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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
______________________________
Commission File No. 0-12942
PARLEX CORPORATION
Massachusetts 04-2464749
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Parlex Place, Methuen, Massachusetts 01844
(Address of Principal Executive Offices, Zip Code)
978-685-4341
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Common Stock ($.10 par value) NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates (without
admitting that any person whose shares are not included in the calculation
is an affiliate) of the registrant as of December 28, 2003 was
approximately $25,492,711. Such aggregate market value was computed by
reference to the closing price of the common stock as reported on the
Nasdaq National market on December 26, 2003 (the business day immediately
prior to December 28, 2003).
The number of shares outstanding of the registrant's common stock as of
September 21, 2004 was 6,435,933 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report on Form 10-K.
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1
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
PAGE
PART 1
ITEM 1. Business 3
ITEM 2. Properties 15
ITEM 3. Legal Proceedings 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
ITEM 6. Selected Consolidated Financial Data 20
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 39
ITEM 8. Financial Statements and Supplementary Data 40
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 41
ITEM 9A. Controls and Procedures 41
ITEM 9B Other Information 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant 41
ITEM 11. Executive Compensation 41
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 41
ITEM 13. Certain Relationships and Related Transactions 42
ITEM 14. Principal Accountant Fees and Services 42
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 42
SIGNATURES 43
2
References in this Annual Report on Form 10-K to "the Company", "we", "us"
or "our" include Parlex Corporation and its consolidated subsidiaries,
unless the context indicates otherwise.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this document and in the documents that are or
will be incorporated by reference into this document contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. This document
includes and incorporates forward-looking statements that are subject to a
number of risks and uncertainties. All statements, other than statements of
historical facts included or incorporated in this document, regarding our
strategy, future operations, financial position and estimated revenues,
projected costs, prospects, plans and objectives of management are forward-
looking statements. When used in this document, the words "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements and
you should not place undue reliance on our forward-looking statements. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic investments.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the
risks described in the section of this report entitled "Factors that May
Affect Future Results" and elsewhere in this document. Any or all of our
forward-looking statements in this document and in the documents we have
referred you to may turn out to be wrong. They can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties.
Therefore, you should not place undue reliance on any such forward-looking
statements. We do not intend to update publicly any forward-looking
statement, whether as a result of new information, future events, or
otherwise, except as required by law. This discussion is permitted by the
Private Securities Litigation Reform Act of 1995.
PART I
Item 1. Business
- ----------------
Overview
We believe that we are a leading provider of flexible interconnect solutions
to the automotive, telecommunications, computer, military, medical, home
appliance, electronic identification and diversified electronics markets. Our
product offerings, which we believe are the broadest of any company in the
flexible interconnect industry, include flexible circuits, laminated cable,
polymer thick film circuit, flexible interconnect hybrid circuits, and
flexible interconnect assemblies.
Our objective is to be a solutions provider for key customers in markets
where cost-effective flexible interconnects provide added value to our
customers' products. We believe that our creative engineering expertise, our
ability to advance the technology of manufacturing processes and materials
and our broad product portfolio allow us to provide the optimum solution that
meets the cost and performance requirements of our customers.
We have a long history of providing flexible interconnect solutions to some
of the leading original equipment manufacturers, or OEMs, in our target
markets, including Hewlett-Packard, Raytheon, Infineon, Motorola, Maytag,
Tyco, Delphi, Siemens, and Whirlpool. We also supply these products to major
electronic manufacturing services companies such as Flextronics, Solectron,
Sanmina, and JABIL. We have a global presence and operate seven manufacturing
facilities, which are located in China, Mexico, the United Kingdom and the
United States. Certain information related to revenues derived by geographic
location, major customers and product lines is included in Note 16 of our
financial statements and is incorporated herewith by reference.
3
Industry Background
Over the past two decades, electronic systems have become smaller, lighter
and more complex, while demand for increased performance at lower cost has
increased dramatically. As two-dimensional rigid printed circuit boards, a
conventional form of electronic interconnect packaging, limit the options
available to design engineers, the demand for three-dimensional, flexible
interconnect solutions has increased. In addition to their improved packaging
and performance characteristics, they offer superior heat dissipation
characteristics compared to conventional circuits, making flexible
interconnects attractive for use in advanced, high-speed electronics.
According to Allied Business Intelligence, a technology consulting firm, the
market size for flexible circuits was approximately $4.2 billion in 2003 and
is expected to grow to $7.1 billion by 2007.
Flexible interconnects provide an electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic devices. Flexible interconnects offer several
advantages over rigid printed circuit boards and ceramic hybrid circuits,
particularly for small, complex electronic systems:
* Their ability to physically bend or flex and their three-dimensional
shape permit them to accommodate packaging contours and motion in a
manner that traditional two-dimensional rigid printed circuit boards
cannot;
* They provide improved heat dissipation and signal integrity as compared
to rigid printed circuit boards; and
* They permit the use of substrates for component attachment, as well as
connectors, cables and other interconnection devices, with reduced size,
weight and expense.
We consider the following trends important in understanding the flexible
interconnect industry:
Miniaturization, Portability and Complexity of Electronic Products
High-performance electronic products, such as mobile communications devices
including cellular phones, laptop computers and personal digital assistants,
continue to become more compact, portable and contain greater functionality.
The complexity of these new products requires flexible interconnects with
smaller size, lighter weight, greater circuit and component density, better
heat dissipation properties, higher frequencies and increased reliability. As
electronic products become increasingly sophisticated, electronic
interconnect suppliers will require greater engineering expertise and
investment in manufacturing and process technology to produce high-quality
electronic interconnect products on time, in volume and at acceptable cost.
Shorter Product Life Cycles and Time-to-Market Pressure
Rapid technological advances have significantly shortened the life cycle of
complex electronic products and increased pressure to develop and introduce
new products quickly. These time-to-market challenges have in turn increased
OEMs' emphasis on the development, design, engineering, prototype development
and ramp-to-volume capabilities of their suppliers.
Globalization and Reduction of Manufacturing Costs
Customers continue to demand increased electronic performance at lower
prices. Leading OEMs who often manufacture products in multiple geographic
regions are relying on suppliers with global sourcing capabilities. Local
sourcing can help to shorten the manufacturer's supply chain and provide
regionally competitive pricing. Our customers increasingly demand that their
suppliers provide infrastructure for local delivery of engineering,
manufacturing and sales support.
Increased Outsourcing
To avoid delays in new product introductions, reduce manufacturing costs and
avoid logistical complexities, OEMs are increasingly turning to suppliers
capable of producing electronic interconnect products from development,
4
design, quick-turn prototype and pre-production through volume production and
assembly. The accelerated time-to-market and ramp-to-volume needs of
manufacturers have resulted in increased collaboration with qualified
suppliers capable of providing a broad and integrated offering. Many OEMs now
seek to use a small number of technically qualified, strategically located
suppliers capable of providing both quick-turn prototype and pre-production
quantities as well as cost-competitive volume production quantities.
Our Solution
We combine creative engineering design capabilities with innovative
manufacturing processes and materials to provide our customers with a
complete and cost-effective flexible interconnect solution. We believe that
our processes and technologies allow us to produce superior flexible
interconnect solutions at a competitive cost. In addition, because we are
able to produce a broad range of flexible interconnects ranging from low-cost
laminated cable to more expensive high-performance multi-layer and rigid-
flexible interconnects, we are able to provide our customers with a product
that most efficiently meets their demands for functionality.
Our solution begins with the product design phase in which our engineers
typically work closely with customers to develop a technically advanced
flexible interconnect design. Although our customers generally provide the
initial engineering guidelines for a particular interconnect, our design
engineers are often called upon to work in tandem with a customer's design
team to develop a solution. An important part of the Parlex solution is
ensuring at an early stage, before time and money are spent on manufacturing,
that the design can be produced efficiently and cost-effectively.
Once the design is completed, we apply our experience with materials and
manufacturing processes to produce a flexible interconnect solution that
meets our customer's objectives. We have developed materials and processes
that provide customers improved performance at a competitive production cost.
In addition, we provide a dedicated quick-turn capability for producing
prototype flexible interconnects and supporting our customers' needs for
limited quantities of flexible interconnects on short notice. We believe that
we are one of the few volume manufacturers of flexible interconnects to offer
this valuable service in a dedicated facility. When customers come to us for
prototype development of a flexible interconnect, we believe that we enjoy a
competitive advantage in pursuing the subsequent volume production of that
flexible interconnect. Over the past several years we have gained substantial
experience in producing products in high volume, and we believe this
expertise is a key factor in our ability to provide customers with cost-
effective, flexible interconnect solutions.
We believe that our ability to supply worldwide a broad range of products
with a diverse mix of performance characteristics will enable us to capture
additional market share in the flexible interconnect industry. We are one of
a limited number of independent manufacturers that offers a range of flexible
interconnect solutions from design concept through high-volume production. By
offering a variety of products and services, we can provide design and
manufacturing solutions for our customers while reducing their time-to-market
and product development costs.
Our Strategy
Our objective is to be the flexible interconnect supplier of choice for
customers in our target markets. Our strategy to achieve this objective
includes the following key elements:
Develop Innovative Processes and Materials
We believe that our ability to develop innovative processes and materials
enhances our opportunity for growth within our target markets. We intend to
continue to focus our development efforts on proprietary flexible materials
and processes that have a broad range of applications. These materials and
processes enable us to produce, at reduced cycle times, cost-effective
flexible interconnects that are highly reliable and improve product
performance. Our PALFlex(R), PALCoat(R), U-Flex(R), PALCore(R) HP,
Polysolder(R), AutoNet(TM) and additive print and plate technologies are
examples of some of our innovative materials and manufacturing processes.
5
Offer the Broadest Range of Products and Services in the Flexible
Interconnect Industry
We offer product lines that service virtually all of our customers' flexible
interconnect needs. We are not aware of another company in the flexible
interconnect industry that provides a broader range of products and services.
Our product line includes flexible and rigid-flexible circuits from 1 to 24
layers, laminated cable, flexible interconnect hybrid circuits, flexible
interconnect assemblies and, surface mount assembly capabilities. We offer
products using a variety of materials, including adhesiveless and adhesive-
based polyimide, polyester, and polymer thick film technologies. We believe
this wide product range enables us to remain the flexible interconnect
solution provider of choice to customers even when their functional
requirements change.
Develop Strategic Relationships with Key Customers
We seek to develop strategic relationships with key customers in targeted
industries. As a value-added strategic partner with our customers, we work
with a customer's technology roadmap to design and develop cost-effective
flexible interconnect solutions. We believe that these relationships are most
effective when we provide a significant portion of a customer's flexible
interconnect needs. Through these strategic relationships, we achieve greater
visibility into our customers' entire range of flexible interconnect
requirements. As a result of our relationships with key customers, we
developed PALFlex(R), PALCore(R), PALCore(R) HP, PALCoat(R), Polysolder(R)
and HSI+(R) with the knowledge that successful development would result in
immediate market acceptance.
Diversify Customer Base across Specific Target Markets
We seek to serve a variety of markets to help mitigate the effects of
economic cycles in any one industry. We believe our diversification among the
major segments of the electronics industry provides greater insight into
emerging technological requirements. For example, we applied our proprietary
knowledge of shielding and impedance control which was developed for the
laptop computer market to gain a competitive advantage in the
telecommunications and networking market.
Expand Global Presence
We believe that our customers will increasingly require service and support
on a global basis. To address these requirements, we have continued to expand
our global presence in emerging markets and throughout the world. We now have
facilities in Asia, Europe, and both the east and west coasts of North
America. We established a presence in China to address the emerging flexible
circuit market throughout Asia and to produce specific products more cost-
effectively for North American and European customers. Asia continues to be
the fastest growing market for electronic manufacturing. Over the past 9
years, we have significantly expanded our China operations. We currently have
approximately 170,000 square feet of manufacturing and assembly space under
lease in Shanghai and Kunshan. In May 1998, we opened a facility in Mexico
that performs the finishing and, in some instances, assembly operations for
flexible interconnects manufactured at our other facilities and shipped to
North American markets. In 1999, we purchased a business in San Jose,
California to produce low to medium volumes of flexible circuits and provide
our customers with quick-turn and prototyping services. In addition, we have
developed, and plan to continue to develop, strategic relationships and
alliances that we believe are necessary for the success of our international
business. In March 2000, we acquired the polymer thick film operations of
Cookson Electronics with manufacturing facilities in Rhode Island and the
United Kingdom. We believe these transactions have positioned us to further
expand our sales presence in Asia and Europe. We will continue to explore
appropriate expansion opportunities as demand for our solutions increases.
The additional expenses and risks related to our existing international
operations, as well as any expansion of our global operations, could
adversely affect our business. See "Factors That May Affect Future Results"
within Item 7 of the "Management Discussion and Analysis of Financial
Condition and Results of Operations" section of this document for a
discussion of the inherent risks associated with our international
operations.
6
Our Markets
Flexible interconnects are used in most segments of the electronics industry.
The primary market segments that place high value on superior, cost-effective
flexible interconnect solutions include:
Telecommunications and Networking
The telecommunications and networking market includes infrastructure
equipment and subscriber equipment sub-markets. Infrastructure equipment
consists of support electronics for the distribution of voice and data
transmission. Infrastructure equipment employs sophisticated electronics
which usually require the use of complex flexible interconnects. Subscriber
equipment consists of cellular devices such as handsets and battery
assemblies. Tight packaging, increased functionality and the need to reduce
weight have dramatically driven the demand for flexible interconnects in this
sub-market. Laminated cable and single and double-sided flexible circuits are
generally used in subscriber equipment. Recent design changes to incorporate
cell phone antennas within the cellular device has opened a rapidly growing
market opportunity for Parlex.
Computer
Demand for flexible circuits and laminated cable in the computer market is
driven by short product life cycles as consumers demand increasingly
powerful, less expensive, smaller, faster and lighter equipment. Disk drives
represent the largest application for flexible circuits in this market. Other
applications include personal computers, notebook displays, personal digital
assistants, mass storage devices and peripheral equipment such as scanners,
printers and docking stations. Parlex has secured a strong presence in the
printer market for circuits that employ our proprietary polysolder assembly
technology.
Automotive
Automobile manufacturers increasingly use electronics to enhance vehicle
performance and functionality, while at the same time reducing electronic
component size, weight and manufacturing and assembly costs. Flexible
circuits and laminated cable can provide cost-effective interconnect
solutions for such applications as dashboard instrumentation, automotive
entertainment systems, electronic engine control units, steering wheel
controls, power distribution, intelligent airbag deployment systems, sensors
and anti-lock brakes. Providers of flexible interconnects typically work
closely with the companies that supply these electronic systems to the
vehicle manufacturers. Because automotive production cycles generally last
three to five years and designs are unlikely to change during that period, a
flexible interconnect that is designed into an automobile model or platform
provides a relatively predictable source of demand over an extended time
period.
Military
Military electronics were at one time the primary applications for flexible
circuitry. Because of product complexity and space restrictions, military
applications often require multi-layer rigid-flexible circuits. Typical
applications are navigation systems, flight controls, displays,
communications equipment and smart munitions. We believe that procurement of
flexible interconnects in this market will experience growth. We believe that
the trend toward "smart" military systems will drive demand for flexible
interconnects in this segment.
Home Appliance
The home appliance market is beginning to make the transition from electro-
mechanical controls to electronic controls containing intelligence and
display. Over time, appliances are expected to become more technologically
advanced. The utility and ease of use and repair associated with flexible
interconnects make them especially suitable for these applications. Our
primary application today is the dishwasher market but we have recently
secured new business for the range and laundry markets.
Electronic Identification
The emerging identification and tracking market is based upon next generation
identification tags, which in some cases are attached to an antenna, emitting
radio frequency signals. Advancing technology at lower prices,
7
increasing cooperation among industry participants and high volume
applications such as automated fuel payment, ATM and credit cards, electronic
ticketing, baggage handling and parcel tracking are expected to be the growth
drivers for this market. The size, cost and performance requirements demanded
by this market are expected to drive the use of flexible circuits and
assemblies in these applications. In 2002, we entered into a multiyear
agreement to provide substrates for the world's leading producer of smart
cards utilizing our proprietary technology. This agreement has not produced
significant revenues through June 30, 2004, but is forecasted to provide
significant revenues beginning in fiscal 2005.
Diversified Electronics
The diversified electronics market encompasses many applications. Virtually
any electronic device which requires tight packaging, lightweight or high
reliability is a product that could incorporate flexible interconnects.
Typical applications include electronic scales, industrial controls, postal
metering devices/scanners and camera products.
Medical
Healthcare continues to be a rapidly growing market, particularly in North
America. Electronics have become increasingly important with trends toward
increased computing power and smaller size electronic components resulting in
medical devices that are smaller, mechanically simpler and more reliable.
Medical device companies often rely heavily on design and manufacturing
services of local manufacturing solutions providers in an effort to lower
costs, focus on core competencies and speed FDA regulatory approvals. In
addition, Parlex is uniquely positioned with proprietary technologies to
address the disposable diagnostic segment of the medical market. In fiscal
year 2004, the medical market grew by more than 90% and now represents our
second largest market.
Our Products
Our current flexible interconnect products include flexible circuits,
laminated cable, flexible interconnect hybrid circuits and flexible
interconnect assemblies. We manufacture our products, which are designed by
us, our customers or jointly, to our customers' application-specific
requirements. Lead times for the design and manufacture of our products
generally range from one week for some products to three months for more
sophisticated products.
Flexible Circuits
Flexible circuits, which consist of conductive patterns that are etched or
printed onto flexible substrate materials such as polyimide or polyester, are
used to provide connections between electronic components and as a substrate
to support these electronic devices. The circuits are manufactured by passing
base materials through multiple processes such as drilling, screening, photo
imaging, etching, plating and finishing. Flexible circuits can be produced in
single or multiple layers. We produce a wide range of flexible circuits
including:
* Single-Sided Flexible Circuits, which have a conductive pattern only on
one side. Single-sided flexible circuits are usually less costly and more
flexible than double-sided flexible circuits. Through our proprietary
high-speed interconnect screening technology, HSI+(R), which eliminates
the need for a separate shield layer, we can produce single-sided
flexible circuits that provide the same functionality as double-sided
flexible circuits at a lower cost. We manufacture single-sided circuitry
in both the United States and Shanghai, China, where a large percentage
of our production is single-sided.
* Double-Sided Flexible Circuits, which have conductive patterns or
materials on both sides that are interconnected by a drilled and copper-
plated hole. Double-sided flexible circuits can provide either more
functionality than a single-sided flexible circuit by containing
conductive patterns on both sides, or can provide greater shielding than
a single-sided flexible circuit by having a conductive pattern on one
side and a layer of shielding material on the other. While most double
sided circuits are produced on polyimide film, Parlex is unique in
offering lower cost PET (polyester) material as an alternative.
8
* Multilayer and Rigid-Flexible Circuits, which consist of layers of
circuitry that are stacked and then laminated. These circuits are used
where the complexity of the electronic design demands multiple layers of
flexible circuitry. If some of the layers are rigid printed circuit board
material, the product becomes a rigid-flexible circuit. We have
manufactured these circuits with up to 40 layers in prototype programs
and 24 layers in production.
* Polymer Thick Film Flexible Circuits, which are flexible circuits
manufactured using a technology that uses a low-cost thick film polyester
dielectric substrate and a silver screen-printed conductive pattern.
These circuits are made with an additive process involving the high-speed
screen printing of conductive traces utilizing internally developed ink
systems. We are able to produce multilayer circuits using proprietary
dielectric materials and double-sided circuits using proprietary printed
through-hole technologies. Polymer thick film flexible circuits are used
in low-cost, low-temperature, low-power interconnect applications.
Laminated Cable
Laminated cable, which consist of flat or round wire laminated to a flexible
substrate material, provides connections between electronic sub-systems and
replace conventional wire harnesses. We manufacture laminated cable in an
efficient, proprietary roll process. Substantially all of the laminated cable
that we produce uses flat wire. Approximately 95% of the laminated cable that
we produce is insulated with polyester material, which meets or exceeds our
customers performance requirements and cost parameters. Our laminated cable
is capable of handling both power (high current) and signal (low current).
Improving the process by which laminated cable is manufactured can increase
functionality and lower the cost of production. To this end, we have
developed U-Flex(R), a proprietary technique that forms flat wire into a u-
shape, followed by an injection molding process that enables the u-shaped end
to function as a connector. This technique improves electrical performance
and eliminates the need for a separate costly connector. We have also
developed Pemacs(R) shielding, which adds a specially designed silver ink to
laminated cable to meet stringent electronic shielding requirements without
compromising flexibility.
