
and continue to evaluate solutions for increased capacity utilization.
Cost of Products Sold. Cost of products sold was $20.9 million, or 89% of
total revenues, for the three months ended December 28, 2003, versus $22.0
million, or 96% of total revenues, for the three months ended December 29,
2002. Cost of products sold were favorably impacted year over year by the
closing of our significantly unprofitable domestic PALFlex operations in
February 2003. In addition, strong production demand in China resulted in
increased capacity utilization and corresponding gross margin improvements.
China gross margins increased from 11% to 19% year over year. Margins in
China were however unfavorably impacted by initial production ramp on our
new Smartcard manufacturing line. We anticipate a rapid production ramp to
continue thoughout fiscal 2004 with breakeven on this business to be
reached in the March or April 2004 timeframe. Our Methuen facility
continued to experience low capacity utilization and correspondingly,
significant unfavorable manufacturing variances. Continued growth in our
Multi-Layer business, primarily in the military and medical markets, and
the relocation of our Laminated Cable operations from Salem, New Hampshire
to Methuen Massachusetts, which was completed in January 2003, are
anticipated to improve margins in fiscal 2004. To date we have been
disappointed with the slow growth in our Multi-Layer business. We are
currently evaluating opportunities to acquire new business in an effort to
significantly improve capacity utilization.
During the past year, we have made a significant investment to improve our
margins through the transfer of labor intensive manufacturing operations 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. Moreover, during fiscal 2003, we completed the transfer of our
PALFlex operations to China. Although the transfer of manufacturing
capabilities is costly, this investment is key 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 $4.0 million for the three months ended
December 28, 2003 versus $3.7 million for the comparable period in the
prior year. Increases can be attributed to higher commission expense of
$150,000 primarily in China, on increased sales levels, staffing of several
key openings in the sales organization including Asia and the western
region of the United States, $75,000, and year over year infrastructure
investment in China including critical headcount additions.
Interest Income. Interest income was $2,000 for the three months ended
December 28, 2003 compared to $4,000 for the three months ended December
29, 2002, and primarily consists of interest income on our cash balances.
Interest Expense. Interest expense was $665,000 for the three months ended
December 28, 2003 and $223,000 for the three months ended December 29,
2002. Interest expense represents interest incurred on our short and long-
term borrowings and interest expense associated with deferred compensation.
Interest expense for the three months ended December 28, 2003 includes
$487,000 for interest payable in common stock and amortized deferred
financing costs. The deferred financing costs are associated with the
sale-leaseback of our Methuen facility and sale of convertible subordinated
notes
Non operating income. Non operating income was $41,000 for the three
months ended December 28, 2003 versus $5,000 for the three months ended
December 29, 2002. Non operating income primarily represents currency
exchange rate gains.
Non operating expense. Non operating expense was $0 for the three months
ended December 28, 2003 compared to $37,000 for the three months ended
December 29, 2002. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese
venture, Parlex Shanghai, was $1.9 million in the three months ended
December 28, 2003 compared to $3.1 million in the three months ended
December 29, 2002.
19
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 0% for the three
months ended December 28, 2003 versus an effective tax rate of 225% for the
three months ended December 29, 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
recording of any valuation allowance. As a result of our recent history of
operating losses, uncertain future operating results, and the past non-
compliance with certain of our debt covenants requirements, we determined
that it is more likely than not that certain historic and current year
income tax benefits will not be realized. Consequently, we recorded no
income tax benefits on our U.S operating losses during the three months
ended December 28, 2003. In the prior year, we established a valuation
allowance against all of our remaining net U.S. deferred tax assets.
Six Months Ended December 28, 2003 Compared to Six Months Ended
- ---------------------------------------------------------------
December 29, 2002
- -----------------
Total Revenues. Total revenues for the six months ended December 28, 2003
were $43.3 million versus $44.6 million for the six months ended December
29, 2002. This represents a decrease of $1.3 million or 3%. This decrease
is primarily attributable to the discontinuation of our unprofitable
domestic PALFlex operation. Excluding PALFlex revenues from both years,
total revenues increased by approximately $3.8 million or 9% in the first
six months of fiscal 2004.
