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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 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
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2464749
- ---------------------------------------------------------------------------
(State of incorporation) (I.R.S. ID)
One Parlex Place, Methuen, Massachusetts 01844
(Address of Principal Executive Offices) (Zip Code)
978-685-4341
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of
November 8, 2004 was 6,449,056 shares.
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PARLEX CORPORATION
------------------
FORM 10 - Q
-----------
INDEX
-----
Part I - Financial Information Page
----
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 2004
and June 30, 2004 3
Condensed Consolidated Statements of Operations - For
the Three Months Ended September 30, 2004 and September
28, 2003 4
Condensed Consolidated Statements of Cash Flows - For
the Three Months Ended September 30, 2004 and September
28, 2003 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 35
Item 4. Controls and Procedures 36
Part II - Other Information
Item 6. Exhibits 38
Signatures 39
Exhibit Index 40
2
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------
ASSETS September 30, 2004 June 30, 2004
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,476,287 $ 1,626,275
Accounts receivable - net 25,860,262 21,999,646
Inventories - net 22,570,748 20,326,134
Refundable income taxes 291,823 380,615
Deferred income taxes 42,958 42,958
Other current assets 2,234,581 2,381,471
------------ ------------
Total current assets 53,476,659 46,757,099
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 44,364,560 44,979,740
INTANGIBLE ASSETS - NET 32,014 32,746
GOODWILL - NET 1,157,510 1,157,510
DEFERRED INCOME TAXES 40,000 40,000
OTHER ASSETS - NET 2,114,313 2,283,136
TOTAL $101,185,056 $ 95,250,231
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 15,404,125 $ 12,861,077
Accounts payable 20,557,461 16,479,547
Dividends payable 67,582 39,317
Accrued liabilities 4,299,883 4,277,587
------------ ------------
Total current liabilities 40,329,051 33,657,528
------------ ------------
LONG-TERM DEBT 10,594,598 10,534,679
------------ ------------
OTHER NONCURRENT LIABILITIES 909,421 1,025,091
------------ ------------
MINORITY INTEREST IN PARLEX SHANGHAI 611,114 570,963
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 40,625 40,625
Common stock 643,593 663,281
Accrued interest payable in common
stock 68,502 87,924
Additional paid-in capital 65,981,801 66,979,397
Accumulated deficit (18,570,034) (17,771,307)
Accumulated other comprehensive
income 576,385 499,675
Less treasury stock, at cost - (1,037,625)
------------ ------------
Total stockholders' equity 48,740,872 49,461,970
------------ ------------
TOTAL $101,185,056 $ 95,250,231
============ ============
See notes to unaudited condensed consolidated financial statements.
3
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
- ---------------------------------------------------------------------------
Three Months Ended
September 30, 2004 September 28, 2003
REVENUES: $31,487,405 $19,704,431
----------- -----------
COSTS AND EXPENSES:
Cost of products sold 26,800,499 17,472,246
Selling, general and administrative expenses 4,608,647 3,740,366
----------- -----------
Total costs and expenses 31,409,146 21,212,612
----------- -----------
OPERATING INCOME (LOSS) 78,259 (1,508,181)
INTEREST AND NON OPERATING INCOME (EXPENSE)
Interest income 6,361 4,595
Interest expense (764,351) (532,651)
Non operating income - 11,742
Non operating expense (25,989) (218)
----------- -----------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (705,720) (2,024,713)
PROVISION FOR INCOME TAXES (52,856) -
----------- -----------
LOSS BEFORE MINORITY INTEREST (758,576) (2,024,713)
MINORITY INTEREST (40,151) (62,318)
----------- -----------
NET LOSS (798,727) (2,087,031)
PREFERRED STOCK DIVIDENDS (67,582) -
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (866,309) $(2,087,031)
----------- -----------
BASIC AND DILUTED LOSS PER SHARE $ (0.13) $ (0.33)
----------- -----------
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 6,435,933 6,312,216
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
PARLEX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
- ---------------------------------------------------------------------------
Three Months Ended
September 30, 2004 September 28, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (798,727) $ (2,087,031)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Non-cash operating items:
Depreciation of property, plant and equipment 1,392,793 1,658,636
Amortization of deferred loss on sale-leaseback,
deferred financing costs and intangible assets 292,611 143,221
Interest payable in common stock 68,502 73,195
Minority interest 40,151 62,318
Changes in current assets and liabilities:
Accounts receivable - net (3,862,804) (2,623,007)
Inventories (2,251,206) (2,006,270)
Refundable taxes 88,792 144,776
Other assets 153,533 (108,796)
Accounts payable and accrued liabilities 3,889,109 (1,271,071)
------------ ------------
Net cash used for operating activities (987,246) (6,014,029)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit received for sale of China land use
rights - 974,964
Additions to property, plant and equipment
and other assets (594,026) (280,611)
------------ ------------
Net cash (used for) provided by investing
activities (594,026) 694,353
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 24,960,000 7,502,960
Payment of bank loans (22,431,426) (7,846,834)
Payment of capital lease (26,240) -
Payment of Methuen sale-leaseback financing
obligation (60,993) (74,974)
Cash received for interest on sale-leaseback
note receivable 32,250 -
Dividend paid to series A preferred stock
investors (39,317) -
Proceeds from convertible note, net of costs - 5,509,984
------------ ------------
Net cash provided by financing activities 2,434,274 5,091,136
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,990) 8,324
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 850,012 (220,216)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,626,275 1,513,523
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,476,287 $ 1,293,307
============ ============
SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Property, plant, equipment and other asset
purchases financed under capital lease,
long-term debt and accounts payable $ 187,120 $ 242,874
============ ============
Issuance of warrants in connection with
issuance of convertible debt $ - $ 1,139,252
============ ============
Beneficial conversion feature associated
with convertible debt $ - $ 1,035,016
============ ============
Interest receivable associated with Methuen
sale-leaseback financing obligation $ - $ 33,125
============ ============
Interest payable in common stock $ 87,924 $ -
============ ============
Accrual of preferred stock dividends $ 67,582 $ -
============ ============
See notes to unaudited condensed consolidated financial statements.