Flexible Interconnect Hybrid Circuits
In many cases, although a laminated cable is capable of carrying the
necessary signals, etched circuitry is required for termination. For these
applications we manufacture flexible interconnect hybrid circuits, which take
advantage of the lower cost of laminated cable and the technology of flexible
circuits by combining them into a single interconnect. On some products, we
apply our HSI+(C) process to the flexible interconnect hybrid circuit in
order to provide signal clarity and shielding.
Flexible Interconnect Assemblies
Both flexible circuits and laminated cable can be converted into an
electronic assembly by adding electronic components. This process can be as
simple as adding a connector or as complex as attaching components such as
capacitors, resistors or integrated circuits onto a flexible circuit using
high volume surface mount assembly. We attach surface mount components to
both copper and polymer thick film circuits with either solder paste or our
patented Polysolder(R) lead-free conductive adhesive. We can place a full
range of electronic devices, from passive components to computing devices, on
our flexible interconnects. We believe we are one of a limited number of
manufacturers who provide a seamless integration from design and initial
prototype through high volume circuit manufacturing and value added assembly.
We further believe our value added capabilities, including the use of
proprietary technologies, to be a significant differentiation versus our
competitors.
9
The following table sets forth representative applications in which our
products are used:
Flexible Circuits
-----------------
Single-Sided Automotive Displays
Batteries for Cellular Phones
Printers
Personal Digital Assistants
Data Storage
Cell Phone Antennas
Double-Sided Engine Control Units
Laptop Computers
Cellular Phones Engine Sensors
Smart Cards
Multilayer and Rigid-Flexible Engine Control Units
Computer Networks
Network Switching Systems
Aircraft Displays
Automotive Transmission Systems
Polymer Thick Film Business Phones
Disposable Medical Devices
Appliances
Radio Frequency Identification
(RFID)
Laminated Cable Postage Meters
--------------- Automotive Sound Systems
Notebook Computers
Industrial Controls
Electronic Scanning Devices
Touch Screen Displays
Flexible Interconnect Hybrid Circuits Total Vehicle Interconnection
------------------------------------- Printers
Sensors
Scanning Devices
Night Vision Systems
Flexible Interconnect Assemblies Aircraft Identification Systems
-------------------------------- Sensors
Scanning Devices
Batteries for Portable Products
Disk Drives
Night Vision Systems
Personal Computers
New Process and Material Technologies
An important part of our strategy is development of new processes and
materials for use in our products. Our proprietary processes and materials
include:
PALCore(R) HP - PALCore(R) HP is a low-cost multilayer flexible material that
is designed to minimize the difference between the cost of materials used in
flexible circuits and those used in conventional rigid circuits. We have
received patents on our latest, more flexible version of PALCore(R) HP, which
entered production in January 2000.
10
Polysolder(R) - Polysolder(R) is both a patented lead-free, conductive
adhesive used to attach electronic components onto flexible interconnects and
a patented manufacturing process that enables the attachment of electronic
devices onto substrates at low temperatures. Polysolder(R) has been used in
the production of polymer thick film flexible circuit assemblies for several
years. We plan to apply the Polysolder(R) process to etched flexible circuits
and laminated cable. This technology will enable us to use polyester, instead
of the more expensive polyimide, as a substrate in the production of these
flexible interconnect assemblies.
Electronic Identification Flip Chip Attachment Process - We have developed a
low-cost process that we believe will be an enabling technology in the
electronic identification market. Our high-speed flip chip attachment process
is up to ten times faster at placing semiconductors on low-cost materials
than conventional process alternatives. This process allows us to meet our
customer's goals for cost and reliability. This process entered production in
September 1999.
AutoNet(TM)- AutoNet(TM)is a proprietary flexible interconnect designed
specifically to meet the emerging needs of the automotive industry. As each
generation of vehicles incorporates greater electronic content,
interconnection becomes both more important and more difficult.
AutoNet(TM)draws upon our flexible interconnect process and materials
technology to provide a cost-effective interconnect for placement in the
headliners, trunks and doors of automobiles. AutoNet(TM)is designed to
replace traditional wire harnesses and is lighter, smaller, more reliable and
provides shielding necessary to control the emission of electronic signals.
We believe that the potential market for AutoNet(TM)is substantial and will
develop over the next few years.
Print - Plate - Through a joint development project with Nashua Corporation,
we have developed a method of printing circuit patterns using a proprietary
silver conductive ink on high-speed commercial printing presses. A
proprietary copper plating on the circuit patterns follows this process. This
technology dramatically reduces the cost of flexible circuits for certain
applications. We began marketing this technology to our customers in late
fiscal 2004 and will commence volume production in early fiscal 2005. Initial
target markets are cell phone antennas, automotive interiors and RFID
antennas.
Our Customers
Our customers are a diverse group of OEMs that serve a variety of industries.
Our largest 20 customers based on sales accounted for approximately 52% of
total revenues in 2004, 50% in 2003 and 44% in 2002. In addition, two
customers individually accounted for more than 10% of our accounts receivable
at June 30, 2002.
The loss of more than one of our largest customers may have a significant
impact on our operations. However, the loss of any one customer is not
expected to have a significant impact on our business as the individual
receivable balances are closely monitored and no single customer represented
10% or more of our total revenues in 2004, 2003 or 2002.
Our major end-customers include: BAE, Delphi, Hewlett-Packard, Hitachi,
Infineon, Johnson Controls, Maytag, Motorola, Pitney Bowes, Raytheon,
Samsung, Siemens, Visteon, Hypoguard, Intier and Whirlpool. To support these
end customers, we work closely with major electronics manufacturing services
(EMS) companies such as Flextronics, Solectron, Sanmina, JABIL, Plexus, and
Celestica.
Sales and Customer Service
Our sales and marketing organization is structured to support a very
geographically dispersed customer base. Our corporate sales organization is
regionally focused and provides local support to the various customer
engineering, procurement, and operations teams. We believe that a regionally-
based sales organization improves program support throughout the entire
product life cycle. Our regional sales teams are responsible for marketing
and selling the entire Parlex product offering to existing and potential
customers within their territories. These regional organizations include
direct sales engineers and independent manufacturers' representatives. Parlex
currently has sales or engineering support offices in eight locations in the
United States, two locations in Europe and three locations in Asia.
11
Complementing the sales force are robust product line organizations within
each of the manufacturing operations. Led by a product line manager, this
group provides technical marketing, research and development input, and
sustaining customer support for our customer base on a worldwide basis.
Manufacturing
We believe that our manufacturing expertise in a number of specialized areas,
together with our investment in process research and development and
equipment, have contributed to our position as an industry leader. A
significant amount of our production equipment is proprietary, including
cable laminators, precision cable slitters and roll plating, roll etching and
automatic punching equipment.
Our computer-aided manufacturing system takes the customer's design and
programs the various steps that will be required to manufacture the
particular product. The manufacturing process varies a great deal from
product to product. Although there is no standard process, significant
elements of production are highlighted below:
Polymer Thick Film
Etched Flexible Circuit Flexible Circuit Laminated Cable
- ----------------------- ----------------- ---------------
Drilling Convert/Condition Substrate Lamination
Plating Screen Print Slitting
Photo Imaging Diecut Conductor Forming
Etching Conductive Adhesive Injection Molding
Lamination Surface Mount/Flip Chip Assembly Shielding
Electrical Testing Electrical Testing Laser Skiving
Assembly Assembly
During 2004, 2003 and 2002, we continued to focus on cost reduction
initiatives. Core to this strategy is relocation of high-volume low-cost
manufacturing to China and Mexico and better utilization of our excess
capacity. In June 2002, we decided to close our Salem, New Hampshire facility
and the transfer our laminated cable business to Methuen, Massachusetts,
better utilizing our excess capacity. In January 2003, we completed the
closure of our Salem, New Hampshire facility and transfer of our laminated
cable business to Methuen, Massachusetts and Mexico. In February 2003, we
completed the transfer of our PALFlex manufacturing business to China and
discontinued production in the U.S. In May 2004, we completed the transfer of
our high volume surface mount assembly capability to China. We believe that
we have sufficient capacity to meet forecast demand in the U.S. operations
for the next several years.
In January 2004, we expanded our China facilities, leasing an additional
25,000 square feet of assembly space in Kunshan. Further, in January 2004, we
completed a strategic reorganization of our China facilities by consolidating
our engineering intensive wet process operations in our two Shanghai
locations and relocating our assembly and finishing operations to our lower
cost facility in Kunshan. Kunshan is approximately 45 miles from our Shanghai
location. In May 2004, we also relocated our Smart Card production line from
Suzhou, China to our main facility in Shanghai.
In 2003, we expanded our China facilities by leasing an additional 12,000
square feet of manufacturing space in Suzhou and an additional 50,000 square
feet of assembly and finishing space in Kunshan.
Five of our manufacturing facilities are certified to the international
standard ISO 9001-2000 or ISO 9002 and to the automotive standard QS 9000.
One facility is certified to the automotive standard TS 16949 and the
environmental standard ISO 14001.
Materials and Materials Management
We aggressively attempt to control our cost of purchased materials and our
level of inventories through long-term relationships with our suppliers. Our
goal is to attain a competitive price from suppliers and foster a shared
vision towards advancing technology.
12
We purchase raw materials, process chemicals and various components from
multiple outside sources. We often make long-term purchasing commitments with
key suppliers for specific customer programs. These suppliers commit to
provide cooperative engineering as required and in some cases to maintain a
local inventory to provide shorter lead times and reduced inventory levels.
In many cases our customers approve, and often specify, sources of supply.
We qualify our suppliers through a vendor rating system that limits the
number of suppliers to those that can provide the best total value and
quality. We monitor each supplier's quality, delivery, service and technology
so that the materials we receive meet our objectives.
Competition
Our business is highly competitive. We compete against other manufacturers of
flexible interconnects as well as against manufacturers of rigid-printed
circuits. In addition to competing with industry peers who produce flexible
circuitry (etched), laminated cable, and polymer think film products, we also
compete with alternative technology leaders in the rigid printed circuit,
wire harness and cable, and connector industries. Competitive factors among
flexible circuit and laminated cable suppliers are price, product quality,
technological capability and service. We believe that we compete favorably on
all of these competitive factors, and believe that our competitive strength
is in our ability to apply technology to reduce cost and/or increase
functionality. We compete against rigid board products on the basis of
product versatility, although price can also be a competitive factor if the
difference between the cost of a rigid circuit and a flexible circuit becomes
too great. Our ability to develop alternative material and process solutions
continues to reduce the inherent cost advantage rigid printed circuit
manufacturing has held.
Intellectual Property
We have acquired patents and we seek patents on new products and processes
where we believe patents would be appropriate to protect our interests.
Although patents are an important part of our competitive position, we do not
believe that any single patent or group of patents is critical to our
success. We believe that, due to the rapid technological change in the
flexible interconnect business, our success depends more on design creativity
and manufacturing expertise than on patents and other intellectual property.
We own 20 patents issued, and have 9 patent applications pending, in the
United States and several foreign countries. We have obtained federal
trademark registrations for PALFlex(R), PALCore(R), U-Flex(R), PALCoat(R),
Polysolder(R), and HSI and have one trademark application pending. We also
rely on internal security measures and on confidentiality agreements for
protection of trade secrets and proprietary know-how. We cannot be sure that
our efforts to protect our intellectual property will be effective to prevent
misappropriation or that others may not independently develop similar
technology.
Environmental Regulations
Flexible interconnect manufacturing requires the use of metals and chemicals.
Water used in the manufacturing process must be treated to remove metal
particles and other contaminants before it can be discharged into the
municipal sanitary sewer system. We operate and maintain water effluent
treatment systems and use approved laboratory testing procedures to monitor
the effectiveness of these systems at our San Jose, California and Methuen,
Massachusetts facilities. We operate these treatment systems under an
effluent discharge permit issued by the local governmental authority. Air
emissions resulting from our manufacturing processes are regulated by permits
issued by government authorities. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental
laws. We believe that the waste treatment equipment at our facilities is
currently in compliance with the requirements of environmental laws in all
material respects and that our air emissions are within the limits
established in the relevant permit. However, violations may occur in the
future. We are also subject to other environmental laws including those
relating to the storage, use and disposal of chemicals, solid waste and other
hazardous materials, as well as to work place health and safety and indoor
air quality emissions. Furthermore, environmental laws could become more
stringent or might apply to additional aspects of our operations over time,
and the costs of complying with such laws could be substantial. Compliance
with local, state and federal laws did not have a material impact on our
capital expenditures, earnings or competitive position in
13
2004. We estimate that the total capital expenditures in 2005 associated with
environmental compliance will be approximately $100,000.
Employees
As of June 30, 2004, we employed approximately 585 people in the United
States. Of these employees, 508 were direct employees of Parlex and 77 worked
for interim staffing agencies. In addition, we employed approximately 85
people in Mexico, approximately 146 people in the United Kingdom and
approximately 1,785 people in China. We are not a party to any collective
bargaining agreement and we believe our relations with our employees are
good.
Available Information
We are subject to the informational requirements of the Securities Exchange
Act, and in accordance with those requirements file reports, proxy
statements and other information with the Securities and Exchange
Commission. You may read and copy the reports, proxy statements and other
information that we file with the Commission at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call 1-800-SEC-0330 for information about the Commission's Public Reference
Room. The Commission also maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the Commission's
Web site is http: //www.sec.gov.
A copy of our code of ethics may be obtained free of charge by writing to
our Investor Relations Department, Parlex Corporation, One Parlex Place,
Methuen, MA 01844.
14
Item 2. Properties
- ------------------
Facilities
Our facilities at June 30, 2004 are:
Approximate
Location Square Feet Leased/Owned Description
- -------- ----------- ------------ -----------
Methuen, Massachusetts 172,000 Leased (lease expires in Corporate headquarters, product
June 2018) and process development,
flexible circuit and laminated cable
manufacturing
Cranston, Rhode Island 55,000 Leased (lease expires in Polymer thick film and surface
June 2008) mount assembly operations
Newport, Isle of Wight, 40,000 Leased (lease expires in Polymer thick film and surface
United Kingdom November 2009) mount assembly operations
Shanghai, China 47,000 Leased (lease expires in Single- and double-sided
August 2007) flexible circuit manufacturing
Shanghai, China 55,000 Leased (lease expires in Single- and double-sided
August 2007) flexible circuit manufacturing
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
February 2008)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
June 2008)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
December 2009)
Empalme, Sonora, Mexico 18,700 Leased (lease expires in Finishing and assembly operations
January 2005)
San Jose, California 16,800 Leased (lease expires in Prototype and quick-turn operations
December 2008)
Our facilities are well maintained and suitable for the operations conducted.
We believe that the space available at our facilities is adequate to meet our
current needs.
In December 2001, one of our subsidiaries, Parlex (Shanghai) Interconnect
Products Co., Ltd. ("Parlex Interconnect"), purchased land use rights for a
parcel of land located in the People's Republic of China. The purchase price
of the land use rights was approximately $1.1 million. In July 2003, Parlex
Interconnect sold its land use rights for approximately $1.2 million.
15
Item 3. Legal Proceedings
- -------------------------
From time to time we are involved in litigation relating to claims arising
out of our operations in the normal course of business. We are not currently
involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
Price Range of Common Stock
Our common stock is quoted on the NASDAQ National Market under the symbol
"PRLX." The following table sets forth, for the periods indicated, the high
and low closing sale prices for our common stock as reported on the NASDAQ
National Market.
High Low
---- ---
Fiscal Year Ended June 30, 2004
First Quarter $ 8.63 $ 6.79
Second Quarter $ 8.92 $ 7.60
Third Quarter $ 9.01 $ 5.81
Fourth Quarter $ 7.12 $ 5.98
Fiscal Year Ended June 30, 2003
First Quarter $12.90 $10.46
Second Quarter $11.80 $ 8.61
Third Quarter $10.50 $ 7.28
Fourth Quarter $ 8.10 $ 6.32
On September 21, 2004, the closing sale price of our common stock as reported
on the NASDAQ National Market was $5.40 per share and there were 88 holders
of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and we
presently intend to retain future earnings, if any, for our business. Our
credit agreement prohibits us from paying or declaring any cash dividends on
our common stock without the bank's prior written consent.
Recent Sales of Unregistered Securities
Series A Preferred Stock and Warrants
On May 7, 2004 and June 8, 2004, we entered into stock and warrant purchase
agreements with a small number of accredited investors to purchase shares
of our Series A Preferred Stock (the "Preferred Stock") and related
warrants to purchase our common stock. The purchase agreements provided for
the purchase and sale of 40,625 shares of Preferred Stock, and warrants
which will entitle holders to purchase up to
16
203,125 shares of common stock, for the aggregate amount of $3.25 million.
We received net proceeds of approximately $2.95 million, after payment of
placement agent fees, legal expenses and related costs.
The Preferred Stock and warrants were sold for $80.00 per unit. The
Preferred Stock may be converted in whole but not in part at any time by
the purchasers into shares of common stock at an initial conversion price
of $8.00 per share. In the event the trading price of our common stock
exceeds 150% of the conversion price for 20 consecutive trading days, then
all outstanding shares of Preferred Stock shall be automatically converted
into common stock. The Series A Preferred Stockholders have no voting
rights.
The Preferred Stock has a fixed dividend rate of 8.25% per annum, payable
quarterly, at our sole discretion, in either cash or shares of common
stock. If we do not redeem the Preferred Stock on the third anniversary
date of the issuance date (as discussed below), then the fixed dividend
rate shall thereafter be increased to 14% per annum, and shall be payable
solely in cash.
The Preferred Stock also entitles the holders thereof to a preferential
payment in the event of our voluntary or involuntary liquidation,
dissolution or winding up. Specifically, in any such case, the holders of
Preferred Stock shall be entitled to be paid, out of our assets that are
available for distribution to our shareholders, the sum of $80.00 per share
of Preferred Stock held, plus all accrued and unpaid dividends thereon,
prior to any payments being made to holders of our common stock. The $80.00
per share liquidation preference payment amount is
subject to equitable adjustment for stock splits, stock dividends,
combinations, reorganizations and similar events effecting the shares of
Preferred Stock.
On the third anniversary of the issuance date, we may in our sole
discretion redeem all, but not less than all, of the then-outstanding
Preferred Stock. The redemption price shall be equal to the initial
purchase price of the Preferred Stock, subject to equitable adjustments for
stock splits or similar actions, plus all accrued and unpaid dividends to
the redemption date. We must provide the purchasers with notice of our
intent to redeem at least 30 days prior to the third anniversary date.
Following receipt of such notice, the purchasers may elect to convert their
Preferred Stock into common stock prior to the redemption date, provided
that they perform such conversion within 20 days of receipt of the
redemption notice.
In connection with the transaction, we also issued warrants to purchase up
to 203,125 shares of our common stock. The warrants, which expire in three
years, are exercisable:
* at an initial exercise price of $8.00 per share;
* commencing six months after their issuance date; and
* on a cashless basis, whereby the holder, rather than pay the
exercise price in cash, may surrender that number of warrants
based on the than current fair value of our common stock equal to
the exercise price of the warrants being exercised.
The conversion price of the Preferred Stock and the exercise price of the
warrants are subject to adjustment in the event of:
* stock splits, dividends and certain combinations;
* certain distributions on account of our common stock; and/or
* certain reclassifications, exchanges or substitutions affecting
our common stock.
Each of the purchasers also received an option to purchase a number of
additional shares of Preferred Stock and warrants equal to 20% of the
number initially purchased by such investor (the "Over-Allotment Option").
The Over-Allotment Option may be exercised in whole or in part (but only
once) on or before 180 days following the closing date. The Over-Allotment
Option is exercisable at $80.00 per unit of Preferred Stock and warrant
purchased.
17
We filed a registration statement on Form S-3 (File No. 333-116314)
covering resale of the shares issuable upon conversion of the Preferred
Stock and exercise of the warrants with the Securities and Exchange
Commission. The registration statement was declared effective by the
Commission on June 28, 2004.
7% Convertible Subordinated Notes and Warrants
On July 28, 2003, Parlex entered into a securities purchase agreement with
Tate Capital Partners Fund, LLC, SF Capital Partners Ltd., Midsummer
Investment, Ltd., Islandia L.P. and Heartland Group, Inc. (solely on behalf
of Heartland Value Fund). The securities purchase agreement provided for
the purchase and sale of our 7% convertible subordinated notes in the
aggregate amount of $6.0 million. The notes were sold at 100% of face
value, and we received net proceeds of approximately $5.5 million, after
payment of finder's fees and legal expenses.