Strong revenues were recorded in our China operations for the first six
months of fiscal 2004. China sales increased to 40% of the Company's total
revenues versus 27% for the first six months of fiscal 2003. Foreign
sourced revenues increased to 50% of total revenues for the first six
months of fiscal 2004. China revenue increases, $5.1 million, were driven
by strong sales in the computer peripheral, wireless telecom, automotive,
and electronic identification markets. Polymer thick film revenues
increased $500,000 over the same period of the prior year with growth
occurring primarily in the medical and appliance markets. Revenue increases
were in part offset by decreases which occurred in our Multilayer,
$800,000, and Laminated Cable operations, $900,000. Our Laminated Cable
operations experienced solid recovery in the second quarter after
disappointing soft North American demand in the first quarter of fiscal
2004.
Cost of Products Sold. Cost of products sold was $38.3 million, or 89% of
total revenues, for the six months ended December 28, 2003, versus $42.7
million, or 96% of total revenues, for the six months ended December 29,
2002. Cost of products sold were favorably impacted year over year by the
closing of our significantly unprofitable domestic PALFlex operations in
February 2003. In addition, increases in capacity utilization in China
resulted in further margin improvements. Gross margins in China were 19%
for the first six months of fiscal 2004 versus 8% for the comparable period
of the prior year. Polymer thick film gross margins were essentially flat
year over year at 17%. Our Methuen facility continued to experience low
capacity utilization and correspondingly, significant unfavorable
manufacturing variances. Continued growth in our Multi-Layer business,
primarily in the military and medical markets, and the relocation of our
Laminated Cable operations from Salem, New Hampshire to Methuen
Massachusetts, which was completed in January 2003, are anticipated to
improve margins in fiscal 2004. We continue to drive operational
improvements which we believe will reduce breakeven revenue levels. These
include yield and process improvement programs as well as raw material cost
reduction initiatives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $7.7 million for the six months ended December
28, 2003 versus $6.6 million 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 in fiscal 2003, headcount related
selling expenses increased $200,000 in the first six months of fiscal 2004.
Commission expenses increased $300,000, primarily in China. Commissions
were lower in the first six months of fiscal 2003 as no commissions were
paid on a significant portion of sales deemed a Corporate account. Further,
in the first quarter of fiscal 2003, the Company reduced its reserves for
bad debts by approximately $360,000. We believe our reserves for bad debts
to be adequate at December 28, 2003 and have historically experienced few
bad debt write-offs. Remaining increases in administrative expenses
includes sales tax, $100,000, China infrastructure investment, $150,000,
and continued growth in public company costs, $100,000.
20
Interest Income. Interest income was $7,000 for the six months ended
December 28, 2003 compared to $11,000 for the six months ended December 29,
2002, and primarily consists of interest income on our cash balances.
Interest Expense. Interest expense was $1.2 million for the six months
ended December 28, 2003 and $427,000 for the six months ended December 29,
2002. Interest expense represents interest incurred on our short and long-
term borrowings and interest expense associated with deferred compensation.
Interest expense for the six months ended December 28, 2003 includes
$891,000 for interest payable in common stock and amortized deferred
financing costs. The deferred financing costs are associated with the
sale-leaseback of our Methuen facility and sale of convertible subordinated
notes
Non operating income. Non operating income was $52,000 for the six months
ended December 28, 2003 versus $5,000 for the six months ended December 29,
2002. Non operating income primarily represents currency exchange rate
gains.