5
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
1. Basis of Presentation
---------------------
The condensed consolidated financial statements include the accounts of
Parlex Corporation, its wholly owned subsidiaries ("Parlex" or the
"Company") and its 90.1% investment in Parlex (Shanghai) Circuit Co., Ltd.
("Parlex Shanghai"). The financial statements as reported in Form 10-Q
reflect all adjustments that are, in the opinion of management, necessary
to present fairly the financial position as of September 30, 2004 and the
results of operations and cash flows for the three months ended September
30, 2004 and September 28, 2003. All adjustments made to the interim
financial statements included all those of a normal and recurring nature.
The results for interim periods are not necessarily indicative of results
that may be expected for any other interim period or for the full year.
This filing should be read in conjunction with the Company's annual report
on Form 10-K for the year ended June 30, 2004.
As shown in the consolidated financial statements, the Company incurred net
losses of $798,727 and $2,087,031 and used $987,246 and $6,014,029 of cash
in operations for the three months ended September 30, 2004 and September
28, 2003, respectively. In addition, the Company had an accumulated
deficit of $18,570,034 at September 30, 2004. As of September 30, 2004,
the Company had a cash balance of $2,476,287.
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 that were previously
manufactured by Delphi Corporation 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 fiscal years 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
from the sale of its 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 at least through September 2005. If the Company
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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 September 30, 2004, the Company was in compliance,
and expects to remain in compliance, with all of its financial covenants
associated with its financing arrangements.
2. Inventories
-----------
Inventories of raw materials are stated at the lower of cost (first-in,
first-out) or market. Work in process and finished goods are valued as a
percentage of completed cost, not in excess of net realizable value. Raw
material, work in process and finished goods inventory associated with
programs cancelled by customers are fully reserved for as obsolete.
Reductions in obsolescence reserves are recognized when the underlying
products are disposed of or sold. Inventories consisted of:
September 30, June 30,
2004 2004
Raw materials $10,255,636 $ 8,729,132
Work in process 10,211,249 9,444,722
Finished goods 5,121,746 5,049,796
----------- -----------
Total cost 25,588,631 23,223,650
Reserve for obsolescence (3,017,883) (2,897,516)
----------- -----------
Inventory, net $22,570,748 $20,326,134
=========== ===========
3. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives. Property, plant
and equipment consisted of:
September 30, June 30,
2004 2004
Land and land improvements $ 589,872 $ 589,872
Buildings 18,543,295 18,543,295
Machinery and equipment 63,828,002 64,348,226
Leasehold improvements and other 6,605,973 6,695,173
Construction in progress 3,856,584 2,902,141
------------ ------------
Total cost 93,423,726 93,078,707
Less: accumulated depreciation (49,059,166) (48,098,967)
------------ ------------
Property, plant and equipment, net $ 44,364,560 $ 44,979,740
============ ============
7
4. Intangible Assets
-----------------
Intangible assets consisted of:
September 30, June 30,
2004 2004
Patents $ 58,560 $ 58,560
Accumulated amortization (26,546) (25,814)
-------- --------
Intangible assets, net $ 32,014 $ 32,746
======== ========
The Company has reassessed the remaining useful lives of the intangible
assets at September 30, 2004 and determined the useful lives are
appropriate in determining amortization expense. Amortization expense for
the three months ended September 30, 2004 and September 28, 2003 was $732
and $2,449, respectively.