These convertible notes mature on July 28, 2007, with the interest payable
quarterly in shares of our common stock so long as we maintain the
effectiveness of this registration statement. The notes are convertible
immediately by the investors, in whole or in part, into shares of our
common stock at an initial conversion price equal to $8.00.
After two years from the date of issuance, under certain conditions we will
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.
After three years from the date of issuance, the holder of any note may
require us to redeem the note 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. The holder must provide us with a notice of their
intent to redeem within 30 days of the third anniversary of the note.
In connection with the securities purchase agreement, we issued common
stock purchase warrants to each of the security holders to purchase up to
300,000 shares of our common stock. The warrants are exercisable:
* at an initial exercise price of $8.00 per share;
* during the four year period terminating July 28, 2007; and
* on a cashless basis, whereby the holder, rather than pay the
exercise price in cash, may surrender that number of warrants
based on the than current fair value of our common stock equal to
the exercise price of the warrants being exercised.
The conversion price of the notes and the exercise price of the warrants
are subject to adjustment in the event of:
* stock splits, dividends and certain combinations;
* distributions on account of our common stock; and/or
* our issuance of additional shares of common stock (or securities
convertible into common stock) at less than the conversion price
of the note or exercise price of the warrant.
There shall, however, be no adjustment to the conversion price of the notes
or exercise price of the warrants where the issuance of common stock, or
rights to acquire common stock, are:
* granted or issued pursuant to option plans for key employees and
consultants;
18
* granted or issued in connection with a merger or other
combination, or similar strategic transaction, where the primary
purpose for the grant or issuance is not capital raising; or
* issuable pursuant to that certain warrant to purchase common
stock granted to Silicon Valley Bank in connection with our
recent refinancing of our primary credit relationship.
In the event a price adjustment is required, both the conversion price of
the notes and the exercise price of the warrants will be reduced to:
* if the triggering transaction or event occurs within the first
eighteen months after July 28, 2003, such lower price; or
* thereafter, a reduced price representing a weighted average anti-
dilution price. Specifically, the new price shall be equal to the
price (calculated to the nearest cent) determined by dividing (A)
an amount equal to the sum of (1) the number of shares of our
common stock outstanding immediately prior to such issue or sale
(including for this purpose shares issuable upon conversion or
exercise of any convertible notes or warrants then outstanding)
multiplied by the conversion price or exercise price then in
effect, and (2) the consideration, if any, we received upon such
issue or sale, by (B) an amount equal to the sum of (1) the
number of shares of common stock then outstanding (including for
this purpose shares issuable upon conversion or exercise of any
convertible notes or warrants then outstanding) and (2) the
number of shares of common stock thus issued or sold.
We filed a registration statement on Form S-3 (File No. 333-109681)
covering resale of the shares issuable upon conversion of the notes and
upon exercise of the warrants with the Securities and Exchange Commission.
The registration statement was declared effective by the Commission on
November 21, 2003.
Both of these transactions were exempt from registration under the
Securities Act of 1933, as amended, by reason of Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder as
transactions by an issuer not involving any public offering. Each purchaser
represented that (a) it was acquiring the securities for investment
purposes only and not with a view to or for sale in connection with any
distribution thereof unless registered or exempt from registration, (b) it
was an "accredited investor," (c) it had such knowledge and experience in
business and financial matters that it was able to understand the risks and
merits of an investment in our securities, and (d) it did not acquire the
securities as a result of any general solicitation or advertising.
Moreover, appropriate restrictive legends were affixed to the securities
issued in these transactions and each purchaser had access to sufficient
information about us in order to make an informed investment decision.
19
Item 6. Selected Consolidated Financial Data
- --------------------------------------------
The following table sets forth financial data for the last five years. This
selected financial data should be read in conjunction with the Consolidated
Financial Statements and related notes and other financial data included
elsewhere herein.
Fiscal Year Ended June 30,
2004 2003 2002 2001 2000(a)
---- ---- ---- ---- -------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Total revenues $95,539 $ 82,821 $ 87,056 $103,620 $101,839
Cost of products sold 85,217 80,803 90,294 97,460 76,614
------- -------- -------- -------- --------
Gross profit (loss) 10,322 2,018 (3,238) 6,160 25,225
Selling, general and administrative expenses 15,820 14,484 14,049 17,706 14,097
------- -------- -------- -------- --------
Operating (loss) income (5,498) (12,466) (17,287) (11,546) 11,128
(Loss) income from operations before income
taxes and minority interest (8,066) (13,411) (17,724) (11,517) 10,473
Net (loss) income $(8,166) $(19,517) $(10,388) $ (6,199) $ 6,335
======= ======== ======== ======== ========
Net (loss) income attributable
to common stockholders $(8,337) $(19,517) $(10,388) $ (6,199) $ 6,335
======= ======== ======== ======== ========
Net (loss) income per share attributable
to common stockholders:
Basic $ (1.31) $ (3.09) $ (1.65) $ (0.99) $ 1.31
======= ======== ======== ======== ========
Diluted $ (1.31) $ (3.09) $ (1.65) $ (0.99) $ 1.28
======= ======== ======== ======== ========
Weighted average shares outstanding:
Basic 6,370 6,309 6,303 6,289 4,842
Diluted 6,370 6,309 6,303 6,289 4,940
Fiscal Year Ended June 30,
2004 2003 2002 2001 2000(a)
(in thousands)
Consolidated Balance Sheet Data:
Working capital $13,100 $12,722 $ 22,320 $ 31,016 $ 38,752
Total assets 95,250 86,033 106,054 110,864 115,341
Current portion of long-term debt 12,861 3,813 3,561 10,710 1,483
Long-term debt, less current portion 10,535 10,802 12,000 119 360
Stockholders' equity 49,462 51,248 70,141 81,351 87,790
(a) On March 1, 2000, we acquired Poly-Flex Circuits, Inc. ("Poly-Flex").
The acquisition was recorded under the purchase method of accounting.
Accordingly, the information for 2000 includes Poly-Flex's operations
beginning March 1, 2000.
20
Item 7. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
-------------------------
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the financial information
included elsewhere in this Annual Report on Form 10-K and with "Factors
That May Affect Future Results" set forth on page 32.
This discussion contains "forward-looking statements," as that term is
defined in the Private Securities Litigation Reform Act of 1995 and in
other federal securities laws. See "Cautionary Note Regarding Forward-
Looking Statements" on page 3 of this Annual Report on Form 10-K.
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 medical and
computer markets. We believe that our development of innovative materials and
processes provides us with a competitive advantage in the markets in which we
compete. During the past three years, we have invested approximately $12.4
million in property and equipment and approximately $17.7 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.
Over the past three years, we were adversely affected by the economic
downturn and its impact on our key customers and markets. In 2004 we
experienced sales growth in several strategic markets, particularly in the
second half of the year. Growth in the medical, appliance and military
markets has helped to reduce domestic losses. Significant investment over the
past three years has positioned us to capitalize on a rapidly expanding China
electronic manufacturing industry. In 2004 our China operations revenues
increased by over 65% with significant improvement in profitability.
Over the last three years we incurred operating losses of $35.3 million and
have used cash to fund operations and working capital of $13.7 million. We
have taken certain steps to improve operating margins, including the closure
of facilities, downsizing of our North American employee base, and transfer
of our manufacturing operations to lower cost locations, such as the People's
Republic of China. In addition, we have worked closely with our lenders to
manage through this difficult time and have obtained additional capital in
2003 and 2004 through sale-leasebacks of selected corporate assets, the
issuance of convertible debt and preferred stock and the execution of new
working capital borrowing agreements. As a result of the difficult economic
environment, we have had difficulty maintaining compliance with the terms and
conditions of certain of our financing facilities in prior years and
throughout 2004. At June 30, 2004, however, we were in compliance with all
financial covenants. Based upon our recent improvement in financial
performance, we are currently, and expect to remain, in compliance with all
of our financial covenants.
We have $8.9 million in existing short-term debt, associated with our
Chinese operations, that will be refinanced or repaid in 2005. We believe
that we will be able to obtain the necessary refinancing of this debt
because of our history of successfully refinancing our short-term Chinese
borrowings and our rapidly improving Chinese operating results. In fiscal
2004, revenues from our Chinese operations grew 65%. We expect similar
revenue growth and improved profitability in China during fiscal 2005.
Failure to obtain such financing may have a material adverse impact on our
operations.
We formed a Chinese joint venture, Parlex (Shanghai) Circuit Co., LTD
("Parlex Shanghai"), in 1995 to better serve our customers that have
production facilities in Asia and to more cost-effectively manufacture
products for worldwide distribution. Effective October 22, 2001, we purchased
the 40% share of Parlex Shanghai held by one of our joint venture partners,
increasing our equity interest in Parlex Shanghai to 90.1%. Parlex Shanghai's
results of operations, cash flows and financial position are included in our
consolidated financial statements. In 2003 we completed the transfer of the
production of our automotive related products utilizing our PALFlex(R)
technology from our Methuen, Massachusetts facility to Parlex Interconnect, a
wholly owned subsidiary of Parlex Asia Pacific Limited ("Parlex Asia"), which
is located in China. The transfer of this technology and manufacturing
capability was critical to exiting a very unprofitable North American
manufacturing business.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are, in
management's view, most important to the portrayal of the company's
financial condition and results of operations and most demanding of their
judgment.
21
We believe the following policies to be critical to an understanding of our
consolidated financial statements and the uncertainties associated with the
complex judgments made by us that could impact our results of operations,
financial position and cash flows. Our significant accounting policies are
more fully described in Note 2 to our consolidated financial statements for
the year ended June 30, 2004 included in Item 8 of this Form 10-K and in
Part IV, Item 15 "Exhibits, Financial Statement Schedules and Reports on
Form 8-K".
The preparation of 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. 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. Actual results would differ from these estimates.
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
through disposal of reserved items, either through sale or scrapping.
Goodwill. We recorded goodwill in connection with our acquisition of a 40%
interest in Parlex Shanghai and our 1999 acquisition of Parlex Dynaflex
Corporation ("Dynaflex"). We account for goodwill under the provisions of
SFAS No.142, "Goodwill and Other Intangible Assets". Under the provisions
of SFAS No. 142, if an intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life is determined
to be no longer indefinite. An intangible asset that is not subject to
amortization shall be tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be
impaired. Goodwill is not amortized but is tested for impairment, for each
reporting unit, on an annual basis and between annual tests in certain
circumstances. In accordance with the guidelines in SFAS No. 142, we
determined we have one reporting unit. We evaluate goodwill for impairment
by comparing our market capitalization, as adjusted for a control premium,
to our recorded net asset value. 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. Since our market
capitalization, as adjusted, exceeded our recorded net asset value upon
adoption of SFAS No. 142 and at the subsequent annual impairment analysis
dates, we have concluded that no impairment adjustments were required at
the time of adoption or at the annual impairment analysis date. The
carrying value
22
of the goodwill was $1,157,510 at June 30, 2004 and 2003.
Income Taxes. We determine if our deferred tax assets and liabilities are
realizable on an ongoing basis by assessing our valuation allowance and by
adjusting the amount of such allowance, as necessary. In the determination of
the valuation allowance, we have considered future taxable income and the
feasibility of tax planning initiatives. Should we determine that it is more
likely than not that we will realize certain of our 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
we have adequately considered 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." Our obligations under operating
leases are disclosed in the notes to our financial statements.
Results of Operations
The following table sets forth, for the periods indicated, selected items in
our statements of operations expressed as a percentage of total revenue. You
should read the table and the discussion below in conjunction with our
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Annual Report on Form 10-K.
Fiscal Year Ended June 30,
----------------------------
2004 2003 2002
---- ---- ----
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 89.2% 97.6% 103.7%
Gross profit (loss) 10.8% 2.4% (3.7%)
Selling, general and administrative expenses 16.6% 17.5% 16.1%
Operating loss (5.8%) (15.1%) (19.9%)
Loss from operations before income taxes and minority interest (8.4%) (16.2%) (20.4%)
Net loss (8.5%) (23.5%) (11.9%)
Net loss attributable to common shareholders (8.7%) (23.5%) (11.9%)
Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003
Total Revenues. Total revenues for 2004 were $95.5 million, an increase of
15% from $82.8 million in 2003. Revenues from our China operations were
approximately $36 million, an increase of 65% over the prior year. Strong
growth occurred in the computer and peripherals, automotive,
telecommunications and electronic identification markets. During 2004 we
significantly expanded our China value added assembly operations which
included the transfer of our domestic high volume automated surface mount
capability to our Kunshan facility in May 2004.
Polymer thick film revenue increased 16% from $27.2 million in 2003 to
$31.6 million in 2004. Revenues from the appliance market, representing 13%
of total revenues in 2004, continued to be strong, largely driven by
laundry equipment product sales. Initial qualification was completed on two
new product opportunities (range and laundry equipment) during the fourth
quarter of 2004. Most significant increases occurred in the medical market,
primarily in disposable medical devices. Proprietary technologies including
silver-based conductive inks and gels have generated significant new
product opportunities including disposable blood glucose monitors and
sensors to detect carpal tunnel syndrome. Worldwide, medical revenues grew
to $16 million in 2004 from $8 million in 2003. In addition to the
importance to our market diversification strategy, growth in medical
revenues
23
is important to domestic and European facility utilization. Laminated cable
revenues were flat year over year but increased by 22% in the second half
of the year compared to the first half of 2004, indicative of a
strengthening North American electronics market.
Total revenues included licensing and royalty fees of approximately $54,000
for 2004 and $41,000 for 2003. Although we intend to continue developing
materials and processes that we can license to third parties, we do not
expect that licensing and royalty revenues will represent a significant
portion of total revenues in the near term.
Cost of Products Sold. Cost of products sold was $85.2 million, or 89% of
total revenues, for 2004, versus $80.8 million, or 98% of total revenues
for 2003. Revenue increases, of $18.6 million, in China and our polymer
thick film operations were responsible for gross margin increases of $12
million in 2004 compared to $7.5 million in 2003, or a year over year
increase in gross margin of 59%. China's gross margins were adversely
impacted by start-up costs associated with the initial production ramp of
our new smartcard manufacturing line. Smartcard revenues and cost of goods
sold were $1.6 million and $1.8 million respectively, in 2004. Initial
production of smartcards commenced in October 2003. Breakeven production
volumes of our smartcard business were achieved in June 2004. Margins
improved from 26% to 32% in our laminated cable operations. Material cost
reduction efforts coupled with increased utilization of lower cost Mexico
assembly and finishing capabilities contributed to improved gross margins.
In 2003, gross margins were significantly adversely impacted by shutdown
costs associated with the closing of our domestic PALFlex operations. In
2003, we recorded $13.1 million in costs of products sold from our PALFlex
operations on $6.4 million in revenue. Operations of our U.S. PALFlex
business ceased in February 2003.
The Methuen multilayer operation continued to experience low capacity
utilization and, correspondingly, significant unfavorable manufacturing
variances. Revenue in the multilayer operation was severely impacted by the
rapid decline in telecommunications network infrastructure market. In
fiscal 2001 this market represented over 75% of multilayer revenues. In
2004, revenues in this market were immaterial. Over the past two years we
have sought to replace this revenue by targeting markets demanding complex
North American design and manufacturing solutions. We believe the military
aerospace and medical markets represent two growing markets demanding such
services. In addition to a focused corporate sales effort targeting new
business development, we have continued to evaluate opportunities to
acquire business, particularly in the highly fragmented military aerospace
market. In June 2004, we completed a strategic sourcing agreement with
Delphi Corporation. Under the arrangement Delphi will transfer production
of its multilayer flexible circuit manufacturing to our Methuen operation.
We expect this will significantly improve facility utilization and further
reduce operating losses in the U.S.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $15.8 million in 2004, or 16.6 % of total
revenues, and $14.5 million, or 17.5% of total revenues, for the comparable
period in the prior year. Increases occurred in the following areas:
commissions ($500,000) primarily due to volume, headcount for direct sales
and China infra-structure ($250,000), insurance and public company costs
($350,000) and bad debt reserves associated with a customer dispute
($200,000).
Interest Income. Interest income was $84,000 in 2004 compared to $36,000 in
2003, and primarily consists of interest income on refunded tax payments
and interest income on our cash balances and short-term investments.
Interest Expense. Interest expense was $2.6 million in 2004 and $900,000 in
2003. Interest expense for 2004 includes $1.5 million related to amortized
deferred financing costs and $343,000 for interest payable in common stock
related to the issuance of convertible notes in July 2003. The deferred
financing costs are associated with the sale-leaseback of our Methuen
facility, the Loan Security Agreement and sale of convertible subordinated
notes. The balance of the interest expense represents interest incurred on
our short and long-term bank borrowings and deferred compensation.
Non operating income. Non operating income was $129,000 in 2004 and $3,000
in 2003. Non operating income primarily represents currency exchange rate
gains.
24
Non operating expense. Non operating expense was $186,000 in 2004 and
$84,000 in 2003. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese joint
venture, Parlex Shanghai, was $8.1 million in 2004 compared to $13.4
million in 2003. 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 benefit was approximately (1%) in 2004
compared to an effective tax rate of 46% in 2003. 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 history of
operating losses and uncertain future operating results, we determined that
it is more likely than not that certain historic and current year income
tax benefits would not be realized. Consequently, in 2003 we increased our
valuation allowance by $11.5 million resulting in an effective tax rate of
46%. In 2004, we realized and recognized $317,000 of state and federal tax
refunds, recognized $89,000 of federal refunds and recorded a $351,000
state and foreign tax provision resulting in a net tax rate benefit of
(1%).
Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002
Total Revenues. Total revenues for 2003 were $82.8 million, a decrease of
5% from $87.1 million in 2002. In February 2003, we closed our domestic
PALFlex operations in Methuen, Massachusetts. PALFlex is a proprietary
adhesiveless double-sided copper flexible circuit roll to roll
manufacturing process. Revenues generated from our PALFlex operations in
2003 were $6.4 million versus $15.0 million in 2002. Excluding PALFlex
revenues from both years, total revenues grew by 6%. Decreases in our
Multi-Layer ($4.7 million) and Laminated Cable ($2.2 million) operations
were offset by strong growth in our Polymer Thick Film ($5.4 million) and
China ($6.3 million) operations.
In 2003, we continued to emphasize a strategy of market diversification.
Our major markets, which represent growth from the prior year, include the
home appliance market with Whirlpool and Maytag as our largest customers,
the military market with Raytheon, BAE and General Dynamics and the
computer market with strong growth from Hewlett Packard. Reductions in
revenues occurred primarily in the automotive market driven by the closing
of our domestic PALFlex operations.
Total revenues included licensing and royalty fees of approximately $41,000
for 2003 and $50,000 for 2002. Although we intend to continue developing
materials and processes that we can license to third parties, we do not
expect that licensing and royalty revenues will represent a significant
portion of total revenues in the near term.
Cost of Products Sold. Cost of products sold was $80.8 million, or 98% of
total revenues, for 2003, versus $90.3 million, or 104% of total revenues
for 2002. In 2003, cost of products sold was adversely impacted by the cost
of closing the domestic PALFlex operation. In 2003, we recorded $13.1
million in costs of products sold from our PALFlex operations on $6.4
million in revenue. In addition to operating significantly under capacity
and therefore absorbing high fixed costs, we recorded severance costs for
60 people terminated in March and capital and inventory write-downs. In
addition, the Methuen operation continued to experience low capacity
utilization and, correspondingly, significant unfavorable manufacturing
variances. In 2003, these variances totaled approximately $13 million and
have been charged to cost of products sold. To improve utilization in 2003,
we relocated our Salem, New Hampshire laminated cable business to Methuen.
Relocation costs of approximately $500,000 were expensed as incurred in the
first half of the year. The move was completed in January 2003.
During the past year, we have made a significant investment to improve our
margins through the transfer of labor intensive manufacturing operations in
the United States to more cost-effective locations. A large portion of the
final assembly, inspection, and test procedures previously performed in our
Methuen, Massachusetts and Salem, New Hampshire facilities are now
performed in Mexico. During 2003, we completed the transfer of our PALFlex
operations to China. The transfer of manufacturing capabilities is costly,
however this investment is core to our long-term strategy for cost
effective manufacturing. Although these cost reduction measures are
25
expected to improve our gross margins, a return to profitability is
predicated upon operational performance, a favorable product mix and
increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.5 million in 2003, or 17.5% of total
revenues, and $14.0 million, or 16% of total revenues, for the comparable
period in the prior year. Due to the reorganization of our sales force in
mid-2002 and the staffing of several open regional positions, selling
expenses increased $753,000 in 2003. The increase in selling expenses was
partially offset by a $317,000 decrease in administrative expenses.