Non operating expense. Non operating expense was $218 for the six months
ended December 28, 2003 compared to $65,000 for the six months ended
December 29, 2002. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese
venture, Parlex Shanghai, was $3.9 million in the six months ended December
28, 2003 compared to $5.2 million in the six months ended December 29,
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 0% for the six
months ended December 28, 2003 versus an effective tax rate of 118% for the
six months ended December 29, 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
recording of any valuation allowance. As a result of our recent history of
operating losses, uncertain future operating results, and the past non-
compliance with certain of our debt covenants requirements, we determined
that it is more likely than not that certain historic and current year
income tax benefits will not be realized. Consequently, we recorded no
income tax benefits on our U.S operating losses during the six months ended
December 28, 2003. In the prior year, we established a valuation allowance
against all of our remaining net U.S. deferred tax assets.
Liquidity and Capital Resources
- -------------------------------
As of December 28, 2003, we had approximately $1.6 million in cash and cash
equivalents.
Net cash used by operations during the six months ended December 28, 2003
was $7.9 million. Net operating losses of $4.0 million after adjustment for
minority interest, interest payable in common stock, gain on sale of land
use rights, depreciation and amortization, used $611,000 of operating cash
and $7.3 million for our working capital requirements. Cash used for
working capital included accounts receivable increases of $4.5 million and
inventory increases of $2.7 million.
Net cash provided by investing activities was $971,000 for the six months
ended December 28, 2003. This included $1.2 million for the sale of our
Chinese land use rights offset with funds used to purchase capital
equipment and other assets. As of December 28, 2003, we have an additional
$550,000 of capital equipment financed under our accounts payable. We have
implemented plans to control our capital expenditures in order to enhance
cash flows and maintain compliance with restrictive covenants under our
Loan Agreement. Cash provided by financing activities was $7.0 million for
the six months ended December 28, 2003 including net proceeds of $5.5
million from the sale of our convertible subordinated notes and $1 million,
which represents the net repayments and borrowings on our bank debt. The
bank borrowings include $22.2 million from our primary lender, Silicon
Valley Bank, and $2.1 million from our
21
Parlex Shanghai lender. Payments include $21.4 million to Silicon Valley
Bank and $1.1million to retire two of Parlex Shanghai's local short-term
bank notes. In December 2003, one of the note holders of our convertible
debt exercised 100% of their warrants to purchase Parlex common stock. The
warrants were exercisable at $8.00 per share of common stock. The Company
received proceeds totaling $600,000 upon notice of exercise of warrants and
subsequently in January 2004 issued 75,000 shares of Parlex common stock.
Loan and Security Agreement (the "Loan Agreement") - We executed a Loan
Agreement with Silicon Valley Bank on June 11, 2003. The Loan Agreement
provided the 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 account receivable. Borrowings may be used for working capital
purposes only. 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 which, among other things,
require us to maintain $750,000 in minimum cash balances or excess
availability under the Loan Agreement.
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 (4.0% at December 28, 2003) 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. At December 28, 2003, we had available borrowing
capacity under the Loan Agreement of $2,566,000. Since the available
borrowing capacity exceeded $750,000 at December 28, 2003, none of our cash
balance was subject to restriction at December 28, 2003. As of December 28,
2003, we were not in compliance with the Loan Agreement financial
covenants, as modified by the Modification Agreement. We have received a
waiver from the bank for our non-compliance at December 28, 2003.The bank
has continued to allow us to borrow against the Loan Agreement. We are
currently negotiating an amendment to modify certain of the Loan
Agreement's financial covenants. The proposed amendment shall remove the
fixed charge coverage ratio from the Loan Agreement and shall require us to
report EBITDA of at least $50,000 on a three month trailing basis,
beginning January 31, 2004. The minimum EBITDA requirement will be
increased to $250,000 at June 30, 2004. The interest rate on all
obligations due to Silicon Valley Bank shall be increased to Prime (as
defined in the Loan Agreement) plus 2%, but may be subsequently decreased
upon our reporting positive operating or net income. We expect to execute
the amendment during the third quarter of fiscal year 2004.