5. Other Assets
------------
Other assets consisted of:
September 30, June 30,
2004 2004
Deferred loss on sale-leaseback of Poly-Flex
Facility, net $1,018,915 $1,087,606
Deferred financing costs on sale-leaseback
of Methuen facility (see Note 7) 361,700 361,700
Deferred financing costs on the Loan and
Security Agreement (see Note 7) 292,722 267,722
Deferred financing costs on Convertible
Subortinated Note (see Note 7) 673,930 673,930
Other 130,060 160,650
---------- ----------
Total cost 2,477,327 2,551,608
Less: accumulated amortization (363,014) (268,472)
---------- ----------
Total Other Assets, net $2,114,313 $2,283,136
========== ==========
In June 2003, Poly-Flex sold its operating facility in Cranston, Rhode
Island for a total purchase price of $3,000,000 in cash. Under the terms of
the Purchase and Sale Agreement, Poly-Flex entered into a five-year lease
of the Poly-Flex Facility with the buyer. The Company did not record an
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 - Net on
the condensed consolidated balance sheets. The deferred loss is being
amortized to lease expense over the five-year lease term. Amortization of
the deferred loss, reported as a component of rent expense, was $69,000 for
the three months ended September 30, 2004 and September 28, 2003.
Amortization of deferred financing costs was $95,000 and $57,000 for the
three months ended September 30, 2004 and September 28, 2003, respectively.
8
6. Accrued Liabilities - Facility Exit Costs
-----------------------------------------
The following is a summary of the facility exit costs activity during the
three months ended September 30, 2004:
Facility FY2005 Facility
Exit Costs Activity Exit Costs
Accrued Cash Accrued
June 30, 2004 Payments September 30, 2004
------------- -------- ------------------
Total Facility refurbishment costs $136,952 $(3,500) $133,452
The remaining accrued facility exit costs at September 30, 2004 represent
the estimated costs to refurbish the facility. The Company expects the
balance of accrued facility exit costs at September 30, 2004 to be paid
within the next three months.
7. Long-term Debt
--------------
Long-term debt consisted of:
September 30, June 30,
2004 2004
Loan and Security Agreement $ 7,354,890 $ 3,618,091
Parlex Shanghai term notes 7,662,567 8,870,792
Finance obligation on sale-leaseback of
Methuen Facility 5,880,501 5,909,245
Convertible Subordinated Note 4,533,728 4,404,351
Other 567,037 593,277
----------- -----------
Total long-term debt 25,998,723 23,395,756
Less: current portion of long-term debt 15,404,125 12,861,077
----------- -----------
Long-term debt $10,594,598 $10,534,679
=========== ===========
A summary of the current portion of our long term debt described above is
as follows:
September 30, June 30,
2004 2004
Loan and Security Agreement $ 7,354,890 $ 3,618,091
Parlex Shanghai term notes 7,662,567 8,870,792
Finance obligation on sale-leaseback
of Methuen Facility 276,027 263,849
Other 110,641 108,345
----------- -----------
Total current portion of long-term debt $15,404,125 $12,861,077
=========== ===========
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
9
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
September 30, 2004, the Company had a $1,000,000 letter of credit
outstanding. The Loan Agreement contains certain restrictive covenants,
including but not limited to, limitations on debt incurred by its foreign
subsidiaries, acquisitions, sales and transfers of assets, and prohibitions
against cash dividends, mergers and repurchases of stock without prior bank
approval. The Loan Agreement also has financial covenants, which among
other things require the Company to maintain $750,000 in minimum cash
balances or excess availability under the Loan Agreement.
On September 23, 2003, the Company executed a Modification Agreement (the
"Modification Agreement") with Silicon Valley Bank. The Modification
Agreement increased the interest rate on borrowings to the bank's prime
rate 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 earnings before income taxes,
depreciation and amortization ("EBITDA") of at least $50,000 on a three
month trailing basis, beginning January 31, 2004. The minimum EBITDA
requirement was 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 (4.75% at September 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 September 30,
2004, the Company was in compliance with its financial covenants. At
September 30, 2004, the Company had available borrowing capacity under the
Loan Agreement of approximately $1.6 million. As the available borrowing
capacity exceeded $750,000 at September 30, 2004, none of the Company's
cash balance was subject to restriction at September 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 September 30, 2004 and 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: 1)
such borrowings are refinanced on a long-term basis, 2) the subjective
acceleration terms of the Loan Agreement are modified, or 3) such
borrowings will not require the use of working capital within one year.
10
Parlex Shanghai Term Notes - On August 20, 2003, Parlex Shanghai entered
into a short-term bank note for 1.2 million, due August 20, 2004, bearing
interest at 5.841% and guaranteed by Parlex Interconnect. 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 September 30, 2004. On January 14,
2004, Parlex Shanghai entered into two short-term bank notes, due October
12, 2004 for $725,000 and November 10, 2004 for $1.0 million bearing
interest at 5.31% and guaranteed by Parlex Interconnect. On October 11,
2004 Parlex Shanghai renewed the bank note due October 12, 2004 for an
additional six months. The Company intends on renewing the bank note due
November 10, 2004 at similar terms and conditions. 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 September 30, 2004 totaled $3.8 million. 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 the Company's
subsidiary Parlex Asia Pacific Ltd, ("Parlex Asia"). Amounts outstanding
under this short-term note as of September 30, 2004 total $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.
Parlex Interconnect Term Notes - On October 28, 2004, Parlex Interconnect
entered into a $605,000 short-term bank note, due October 27, 2005, bearing
interest at 5.31% and guaranteed by Parlex Shanghai.