Interest Income. Interest income was $36,000 in 2003 compared to $207,000
in 2002 and primarily consists of interest income on short-term
investments. The reduction in interest income is due to lower average
investment balances and lower interest rates.
Interest Expense. Interest expense was $900,000 in 2003 and $644,000 in
2002. The interest expense represents interest incurred on our short and
long-term borrowings for working capital needs, interest expense associated
with deferred compensation and, beginning in 2003, interest associated with
the sale-leaseback of our corporate headquarters and manufacturing facility
in Methuen, Massachusetts ("Methuen Facility") which has been accounted for
as a financing obligation. The increase in interest expense in 2003 is due
to higher average borrowing levels and to the interest associated with the
sale-leaseback of the Methuen Facility.
Non operating income. Non operating income was $3,000 in 2003 and $105,000
in 2002. Non operating income in 2002 represents currency exchange rate
gains.
Non operating expense. Non operating expense was $84,000 in 2003 and
$105,000 in 2002. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese joint
venture, Parlex Shanghai, was $13.4 million in 2003 compared to $17.7
million in 2002. We own 90.1% of the equity interest in Parlex Shanghai
and, accordingly, include Parlex Shanghai's results of operations, cash
flows and financial position in our consolidated financial statements.
Income Taxes. Our effective tax rate was approximately 46% in 2003 compared
to an effective tax rate benefit of (39%) in 2002. Our effective tax rate
is impacted by the proportion of our estimated annual income being earned
in domestic versus foreign tax jurisdictions, the generation of tax credits
and the recording of any valuation allowance. As a result of our recent
history of operating losses, uncertain future operating results, and the
non-compliance with certain of our debt covenants requirements, which has
subsequently been waived, we determined that it is more likely than not
that certain historic and current year income tax benefits will not be
realized. Consequently, we increased our valuation allowance by $11.5
million in 2003.
Liquidity and Capital Resources
As of June 30, 2004, we had approximately $1.6 million in cash and short-
term investments.
Net cash used by operations during 2004 was $11.4 million. Net losses of
$8.2 million after adjustment for depreciation and amortization, deferred
income taxes, facility exit cost, interest payable in common stock, gain on
sale of land use rights and minority interest, used $1.0 million of
operating cash. Working capital consumed $10.4 million of cash. Cash used
for working capital included $8.0 million for accounts receivable, $3.1
million for inventory and $900,000 for other working capital needs which
was in part offset by cash provided from increases in accounts payable of
$1.6 million.
Net cash used for investing activities was $1.3 million in 2004. This
included $2.5 million used to purchase capital equipment and other assets
offset by $1.2 million received for the sale of our Chinese land use
rights.
26
Capital expenditures largely occurred in China and represent our investment
in our new smartcard manufacturing line and expanded volume capacity.
Cash provided by financing activities was $12.8 million during 2004. This
included net proceeds of $5.5 million from the sale of our convertible
subordinated notes, $3.0 million from the sale of our Series A Preferred
Stock and $3.2 million, which represented the net repayments and borrowings
on our bank debt. The bank borrowings include $57.2 million from our
primary lender, Silicon Valley Bank, and $9.1 million from our Parlex
Shanghai lenders. Payments include $56.9 million to Silicon Valley Bank,
$2.5 million to retire three of Parlex Shanghai's local short-term bank
notes and $3.8 million to retire Parlex Interconnect's Citic Ka Wah Bank
loan. In December 2003, one of the note holders of our convertible debt
exercised 100% of their warrants to purchase Parlex common stock at $8.00
per share. We received proceeds totaling $600,000 upon exercise of the
warrants and issued 75,000 shares of Parlex common stock. In 2004, we
received $885,000 from the Methuen sale-leaseback note receivable of which
$135,000 was interest payments and $750,000 was principal. We expect to
continue to receive interest payments on our Methuen sale-leaseback note,
but do not expect any additional principal payments before June 30, 2006.
Improved financial performance in the fourth quarter significantly reduced
operating losses and cash used in operations. Increased sales in the fourth
quarter of 2004, however, have placed additional cash demands on working
capital with growth in account receivables. The strong credit ratings of
our large OEM and EMS customer base has allowed us to successfully finance
this growth through asset based working capital lines of credit. We
recently completed stand alone financing for our China operations through a
new line of credit with Bank of China which will allow us to continue
financing our growth plans. See "Factors That May Affect Future Results"
on page 32 of this Annual Report on Form 10-K.
Series A Convertible Preferred Stock - On June 8, 2004, we completed a
private placement of 40,625 shares of Series A Convertible Preferred Stock
and warrants entitling holders to purchase an aggregate of 203,125 shares
of common stock at $80.00 per unit for proceeds of approximately
$2,950,000, net of issuance costs of approximately $300,000. In connection
with the private placement, the investors received rights to purchase
additional shares of the Series A Preferred Stock. For additional
information relating to the Series A Convertible Preferred Stock, please
see the section of this Annual Report on Form 10-K entitled "Market for
Registrant's Common Equity and Related Stockholder Matters -- Recent Sales
of Unregistered Securities -- Series A Preferred Stock and Warrants".
Loan and Security Agreement (the "Loan Agreement") - We executed the Loan
Agreement with Silicon Valley Bank on June 11, 2003. The Loan Agreement
provided Silicon Valley Bank with a secured interest in substantially all
of our assets. We may borrow up to $10,000,000, based on a borrowing base
of eligible accounts receivable. Borrowings may be used for working capital
purposes only. The Loan Agreement 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 Modification Agreement (the
"Modification Agreement") with Silicon Valley Bank. The Modification
Agreement increased the interest rate on borrowings to the bank's prime
rate plus 1.5% and amended the financial covenants. On February 18, 2004,
we executed a Second Modification Agreement (the "Second Modification
Agreement") with Silicon Valley Bank. The Second Modification Agreement
removed the fixed charge coverage ratio from the Loan Agreement and
required 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 Second Modification Agreement
increased the interest rate on borrowings to the bank's prime rate plus
2.0% (decreasing to prime plus 1.25% after two consecutive quarters of
positive operating income and to prime plus 0.75% after two consecutive
quarters of positive net income, respectively) and amended the financial
covenants. On March 28, 2004, we entered into a Third Loan Modification
Agreement with Silicon Valley Bank, which permitted certain of our
27
subsidiaries to increase the amount of indebtedness they could incur from
$8 million to $13 million, so long as such indebtedness was without
recourse to Parlex and our principal subsidiaries. On May 10, 2004, we
executed a Fourth Loan Modification Agreement (the "Fourth Modification
Agreement") with Silicon Valley Bank. The Fourth Modification Agreement
changed the EBITDA requirement to $1.00 as of April 30, 2004 and May 31,
2004 and $250,000 on a three month trailing basis beginning June 30, 2004.
On June 25, 2004, we executed a Fifth Loan Modification Agreement (the
"Fifth Modification Agreement") with Silicon Valley Bank. The Fifth
Modification Agreement permitted certain of our subsidiaries to borrow up
to $5,000,000 in the aggregate from the Bank of China. The Fifth
Modification Agreement increased the interest rate on borrowings to the
bank's prime rate (4.0% at June 30, 2004) plus 2.25% (decreasing to prime
plus 1.25% after two consecutive quarters of positive operating income and
to prime plus 0.75% after two consecutive quarters of positive net income,
respectively). On September 24, 2004, we executed a Sixth Loan Modification
Agreement with Silicon Valley Bank to extend the maturity date of the Loan
Agreement from June 10, 2005 to July 11, 2005. All other terms and
conditions of the Loan Agreement remain the same. As of June 30, 2004, we
were in compliance with our financial covenants. At June 30, 2004, we had
available borrowing capacity under the Loan Agreement of approximately $4.4
million. Since the available borrowing capacity exceeded $750,000 at June
30, 2004, none of our cash balance was subject to restriction at June 30,
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 have been classified as current liabilities in the
accompanying consolidated balance sheets as of June 30, 2004 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 borrowing 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% and guaranteed by Parlex Interconnect. Amounts outstanding under
this short-term note totaled $1.2 million as of June 30, 2004. The note was
retired in August 2004. On December 15, 2003, Parlex Shanghai entered into
a short-term bank note, due December 15, 2004, bearing interest at 5.31%
and guaranteed by Parlex Interconnect. Amounts outstanding under this
short-term note totaled $605,000 as of June 30, 2004. 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, bearing interest at
5.31% and guaranteed by Parlex Interconnect. On February 13, 2004 and March
2, 2004, Parlex Shanghai entered into two short-term bank notes, due
January 12, 2005 and March 1, 2005, bearing interest at 5.31% and
guaranteed by Parlex Interconnect. Amounts outstanding under these short-
term notes as of June 30, 2004 totaled $3.8 million. These notes replaced a
similar short-term note that terminated on February 25, 2004. On March 5,
2004, Parlex Shanghai entered into a short-term bank note, due January 5,
2005, bearing interest at LIBOR plus 2.5% and guaranteed by Parlex Asia.
Amounts outstanding under this short-term note as of June 30, 2004 totaled
$1.5 million. We believe that we will be able to obtain the necessary
refinancing of our Parlex Shanghai short-term debt because of our history
of successfully refinancing our Chinese debt and our improving operating
results.
Parlex Interconnect Term Notes - In June 2002, Parlex Interconnect executed
a $5,000,000 Loan Agreement (the "CITIC Loan Agreement") with CITIC Ka Wah
Bank. As a condition of the approval of this CITIC Loan Agreement, our
subsidiary, Parlex Asia, and we provided a guarantee of the payment of this
loan. Under the provisions of the guarantee, we are required to comply with
certain financial covenants. In March 2004, Parlex Interconnect retired the
outstanding balance of the CITIC term note.
Parlex Asia Banking Facility - Subsequent to June 30, 2004, on September
15, 2004 Parlex Asia entered into an agreement with the Bank of China for a
$5 million banking facility guaranteed by Parlex. Under the terms of the
banking facility, Parlex Asia may borrow up to $5 million based on a
borrowing base of eligible account receivables. The banking facility bears
interest at LIBOR plus 2%. We anticipate utilizing borrowings from this
financing for the refinancing of certain Parlex Shanghai term notes or for
working capital needs.
28
Finance Obligation on Sale Leaseback of Methuen Facility - In June 2003, we
sold our Methuen Facility for a 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 (the "Note") and up to $1,000,000 in additional cash
under the terms of an Earn Out Clause. In June 2004, we received $750,000
reducing the principal balance of the promissory note to $1,900,000. Under
the terms of the Purchase and Sale Agreement, we 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 the Note
from the buyer provide us with a continuing involvement in the Methuen
Facility, we have accounted for the sale-leaseback of the Methuen Facility
as a financing transaction. Accordingly, we continue to report the Methuen
Facility as an asset and continue to record depreciation expense. We record
all cash received under the transaction as a finance obligation. The Note
and related interest thereon, and the $1,000,000 in additional cash under
the terms of an Earn Out Clause will be recorded as an increase to the
finance obligation as cash payments are received. We record 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), we will reevaluate our accounting to determine whether a gain or
loss should be recorded on this sale-leaseback transaction.
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 pay down amounts borrowed under our
Loan 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 our common stock. The number of shares of common stock to be issued is
calculated by dividing the accrued quarterly interest by a conversion
price, which was initially established at $8.00 per share. The conversion
price is subject to adjustment in the event of stock splits, dividends and
certain combinations.
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 have 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 $87,924 within stockholders' equity at June 30,
2004, 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
June 30, 2004, we issued a total of 35,594 shares of common stock in
October 2003, January 2004 and April 2004 in satisfaction of previously
recorded interest. We also issued 13,123 shares of common stock in July
2004 as payment for the interest accrued in the fourth quarter.
The Notes contained a beneficial conversion feature reflecting 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
of the 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.
29
Payments Due Under Contractual Obligations - The following table summarizes
the payments due under our contractual obligations at June 30, 2004,
adjusted to include the cash commitments associated with the 7% convertible
subordinated notes, and the effect such obligations are expected to have on
liquidity and cash flow in future periods:
Payments due by period
---------------------------------------------------------------------
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
----------- ----- --------- ----- ----- ---------
Long-term debt
obligations $12,488,883 $12,488,883 $ - $ - $ -
Capital lease obligations,
including Methuen
facility finance
obligation 18,611,155 1,210,426 2,564,602 2,663,210 12,172,917
Operating leases,
including Poly-Flex
Facility 6,645,550 1,663,306 2,458,821 1,888,951 634,472
Deferred compensation 854,553 182,000 381,829 290,724 -
Convertible sub-
ordinated notes 6,000,000 - - 6,000,000 -
----------- ----------- ---------- ----------- -----------
Total $44,600,141 $15,544,615 $5,405,252 $10,842,885 $12,807,389
=========== =========== ========== =========== ===========
In response to the worldwide downturn in the electronics industry, we have
taken a series of actions to reduce operating expenses and to restructure
operations, consisting primarily of reductions in workforce and
consolidation of manufacturing operations. During 2004, we transferred our
high volume automated surface mount assembly line from our Cranston, Rhode
Island facility to China. In August 2004, we announced a new strategic
relationship with Delphi Corporation to supply all multilayer flex and
rigid flex circuits which were previously manufactured by Delphi in its
Irvine, California facility. We continue 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 us to profitability. Our plans include the following actions: 1)
continuing to consolidate manufacturing facilities; 2) continuing to
transfer certain manufacturing processes from our domestic operations to
lower cost international manufacturing locations, primarily 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 general and administrative
expenses; and 5) continuing to evaluate opportunities to improve capacity
utilization by either acquiring multilayer flexible circuit businesses or
entering into strategic relationships for their production.
In 2003 and 2004, we entered into a series of alternative financing
arrangements to partially replace or supplement those currently in place in
order to provide us with financing to support our current working capital
needs. Working capital requirements, particularly those to support the
growth in our China operations, consumed $10.4 million of a total of $11.4
million of cash used in operations during 2004. In September 2004, we
secured a new $5 million asset based working capital agreement with the
Bank of China which provides stand alone financing for our China
operations. In addition, in May 2004 we received net proceeds of
approximately $2.95 million from the sale of our Series A convertible
preferred stock. We continue to evaluate alternative financing
opportunities to further improve our liquidity and to fund working capital
needs.
30
We believe that our cash on hand and the cash expected to be generated from
operations will be sufficient to enable us to meet our operating
obligations through June 2005. If we require additional or new 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
such financing. Failure to obtain such financing may have a material
adverse impact on our operations. At June 30, 2004, we were in compliance,
and we expect to remain in compliance, with all of our financial covenants
associated with our financing arrangements.
Recent 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 an
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.
31
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our prospects are subject to certain uncertainties and risks. Our future
results may differ materially from the current results and actual results
could differ materially from those projected in the forward-looking
statements as a result of certain risk factors, 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.
If we cannot obtain additional financing when needed, we may experience a
material adverse impact on our operations.
We may need to raise additional funds either through borrowings or further
equity financing. We may not be able to raise additional capital on
reasonable terms, or at all. The cash expected to be generated will not be
sufficient to enable us to meet our financing and operating obligations
over the next twelve months based on current growth plans. If we cannot
raise the required funds when needed, we may experience a material adverse
impact on our operations.
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. In the event that we are not in compliance with our
financial covenants in the future, we cannot be certain our lenders will
grant us waivers or execute amendments on terms which are satisfactory to
us. If such waivers are not received, our debt is immediately callable.
Since entering into our current loan arrangement with our primary lender,
Silicon Valley Bank, in June of 2003, we have requested and received
several waivers relating to our failure to comply with certain financial
covenants under our loan arrangement. In conjunction with the waivers, we
have also executed several modifications of our loan arrangement which have
primarily resulted in easing our covenant compliance requirements, but have
also increased our costs of borrowing. Although we do not believe Silicon
Valley Bank will exercise any right it may have to immediately call our
debt if we fail to comply with our financial covenants, we cannot guarantee
that they will not do so. We are currently in compliance with all of our
financial covenants, as amended.
The issuance of our shares upon conversion of outstanding convertible
notes, conversion of preferred stock 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 is $8.00 per share. In addition, on June 8,
2004, we completed a private placement of 40,625 shares of our Series A
Convertible Preferred Stock (the "Preferred Stock") (and accompanying
warrants), for $80.00 per share, or $3.25 million in the aggregate. Each
share of Preferred Stock may be converted at any time at the option of the
holder of the Preferred Stock for 10 shares of common stock, and the
exercise price of the warrants is $8.00 per share. For additional
information relating to the sale of the convertible subordinated notes and
related warrants, please see "Market for Registrant's Common Equity and
Related Stockholder Matters - Recent Sales of Unregistered Securities - 7%
Convertible Subordinated Notes and Warrants." For additional information
relating to the sale of Preferred Stock and related
32
warrants, please see "Market for Registrant's Common Equity and Related
Stockholder Matters - Recent Sales of Unregistered Securities - Series A
Preferred Stock and Warrants."
The issuance of our shares upon conversion of the convertible subordinated
notes and/or Preferred Stock, 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 holders of these securities elect to
convert or exercise their securities for common stock. In addition, 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.
Substantial leverage and debt service obligations may adversely affect us.
We have a substantial amount of indebtedness. As of June 30, 2004, we had
approximately $23.4 million of consolidated debt of which $12.9 million is
due within one year. Our substantial level of indebtedness increases the
possibility that we may be unable to generate sufficient cash to pay when
due the principal of, interest on, or other amounts due with respect to our
indebtedness. Approximately 22% of our outstanding indebtedness bears
interest at floating rates. As a result, our interest payment obligations
on such indebtedness will increase if interest rates increase.
Our substantial leverage could have significant negative consequences on
our financial condition, results of operations, and cash flows, including:
* Impairing our ability to meet one or more of the financial
ratios contained in our debt agreements or to generate cash sufficient to
pay interest or principal, including periodic principal amortization
payments, which events could result in an acceleration of some or all of
our outstanding debt as a result of cross-default provisions;
* Increasing our vulnerability to general adverse economic and
industry conditions;
* Limiting our ability to obtain additional debt or equity
financing;
* Requiring the dedication of a substantial portion of our cash
flow from operations to service our debt, thereby reducing the amount of
our cash flow available for other purposes, including capital expenditures;
* Requiring us to sell debt or equity securities or to sell some
of our core assets, possibly on unfavorable terms, to meet payment
obligations;
* Limiting our flexibility in planning for, or reacting to,
changes in our business and the industries in which we compete; and
* Placing us at a possible competitive disadvantage with less
leveraged competitors and competitors that may have better access to
capital resources.
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
33
borrowed thereunder, together with accrued interest, to be due and payable,
foreclose on the assets securing our credit agreement and/or cease to
provide additional revolving loans or letters of credit, which would have a
material adverse effect on us.
We have incurred losses in each of the last three years, and we may
continue to incur losses.
We incurred net losses in each of the last three fiscal years. We had net
losses of $8.2 million in fiscal year 2004, $19.5 million in fiscal year
2003 and $10.4 million in fiscal year 2002. 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 financing. 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 adversely
impact 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 adversely impact 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 52% of total revenues in fiscal year 2004, 50%
of total revenues in fiscal year 2003, and 44% in fiscal year 2002.
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.
34
If we are unable to respond effectively to the evolving technological
requirements of customers, our products may not be able to satisfy the
demands of existing and prospective customers and we may lose revenues and
market share.
The market for our products is characterized by rapidly changing technology
and continuing process development. The future success of our business will
depend in large part upon our ability to maintain and enhance our
technological capabilities. We will need to develop and market products
that meet changing customer needs, and successfully anticipate or respond
to technological changes on a cost-effective and timely basis. There can be
no assurance that the materials and processes that we are currently
developing will result in commercially viable technological processes, or
that there will be commercial applications for these technologies. In
addition, we may not be able to make the capital investments required to
develop, acquire or implement new technologies and equipment that are
necessary to remain competitive. If we fail to keep pace with technological
change, our products may become less competitive or obsolete and we may
lose customers and revenues.
Competing technologies may reduce demand for our products.
Flexible circuit and laminated cable interconnects provide electrical
connections between components in electrical systems and are used as a
platform to support the attachment of electronic devices. While flexible
circuits and laminated cables offer several advantages over competing
printed circuit board and ceramic hybrid circuit technologies, our
customers may consider changing their designs to use these alternative
technologies in future applications. If our customers switch to alternative
technologies, our business, financial condition and results of operations
could be materially adversely affected. It is also possible that the
flexible interconnect industry could encounter competition from new
technologies in the future that render existing flexible interconnect
technology less competitive or obsolete.