The Loan Agreement includes both a subjective acceleration clause and a
lockbox arrangement that requires all lockbox receipts to be used to pay
down the revolving credit borrowings. Accordingly, borrowings under the
Loan Agreement should be classified as current liabilities in the
accompanying condensed consolidated balance sheets as of December 28, 2003
as required by Emerging Issues Task Force Issue No. 95-22, "Balance Sheet
Classification of Borrowings Outstanding Under Revolving Credit Agreements
that include both a Subjective Acceleration Clause and a Lockbox
Arrangement". However, such borrowings will be excluded from current
liabilities in future periods and considered long-term obligations if such
borrowings are: 1) refinanced on a long-term basis, 2) the subjective
acceleration terms of the Loan Agreement are modified, or 3) will not
require the use of working capital within one year. At June 30, 2003, the
balance outstanding under the Loan Agreement was properly classified as
long-term debt as a result of the refinancing of such debt on a long-term
basis with the proceeds of the 7% Convertible Notes.
Parlex Shanghai Term Notes - 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 December 28, 2003. The note replaced a similar short-term note that
terminated on August 22, 2003. 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 $1.3 million
at December 28, 2003. On December 15, 2003, Parlex Shanghai entered into a
short-term bank note, due December 15, 2004, bearing interest at 5.31%.
Amounts outstanding under this note short-term note total $605,000 as of
December 28, 2003. On January 14, 2004, Parlex Shanghai entered into two
short-term bank notes, due October 12, 2004 and November 10, 2004, totaling
$1.8 million and bearing interest at 5.31%.
Parlex Interconnect Term Note - In June 2002, Parlex Interconnect executed
the $5,000,000 CITIC Loan Agreement with CITIC. 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 the
guarantee, we are required to comply with certain financial covenants.
Effective October 8, 2003, CITIC entered into the CITIC Loan Agreement
Amendment with Parlex Interconnect, and the Guarantee Agreement Amendment
with us. 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. Amounts outstanding as of
December 28, 2003 totaled $3,000,000. The Guarantee Agreement Amendment
modified certain restrictive financial covenants with us such as Current
Ratio, Tangible Net Worth and Total Liabilities
22
to Tangible Net Worth. We are in compliance with the financial covenants of
the CITIC Loan Agreement, as amended, as of December 28, 2003. Certain
cross-default provisions contained in the CITIC Loan Agreement, however,
have required us to classify the outstanding amounts under this loan
agreement as current, until such time as the default under the Silicon
Valley Loan Agreement is cured.
Convertible Subordinated Notes - On July 28, 2003, we sold an aggregate
$6,000,000 of our 7% convertible subordinated notes (the "Notes") with
attached warrants to several institutional investors. We received net
proceeds of approximately $5.5 million from the transaction, after
deducting approximately $500,000 in finders' fees and other transaction
expenses. Net proceeds were used to refinance amounts borrowed under our
Loan and Security Agreement and utilized for working capital needs. No
principal payments are due until maturity on July 28, 2007. The Notes are
unsecured.
The Notes bear interest at a fixed rate of 7%, payable quarterly in shares
of Parlex common stock. The number of shares of common stock to be issued
is calculated by dividing the accrued interest by the 'Initial Conversion
Price' (a defined term) which was established at $8.00 per share.
Interest expense is recorded quarterly based on the fair value of the
common shares issued. Accordingly, interest expense may fluctuate from
quarter to quarter. We concluded that the interest feature does not
constitute an embedded derivative as it does not currently meet the
criteria for classification as a derivative. We recorded accrued interest
payable on the Notes of $101,703 within stockholders' equity at December
28, 2003, as the interest is required to be paid in the form of common
stock. Based on the conversion price of $8.00 per common share at December
28, 2003, we issued 9,348 shares of common stock in October 2003 in
satisfaction of previously recorded interest and issued 13,123 shares of
common stock in January 2004 as payment for interest accrued in the second
quarter.
The Notes are convertible immediately by the investors, in whole or in
part, into shares of common stock at an initial conversion price equal to
$8.00. The conversion price is subject to adjustment in the event of stock
splits, dividends and certain combinations. 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, which has been recorded as an
increase to additional paid-in capital and as an original issue discount on
the Notes which is being amortized to interest expense over the 4-year life
of the Notes.