Parlex Asia Banking Facility - 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 - In June 2003,
Parlex entered into a sale-leaseback transaction pursuant to which it sold
its corporate headquarters and manufacturing facility located in Methuen,
Massachusetts (the "Methuen Facility") for a purchase price of $9,000,000.
The purchase price 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. In connection with the transaction, 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
11
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 $68,502
within stockholders' equity at September 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
48,717 shares of common stock in October 2003, January, April and July 2004
in satisfaction of previously recorded interest and issued 13,123 shares of
common stock in October 2004 as payment for the interest accrued at
September 30, 2004.
The Notes contain 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 that is being amortized to interest expense over the four 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 accrued interest.
8. 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 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
12
date. The Series A Preferred Stockholders have no voting rights, except
with respect to certain limited matters that directly impact the Series A
Preferred Stock.
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 five 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.
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 September 30, 2004:
Fiscal Year Number Weighted-Average Expiration
Granted Outstanding Exercise 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,
13
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 three months ended
September 30, 2004 and September 28, 2003 was $12,600.
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 an 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 four year
life of the Note and totaled $72,300 for the three months ended September
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.
Treasury Stock - Effective July 1, 2004, companies incorporated in
Massachusetts became subject to the Massachusetts Business Corporation Act,
Chapter 156D. The new Act eliminates the concept of "treasury stock" and
instead Section 6.31 of Chapter 156D provides that shares that are
reacquired by a company become authorized but unissued shares.
Accordingly, shares previously reported as treasury stock by the Company
have been redesignated, at an aggregate cost of $1,037,625, as authorized
but unissued shares. This aggregate cost has been allocated to the common
stock's par value and additional paid in capital.
9. Revenue Recognition
-------------------
Revenue on product sales is recognized when persuasive evidence of an
agreement exists, the price is fixed or determinable, delivery has occurred
and there is reasonable assurance of collection of the sales proceeds. The
Company generally obtains written purchase authorizations from its
customers for a specified amount of product, at a specified price and
considers delivery to have occurred at the time title to the product passes
to the customer. Title passes to the customer according to the shipping
terms negotiated between the Company and the customer. License fees and
royalty income are recognized when earned.
10. Stock-Based Compensation
------------------------
The Company accounts for stock-based compensation to employees and
nonemployee directors in accordance with Accounting Principles Board
("APB") Opinion No. 25 using the intrinsic-value method as permitted by
Statement of Financial Accounting Standards ("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.
14
Had the Company used the fair-value method to measure compensation, the
Company's net loss and basic and diluted net loss per share would have been
as follows:
Three Months Ended
September 30, 2004 September 28, 2003
Net loss attributable to common stockholders $ (866,309) $(2,087,031)
Add stock-based compensation expense
included in reported net loss - -
Deduct stock-based compensation expense
determined under the fair-value method (82,000) (191,000)
---------- -----------
Net loss - attributable to common stockholders
- pro forma $ (948,309) $(2,278,031)
========== ===========
Basic and diluted net loss per share - as reported $ (0.13) $ (0.33)
Basic and diluted net loss per share - pro forma $ (0.15) $ (0.36)
The fair values of the options at the date of grant were estimated using
the Black-Scholes option pricing model with the following assumptions:
Three Months Ended Three Months Ended
September 30, 2004 September 28, 2003
Average risk-free interest rate 2.9% 2.4%
Expected life of option grants 3.5 years 3.5 years
Expected volatility of underlying stock 70% 77%
Expected dividend rate None None
The following is a summary of activity for all of the Company's stock
option plans:
Three Months Ended
September 30, 2004
Weighted-
Shares Average
Under Exercise
Option Price
Outstanding options at beginning of period 567,775 $12.54
Granted 116,500 6.01
Cancelled 17,500 12.06
Exercised - -
------- ------
Outstanding options at end of period 666,775 $11.41
======= ======
Exercisable options at end of period 389,878 $13.52
======= ======
Weighted average fair value of options
granted during the period $ 2.99
======
15
The following table presents weighted average price and life information
about significant option groups outstanding and exercisable at September
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 - $ 6.67 128,500 9.0 $ 6.01 12,000 $ 6.05
8.39 - 10.48 135,000 8.4 9.04 46,250 9.43
11.37 - 13.25 271,525 6.5 12.17 199,878 12.28
15.50 - 16.25 66,250 4.8 16.18 66,250 16.18
18.75 - 19.13 63,500 3.0 18.78 63,500 18.78
22.00 - 22.00 2,000 5.6 22.00 2,000 22.00
------- --- ------ ------- ------
$ 5.67 - $22.00 666,775 6.9 $11.41 389,878 $13.52
======= === ====== ======= ======
11. Income Taxes
------------
Income taxes are recorded for interim periods based upon an estimated
annual effective tax rate. The Company's effective tax rate is impacted by
the proportion of its estimated annual income being earned in domestic
versus foreign tax jurisdictions, the generation of tax credits and the
recording of a valuation allowance.