We are heavily dependent upon certain target markets for domestic
manufacturing. A slowdown in these markets could have a material impact on
domestic capacity utilization resulting in lower sales and gross margins.
We manufacture our products in seven 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 year 2004, we purchased
approximately 21% of our materials from Tongxing, a Chinese gold
35
plater, 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 Tongxing 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.
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; foreign labor issues; wars and acts of
terrorism; 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, 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.
We face risks from fluctuations in the value of foreign currency versus the
U.S. dollar and the cost of currency exchange.
While we transact business predominantly in U.S. dollars, a large portion
of our sales and expenses are denominated in foreign currencies, primarily
the Chinese Renminbi ("RMB"), the basic unit of currency issued by the
People's Bank of China. Currently, our exposure to risk from foreign
exchange is limited due to the fact that the People's Republic of China has
fixed the exchange rate of the Renminbi to the U.S. dollar. The value of
the Renminbi is subject to changes in the PRC government's policies and
depends to an extent on its domestic and international economic and
political developments, as well as supply and demand in the local market.
We
36
cannot give any assurance that the Renminbi will continue to remain stable
against the U.S. dollar and other foreign currencies. Any devaluation of
the Renminbi may adversely affect our results of operations. In addition, a
small portion of our sales and expenses are denominated in Euros and the
British Pound. Changes in the relation of foreign currencies to the U.S.
dollar will affect our cost of sales and operating margins and could result
in exchange losses. We do not enter into foreign exchange contracts to
reduce our exposure to these risks.
If we are unable to attract, retain and motivate key personnel, we may not
be able to develop, sell and support our products and our business may lack
strategic direction.
We are dependent upon key members of our management team. In addition, our
future success will depend in large part upon our continuing ability to
attract, retain and motivate highly qualified managerial, technical and
sales personnel. Competition for such personnel is intense, and there can
be no assurance that we will be successful in hiring or retaining such
personnel. We currently maintain a key person life insurance policy in the
amount of $1.0 million on Peter J. Murphy. If we lose the services of Mr.
Murphy or one or more other key individuals, or are unable to attract
additional qualified members of the management team, our ability to
implement our business strategy may be impaired. If we are unable to
attract, retain and motivate qualified technical and sales personnel, we
may not be able to develop, sell and support our products.
If we are unable to protect our intellectual property, our competitive
position could be harmed and our revenues could be adversely affected.
We rely on a combination of patent and trade secret laws and non-disclosure
and other contractual agreements to protect our proprietary rights. We own
20 patents issued and have 9 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
37
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, products or
activities that have not been subject to regulation previously. The costs
of complying with new or more stringent regulations, or with more vigorous
enforcement of these regulations, could be significant.
Environmental laws require us to maintain and comply with a number of
permits, authorizations and approvals and to maintain and update training
programs and safety data regarding materials used in our processes.
Violations of these requirements could result in financial penalties and
other enforcement actions. We could also be required to halt one or more
portions of our operations until a violation is cured. Although we attempt
to operate in compliance with these environmental laws, we may not succeed
in this effort at all times. The costs of curing violations or resolving
enforcement actions that might be initiated by government authorities could
be substantial.
Undetected problems in our products could directly impair our financial
results.
If flaws in design, production, assembly or testing of our products were to
occur by us or our suppliers, we could experience a rate of failure in our
products that would result in substantial repair or replacement costs and
potential damage to our reputation. Continued improvement in manufacturing
capabilities, control of material and manufacturing quality, and costs and
product testing, are critical factors in our future growth. There can be no
assurance that our efforts to monitor, develop, modify and implement
appropriate test and manufacturing processes for our products will be
sufficient to permit us to avoid a rate of failure in our products that
results in substantial delays in shipment, significant repair or
replacement costs, or potential damage to our reputation, any of which
could have a material adverse effect on our business, results of operations
or financial condition.
Our stock is thinly traded.
Our stock is thinly traded and you may have difficulty in reselling your
shares quickly. The low trading volume of our common stock is outside of
our control, and we cannot guarantee that trading volume will increase in
the near future.
We do not expect to pay dividends in the foreseeable future.
We have never paid cash dividends on our common stock 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.
38
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 40,625 shares are issued and
outstanding as a result of our preferred stock offering completed in June
2004. Our Articles of Organization gives our board of directors the
authority to issue preferred stock without approval of our stockholders. We
may issue additional shares of preferred stock to raise money to finance
our operations. We may authorize the issuance of the preferred stock in one
or more series. In addition, we may set the terms of preferred stock,
including:
* dividend and liquidation preferences;
* voting rights;
* conversion privileges;
* redemption terms; and
* other privileges and rights of the shares of each authorized
series.
The issuance of large blocks of preferred stock could possibly have a
dilutive effect to our existing stockholders. It can also negatively impact
our existing stockholders' liquidation preferences. In addition, while we
include preferred stock in our capitalization to improve our financial
flexibility, we could possibly issue our preferred stock to friendly third
parties to preserve control by present management. This could occur if we
become subject to a hostile takeover that could ultimately benefit Parlex
and Parlex's stockholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
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.
Interest Rate Risk
Our primary bank facility bears interest at our lender's prime rate plus
2.25%. We also have a subsidiary bank note for $1,500,000 at LIBOR plus 2.5%.
The prime rate is affected by changes in market interest rates. These
variable rate lending facilities create exposure for us relating to interest
rate risk; however, we do not believe our interest rate risk to be material.
As of June 30, 2004, we had an outstanding balance under our primary bank
facility of $3,618,000 and an outstanding balance of $1,500,000 under our
subsidiary note. A hypothetical 10% change in interest rates would impact
interest expense by approximately $32,000 over the next fiscal year, and such
amount would not have a material effect on our financial position, results of
operations and cash flows.
The remainder of our long-term debt bears interest at fixed rates and is
therefore not subject to interest rate risk.
39
Currency 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., we do not believe the market risk is material. We do not engage
in regular hedging activities to minimize the impact of foreign currency
fluctuations. Parlex Shanghai and Parlex Interconnect had combined net
assets as of June 30, 2004 of approximately $18.6 million. Poly-Flex
Circuits Limited and Parlex Europe had combined net assets as of June 30,
2004 of approximately $5.8 million. We believe that a 10% change in
exchange rates would not have a significant impact upon Parlex Shanghai's
or Poly-Flex Circuits Limited's financial position, results of operation or
outstanding debt. As of June 30, 2004, Parlex Shanghai had outstanding debt
of approximately $8.9 million. As of June 30, 2004, Poly-Flex Circuits
Limited had no outstanding debt.
40
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Parlex Corporation
Methuen, Massachusetts
We have audited the accompanying consolidated balance sheets of Parlex
Corporation and subsidiaries (the "Company") as of June 30, 2004 and 2003,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June
30, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Parlex Corporation and
subsidiaries at June 30, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 2004, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
September 28, 2004
F-1
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
- ---------------------------------------------------------------------------
ASSETS 2004 2003
CURRENT ASSETS:
Cash and cash equivalents $ 1,626,275 $ 1,513,523
Accounts receivable - less allowance
for doubtful accounts $1,337,299
in 2004 and $949,261 in 2003 21,999,646 13,835,589
Inventories - net 20,326,134 17,082,878
Refundable income taxes 380,615 279,381
Deferred income taxes 42,958 313,109
Other current assets 2,381,471 2,077,409
------------ ------------
Total current assets 46,757,099 35,101,889
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 44,979,740 46,893,216
INTANGIBLE ASSETS - NET 32,746 1,130,005
GOODWILL - NET 1,157,510 1,157,510
DEFERRED INCOME TAXES 40,000 -
OTHER ASSETS 2,283,136 1,750,061
------------ ------------
TOTAL $ 95,250,231 $ 86,032,681
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,861,077 $ 3,813,117
Accounts payable 16,479,547 13,396,274
Dividends payable 39,317 -
Accrued liabilities 4,277,587 5,170,608
------------ ------------
Total current liabilities 33,657,528 22,379,999
------------ ------------
LONG-TERM DEBT 10,534,679 10,802,275
------------ ------------
OTHER NONCURRENT LIABILITIES 1,025,091 1,187,280
------------ ------------
MINORITY INTEREST IN PARLEX SHANGHAI 570,963 415,583
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
authorized, 1,000,000 shares in
2003; issued 40,625 shares in 2004
(aggregate liquidation preference
of $3,289,317) 40,625 -
Common stock, $.10 par value -
authorized, 30,000,000 shares in
2004 and 2003; issued 6,632,810
and 6,522,216 shares in 2004 and
2003, respectively 663,281 652,221
Accrued interest payable in common stock 87,924 -
Additional paid-in capital 66,979,397 61,049,486
Accumulated deficit (17,771,307) (9,605,380)
Accumulated other comprehensive income 499,675 188,842
Less treasury stock, at cost - 210,000
shares in 2004 and 2003 (1,037,625) (1,037,625)
------------ ------------
Total stockholders' equity 49,461,970 51,247,544
------------ ------------
TOTAL $ 95,250,231 $ 86,032,681
============ ============
See notes to consolidated financial statements.
F-2
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------
2004 2003 2002
REVENUES: $ 95,538,940 $ 82,821,151 $ 87,055,564
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 85,217,236 80,803,104 90,293,843
Selling, general and administrative expenses 15,819,849 14,484,036 14,049,040
------------ ------------ ------------
Total costs and expenses 101,037,085 95,287,140 104,342,883
------------ ------------ ------------
OPERATING LOSS (5,498,145) (12,465,989) (17,287,319)
INTEREST AND NON OPERATING INCOME (EXPENSE)
Interest income 84,494 36,338 206,505
Interest expense (2,595,290) (900,496) (643,722)
Non operating income 129,228 3,343 105,205
Non operating expense (185,835) (84,327) (104,715)
------------ ------------ ------------
LOSS FROM OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST (8,065,548) (13,411,131) (17,724,046)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 55,001 (6,120,664) 6,855,127
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (8,010,547) (19,531,795) (10,868,919)
MINORITY INTEREST (155,380) 14,621 481,091
------------ ------------ ------------
NET LOSS $ (8,165,927) $(19,517,174) $(10,387,828)
============ ============ ============
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (8,336,994) $(19,517,174) $(10,387,828)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (1.31) $ (3.09) $ (1.65)
============ ============ ============
WEIGHTED AVERAGE SHARES 6,369,516 6,308,542 6,303,216
============ ============ ============
See notes to consolidated financial statements.
F-3
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------
Preferred Stock Common Stock
Shares Amount Shares Amount
BALANCE, JULY 1, 2001 - - 6,513,216 $651,321
Comprehensive income (loss):
Net loss - - - -
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustment - - - -
Unrealized gain on
short-term investments - - - -
Other comprehensive income
(loss) - - - -
Comprehensive income (loss)
Distribution of earnings
in consideration for 40%
interest in Parlex
Shanghai Circuits Corp. - - - -
------ ------- --------- --------
BALANCE, JUNE 30, 2002 - - 6,513,216 651,321
Comprehensive loss:
Net loss - - - -
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment - - - -
Comprehensive income (loss)
Issuance of common stock
warrants - - - -
Exercise of stock options - - 9,000 900
------ ------- --------- --------
BALANCE, JUNE 30, 2003 - - 6,522,216 652,221
Comprehensive loss:
Net loss - - - -
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment - - - -
Comprehensive income (loss)
Fair value of beneficial
conversion feature on 7%
Convertible Subordinated
Notes - - - -
Issuance of common stock
warrants on 7% Convertible
Subordinated Notes - - - -
Issuance of common stock
warrants in lieu of payment
for services - - - -
Exercise of common stock
warrants - - 75,000 7,500
Interest payable in common
stock - - - -
Interest paid in common stock - - 35,594 3,560
Issuance of Series A
Preferred stock (net of
issuance costs of $300,000) 40,625 $40,625 - -
Fair value of common stock
warrants issued to Series A
Preferred Stock investors - - - -
Fair value of over-allotment
rights granted to Series A
Preferred Stock investors - - - -
Fair value of beneficial
conversion feature on
Series A Preferred Stock - - - -
Accretion of beneficial
conversion feature on
Series A Preferred Stock - - - -
Dividends accrued on Series
A Preferred Stock - - - -
------ ------- --------- --------
BALANCE, JUNE 30, 2004 40,625 $40,625 6,632,810 $663,281
====== ======= ========= ========
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------
Accrued Retained Accumulated
Interest Additional Earnings Other Comprehensive
Payable In Paid-in (Accumulated Comprehensive Treasury Income
Common Stock Capital deficit) Income (Loss) Stock (Loss) Total
BALANCE, JULY 1, 2001 $ - $60,897,275 $ 21,467,585 $(627,425) $(1,037,625) $ 81,351,131
Comprehensive income (loss):
Net loss - - (10,387,828) - - $(10,387,828) (10,387,828)
------------
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustment - - - - - 380,533 380,533
Unrealized gain on
short-term investments - - - - - (34,752) (34,752)
------------
Other comprehensive income
(loss) - - - 345,781 - 345,781
------------
Comprehensive income (loss) $(10,042,047)
------------
Distribution of earnings
in consideration for 40%
interest in Parlex
Shanghai Circuits Corp. - - (1,167,963) - - (1,167,963)
------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 2002 - 60,897,275 9,911,794 (281,644) (1,037,625) 70,141,121
Comprehensive loss:
Net loss - - (19,517,174) - - $(19,517,174) (19,517,174)
------------
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment - - - 470,486 - 470,486 470,486
------------
Comprehensive income (loss) $(19,046,688)
------------
Issuance of common stock
warrants - 100,581 - - - 100,581
Exercise of stock options - 51,630 - - - 52,530
------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 2003 - 61,049,486 (9,605,380) 188,842 (1,037,625) 51,247,544
Comprehensive loss:
Net loss - - (8,165,927) - - $ (8,165,927) (8,165,927)
------------
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment - - - 310,833 - 310,833 310,833
------------
Comprehensive income (loss) $ (7,855,094)
------------
Fair value of beneficial
conversion feature on 7%
Convertible Subordinated
Notes - 1,035,016 - - - 1,035,016
Issuance of common stock
warrants on 7% Convertible
Subordinated Notes - 1,035,016 - - - 1,035,016
Issuance of common stock
warrants in lieu of payment
for services - 145,932 - - - 145,932
Exercise of common stock
warrants - 592,500 - - - 600,000
Interest payable in common
stock 87,924 - - - - 87,924
Interest paid in common stock - 251,389 - - - 254,949
Issuance of Series A
Preferred stock (net of
issuance costs of $300,000) - 2,327,375 - - - 2,368,000
Fair value of common stock
warrants issued to Series A
Preferred Stock investors - 486,000 - - - 486,000
Fair value of over-allotment
rights granted to Series A
Preferred Stock investors - 96,000 - - - 96,000
Fair value of beneficial
conversion feature on
Series A Preferred Stock - (131,750) - - - (131,750)
Accretion beneficial
conversion feature on
Series A Preferred Stock - 131,750 - - - 131,750
Dividends accrued on Series
A Preferred Stock - (39,317) - - - (39,317)
------- ----------- ------------ --------- ----------- ------------
BALANCE, JUNE 30, 2004 $87,924 $66,979,397 $(17,771,307) $ 499,675 $(1,037,625) $ 49,461,970
======= =========== ============ ========= =========== ============
See notes to consolidated financial statements.
F-4
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,165,927) $ (19,517,174) $ (10,387,828)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Non-cash operating items:
Depreciation of property, plant and equipment 5,476,718 6,462,860 6,422,514
Deferred income taxes 270,151 6,136,006 (4,593,804)
Amortization of deferred loss on sale-leaseback,
deferred financing costs and intangible assets 1,015,856 50,290 -
Facility exit costs (16,943) - 1,480,000
Interest payable in common stock 342,872 - -
Loss on property, plant and equipment - 621,052 173,828
Gain on sale of China land use rights (86,531) - -
Minority interest 155,380 (14,621) (481,091)
Changes in current assets and liabilities:
Accounts receivable - net (7,988,277) 3,929,857 (115,019)
Inventories (3,089,396) 594,604 1,771,999
Refundable income taxes (101,234) 1,530,721 1,111,043
Other assets (803,198) 488,248 (1,107,309)
Accounts payable and accrued liabilities 1,596,760 (101,863) 3,195,360
------------ ------------- -------------
Net cash (used in) provided by operating activities (11,393,769) 179,980 (2,530,307)
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Poly-Flex subsidiary - - 525,000
Acquisition of minority interest in Parlex Shanghai - - (4,485,095)
Sale and maturity of available for sale securities - - 5,498,951
Sale of China land use rights 1,179,145 - -
Net proceeds from sale-leaseback of Poly-Flex facility - 2,927,213 -
Additions to property, plant, equipment and other assets (2,476,939) (2,244,008) (5,243,605)
------------ ------------- -------------
Net cash (used for) provided by investing activities (1,297,794) 683,205 (3,704,749)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 66,330,752 23,063,796 28,975,378
Payment of bank loans (63,178,573) (29,305,450) (24,243,584)
Proceeds from sale-leaseback of Methuen facility 750,000 5,019,219 -
Cash received for interest on sale-leaseback note receivable 134,712 - -
Payment of Methuen sale-leaseback financing obligation (309,064) - -
Payment of capital lease (38,544) - -
Proceeds from convertible note, net of issuance costs of
approximately $674,000 5,513,697 - -
Proceeds from series A preferred stock issuance, net of
issuance costs of approximately $300,000 2,950,000 - -
Exercise of common stock warrants 600,000 - -
Exercise of stock options - 52,530 -
------------ ------------- -------------
Net cash provided by (used for) financing activities 12,752,980 (1,169,905) 4,731,794
------------ ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 51,335 35,218 84,297
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112,752 (271,502) (1,418,965)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,513,523 1,785,025 3,203,990
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,626,275 $ 1,513,523 $ 1,785,025
============ ============= =============
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Property, plant, equipment and other asset purchases
financed under capital lease obligations, long-term
debt, and accounts payable $ 822,439 $ 148,806 $ 1,474,311
============ ============= =============
Issuance of stock warrants in connection with
Silicon Valley Bank debt $ - $ 100,581 $ -
============ ============= =============
Issuance of stock warrants in connection with issuance
of convertible debt $ 1,180,948 $ - $ -
============ ============= =============
Beneficial conversion feature associated with convertible
debt $ 1,035,016 $ - $ -
============ ============= =============
Interest payable in common stock $ 342,872 $ - $ -
============ ============= =============
Issuance of stock warrants in connection with issuance
of preferred stock $ 486,000 $ - $ -
============ ============= =============
Issuance of over-allotment rights in connection with
issuance of preferred stock $ 96,000 $ - $ -
============ ============= =============
Accrual of preferred stock dividends $ 39,317 $ - $ -
============ ============= =============
Beneficial conversion feature associated with preferred
stock $ 131,750 $ - $ -
============ ============= =============
See notes to consolidated financial statements.
F-5
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
- ---------------------------------------------------------------------------
1. BUSINESS AND BASIS OF PRESENTATION
Business - Parlex Corporation ("Parlex" or the "Company") is a world leader
in the design and manufacture of flexible interconnect products. Parlex
produces flexible circuits, laminated cables, flexible interconnect hybrid
circuits and flexible interconnect assemblies utilizing proprietary
processes and patented technologies, which are designed to satisfy the
unique requirements of a wide range of customers. Parlex provides its
products and engineering services to a variety of markets including
automotive, telecommunications and networking, diversified electronics,
military, home appliance, electronic identification and computer.
Basis of Presentation - As shown in the consolidated financial statements,
the Company incurred net losses of $8,165,927 and $19,517,174 and used
$11,393,769 and provided $179,980 in cash from operations for the fiscal
years ended June 30, 2004 and 2003, respectively. In addition the Company
had an accumulated deficit of $17,771,307 at June 30, 2004.
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. During 2004, the Company
transferred its high volume automated surface mount assembly line from its
Cranston, Rhode Island facility to China. In August 2004, the Company
announced a new strategic relationship with Delphi Corporation to supply
all multilayer flex and rigid flex circuits which were previously
manufactured by Delphi in its Irvine, California facility. 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 the Company's domestic
operations to lower cost international manufacturing locations, primarily
those in the People's Republic of China; 3) expanding the Company's
products in the home appliance, laptop computer, medical, military and
aerospace, and electronic identification markets; 4) continuing to monitor,
general and administrative expenses; and 5) continuing to evaluate
opportunities to improve capacity utilization by either acquiring
multilayer flexible circuit businesses or entering into strategic
relationships for their production.