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.
Land Use Rights - In July 2003, Parlex Interconnect executed an agreement
to sell its land use rights in China for approximately $1.2 million. We
received approximately $1.0 million in cash in August 2003 and the balance
in December 2003. The sale was recorded in the quarter ending December 28,
2003 and resulted in a gain of approximately $87,000, which is included in
operating loss for the six months ending December 28, 2003.
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. 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 of 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, medical, military and aerospace, and electronic
identification markets; 4) continuing to monitor and reduce selling,
general and administrative expenses; 5) completing sales of non-essential
assets such as our land use
23
rights in China.; 6) evaluating opportunities to acquire new multilayer
business in an effort to significantly improve capacity utilization.
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 longer-term financing to support our
current working capital needs.
We believe that our cash on hand 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
external financing.
Recent Adoption of Accounting Pronouncements
- --------------------------------------------
On July 1, 2003, we adopted 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.
The adoption of SFAS No. 150 did not have a material effect on our
financial statements.
Factors That May Affect Future Results
- --------------------------------------
Our prospects are subject to certain uncertainties and risks. This Quarterly
Report on Form 10-Q contains certain "forward-looking statements" as defined
under the federal securities laws. 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. Though we have
experienced some general market spending improvement during the past quarter,
should market conditions not continue to 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. At December 28, 2003, we were not in compliance with
certain financial covenants in our Silicon Valley Bank Loan Agreement. We
cannot be certain our lenders will grant us waivers or execute amendments
or modifications on terms which are satisfactory to us. If such waivers are
not received, our debt is immediately callable.
At December 28, 2003, we were not in compliance with certain financial
covenants under our Loan Agreement with Silicon Valley Bank. We have
received a waiver for such technical default. We are currently negotiating,
and believe we will be successful in obtaining, reasonable amendment terms
to modify certain restrictive covenants. Our loan agreement with CITIC Ka
Wah Bank contains cross-default provisions that make such debt immediately
callable in the event we are not in compliance with our Silicon Valley Bank
Loan Agreement covenants. Although we do not believe either Silicon Valley
Bank or CITIC Ka Wah Bank will exercise any right it may have to
immediately call our debt, we cannot guarantee that they will not do so.
For additional information regarding these matters, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
24
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. 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 - Convertible Subordinated Notes".
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.
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. 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 - Convertible Subordinated Notes".
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 additional 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 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.
25
We incurred net losses in the recently completed six months ended December
28, 2003, as well as in fiscal years 2003, 2002 and 2001. We had net losses
of $4.0 million in the six months ended December 28, 2003, $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.
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
26
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.
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 five 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
27
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 investment 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
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
28
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
23 patents issued and have 14 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.
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
29
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 and we do not expect
to pay cash dividends on our common stock any time in the foreseeable
future. In addition, 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 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:
30
* 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 3. 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 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 December 28, 2003, we have an outstanding balance under
our Loan Agreement of $4,177,000. We have the option to repay borrowings at
anytime without penalty and therefore believe that our market risk is not
material. A 10% change in interest rates would impact annual interest
expense by approximately $23,000. 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 December 28, 2003, of
approximately $14.6 million. Poly-Flex Circuits Limited and Parlex Europe had
combined net assets as of December 28, 2003 of approximately $5.4 million. We
believe that a 10% change in exchange rates would not have a significant
impact upon Parlex Shanghai's or Poly-Flex Circuits Limited's financial
position, results of operation or outstanding debt. As of December 28, 2003,
Parlex Shanghai and Parlex Interconnect had combined outstanding debt of
approximately $6.1 million. As of December 28, 2003, Poly-Flex Circuits
Limited had no outstanding debt.