The Company performs an ongoing evaluation of the realizability of its net
deferred tax assets. As a result of its operating losses, uncertain future
operating results, and past non-compliance with certain of its debt
covenant requirements, the Company determined during fiscal 2003 that it is
more likely than not that certain historic and current year income tax
benefits will not be realized. Consequently, the Company established a
valuation allowance against all of its U.S. net deferred tax assets and has
not given recognition to these net tax assets in the accompanying financial
statements at September 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.
12. Net Loss Per Share
------------------
Basic net loss per share is calculated on the weighted-average number of
common shares outstanding during the period. Diluted net 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:
Three Months Ended
September 30, 2004 September 28, 2003
Net loss $(798,727) $(2,087,031)
Dividends accrued on Series A
preferred stock (67,582) -
--------- -----------
Net loss attributable to common
stockholders $(866,309) $(2,087,031)
16
Antidilutive shares were not included in the per-share calculations for the
three months ended September 30, 2004 and September 28, 2003 due to the
reported net losses for those periods. Antidilutive shares totaled
approximately 1,085,900 and 937,000 for the three months ended September
30, 2004 and September 28, 2003, respectively. All antidilutive shares
relate to outstanding stock options except for 475,625 and 347,500
antidilutive shares for the three months ended September 30, 2004 and
September 28, 2003, respectively relating to warrants issued in connection
with certain debt and equity financings (see Note 8).
13. Comprehensive Loss
------------------
Comprehensive loss for the three months ended September 30, 2004 and
September 28, 2003 is as follows:
Three Months Ended
September 30, 2004 September 28, 2003
Net loss $(798,727) $(2,087,031)
Other comprehensive income (loss):
Foreign currency translation
adjustments 76,710 (57,575)
--------- -----------
Total comprehensive loss $(722,017) $(2,144,606)
========= ===========
At September 30, 2004 and June 30, 2004, the Company's accumulated other
comprehensive loss pertains entirely to foreign currency translation
adjustments.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
information included in this Quarterly Report on Form 10-Q and with
"Factors That May Affect Future Results" set forth on page 27. The
following discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, and is subject to
the safe-harbor created by such Act. Forward-looking statements express our
expectations or predictions of future events or results. They are not
guarantees and are subject to many risks and uncertainties. There are a
number of factors - many beyond our control - that could cause actual
events or results to be significantly different from those described in the
forward-looking statement. Any or all of our forward-looking statements in
this report or in any other public statements we make may turn out to be
wrong. Forward-looking statements can be identified by the fact that they
do not relate strictly to historical or current facts. They use words such
as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" or words of similar meaning. They may also use words such as
"will," "would," "should," "could" or "may". Our actual results could
differ materially from the results contemplated by these forward-looking
statements as a result of many factors, including those discussed below and
elsewhere in this Quarterly Report on Form 10-Q.
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements in our Annual Report on Form 10-K for
the year ended June 30, 2004. However, certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of operations and require the application of significant judgment
by our management which subjects them to an inherent degree of uncertainty.
In applying our accounting policies, our management uses its best judgment
to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical experience,
terms of existing contracts, our observance of trends in the industry,
information provided by our customers, information available from other
outside sources, and on various other factors that we believe to be
appropriate under the circumstances. We believe that the critical
accounting policies discussed below involve more complex management
judgment due to the sensitivity of the methods, assumptions and estimates
necessary in determining the related asset, liability, revenue and expense
amounts.
Overview
We believe we are a leading supplier of flexible interconnects principally
for sale to the automotive, telecommunications and networking, diversified
electronics, military, home appliance, electronic identification, 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 fiscal 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 fiscal year. Growth in the medical, home 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.
During fiscal years 2002, 2003 and 2004 we incurred operating losses of $35.3
million and 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
18
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 September 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 $7.7 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%. In the quarter ended September 30, 2004
revenues from our Chinese operations grew 89% compared to the quarter ended
September 28, 2003. We expect continued revenue growth and improved
profitability in China during fiscal 2005. Failure to obtain the necessary
refinancing of our short-term Chinese debt may have a material adverse impact
on our operations.
Critical Accounting Policies
The U.S. Securities and Exchange Commission 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. 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 our Annual
Report on Form 10-K for the year ended June 30, 2004.
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.
19
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 of the goodwill was $1,157,510 at September 30, 2004 and
June 30, 2004. Based on the current recorded net asset value, we may be
required to record a charge for the impairment of our goodwill in the
future should our stock price consistently remain at a price of less than
approximately $5.00 per share.
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.
20
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, selected items
in our statements of operations as a percentage of total revenue. You
should read the table and the discussion below in conjunction with our
Condensed Consolidated Financial Statements and the Notes thereto.
Three Months Ended
September 30, 2004 September 28, 2003
Total revenues 100.0 % 100.0 %
Cost of products sold 85.1 % 88.7 %
----- -----
Gross profit 14.9 % 11.3 %
Selling, general and
administrative expenses 14.6 % 19.0 %
----- -----
Operating income (loss) 0.3 % (7.7)%
Loss from operations before
income taxes and minority
interest (2.2)% (10.3)%
----- -----
Net loss (2.5)% (10.6)%
----- -----
Three Months Ended September 30, 2004 Compared to Three Months Ended
- --------------------------------------------------------------------
September 28, 2003
- ------------------
Total Revenues. Total revenues for the three months ended September 30,
2004 were $31.5 million versus $19.7 million for the three months ended
September 28, 2003. This represents an increase of $11.8 million or 60%.