In 2003 and 2004, 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 financing to support its current working
capital needs. Working capital requirements, particularly those to support
the growth in the Company's China operations, consumed $10.4 million of a
total $11.4 million of cash used in operations during 2004. In September
2004, the Company secured a new $5 million asset based working capital
agreement with the Bank of China which provides standalone financing for
its China operations. In addition, in May and June of 2004 the Company
received net proceeds of approximately $2.95 million net from the sale of
Series A convertible preferred stock. Management continues to evaluate
alternative financing opportunities to further improve its liquidity and to
fund working capital needs. Management believes that the Company's cash on
hand and the cash expected to be generated from operations will be
sufficient to enable the Company to meet its operating obligations through
June 2005. If the Company requires additional or new external financing to
repay or refinance its existing financing obligations or fund its working
capital requirements, the Company believes that it will be able to obtain
such financing. Failure to obtain such financing may have a material
adverse impact on the Company's operations. At June 30, 2004, the Company
is in compliance, and expects to remain in compliance, with all of its
financial covenants associated with its financing arrangements.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Parlex, its wholly owned subsidiaries and its 90.1% investment
in Parlex (Shanghai) Circuit Co., Ltd. ("Parlex Shanghai") (see Note 13)
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
balance sheet dates. Management's estimates are primarily based on
historical experience. Estimates include reserves for accounts receivables,
inventory and deferred taxes, useful lives of property, plant, and
equipment, certain variables used to value stock options and warrants,
certain accrued liabilities including self-insured health insurance claims,
and the Company's effective tax rate. The self-insured health claims are
subject to certain individual and aggregate stop loss limits. Actual
results could differ from those estimates.
Foreign Currency Translation - The functional currency of foreign
operations is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated into
United States dollars using current exchange rates at the balance sheet
date. Results of operations are translated at average exchange rates
prevailing during each period. Gains or losses on translation are
accumulated as a component of other comprehensive income or loss.
Cash and Cash Equivalents - Cash and cash equivalents include short-term
highly liquid investments purchased with remaining maturities of three
months or less.
Short-Term Investments - The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." At July 1, 2001, the Company had
categorized all securities as "available-for-sale", since the Company could
liquidate those investments currently. In calculating realized gains and
losses, cost is determined using the specific-identification method. SFAS
No. 115 requires that unrealized gains and losses on available-for-sale
securities be excluded from earnings and reported in a separate component
of stockholders' equity. The purchase and sale of available-for-sale
securities' activity in 2002 primarily consisted of corporate bond
securities.
Inventories - Inventories of raw materials are stated at the lower of cost,
(first-in, first-out) or market. Work in process and finished goods are
valued as a percentage of completed cost, not in excess of net realizable
value. Raw material, work in process and finished goods inventory
associated with programs cancelled by customers are fully reserved for as
obsolete. Reductions in obsolescence reserves are recognized when the
underlying products are disposed of or sold. At June 30, inventories
consisted of:
2004 2003
Raw materials $ 8,729,132 $ 7,736,473
Work in process 9,444,722 8,285,396
Finished goods 5,049,796 4,034,733
----------- -----------
Total cost 23,223,650 20,056,602
Reserve for obsolescence (2,897,516) (2,973,724)
----------- -----------
Inventory, net $20,326,134 $17,082,878
=========== ===========
Property, Plant and Equipment - Property, plant and equipment are stated at
cost and are depreciated using the straight-line method over their
estimated useful lives: buildings - 30-40 years; machinery and equipment -
2-15 years; and leasehold improvements over the terms of the lease. The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less cost to sell.
F-7
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:
June 30, June 30,
2004 2003
Land and land improvements $ 589,872 $ 589,872
Buildings 18,543,295 18,543,295
Machinery and equipment 64,348,226 59,625,945
Leasehold improvements and other 6,695,173 6,321,658
Construction in progress 2,902,141 4,591,458
------------ ------------
Total cost 93,078,707 89,672,228
Less: accumulated depreciation and amortization (48,098,967) (42,779,012)
------------ ------------
Property, plant and equipment, net $ 44,979,740 $ 46,893,216
============ ============
Goodwill and Other Intangible Assets - The Company recorded goodwill in
connection with its acquisition of a 40% interest in Parlex Shanghai (see
Note 13), and its 1999 acquisition of Parlex-Dynaflex ("Dynaflex"). The
Company accounts for goodwill under the provisions of SFAS No.142,
"Goodwill and Other Intangible Assets". Under the provisions of SFAS No.
142, if an intangible asset is determined to have an indefinite useful
life, it shall not be amortized until its useful life is determined to be
no longer indefinite. An intangible asset that is not subject to
amortization shall be tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be
impaired. Goodwill is not amortized but is tested for impairment, for each
reporting unit, on an annual basis and between annual tests in certain
circumstances. In accordance with the guidelines in SFAS No. 142, the
Company determined it has one reporting unit. The Company evaluates
goodwill for impairment by comparing Parlex's market capitalization, as
adjusted for a control premium, to its recorded net asset value. If the
Company's market capitalization, as adjusted for a control premium, is less
than its recorded net asset value, the Company will further evaluate the
implied fair value of its goodwill with the carrying amount of the
goodwill, as required by SFAS No. 142, and the Company will record an
impairment charge against the goodwill, if required, in its results of
operations in the period such determination was made. Since Parlex's market
capitalization, as adjusted, exceeded its recorded net asset value upon
adoption of SFAS No. 142 and at the subsequent annual impairment analysis
dates, the Company has concluded that no impairment adjustments were
required at the time of adoption or at the annual impairment analysis date.
The carrying value of the goodwill was $1,157,510 at June 30, 2004 and
2003.
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.
Research and Development - Research and development costs are expensed as
incurred and amounted to approximately $6,100,000, $5,500,000 and
$6,145,000 for the years ended June 30, 2004, 2003 and 2002, respectively.
These amounts are reflected in the Company's cost of products sold.
Stock-Based Compensation - The Company accounts for stock-based
compensation to employees and nonemployee directors in accordance with
Accounting Principles Board ("APB") Opinion No. 25 using the intrinsic-
value method as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the intrinsic value method, compensation associated
with stock awards to employees and directors is determined as the difference,
if any, between the current fair value of the underlying common stock on the
date compensation is measured and the price the employee or director must
pay to exercise the award. The measurement date for employee awards is
generally the date of grant. 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.
F-8
Had the Company used the fair-value method to measure compensation, the
Company's net loss and basic and diluted loss per share would have been as
follows at June 30:
2004 2003 2002
Net loss attributable to common stockholders $(8,336,994) $(19,517,174) $(10,387,828)
Add stock-based compensation expense
included in reported net loss - - -
Deduct stock-based compensation expense
determined under the fair-value method (620,441) (717,683) (845,172)
----------- ------------ ------------
Net loss attributable to common stockholders - pro forma $(8,957,435) $(20,234,857) $(11,233,000)
----------- ------------ ------------
Basic and diluted loss per share - as reported $ (1.31) $ (3.09) $ (1.65)
Basic and diluted loss per share - pro forma (1.41) (3.21) (1.78)
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model. Key assumptions used to apply this
option-pricing model are as follows:
2004 2003 2002
Average risk-free interest rate 2.4% 2.6% 4.1%
Expected life of option grants 3.5 years 3.5 years 3.5 years
Expected volatility of underlying stock 73% 67% 74%
Expected dividend rate None None None
The weighted-average fair value of options granted in 2004, 2003 and 2002
was $4.44, $5.53, and $6.72, respectively.
The option-pricing model was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are
not tradable and have contractual lives of 10 years. However, management
believes that the assumptions used and the model applied to value the
awards yield a reasonable estimate of the fair value of the grants made
under the circumstances.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." This statement requires an
asset and liability approach to accounting for income taxes based upon the
future expected values of the related assets and liabilities. Deferred
income taxes are provided for basis differences between assets and
liabilities for financial reporting and tax purposes and for tax loss and
credit carryforwards. Valuation allowances are established, if necessary,
to reduce the deferred tax asset to the amount that will more likely than
not be realized.
Loss Per Share - Basic loss per share is calculated on the weighted-average
number of common shares outstanding during the year. Diluted loss per
share is calculated on the weighted-average number of common shares and
common share equivalents resulting from outstanding options and warrants
except where such items would be antidilutive.
The net loss attributable to common stockholders for each period is as
follows:
F-9
2004 2003 2002
Net loss $(8,165,927) $(19,517,174) $(10,387,828)
Dividends accrued on Series A Preferred Stock (39,317) - -
Accretion of beneficial conversion feature on Series A Preferred Stock (131,750) - -
----------- ------------ ------------
Net loss attributable to common stockholders $(8,336,994) $(19,517,174) $(10,387,828)
=========== ============ ============
A reconciliation between shares used for computation of basic and dilutive
loss per share is as follows:
2004 2003 2002
Shares for basic computation 6,369,516 6,308,542 6,303,216
Effect of dilutive stock options and warrants - - -
--------- --------- ---------
Shares for dilutive computation 6,369,516 6,308,542 6,303,216
========= ========= =========
Antidilutive shares were not included in the per-share calculations for the
years ended 2004, 2003 and 2002 due to the reported net losses for those
years. Antidilutive shares totaled approximately 1,052,000, 533,000 and
471,000 in 2004, 2003 and 2002, respectively. All antidilutive shares
relate to outstanding stock options except for 484,625 and 25,000
antidilutive shares in 2004 and 2003, respectively relating to warrants
issued in connection with certain debt and equity financings (see Note 10).
Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of their short-term nature. The carrying
amounts of the Company's debt instruments approximate fair value since the
majority of long-term debt bears interest at a rate similar to the
prevailing market rate.
Reclassifications - Certain prior period amounts have been reclassified to
conform to the current year presentation.
Recent Adoption of Accounting Pronouncements - On July 1, 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.
F-10
3. SALES-LEASEBACK OF PROPERTY, PLANT AND EQUIPMENT
On June 12, 2003, the Company entered into two sale-leaseback transactions
with an unrelated party as follows:
Parlex Corporate Headquarters and Manufacturing Facility ("Methuen
Facility")
Parlex sold its 172,216 square foot corporate headquarters and
manufacturing facility in Methuen, Massachusetts, consisting of land, land
improvements, building and building improvements for a total maximum
purchase price of $9,000,000 which consisted of $5,350,000 in cash at the
closing, a promissory note in the amount of $2,650,000 ("Note") and up to
$1,000,000 in additional cash under the terms of an Earn Out Clause. In
June 2004, the Company received $750,000, reducing the principal balance of
the promissory note to $1,900,000. The Note is due on June 30, 2006, with a
one-year extension at the sole option of the buyer. The Note is payable to
Parlex only if no "Special Defaults" (as defined in the Purchase and Sale
Agreement) occur on or before the maturity date of the Note. The interest
rate on the Note increases one percent each year from five percent in the
first year to a maximum of eight percent if the buyer exercises the
extension option. The Note is secured by a pledge of 100% of the ownership
interest in the Delaware limited liability company that owns the Methuen
Facility. Under the Earn Out Clause, Parlex will receive $200,000 on June
30, 2004 and on each June 30th thereafter through and including June 30,
2009, up to a maximum of $1,000,000, if and only if for the immediately
preceding 12-month period Parlex has met certain financial milestones (as
defined therein). In the event that Parlex does not meet the financial
milestones as of the end of a particular fiscal year, then the $200,000
installment shall be deferred without interest until the end of the next
fiscal year. The buyer's obligations to pay any and all unpaid portions of
the Earn Out including all deferrals terminates on June 30, 2009. Parlex
did not earn any monies under the Earn Out Clause on June 30, 2004.
The net proceeds received in fiscal 2003 of approximately $5.0 million
from the sale were used to repay existing bank debt and provide additional
working capital to fund its operations.
Under the terms of the Purchase and Sale Agreement, Parlex simultaneously
entered into a written lease for a period of 15 years for the Methuen
Facility. The lease may be extended, at Parlex's option, for two
additional five-year periods upon 12 months written notice prior to the
applicable lease expiration date. The annual base rent for each five-year
extension is equal to the greater of (a) the annual base rent then being
paid under the lease or (b) 95% of the then prevailing market rate for a
five-year lease of similar space in the same market. In addition to the
base rent, Parlex is responsible for the payment of all real estate taxes
and other operating costs of the Methuen Facility. Beginning on July 1,
2009 and continuing through June 30, 2015, Parlex has the option to
purchase the Methuen Facility for its then fair market value, subject to a
minimum agreed value of $12,000,000.
As the repurchase option contained in the lease and the receipt of a
promissory note from the buyer provide Parlex with a continuing involvement
in the Methuen Facility, Parlex has accounted for the sale-leaseback of the
Methuen Facility as a financing transaction. Accordingly, the Company
continues to report the Methuen Facility as an asset and continues to
record depreciation expense. The Company records all cash received under
the transaction as a finance obligation. Accordingly, the Company recorded
the $5,350,000 payment received during 2003 as a finance obligation at June
30, 2003 (see Note 7). Payments received on the $2,650,000 promissory note
and related interest thereon, and the $1,000,000 under the Earn Out Clause
are recorded as increases to the finance obligation. The monthly lease
payments are recorded as a reduction to the finance obligation. The
interest portion of the future monthly lease payments, determined based
upon the Company's cost of borrowing, (14.1% at June 12, 2003), is recorded
as interest expense. The closing costs for the transaction of $362,000 have
been capitalized and are being amortized as interest expense over the initial
15-year lease term. Upon expiration of the repurchase option (June 30, 2015),
the Company will reevaluate its accounting to determine whether a gain or loss
should be recorded on this sale-leaseback transaction.
Poly-Flex Circuits, Inc. ("Poly-Flex") Operating Facility ("Poly-Flex
Facility")
Poly-Flex, a wholly owned subsidiary of Parlex, sold its 54,580 square foot
operating facility in Cranston, Rhode Island, consisting of land, land
improvements, building and building improvements for a total purchase price
of $3,000,000 in cash. The net proceeds of approximately $2,927,000 from
the sale were used to repay existing bank debt and provide additional
working capital to fund operations. At the time of sale, the Poly-Flex
Facility had a fair market value of approximately $4,440,000, based on an
April 2003 independent third party appraisal, and a net book value of
approximately $4,313,000. Under the terms of the Purchase and Sale
Agreement, Poly-Flex entered into a five-year lease
F-11
of the Poly-Flex Facility with the buyer. The lease may be extended, at
Poly-Flex's option, for two additional five-year periods upon 12 months
written notice prior to the applicable lease expiration date. The annual
base rent for each five-year extension is equal to 102.5% of the annual
base rent for the immediately preceding lease year. In addition to the
base rent, Poly-Flex is responsible for the payment of all real estate
taxes and other operating costs of the Poly-Flex Facility. Parlex
guarantees all payments under the Poly-Flex lease. Poly-Flex may terminate
the lease early by delivery of written notice on or before September 30,
2004 and the payment of an early termination fee of approximately $353,000.
In the event Poly-Flex exercises its early termination rights, the lease
term shall terminate on June 30, 2006. Poly-Flex does not intend on
exercising its early termination option.
Since neither Poly-Flex nor the Company has any continuing involvement in
the Poly-Flex Facility after the sale, the transaction has been accounted
for using sale-leaseback accounting. The Company 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 initial five-year lease term (Note 5).
4. INTANGIBLE ASSETS, NET
Intangible assets at June 30 consisted of:
2004 2003
Land use rights $ - $1,145,784
Patents 58,560 58,560
-------- ----------
Total cost 58,560 1,204,344
Accumulated amortization (25,814) (74,339)
-------- ----------
Intangible assets, net $ 32,746 $1,130,005
======== ==========
In December 2001, Parlex (Shanghai) Interconnect Products Co., Ltd.("Parlex
Interconnect"), the Company's second tier subsidiary, purchased land use
rights for a parcel of land located in the People's Republic of China to
potentially expand its operations within China. The rights were being
amortized over their maximum life of 50 years as allowed by Chinese law.
In July 2003, Parlex Interconnect sold its land use rights in China for
approximately $1.2 million and recognized a gain of approximately $87,000,
which is included in operating loss for the year ended June 30, 2004.
The Company has reassessed the remaining useful lives of the intangible
assets, which consist only of patent costs, at June 30, 2004 and determined
the useful lives are appropriate in determining amortization expense.
Amortization expense for the years ended June 30, 2004, 2003 and 2002 was
$4,645, $25,822 and $14,376, respectively.
The estimated amortization expense, for each of the fiscal years subsequent
to June 30, 2004 is as follows:
F-12
Amortization Expense
--------------------
Patents
-------
2005 $ 2,928
2006 2,928
2007 2,928
2008 2,928
2009 2,928
Thereafter 18,106
-------
Total $32,746
=======
5. OTHER ASSETS
Other assets at June 30 consisted of:
2004 2003
Deferred loss on sale-leaseback of Poly-Flex Facility, net $1,087,606 $1,362,370
Deferred financing costs on sale-leaseback of Methuen facility (see Note 3) 361,700 203,353
Deferred financing costs on the Loan Security Agreement (see Note 7) 267,722 138,081
Deferred financing costs on Convertible Subordinated Note (see Note 7) 673,930 -
Other 160,650 48,019
---------- ----------
Total cost 2,551,608 1,751,823
Less: accumulated amortization (268,472) (1,762)
---------- ----------
Total Other Assets, net $2,283,136 $1,750,061
========== ==========
The deferred loss on the Poly-Flex facility (Note 3) is being amortized to
lease expense over the five-year lease term. Amortization of the deferred
loss, reported as a component of rent expense, for the years ended June 30,
2004 and 2003 was $274,764 and $11,448, respectively.
Amortization of deferred financing costs for the years ended June 30, 2004
and 2003 was $266,710 and $1,762, respectively.
6. ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of:
F-13
2004 2003
Payroll and related expenses $1,139,867 $1,573,551
Professional fees 151,030 737,698
Facility exit costs 136,952 583,521
Accrued health insurance 399,922 553,521
Commissions 639,336 412,302
Other 1,810,480 1,310,015
---------- ----------
Total $4,277,587 $5,170,608
========== ==========
In June 2002, management committed to a plan to consolidate, exit and
relocate certain of its manufacturing operations. At June 30, 2002, Parlex
had accrued facility exit costs of $1,480,000 relating to these exit
activities. No amounts were paid as of June 30, 2002.
The following is a summary of the facility exit costs activity during 2003
and 2004:
Facility 2003 Activity Facility
Exit Costs ------------------------------------- Exit Costs
Accrued Cash Asset Change Accrued
June 30, 2002 Payments Write-offs in Estimates June 30, 2003
------------- -------- ---------- ------------ -------------
Lease costs $ 656,000 $(216,145) $ - $ - $439,855
Leasehold improvements 573,767 - (573,767) - -
Facility refurbishment costs 141,233 - - 2,433 143,666
Lease termination penalty 109,000 (106,567) - (2,433) -
---------- --------- --------- ------- --------
Total $1,480,000 $(322,712) $(573,767) $ - $583,521
========== ========= ========= ======= ========
Facility 2004 Activity Facility
Exit Costs ------------------------------------- Exit Costs
Accrued Cash Asset Change Accrued
June 30, 2003 Payments Write-offs in Estimates June 30, 2004
------------- -------- ---------- ------------ -------------
Lease costs $ 439,855 $(456,798) $ - $16,943 $ -
Facility refurbishment costs 143,666 (6,714) - - 136,952
---------- --------- --------- ------- --------
Total $ 583,521 $(463,512) $ - $16,943 $136,952
========== ========= ========= ======= ========
During 2003, lease costs of $216,145 for the Salem, New Hampshire facility,
consisting of rent expense and utilities for the period January 1, 2003
through June 30, 2003, were paid and charged to the facility exit costs
accrual. In January 2003, upon exiting the facility, the Company wrote-
down the value of the leasehold improvements at its Salem, New Hampshire
facility to zero to reflect its abandonment of such assets. The Company's
lease agreement, for which certain costs were accrued under this plan, was
scheduled to terminate on June 30, 2007. However, in June 2003, the
Company exercised its right to terminate the lease early as of June 30,
2004 and paid the related lease early termination fee of $106,567.
F-14
During fiscal 2004, lease costs of $456,798 for the Salem, New Hampshire
facility, consisting of rent expense and utilities for the period July 1,
2003 through June 30, 2004, were paid and charged to the facility exit
costs accrual. The remaining accrued facility exit costs at June 30, 2004
represents the estimated costs to refurbish the facility.