Item 4. Controls and Procedures
- --------------------------------
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that we are
required to file under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer
and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. Management
31
necessarily applied its judgment in assessing the costs and benefits of
such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives. Management
believes that there are reasonable assurances that our controls and
procedures will achieve management's control objectives.
We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15 as of December 28, 2003. Based upon the foregoing, our
Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to Parlex (and its consolidated subsidiaries)
required to be included in our Exchange Act reports.
Changes in Internal Controls Over Financial Reporting
As of the period ended June 30, 2003, we noted deficiencies in our
disclosure controls and procedures. The deficiencies related a failure to
adhere to certain corporate policies and procedures specifically relating
to the shipment of product under certain conditions. We believe this has
not had any material impact on our consolidated financial statements,
however, we have taken steps to detect and correct these deficiencies. We
have communicated our revenue recognition policy to our financial and
management employees and we perform end of reporting period transaction
reviews to ensure proper sales cut-off. Management continues to evaluate
systems and procedural changes that will prevent such sales from being
recognized initially.
Subsequent to the issuance of our condensed consolidated financial statements
for the quarter ended September 28, 2003, our management determined that
borrowings under the Loan Agreement with Silicon Valley Bank should have
been classified as short-term on the condensed consolidated balance sheet.
The Company is considering whether any changes to enhance the Company's
internal processes are warranted.
The evaluation referred to above did not identify any other significant
change in our internal control over financial reporting that occurred
during the period covered by this Quarterly Report on form 10-Q that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
32
PART II - OTHER INFORMATION
---------------------------
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
As of September 28, 2003, we were not in compliance with certain financial
covenants under our guarantee of Parlex Interconnect's debt to CITIC. As of
September 28, 2003, the outstanding balance owed to CITIC under the
guarantee was approximately $3,800,000. Although the bank could have called
for early repayment of the debt, no such demand was made. Effective October
8, 2003, CITIC entered into an Amendment to the Loan Agreement with Parlex
Interconnect and an Amendment to the Guarantee Agreement with us. As a result
of the execution of the amendment to the Loan Agreement and the amendment to
the Guarantee Agreement, we are as of December 28, 2003 in compliance with
the revised financial covenants of our loan agreement with CITIC.
As of December 28, 2003, we were not in compliance with our fixed charge
financial covenant under our Loan Agreement with Silicon Valley Bank, as
amended by our Modification Agreement with the bank. Although the bank
could have called for early repayment of the debt, no such demand was made.
We have received a waiver from the bank for our non-compliance at December
28, 2003, and we are currently negotiating an amendment to modify certain
of the restrictive covenants under the Loan Agreement, as amended. In
addition, due to cross-default provisions contained in our agreement with
Citic Ka Wah Bank, we are in technical default under such agreement until
such time as the defaults under the Silicon Valley Bank Loan Agreement are
cured.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
(a) The Annual Meeting of Stockholders was held on November 25, 2003.
There was no solicitation in opposition to management's nominees as listed
in our proxy statement and all such nominees were elected as Class III
directors for a three-year term.
(b) At the Annual Meeting, stockholders elected the following Class III
directors whose terms expire in 2006:
Name For Authority Withheld
Herbert W. Pollack 5,836,045 27,310
Sheldon Buckler 5,821,445 41,910
The following directors' terms continued after the 2003 Annual Meeting:
Peter J. Murphy, Lester Pollack, Richard W. Hale, Lynn J. Davis and Russell
D. Wright.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits - See Exhibit Index to this report.
(b) Reports on Form 8-K
On November 12, 2003, we furnished a Current Report on Form 8-K
pursuant to Item 12 containing the press release relating to our financial
results for the quarter ended September 28, 2003.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARLEX CORPORATION
By: /s/ Peter J. Murphy
-------------------------------------
Peter J. Murphy
President and Chief Executive Officer
By: /s/ Jonathan R. Kosheff
-------------------------------------
Jonathan R. Kosheff
Treasurer & CFO
(Principal Accounting and Financial Officer)
February 13, 2004
-----------------
Date
34
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
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)
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)
35