Solid revenue growth was recorded in each of our lines of business.
Revenues from our China operations increased to $14.7 million from $7.8
million in the prior year representing an 89% increase for the same period
year over year. Strong growth occurred in the computer and peripheral
market leveraging automated surface mount assembly capabilities installed
late in the prior quarter. Adding surface mount assembly to base flex
circuit manufacturing significantly increased the revenue per circuit
during the period. Increasing value-add capabilities such as automated
surface mount assembly, remains core to our growth strategy. Growth in
China also occurred in several other markets including automotive and
electronic identification.
Polymer thick film revenues totaled $9.5 million increasing 46% versus the
same period of the prior year. Revenues increases continue to be driven by
accelerated growth in the medical market, particularly in disposable
medical devices. Strong performance occurred in both our United Kingdom
and United States manufacturing operations.
Revenues in our Methuen, Massachusetts multilayer manufacturing operations
increased 37% versus the same period of the prior year. Steady growth in
military /aerospace programs has contributed to an improved backlog of base
business. In July 2004, we began transitioning multilayer flex
manufacturing from Delphi Corporation's Irvine, California facility to our
Methuen operation under a strategic sourcing relationship. We expect to
increase shipments from this opportunity over the next several quarters.
Cost of Products Sold. Cost of products sold was $26.8 million, or 85% of
total revenues, for the three months ended September 30, 2004, versus $17.5
million, or 89% of total revenues, for the three months ended September 28,
2003. Reduction in the cost of products sold as a percentage of total
revenues, or correspondingly an improvement in our gross margin, was in
large part driven by manufacturing volume increases. Revenues increased
60%, for the same period year over year, resulting in improved factory
utilization and better absorption of fixed overhead costs. Fixed and
variable manufacturing overhead
21
decreased from 41% of revenues in the first quarter of fiscal 2003 to 31%
of revenues for the current quarter. In addition to improved utilization,
overhead as a percentage of revenue was favorably impacted by a continued
shift of manufacturing to our low cost China operations.
Reductions in manufacturing overhead were in part offset by increases in
material cost. Raw material costs and in particular copper prices
escalated more than 25% during the past year. Similarly, base flexible
materials such as polyimide rose substantially during the year with
worldwide supply constraints. In many cases this has forced increased
pricing to our customers. Long term supply commitments however, do not
always permit price increases, at least in the short term. Rising material
costs continues to place adverse pressure on gross margins.
The Methuen multilayer operation continues to experience low capacity
utilization and, correspondingly, significant unfavorable manufacturing
variances. Revenue in the multilayer operation was severely impacted by
the rapid decline of the telecommunications network infrastructure market.
In fiscal 2001 this market represented over 75% of multilayer revenues. In
the first quarter of fiscal 2005, 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 entered
into a strategic sourcing agreement with Delphi Corporation. Under the
arrangement Delphi Corporation will transfer production of its multilayer
flexible circuit manufacturing to our Methuen operation. In the first
quarter of fiscal 2005 we began manufacturing for Delphi Corporation
although initial shipments only totaled approximately $190,000. We expect
manufacturing to increase significantly over the remainder of the 2005
fiscal year improving facility utilization and further reducing multilayer
operating losses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4.6 million for the three months ended
September 30, 2004 versus $3.7 million for the comparable period in the
prior year. Increases can be primarily attributed to higher commissions
($300,000) on sharp increases in revenues, higher public company costs
($200,000) including legal, audit and insurance, continued escalation of
fringe costs ($100,000) in particular medical expenses, and infrastructure
investment in China ($200,000).
Interest Income. Interest income was $6,000 for the three months ended
September 30, 2004 compared to $5,000 for the three months ended September
28, 2003, and primarily consists of interest income on our cash balances.
Interest Expense. Interest expense was $764,000 for the three months ended
September 30, 2004 compared to $533,000 for the three months ended
September 28, 2003. Interest expense for the period ended September 30,
2004 included $425,000 for amortized deferred financing costs and $69,000
for interest payable in common stock related to issuance of convertible
notes in July 2003. The deferred financing costs are associated with the
sale-leaseback of our Methuen, Massachusetts facility, the Loan Security
Agreement and sale of convertible subordinated note. 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 $0 for the three months
ended September 30, 2004 versus $12,000 for the three months ended
September 28, 2003. Non operating income primarily represents currency
exchange rate gains.
22
Non operating expense. Non operating expense was $26,000 for the three
months ended September 30, 2004 compared to $200 for the three months ended
September 28, 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 $706,000 in the three months ended September
30, 2004 compared to $2.0 million in the three months ended September 28,
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 was approximately 7% for the three
months ended September 30, 2004 versus 0% for the three months ended
September 28, 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,
uncertain future operating results, and the past non-compliance with
certain of our debt covenants requirements, which have 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 recorded no income tax benefits on our U.S. operating losses during the
three months ended September 30, 2004. In fiscal 2003, we established a
valuation allowance against all of our remaining net U.S. deferred tax
assets.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2004, we had approximately $2.5 million in cash and
cash equivalents.