7. INDEBTEDNESS
Long-term debt at June 30 consisted of:
2004 2003
Loan and security agreement $ 3,618,091 $ 3,306,150
Parlex Shanghai term notes 8,870,792 2,175,645
Finance obligation on sale-leaseback of Methuen Facility 5,909,245 5,333,597
Convertible subordinated notes 4,404,351 -
Parlex Interconnect term note - 3,800,000
Other 593,277 -
----------- -----------
Total long-term debt 23,395,756 14,615,392
Less: current portion of long-term debt 12,861,077 3,813,117
----------- -----------
Long-term debt $10,534,679 $10,802,275
=========== ===========
A summary of the current portion of our long term debt described above is
as follows:
2004 2003
Loan and security agreement $ 3,618,091 $ -
Parlex Shanghai term notes 8,870,792 2,175,645
Finance obligation on sale-leaseback of Methuen Facility 263,849 337,472
Parlex Interconnect term note - 1,300,000
Other 108,345 -
----------- -----------
Total current portion of long-term debt $12,861,077 $ 3,813,117
=========== ===========
The scheduled maturities for long-term debt, excluding sale lease back and
capital lease obligations, at June 30, 2004 are $12,488,883 in fiscal year
2005, $0 in fiscal 2006 and fiscal 2007 and $4,404,351 in fiscal 2008.
Interest paid during the years ended June 30, 2004, 2003 and 2002 was
approximately $1,371,000, $767,000 and $625,000, respectively.
The weighted average interest rate on the Company's short-term borrowings
as of June 30, 2004 and 2003 is 5.561% and 4.826% respectively.
Loan and Security Agreement (the "Loan Agreement") - The Company executed
the Loan Agreement with Silicon Valley Bank on June 11, 2003. The Loan
Agreement provided Silicon Valley Bank with a secured interest in
substantially all of the Company's 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. As of
June 30, 2004, the Company had a $1,000,000 letter of credit outstanding.
The
F-15
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 plus 1.5% and amended the financial covenants. On February 18, 2004,
the Company executed a Second Modification Agreement (the "Second
Modification Agreement") with Silicon Valley Bank. The Second Modification
Agreement removed the fixed charge coverage ratio from the Loan Agreement
and required the Company 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 Second
Modification Agreement increased the interest rate on borrowings to the
bank's prime rate plus 2.0% (decreasing to prime plus 1.25% after two
consecutive quarters of positive operating income and to prime plus 0.75%
after two consecutive quarters of positive net income, respectively) and
amended the financial covenants. On March 28, 2004, the Company entered
into a Third Loan Modification Agreement with Silicon Valley Bank, which
permitted certain of the Company's subsidiaries to increase the amount of
indebtedness they could incur from $8 million to $13 million, so long as
such indebtedness was without recourse to Parlex and its principal
subsidiaries. On May 10, 2004, the Company executed a Fourth Loan
Modification Agreement (the "Fourth Modification Agreement") with Silicon
Valley Bank. The Fourth Modification Agreement changed the EBITDA
requirement to $1.00 as of April 30, 2004 and May 31, 2004 and $250,000 on
a three month trailing basis beginning June 30, 2004. On June 25, 2004, the
Company executed a Fifth Loan Modification Agreement (the "Fifth
Modification Agreement") with Silicon Valley Bank. The Fifth Modification
Agreement permitted certain of the Company's subsidiaries to borrow up to
$5,000,000 in the aggregate from the Bank of China. The Fifth Modification
Agreement increased the interest rate on borrowings to the bank's prime
rate (4.0% at June 30, 2004) plus 2.25% (decreasing to prime plus 1.25%
after two consecutive quarters of positive operating income and to prime
plus 0.75% after two consecutive quarters of positive net income,
respectively). On September 24, 2004, the Company executed a Sixth Loan
Modification Agreement with Silicon Valley Bank to extend the maturity date
of the Loan Agreement from June 10, 2005 to July 11, 2005. All other terms
and conditions of the Loan Agreement remain the same. As of June 30, 2004,
the Company was in compliance with its financial covenants. At June 30,
2004, the Company had available borrowing capacity under the Loan Agreement
of approximately $4.4 million. As the available borrowing capacity
exceeded $750,000 at June 30, 2004, none of the Company's cash balance was
subject to restriction at June 30, 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 are classified as current liabilities in the accompanying
consolidated balance sheets as of June 30, 2004 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 borrowing 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% and guaranteed by Parlex Interconnect. Amounts outstanding under
this short-term note total $1.2 million as of June 30, 2004. The note was
retired in August 2004. On December 15, 2003, Parlex Shanghai entered into
a short-term bank note, due December 15, 2004, bearing interest at 5.31%
and guaranteed by Parlex Interconnect. Amounts outstanding under this
short-term note total $605,000 as of June 30, 2004. 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, bearing interest at
5.31% and guaranteed by Parlex Interconnect. On February 13, 2004 and
March 2, 2004 Parlex Shanghai entered into two short-term bank notes, due
January 12, 2005 and March 1, 2005, bearing interest at 5.31% and
guaranteed by Parlex Interconnect. Amounts outstanding under these short-
term notes as of June 30, 2004 totaled $3.8 million. These notes replaced
a similar short-term note that terminated on February 25, 2004. On March 5,
2004, Parlex
F-16
Shanghai entered into a short-term bank note, due January 5, 2005, bearing
interest at LIBOR plus 2.5% and guaranteed by the Company's subsidiary
Parlex Asia Pacific Ltd, ("Parlex Asia"). Amounts outstanding under this
short-term note as of June 30, 2004 totaled $1.5 million. The Company
believes that it will be able to obtain the necessary refinancing of its
Parlex Shanghai short term debt because of the Company's history of
successfully refinancing its short term Chinese borrowings and its rapidly
improving Chinese operating results. In fiscal 2004, revenues from its
Chinese operations grew 65%. The Company expects similar revenue growth and
improved profitability in China during fiscal 2005.
Parlex Interconnect Term Notes - In June 2002, Parlex Interconnect executed
a $5,000,000 Loan Agreement (the "CITIC Loan Agreement") with CITIC Ka Wah
Bank. As a condition of the approval of this CITIC Loan Agreement, Parlex
Asia , and the Company 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. In March 2004, Parlex Interconnect
retired the outstanding balance of the CITIC term note.
Parlex Asia Banking Facility - Subsequent to June 30, 2004, on September
15, 2004 Parlex Asia entered into an agreement with the Bank of China for a
$5 million banking facility guaranteed by Parlex. Under the terms of the
banking facility, Parlex Asia may borrow up to $5 million based on a
borrowing base of eligible account receivables. The banking facility bears
interest at LIBOR plus 2%. The Company anticipates utilizing borrowings from
this financing for the refinancing of certain Parlex Shanghai term notes
or for working capital needs.
Finance Obligation on Sale Leaseback of Methuen Facility - As described in
Note 3, in June 2003, Parlex sold its Methuen Facility for a 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 (the "Note") and up to
$1,000,000 in additional cash under the terms of an Earn Out Clause. In
June 2004, Parlex received $750,000 reducing the principal balance of the
promissory note to $1,900,000. 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 the 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 Note and related interest
thereon, and the $1,000,000 in additional cash under the terms of an 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 pay down amounts borrowed under the
Company's Loan 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 quarterly interest by a conversion
price, which was initially established at $8.00 per share. The conversion
price is subject to adjustment in the event of stock splits, dividends and
certain combinations.
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 $87,924
within stockholders' equity at June 30, 2004, 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, the Company issued a total of 35,594
shares of common stock in October 2003, January and April
F-17
2004 in satisfaction of previously recorded interest and issued 13,123
shares of common stock in July 2004 as payment for the interest accrued at
June 30, 2004.
The Notes contained a beneficial conversion feature reflecting 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 of the 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. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at June 30 consisted of:
2004 2003
Deferred income taxes (Note 9) $ 321,111 $ 353,822
Deferred compensation 703,980 833,458
---------- ----------
$1,025,091 $1,187,280
========== ==========
Deferred compensation of $182,000 is to be paid within one year and is
included within accrued liabilities in the consolidated balance sheet at
June 30, 2004 and 2003.
9. INCOME TAXES
Income (loss) before income taxes consisted of:
2004 2003 2002
Domestic $(9,674,952) $(13,336,692) $(16,345,891)
Foreign 1,609,404 (74,439) (1,378,155)
----------- ------------ ------------
Total $(8,065,548) $(13,411,131) $(17,724,046)
=========== ============ ============
The benefit (provision) for income taxes consisted of:
F-18
2004 2003 2002
Current:
State $ (71,746) $ - $ -
Federal - 37,450 2,288,093
Foreign (81,942) (22,108) (17,771)
----------- ------------ ----------
(153,688) 15,342 2,270,322
Deferred Tax:
State (147,057) (309,118) 83,844
Federal (1,010,106) (1,064,739) 475,116
Foreign 32,711 - (41,919)
----------- ------------ ----------
(1,124,452) (1,373,857) 517,041
Tax Credits:
State 938,079 219,717 451,712
Federal 855,226 (74,057) 1,408,981
----------- ------------ ----------
1,793,305 145,660 1,860,693
Tax Benefit from (Utilization of)
Operating Loss Carryforwards:
State 889,444 783,503 327,262
Federal 3,797,948 5,763,269 2,066,700
Foreign (230,151) - 313,109
----------- ------------ ----------
4,457,241 6,546,772 2,707,071
Valuation Allowance (4,917,405) (11,454,581) (500,000)
----------- ------------ ----------
Total $ 55,001 $ (6,120,664) $6,855,127
=========== ============ ==========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
2004 2003 2002
Statutory federal income tax rate (34)% (34)% (34)%
State income taxes, net of federal tax benefit 1 (4) (3)
Tax credits (22) (4) (5)
Foreign income taxed at lower rates (3) 1 -
Change in valuation allowance on U.S. net
deferred tax assets 61 85 3
Other (4) 2 -
--- --- ---
Effective income tax rate (1)% 46 % (39)%
=== === ===
No provision for U.S. income taxes has been recorded on the undistributed
earnings of the Company's subsidiary, Poly-Flex Circuits Limited
(approximately $590,000 at June 30, 2004), because such amounts are
considered permanently invested.
F-19
Deferred income tax assets and liabilities at June 30 are attributable to
the following:
2004 2003
Deferred tax assets:
Inventories $ 1,128,602 $ 1,158,285
Allowance for doubtful accounts 287,290 209,073
Accruals 564,341 1,068,666
Deferred compensation 332,854 395,528
Domestic net operating loss carryforwards 15,599,347 11,000,747
Foreign net operating loss carryforwards 82,958 313,109
Valuation allowance (17,071,986) (12,154,581)
Tax credit carryforwards 4,642,715 3,166,747
Other 132,435 157,742
------------ ------------
5,698,556 5,315,316
------------ ------------
Deferred tax liabilities:
Depreciation 5,416,100 4,706,771
Deferred loss on sale leaseback 423,630 530,652
Prepaid expenses 96,445 117,749
Other 534 857
------------ ------------
5,936,709 5,356,029
------------ ------------
Net deferred tax liability $ 238,153 $ 40,713
============ ============
As a result of its history of operating losses and uncertain future
operating results, the Company determined in 2003 that it was more likely
than not that certain historic and current year income tax benefits would
not be realized. Consequently, the Company established a valuation
allowance against all of its U.S. deferred tax assets in that year and has
not given recognition to these tax assets in the accompanying financial
statements at June 30, 2004. 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.
Tax credit carryforwards consist primarily of research and development, and
investment tax credits available for state and federal purposes. To the
extent the credits are not currently utilized on the Company's tax returns,
deferred tax assets, subject to the considerations about the need for a
valuation allowance, and are recognized for the carryforward amounts.
Research and development tax credits, if not utilized, will expire in the
years 2008 through 2024. The Company's investment credits do not expire
and can be carried forward indefinitely.
At June 30, 2004, the Company has recorded net deferred tax assets of $82,958
related to foreign net operating loss carryfowards and net deferred tax
liabilities of $321,111 related to depreciation timing differences related
to foreign jurisdictions.
At June 30, 2004, the Company has available federal and state net operating
loss carryforwards of approximately $38,000,000 and $55,000,000,
respectively, expiring beginning in 2022 and 2006, respectively. The
Company has available foreign net operating losses carryforwards of
$550,000, which do not expire.
Income tax payments of approximately $60,406, relating to certain state
jurisdictions, were made in 2004. Income tax refunds of approximately
$317,337, $1,489,000 and $3,348,000 were received in 2004, 2003 and 2002,
respectively. The income tax refunds are primarily due to tax credit refunds
and the carryback of the Company's 2003 and 2002 state and federal net
operating losses to prior years' tax periods.
10. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock - On May 7, 2004 and June 8, 2004, the
Company completed a private placement of 40,625 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") and warrants
entitling holders to
F-20
purchase 203,125 shares of common stock at $80.00 per unit for proceeds of
approximately $2,950,000, net of issuance costs of approximately $300,000.
In connection with the private placement, investors received rights to
purchase additional shares of the Series A Preferred Stock (the
"Over-Allotment Right"). The warrants are exercisable immediately at an
exercise price of $8.00 per share (subject to adjustment for certain
dilutive events) and expire on May 7, 2007 and June 8, 2007. The
Over-Allotment Right allows each investor to purchase additional shares
of Series A Preferred Stock in an amount up to 20% of the original purchase
and on the same terms as the original purchase. The Over-Allotment right
expires on November 7, 2004 and December 8, 2004.
The Series A Preferred Stock is redeemable at the option of the Company on
the third anniversary of the closing, upon 30 days notice to the holders,
in whole but not in part, at $80.00 per share (subject to adjustment for
certain dilutive events) together with all accrued but unpaid dividends to
the redemption date. The Series A Preferred Stockholders have no voting
rights.
Each share of Series A Preferred Stock is only convertible into 10 shares
of common stock at the option of the holder at any time, until 20 days
following the date on which the Company first mails its notice of
redemption, if any. The initial conversion price of $8.00 is adjusted for
certain dilutive events. The Series A Preferred Stock is subject to
mandatory conversion if the Company's common stock price closes above
$12.00 per share for twenty (20) consecutive trading days.
The Series A Preferred Stock is entitled to receive cumulative dividends at
an annual rate of 8.25% ($6.60 per share), payable quarterly in cash or
shares of common stock or a combination of cash and stock at the election
of the Company. In the event the Company does not exercise its right to
redeem the Series A Preferred Stock on the third anniversary, the dividend
rate shall increase to 14% ($11.20 per share) per annum payable quarterly
exclusively in cash.
The Preferred Stock also entitles the holders thereof to a preferential
payment in the event of the Company's voluntary or involuntary liquidation,
dissolution or winding up. Specifically, in any such case, the holders of
Preferred Stock shall be entitled to be paid, out of the Company's assets
that are available for distribution to our shareholders, the sum of $80.00
per share of Preferred Stock held or $3,250,000, plus all accrued and
unpaid dividends thereon, prior to any payments being made to holders of
our common stock. The $80.00 per share liquidation preference payment
amount is subject to equitable adjustment for stock splits, stock
dividends, combinations, reorganizations and similar events effecting the
shares of Preferred Stock.
As the original price of $80.00 included a share of Series A Preferred Stock,
a warrant to purchase 5 shares of common stock and the Over-Allotment Right,
the Company used the relative fair value method to record the transaction.
Accordingly, $2,668,000, $486,000 and $96,000 of the gross proceeds were
attributed to the 40,625 shares of Series A Preferred Stock, the 203,125
common stock warrants and the Over-Allotment Right, respectively. Since
38,750 shares of Series A Preferred Stock were issued for an effective
purchase price of $6.56 per share, which was lower than the fair market
value of the common stock at the date of closing, the investors
realized a beneficial conversion feature of approximately $131,750.
Accordingly, the beneficial conversion feature and the relative fair value
of the warrants and Over-Allotment Right have been recorded as an increase
to additional paid-in capital. The beneficial conversion feature was
immediately accreted, in accordance with EITF 00-27 "Application of Issue
No. 98-5 to Certain Convertible Instruments".
Common Stock Warrants - The Company has 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 June 30, 2004:
F-21
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 31,500 8.00 July 28, 2008
2004 193,750 8.00 May 7, 2007
2004 9,375 8.00 June 8, 2007
------- -----
Total 484,625 $7.94
======= =====
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 Silicon
Valley 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 was
recorded as a deferred financing cost and is being amortized to interest
expense over the life of the Loan Agreement. Amortization expense for the
years ended June 30, 2004 and 2003 was $50,300 and $2,800, respectively.
In connection with the sale of the Convertible Subordinated Notes, the
investors and the investment adviser received warrants to purchase
331,500 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. The relative
fair value of the warrants issued to the investors and to the investment
adviser on July 28, 2003 was approximately $1,035,000 and $146,000,
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. 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
original issue discount is being amortized to interest expense over the
4-year life of the Note and totaled $258,700 for the year ended June 30,
2004.
In connection with the sale of the Series A Convertible Preferred Stock,
the investors received common stock purchase warrants for an aggregate of
203,125 shares of common stock at an initial exercise price of $8.00 per
share. The conversion price of the Preferred Stock and the exercise price
of the Warrants are subject to adjustment in the event of stock splits,
dividends and certain combinations.
Stock Option Plans - The Company has incentive and nonqualified stock
option plans covering officers, key employees and non-employee directors.
The options are generally exercisable commencing one year from the date of
grant and typically expire in either five or ten years, depending on the
plan. The option price for the incentive stock options and for the
directors' plan is fair market value at the date of grant. Non-employee
directors receive an automatic grant of 1,500 options annually.
Additionally, grants of up to 2,250 options annually, per director, may
also be made at the discretion of the Board of Directors. During 2002, the
Board of Directors granted 500 options to one member based on his
participation on several Board committees. No other discretionary grants
were made to the directors in 2004, 2003 or 2002. Nonqualified stock
options may be granted at fair market value or at a price determined by the
Board of Directors, depending on the plan. No options awarded to date by
the Board of Directors have been granted at an exercise price that is less
than the fair market value of the common stock at the date of grant.
At June 30, 2004, there were 740,418 shares reserved for future issuance
upon exercise of grants under its plans.
F-22
The following is a summary of activity for all of the Company's stock
option plans:
Options Options
Outstanding Exercisable
--------------------- ------------------------
Weighted- Weighted-
Average Average
Shares Exercise Exercise
Under Price Per Shares Price Per
Option Share Exercisable Share
July 1, 2001 328,000 $15.76 154,562 $15.33
Granted 160,800 12.30
Exercised (18,050) 14.53
------- ------
June 30, 2002 470,750 14.63 229,370 15.56
Granted 126,150 11.21
Surrendered (80,125) 18.90
Exercised (9,000) 5.84
------- ------
June 30, 2003 507,775 13.26 253,115 14.51
Granted 91,000 8.40
Surrendered (31,000) 12.30
------- ------
June 30, 2004 567,775 $12.54 346,838 $13.83
======= ======
The following table sets forth information regarding options outstanding at
June 30, 2004:
Options Outstanding Options Exercisable
---------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
$ 5.67 - $ 6.67 12,000 0.9 $ 6.05 12,000 $ 6.05
8.39 - 10.48 135,000 8.6 9.04 43,750 10.24
11.37 - 13.25 289,025 6.4 12.17 159,338 12.35
15.50 - 16.25 66,250 5.0 16.18 66,250 16.18
18.75 - 19.13 63,500 3.3 18.78 63,500 18.78
22.00 2,000 5.9 22.00 2,000 22.00
------- --- ------ ------- ------
$ 5.67 - $22.00 567,775 6.3 $12.54 346,838 $13.83
======= === ====== ======= ======
Accumulated Other Comprehensive Income (Loss) - The Company reports
comprehensive income (loss) in accordance with the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements.
The following components and changes in balances of accumulated other
comprehensive income (loss) are as follows:
F-23
Foreign Accumulated
Currency Unrealized Other
Translation Gains (Losses) Comprehensive
Adjustments on Investments Income (Loss)
Balance, July 1, 2001 $(662,177) $ 34,752 $(627,425)
Change in balance 380,533 (34,752) 345,781
--------- -------- ---------
Balance, June 30, 2002 (281,644) - (281,644)
Change in balance 470,486 - 470,486
--------- -------- ---------
Balance, June 30, 2003 188,842 - 188,842
Change in balance 310,833 - 310,833
--------- -------- ---------
Balance, June 30, 2004 $ 499,675 $ - $ 499,675
========= ======== =========
The change in unrealized gains (loss) in short-term investments for the
year ended June 30, 2002 is as follows:
2002
Unrealized gains on short-term investments:
Unrealized holding gains arising during the year $ -
Less reclassification adjustment for (loss) gains realized
in net income (34,752)
-----------
Net unrealized gains (losses) on short-term investments $ (34,752)
===========
11. RELATED PARTY TRANSACTION
The Company purchased $580,000 and $822,000 of equipment in fiscal 2003 and
2002, respectively 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. At June 30, 2003
and 2002, the Company had recorded within accounts payable and accrued
expenses $200,000 and $506,000 respectively for equipment purchases from
this party. As of June 30, 2004, all amounts owed for equipment purchases
from this party had been paid.
12. POLY-FLEX ACQUISITION
The Company received $525,000 in cash during fiscal 2002 as a final
purchase price settlement in connection with the Company's acquisition of
Poly-Flex in March 2000.
13. JOINT VENTURE
On October 22, 2001, the Company executed an agreement (the "Agreement") to
purchase a 40% joint venture interest in Parlex Shanghai, bringing the
Company's interest to 90.1%. The Agreement required the Company to pay the
sum of $2.2 million. The purchase price was allocated to acquired accounts
receivable, inventory, property, plant and equipment, accounts payable,
accrued liabilities and debt, and resulted in goodwill of approximately
$251,000. Prior to the acquisition, a distribution of retained earnings
was declared based upon each joint venture partners' proportional share of
Parlex Shanghai's registered capital as of December 30, 2000. Minority
interest in the consolidated statements of
F-24
operations represents the minority shareholder's share of the income or
loss of Parlex Shanghai. The minority interest in the consolidated balance
sheets reflect the original investment, net of any distributions, by these
minority shareholders in Parlex Shanghai, along with their proportional
share of the earnings or losses of Parlex Shanghai.
14. BENEFIT PLAN
The Company sponsors a 401(k) Savings Plan (the "Plan") covering all
domestic employees of the Company who have three consecutive months of
service and have attained the age of 21. Matching employer contributions
equal 50% of the first 8% of employee contributions and vest 100% after
three complete years of service. Effective September 1, 2001, the Company
suspended the employer matching contribution. There were no Company
contributions to the Plan for the years ended June 30, 2004 and 2003, and
approximately $70,000 in 2002.
15. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain property and equipment under agreements
generally with initial terms from three to five years with renewal options.
As discussed in Note 3, the Company entered into two sale-leaseback
transactions where the Company sold two facilities on June 10, 2003 to an
unaffiliated third party and leased them back. As a result of provisions in
the sale and leaseback agreement for the Methuen facility that provides for
continuing involvement by the Company, the Company has accounted for the
sale-leaseback of the Methuen Facility as a finance obligation. Since the
Company has no continuing involvement in the leaseback of the Poly-Flex
facility, the Company has accounted for the leaseback utilizing sale-
leaseback accounting. Accordingly, the Company has recorded a deferred loss
on the sale and will account for all of its payments as an operating lease.
The deferred loss will be amortized to lease expense over the initial 5-
year lease term.
Rental expense approximated $1,332,000, $1,198,000 and $1,458,000 for the
years ended June 30, 2004, 2003 and 2002, respectively. Amortization of
the deferred loss, reported as a component of rent expense, for the years
ended June 30, 2004 and 2003 was $274,764 and $11,448, respectively.
Future payments under noncancelable leases as of June 30, 2004, including
payments related to the two sale-leasebacks are:
Finance Obligation Operating Leases
(Methuen Facility (Poly-Flex Facility
and other leases) and other leases)
2005 $ 1,210,426 $1,663,306
2006 1,279,176 1,396,813
2007 1,285,426 1,062,007
2008 1,354,176 1,058,563
2009 1,309,034 830,387
Thereafter 12,172,917 634,472
----------- ----------
Total minimum lease payments 18,611,155 6,645,548
Less amounts representing interest (9,861,930) ==========
-----------
Present value of net minimum lease payments $ 8,749,225
===========
Litigation - From time to time, the Company is subject to various legal
proceedings and claims, either asserted or unasserted, which arise in the
ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, management is not aware of any current legal
matters that would have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
F-25
Executive Employment Agreements - Three executives of the Company have
entered into employment agreements with the Company which require, among
others, that the Company continue to pay a portion of the executive's
salary to the executive's designated beneficiary for a specified period of
time in the event of the death of the executive. The Company maintains key
life insurance for only one of the three executives. The Company has not
accrued or paid any amounts related to this benefit in any year in the
three years ended June 30, 2004.
16. BUSINESS SEGMENT, MAJOR CUSTOMER AND INTERNATIONAL OPERATIONS
The Company operates within a single segment of the electronics industry as
a specialist in the interconnection and packaging of electronic equipment
with its product lines of flexible printed circuits, laminated cable, and
related assemblies. The Company organizes itself as one segment reporting
to the chief operating decision maker, the Chief Executive Officer.
Revenue consists of product sales, and license fees and royalty income.
The Company had no customers which individually accounted for 10% or more
of the Company's revenues in 2004, 2003 or 2002.
The Company had two customers which individually accounted for 10% and
11% of the Company's accounts receivables in 2002. None of its customers
accounted for more than 10% of accounts receivable in 2004 or 2003.
Summarized information relating to international operations is as follows:
Year Ended June 30,
2004 2003 2002
Revenues:
United States $50,587,907 $51,130,807 $56,138,749
Canada 573,732 109,913 1,972,938
People's Republic of China 4,689,568 3,634,431 3,845,022
Europe 15,020,941 14,586,452 15,871,637
Asia (excluding People's Republic of China) 21,153,484 11,969,737 8,945,426
Other 3,513,308 1,389,811 281,792
----------- ----------- -----------
Total revenues $95,538,940 $82,821,151 $87,055,564
----------- ----------- -----------
The principal product group sales were:
Flexible circuits $80,455,623 $67,954,482 $70,096,713
Laminated cables 15,083,317 14,866,669 16,958,851
----------- ----------- -----------
Total revenues $95,538,940 $82,821,151 $87,055,564
----------- ----------- -----------
Long-lived assets:
United States $31,255,215 $33,520,640 $47,564,921
----------- ----------- -----------
China $14,671,085 $14,466,382 $10,738,185
----------- ----------- -----------
United Kingdom $ 2,566,832 $ 2,943,770 $ 3,275,430
----------- ----------- -----------
17. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data are as follows (in thousands
except per share amounts):
F-26
First Second Third Fourth
2004 Quarters
Revenues $19,704 $23,559 $23,165 $29,111
Gross profit (loss) 2,232 2,701 1,897 3,491
Net (loss) attributable to common
stockholders (2,087) (1,927) (2,590) (1,733)
Net (loss) per share:
Basic (0.33) (0.30) (0.40) (0.27)
Diluted (0.33) (0.30) (0.40) (0.27)
2003 Quarters
Revenues $21,692 $22,897 $19,439 $18,793
Gross profit (loss) 1,008 816 (1,786) 1,980
Net (loss) attributable to common
stockholders (1,391) (9,900) (5,929) (2,297)
Net (loss) per share:
Basic (0.22) (1.57) (0.94) (0.36)
Diluted (0.22) (1.57) (0.94) (0.36)
F-27
18. SUPPLEMEMTAL INFORMATION
Information with regard to certain valuation and qualifying accounts is as
follows:
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 2004, 2003 and 2002
Additions
Balance at Charges to Charges to Balance at
Beginning Cost and Other End of
of Year Expenses Accounts Deductions Year
---------------------------------------------------------------------
Allowance for Bad Debts
June 30, 2004 $ 949,261 $ 659,083 $- $ (271,045) $ 1,337,299
June 30, 2003 1,215,178 527,598 - (793,515) 949,261
June 30, 2002 1,896,615 355,490 - (1,036,927) 1,215,178
- -----------------------------------------------------------------------------------------------
Accumulated Amortization of Goodwill
June 30, 2004 $ 234,477 - - - $ 234,477
June 30, 2003 234,477 - - - 234,477
June 30, 2002 234,477 - - - 234,477
- -----------------------------------------------------------------------------------------------
Accumulated Depreciation and Amortization
June 30, 2004 $42,779,012 5,805,407 - (485,452) $48,098,967
June 30, 2003 39,480,757 6,488,682 - (3,190,427) 42,779,012
June 30, 2002 34,379,848 6,408,138 - (1,307,229) 39,480,757
- -----------------------------------------------------------------------------------------------
Inventory Obsolescence
June 30, 2004 $ 2,973,724 186,340 - (262,548) $ 2,897,516
June 30, 2003 3,521,701 1,240,208 - (1,788,185) 2,973,724
June 30, 2002 3,494,094 643,942 - (616,335) 3,521,701
F-28
Item 9. Changes In and Disagreements With Accountants on Accounting
- -------------------------------------------------------------------
and Financial Disclosure
------------------------
None.
Item 9A. 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 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 June 30, 2004. 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
There have been no changes in our internal control over financial reporting
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
- --------------------------
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required by Item 10 is incorporated herein by reference to
our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on or about November 23, 2004.
Item 11. Executive Compensation
- -------------------------------
The information required by Item 11 is incorporated herein by reference to
our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on or about November 23, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
and Related Stockholder Matters
-------------------------------
The information required by Item 12 is incorporated herein by reference to
our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on or about November 23, 2004.
41
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by Item 13 is incorporated herein by reference to
our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on or about November 23, 2004.
Item 14. Principal Accountant Fees and Services.
- ------------------------------------------------
The information required by Item 14 is incorporated herein by reference to
our definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on or about November 23, 2004.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)
1. Consolidated Financial Statements
The Consolidated Financial Statements are filed as part of
this report.
2. Consolidated Financial Statement Schedules
All schedules are omitted because of the absence of
conditions under which they are required or because the
required information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits
An index of exhibits that are a part of this Form 10-K
appears following the signature page and is incorporated
herein by reference.
(b) Reports on Form 8-K
On May 11, 2004, we filed a Current Report on Form 8-K, dated
May 7, 2004, under Items 5 and 7 to report the completion of a
private placement offering of our shares of Series A
Convertible Preferred Stock at $80.00 per share.
On May 11, 2004, we filed a Current Report on Form 8-K, dated
May 10, 2004,under Items 7 and 12 to report the issuance of a
press release setting forth our results of operations and
financial condition for our third fiscal quarter ended March
28, 2004.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
September 28, 2004.
Parlex Corporation
By /s/ Peter J. Murphy
-------------------
Peter J. Murphy,
Chief Executive Officer and Director
Each person whose signature appears below constitutes and appoints Herbert
W. Pollack, Peter J. Murphy, and Jonathan R. Kosheff, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them, for him and in his name,
place, and stead, and in any and all capacities, to sign this annual report
on Form 10-K of Parlex Corporation and any amendments thereto, and to file
the same, with all exhibits thereto and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Herbert W. Pollack Chairman of the Board September 28, 2004
- -----------------------
Herbert W. Pollack
/s/ Peter J. Murphy Director and Chief Executive September 28, 2004
- ----------------------- Officer (Principal Executive
Peter J. Murphy Officer)
/s/ Jonathan R. Kosheff Treasurer and Chief September 28, 2004
- ----------------------- Financial Officer (Principal
Jonathan R. Kosheff Financial and Accounting
Officer)
/s/ Sheldon A. Buckler Director September 28, 2004
- -----------------------
Sheldon A. Buckler
/s/ Lynn J. Davis Director September 28, 2004
- -----------------------
Lynn J. Davis
/s/ Richard W. Hale Director September 28, 2004
- -----------------------
Richard W. Hale
/s/ Lester Pollack Director September 28, 2004
- -----------------------
Lester Pollack
/s/ Russell D. Wright Director September 28, 2004
- -----------------------
Russell D. Wright
43
EXHIBIT INDEX
The exhibits listed below are filed with or incorporated by reference in
the Annual Report on Form 10-K.
Exhibit
No. Description
- ------- -----------
3.1 Restated Articles of Organization as amended (dated August 2,
1983) (filed as Exhibits 3-A and 3-B to our Registration
Statement on Form S-1, file No. 2-85588, and incorporated herein
by reference).
3.2 Articles of Amendment to Restated Articles of Organization,
dated December 1, 1987 (filed as Exhibit 10-Q to our Annual
Report on Form 10-K for the fiscal year ended June 30, 1988).
3.3 Bylaws (filed as Exhibit 3-C to our Registration Statement on
Form S-1, file No. 2-85588, and incorporated herein by
reference).
3.4 Articles of Amendment to Restated Articles of Organization,
dated October 21, 1997 (filed as Exhibit 3-D to our Quarterly
Report on Form 10-Q for the quarter ended December 28, 1997).
3.5 Articles of Amendment to Restated Articles of Organization,
dated August 30, 2000 (filed as Exhibit 3.5 to our Annual Report
on Form 10-K for fiscal year ended June 30, 2003).
3.6 Certificate of Vote of Directors establishing Series A
Convertible Preferred Stock (filed as Exhibit 3.1 to our Current
Report on Form 8-K dated May 7, 2004).
4.1 Warrant, dated June 11, 2003, issued to Silicon Valley Bank
(filed as Exhibit 4-A to our Current Report on Form 8-K dated
June 11, 2003).
4.2 Registration Rights Agreement, dated June 11, 2003, by and
between Silicon Valley Bank and Parlex Corporation (filed as
Exhibit 4-B to our Current Report on Form 8-K dated June 11,
2003).
4.3 Securities Purchase Agreement dated July 28, 2003 between Parlex
Corporation and the Investors (filed as Exhibit 4-C to our
Current Report on Form 8-K dated June 28, 2003).
4.4 Form of 7% Convertible Subordinated Note (filed as Exhibit 4-D
to our Current Report on Form 8-K dated June 28, 2003).
4.5 Form of Stock Purchase Warrant to Purchase Shares of Common
Stock, issued to each of the Investors (filed as Exhibit 4-E to
our Current Report on Form 8-K dated June 28, 2003).
4.6 Registration Rights Agreement dated July 28, 2003 between Parlex
Corporation and the Investors (filed as Exhibit 4-F to our
Current Report on Form 8-K dated June 28, 2003).
4.7 Form of Stock and Warrant Purchase Agreement dated May 7, 2004
between Parlex Corporation and the purchasers of Parlex's Series
A Preferred Stock (filed as Exhibit 4.1 to our Current Report on
Form 8-K dated May 7, 2004).
4.8 Form of Warrant to Purchase Common Stock issued to each of the
purchasers of Parlex's Series A Preferred Stock (filed as
Exhibit 4.2 to our Current Report on Form 8-K dated May 7,
2004).
44
4.9 Form of Stock Purchase Warrant to purchase shares of Common
Stock issued to Investec and its affiliates (filed as Exhibit
4.3 to our Registration Statement on Form S-3 filed June 9,
2004).
10.1 1989 Outside Directors' Stock Option Plan* (filed as Exhibit
10-Z to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1991).
10.2 1989 Employees' Stock Option Plan* (filed as Exhibit 10-AA to
our Annual Report on Form 10-K for the fiscal year ended June
30, 1991).
10.3 Chinese Joint Venture Contract, Articles of Association, and
Agreement of Technology License and Technical Service dated May
29, 1995 (filed as Exhibit 10-AH to our Annual Report on Form
10-K for the fiscal year ended June 30, 1995). Confidential
treatment has been granted for portions of this exhibit.
10.4 1996 Outside Directors' Stock Option Plan* (filed as Exhibit
10-O to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1997).
10.5 Shelter Service Agreement between Parlex Corporation and
Offshore International Inc. dated March 6, 1998 (filed as
Exhibit 10-O to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1998).
10.6 Parlex Corporation 2001 Employees' Stock Option Plan* (filed as
Exhibit 10-V to our Quarterly Report on Form 10-Q for the
quarter ended December 30, 2001 ).
10.7 Employment Agreement between Parlex Corporation and Peter J.
Murphy dated September, 2002 (filed as Exhibit 10.11 to our
Annual Report on Form 10-K for the fiscal year ended June 30,
2003).
10.8 Purchase and Sale Agreement, dated May 8, 2003, by and between
Taurus Methuen LLC, as buyer, and Parlex Corporation, as seller
(filed as Exhibit 10-AA to our Current Report on Form 8-K dated
June 11, 2003).
10.9 First Amendment to Purchase and Sale Agreement, dated May 23,
2003, by and between Taurus Methuen LLC, as buyer, and Parlex
Corporation, as seller (filed as Exhibit 10-BB to our Current
Report on Form 8-K dated June 11, 2003).
10.10 Second Amendment to Purchase and Sale Agreement, dated June 3,
2003, by and between Taurus Methuen LLC, as buyer, and Parlex
Corporation, as seller (filed as Exhibit 10-CC to our Current
Report on Form 8-K dated June 11, 2003).
10.11 Lease, dated June 12, 2003, by and between Taurus Methuen, LLC,
as landlord, and Parlex Corporation, as tenant, for the premises
located at One Parlex Place, Methuen, Massachusetts (filed as
Exhibit 10-GG to our Current Report on Form 8-K dated June 11,
2003).
10.12 Lease, dated June 12, 2003, by and between Taurus Cranston, LLC,
as landlord, and Poly-Flex Circuits, Inc., as tenant, for the
premises located at 28 Kenney Drive, Cranston, Rhode Island
(filed as Exhibit 10-HH to our Current Report on Form 8-K dated
June 11, 2003).
10.13 Loan and Security Agreement, dated June 11, 2003, by and among
Silicon Valley Bank, as lender, and Parlex Corporation, Poly-
Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed as Exhibit 10-II to our Current Report on Form
8-K dated June 11, 2003).
10.14 Loan Modification Agreement, dated September 23, 2003, by and
among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed as Exhibit 10.21 to our Annual Report on Form
10-K for the year ended June 30, 2004).
45
10.15 Second Loan Modification Agreement, dated February 18, 2004, by
and among Silicon Valley Bank, as lender, and Parlex
Corporation, Poly-Flex Circuits, Inc. and Parlex Dynaflex
Corporation, as borrowers (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended March 28,
2004).
10.16 Third Loan Modification Agreement, dated March 28, 2004, by and
among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed as Exhibit 10.2 to our Quarterly Report on Form
10-Q for the quarter ended March 28, 2004).
10.17 Fourth Loan Modification Agreement, dated May 10, 2004, by and
among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed as Exhibit 10.3 to our Quarterly Report on Form
10-Q for the quarter ended March 28, 2004).
10.18 Fifth Loan Modification Agreement, dated June 25, 2004, by and
among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed herewith).
10.19 Employment Agreement between Parlex Corporation and Herbert W.
Pollack dated October 1, 2003* (filed as Exhibit 10.22 to our
Annual Report on Form 10-K for the fiscal year ended June 30,
2003).
10.20 Employment Agreement between Parlex Corporation and Jonathan R.
Kosheff dated September 1, 2002* (filed as Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended September
28, 2003).
10.21 First Amendment to Employment Agreement between Parlex
Corporation and Peter J. Murphy, dated July 21, 2004* (filed
herewith).
10.22 First Amendment to Employment Agreement between Parlex
Corporation and Jonathan R. Kosheff, dated July 21, 2004* (filed
herewith).
10.23 Sixth Loan Modification Agreement, dated September 24, 2004, by
and among Silicon Valley Bank, as lender, and Parlex Corporation,
Poly-Flex Circuits, Inc. and Parlex Dynaflex Corporation, as
borrowers (filed herewith)
14.1 Code of Ethics (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Registered Independent Public Accounting Firm (filed
herewith).
24.1 Powers of Attorney (filed herewith as part of the signature page
hereto).
31.1 Certification of Registrant's Chief Executive Officer required
by Rule 13a-14(a) (filed herewith).
31.2 Certification of Registrant's Chief Financial Officer required
by Rule 13a-14(a) (filed herewith).
32.1 Certification of Registrant's Chief Executive Officer pursuant
to 18 U.S.C. 1350 (furnished herewith).
32.2 Certification of Registrant's Chief Financial Officer pursuant
to 18 U.S.C. 1350 (furnished herewith).
- --------------------
* Denotes management contract or compensatory plan or arrangement.
** As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this Annual Report on Form 10-K and are not deemed filed
with the Securities and Exchange Commission and are not incorporated by
reference in any filing of Parlex Corporation under the Securities Act
of 1933 or Securities Exchange Act of 1934, whether made before or
after the date hereof and irrespective of any general incorporation
language in such filings.
46