Net cash used by operations during the three months ended September 30,
2004 was $987,000. Net operating losses of $799,000 after adjustment for
minority interest, interest payable in common stock, depreciation and
amortization, provided $995,000 of operating cash. Working capital
consumed $2.0 million of cash. Cash used for working capital included $3.9
million for accounts receivable, $2.3 million for inventory, $3.9 million
from accounts payable, and $242,000 from other working capital sources.
Increases in accounts receivable were primarily driven by revenue growth.
In addition, a pricing dispute with a major customer, which was resolved in
October 2004, contributed $1 million to the increases in accounts
receivable at September 30, 2004. Inventory increases occurred in raw
material, which includes connectors and assembly components ($1.5 million)
and work in process ($600,000). The growth in inventory is in part a
function of our expanded value-add strategy.
Net cash provided by investing activities was $594,000 for the three months
ended September 30, 2004, and was used to purchase capital equipment and
other assets. As of September 30, 2004, we have an additional $187,000 of
capital equipment financed under our accounts payable. We have implemented
plans to control our capital expenditures in order to enhance cash flows.
Cash provided by financing activities was $2.4 million for the three months
ended September 30, 2004 including $2.5 million that represents the net
repayments and borrowings on our bank debt. Payments include $1.2 million
to retire one of Parlex Shanghai's local short-term bank notes.
Improved financial performance in the first quarter of 2005 significantly
reduced operating losses and cash used in operations. Increased sales in
the first quarter of 2005, however, have placed additional cash demands on
working capital with growth in account receivables and inventory. The
strong credit ratings of our large OEM and EMS customer base have allowed
us to successfully finance this growth through our 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".
23
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 Note 8 to the Notes to Unaudited Condensed Consolidated Financial
Statements.
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 was
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
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 (4.75% at September 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 September 30,
2004, we were in compliance with our financial covenants. At September 30,
2004, we had available borrowing capacity under the Loan Agreement of
approximately $1.6 million. Since the available borrowing capacity exceeded
$750,000 at September 30, 2004, none of our cash balance was subject to
restriction at September 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
24
balance sheets as of September 30, 2004 and 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 : 1) such borrowings are refinanced
on a long-term basis, 2) the subjective acceleration terms of the Loan
Agreement are modified, or 3) such borrowings will not require the use of
working capital within one year.
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. 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 September 30, 2004. On January 14, 2004,
Parlex Shanghai entered into two short-term bank notes, due October 12,
2004 for $725,000 and November 10, 2004 for $1.0 million, bearing interest
at 5.31% and guaranteed by Parlex Interconnect. On October 11, 2004,
Parlex Shanghai renewed the bank note due October 12, 2004 for an
additional six months. We intend on renewing the bank note due November
10, 2004 at similar terms and conditions. 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 respectively, bearing interest at 5.31%
and guaranteed by Parlex Interconnect. Amounts outstanding under these
short-term notes as of September 30, 2004 totaled $3.8 million. 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 September 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 - On October 28, 2004, Parlex Interconnect
entered into a $605,000 short-term bank note, due October 27, 2005, bearing
interest at 5.31% and guaranteed by Parlex Shanghai.
Parlex Asia Banking Facility - 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.
Finance Obligation on Sale Leaseback of Methuen Facility - In June 2003, we
entered into a sale-leaseback transaction pursuant to which we sold our
corporate headquarters and manufacturing facility located in Methuen,
Massachusetts (the "Methuen Facility") for a purchase price of $9,000,000.
The purchase price 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
25
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 $68,502 within stockholders' equity at September
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, we
issued a total of 48,717 shares of common stock in October 2003, and in
January, April and July 2004 in satisfaction of the previously recorded
interest. We also issued 13,123 shares of common stock in October 2004 as
payment for the interest accrued as of September 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 four
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 accrued interest.
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
Corporation 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
26
improve capacity utilization by either acquiring multilayer flexible
circuit businesses or entering into strategic relationships for their
production.
In fiscal years 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.
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 September 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 September 30, 2004, we were
in compliance, and we expect to remain in compliance, with all of our
financial covenants associated with our financing arrangements.
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.
27
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" in our Form
10-K filing for the period ended June 30, 2004. For additional information
relating to the sale of Preferred Stock and related warrants, please see
"Market for Registrant's Common Equity and Related Stockholder Matters -
Recent Sales of Unregistered Securities - Series A Preferred Stock and
Warrants" in our Form 10-K filing for the period ended June 30, 2004.
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 September 30, 2004, we
had approximately $26.0 million of consolidated debt of which $15.4 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 34% 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,
28
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 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.
29
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.
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.
30
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 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
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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 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.
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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 8 patent applications pending in the United
States and have several corresponding foreign patent applications pending.
Our existing patents may not effectively protect our intellectual property
and could be challenged by third parties, and our future patent
applications, if any, may not be approved. In addition, other parties may
independently develop similar or competing technologies. Competitors may
attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. If we fail to adequately protect our
proprietary rights, our competitors could offer similar products using
materials, processes or technologies developed by us, potentially harming
our competitive position and our revenues.
If we become involved in a protracted intellectual property dispute, or one
with a significant damages award or which requires us to cease selling some
of our products, we could be subject to significant liability and the time
and attention of our management could be diverted.
Although no claims have been asserted against us for infringement of the
proprietary rights of others, we may be subject to a claim of infringement
in the future. An intellectual property lawsuit against us, if successful,
could subject us to significant liability for damages and could invalidate
our proprietary rights. A successful lawsuit against us could also force
us to cease selling, or redesign, products that incorporate the infringed
intellectual property. We could also be required to obtain a license from
the holder of the intellectual property to use the infringed technology.
We might not be able to obtain a license on reasonable terms, or at all.
If we fail to develop a non-infringing technology on a timely basis or to
license the infringed technology on acceptable terms, our revenues could
decline and our expenses could increase.
We may, in the future, be required to initiate claims or litigation against
third parties for infringement of our proprietary rights or to determine
the scope and validity of our proprietary rights or the proprietary rights
of competitors. Litigation with respect to patents and other intellectual
property matters could result in substantial costs and divert our
management's attention from other aspects of our business.
Market prices of technology companies have been highly volatile, and our
stock price may be volatile as well.
From time to time the U.S. stock market has experienced significant price
and trading volume fluctuations, and the market prices for the common stock
of technology companies in particular have been extremely volatile. In the
past, broad market fluctuations that have affected the stock price of
technology companies have at times been unrelated or disproportionate to
the operating performance of these companies. Any significant fluctuations
in the future might result in a material decline in the market price of our
common stock.
33
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
34
you require dividend income. The only return on your investment in our
common stock, if any, would most likely come from any appreciation of our
common stock.
We may have exposure to additional income tax liabilities.
As a multinational corporation, we are subject to income taxes in both the
United States and various foreign jurisdictions. Our domestic and
international tax liabilities are subject to the allocation of revenues and
expenses in different jurisdictions and the timing of recognizing revenues
and expenses. Additionally, the amount of income taxes paid is subject to
our interpretation of applicable tax laws in the jurisdictions in which we
file. From time to time, we are subject to income tax audits. While we
believe we have complied with all applicable income tax laws, there can be
no assurance that a governing tax authority will not have a different
interpretation of the law and assess us with additional taxes. Should we
be assessed with significant additional taxes, there could be a material
adverse affect on our results of operations or financial condition.
We could use preferred stock to resist takeovers, and the issuance of
preferred stock may cause additional dilution.
Our Articles of Organization authorizes the issuance of up to 1,000,000
shares of preferred stock, of which 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 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The following discussion about our market risk disclosures involves forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements.
We are exposed to market risk related to changes in U.S. and foreign interest
rates and fluctuations in exchange rates. We do not use derivative financial
instruments.
35
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 September 30, 2004, we had an outstanding balance under our primary
bank facility of $7,355,000 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 $63,000 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.
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 September 30, 2004 of approximately $20.6 million. Poly-Flex Circuits
Limited and Parlex Europe had combined net assets as of September 30, 2004 of
approximately $5.9 million. We believe that a 10% change in exchange rates
would not have a significant impact upon our financial position, results of
operation or outstanding debt. As of September 30, 2004, Parlex Shanghai had
outstanding debt of approximately $7.7 million. As of September 30, 2004,
Poly-Flex Circuits Limited had no outstanding debt.
Item 4. Controls and Procedures
- --------------------------------
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that we are
required to file under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer
and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. Management 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 September 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.
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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.
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PART II - OTHER INFORMATION
---------------------------
Item 6. EXHIBITS
Exhibits - See Exhibit Index to this report.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PARLEX CORPORATION
------------------
By: /s/ Peter J. Murphy
--------------------------------
Peter J. Murphy
President and Chief Executive
Officer
By: /s/ Jonathan R. Kosheff
--------------------------------
Jonathan R. Kosheff
Treasurer & CFO
(Principal Accounting and
Financial Officer)
November 12, 2004
-----------------
Date
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
10.1 Change of Control Agreement, dated July 21, 2004 by and
between Parlex Corporation and Thibaud LeSeguillon (filed
herewith).
10.2 Change of Control Agreement, dated July 21, 2004 by and
between Parlex Corporation and Eric Zanin (filed herewith).
10.3 Form of Stock Option Grant Agreement under Parlex
Corporation's 1989 Employees' Stock Option Plan (file
herewith).
10.4 Form of Stock Option Grant Agreement under Parlex
Corporation's 1996 Outside Directors' Stock Option Plan (file
herewith).
10.5 Form of Stock Option Grant Agreement under Parlex
Corporation's 2001 Employees' Stock Option Plan (file
herewith).
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)
40