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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 0-12942
PARLEX CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2464749
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
145 Milk Street, Methuen, Massachusetts 01844
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 978-685-4341
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of exchange on
Title of each Class which registered
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Common Stock ($.10 par value) Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value of shares of the Registrant's Common Stock,
par value $.10 per share, held by non-affiliates of the Registrant at
September 24, 1997 as computed by reference to the closing price of such
stock was approximately $47,757,717.
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at September 24, 1997 was 3,593,310 shares.
Documents Incorporated By Reference
Portions of the definitive proxy statement to be filed with the
Commission within 120 days after the close of the fiscal year are
incorporated by reference into Part III of this report.
Part I
Item 1. Business.
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Parlex is a leading supplier of flexible interconnects principally
for sale to the automotive, military/aerospace, computer,
telecommunications and industrial markets. The Company's product
offering, which the Company believes is the broadest of any company in the
flexible interconnect industry, includes flexible circuits, laminated
cables, flexible/cable hybrid circuits and flexible interconnect
assemblies. Flexible circuits, which consist of conductive copper
patterns that are laminated to flexible substrate materials such as
polyimide or polyester, are used to provide connections between components
and electronic systems and as a substrate to support electronic devices.
Laminated cables, which consist of flat or round wire laminated to a
flexible substrate material, provide connections between electronic sub-
systems and replace conventional wire harnesses. Flexible/cable hybrid
circuits combine the lower cost of laminated cable with the technology of
flexible circuits into a single cost-effective interconnect. Flexible
interconnect assemblies are formed by adding components such as integrated
circuits, connectors, resistors and capacitors to flexible circuits or
laminated cables. The advantages of flexible interconnects over
alternative technologies such as rigid printed circuits include three-
dimensional packaging and superior thermal qualities as well as reduced
size and weight. The Institute for Interconnecting and Packaging of
Electronic Circuits ("IPC"), an international trade organization,
estimates that worldwide sales of flexible circuits in 1996 exceeded $2.5
billion. The IPC has reported that the flexible circuit industry in North
America has grown at rates between 17% and 19% in each of the past three
years.
The Company believes that its creative engineering expertise and its
ability to advance the technology of manufacturing processes and materials
allow it to provide its customers with a comprehensive range of flexible
interconnect solutions. Beginning at the design phase, the Company's
design engineers work closely with its customers to ensure the
produceability of a design. Once a design has been completed, the Company
utilizes its innovative materials and processes, including PALFlex,
PALCoat, U-Flex, Polyamber, Pemacs and PALCore, to produce a flexible
interconnect product that meets its customers' performance needs and cost
objectives.
The Company's objective is to be the supplier of choice for key
customers in markets where cost-effective flexible interconnects provide
added value to the customers' products. Within its targeted market
segments, the Company believes that its ability to develop strategic
customer relationships and provide a broad product offering serves as a
competitive advantage. These relationships have enabled the Company to
work closely with its customers from the design phase through production
to ensure that its customers' flexible interconnect requirements are met.
In fiscal 1997, the Company's top customers in terms of revenues were
Motorola, Texas Instruments, Northern Telecom, Allied-Signal, Delco
Electronics and Compaq Computer.
An important element of the Company's growth strategy has been
diversification among its targeted markets. Since 1992, the Company has
reduced revenues from military/aerospace applications from approximately
53% to 21% of total revenues, while increasing overall revenues by
approximately 92% over the same period. As a result of the Company's
growth in recent years, the Company has expanded its manufacturing
operations to better accommodate its customers' geographic and cost
requirements. In 1995, the Company established Parlex (Shanghai) Circuit
Co., Ltd. ("Parlex Shanghai"), a joint venture in China designed to serve
the Asian market with flexible circuits as well as to produce certain
products more cost-effectively for North American customers. The Company
is planning to expand its manufacturing facilities and acquire equipment to
increase capacity and accommodate new technology at all of its manufacturing
locations during fiscal 1998.
Industry Overview
Over the past two decades electronic systems have become smaller,
lighter and more reliable, while demands for performance at lower costs
have increased dramatically. Although rigid printed circuits are a
conventional form of electronic packaging, their two-dimensional form
limits the options available to the design engineer. As the demand for
more portable electronic packaging has increased, so too has the demand
for flexible, three-dimensional circuits. In addition to the improved
packaging and performance characteristics, flexible circuits offer
superior thermal dissipation characteristics compared to rigid circuits,
making flexible circuits attractive for use in advanced, high-speed
electronics.
Flexible interconnects are used in most segments of the electronics
industry. The primary market segments that place high value on superior,
cost-effective flexible interconnect solutions include:
Automotive. Automobile manufacturers increasingly use electronics
to enhance vehicle performance and functionality, while at the same time
reducing electronic component size, weight and manufacturing and assembly
costs. Flexible circuits and laminated cables can provide cost-effective
interconnect solutions for such applications as dashboard instrumentation,
automotive entertainment systems, electronic engine control units,
steering wheel controls, power distribution, sensors and anti-lock brakes.
Providers of flexible interconnects typically work closely with the
companies that supply these electronic systems to the vehicle
manufacturers. Because automotive production cycles generally last three
to five years and designs are unlikely to change during that period, a
flexible interconnect that is designed into an automobile model or
platform provides a relatively predictable source of demand over an
extended time period.
Telecommunications. The telecommunications market has two distinct
segments: infrastructure equipment and subscriber equipment.
Infrastructure equipment consists of support electronics for the
distribution of voice and data transmission. The growth of data transfer
via the Internet has dramatically increased demand for this type of
equipment. Infrastructure equipment employs sophisticated electronics
which usually require the use of complex flexible interconnects.
Subscriber equipment consists of cellular devices including battery
assemblies. Tight packaging and the need to reduce weight have driven the
demand for flexible interconnects in this segment. Laminated cables and
single- and double-sided flexible circuits are generally used in
subscriber equipment.
Computer. The IPC has reported that the computer market represents
approximately 37% of the worldwide consumption of flexible interconnects.
Demand for flexible circuits and laminated cable in this market is driven
by short product life cycles as consumers demand increasingly powerful,
less expensive, smaller, faster and lighter equipment. Disk drives
represent the largest application for flexible circuits in this market.
Other applications include notebook displays, mass storage devices and
interconnects for peripheral equipment such as scanners, printers and
docking stations.
Military/Aerospace. Military/aerospace electronics were at one time
the primary applications for flexible circuitry. Because of product
complexity and space restrictions, aerospace requirements often demand
multilayer rigid-flexible circuits. Typical applications are navigation
systems, flight controls, displays, communications equipment and
munitions. Although overall spending in this segment has decreased, the
Company estimates procurement of flexible interconnects will continue to
experience modest growth. The Company believes that the trend toward
"smart" military systems will continue to drive demand for flexible
interconnects in this segment.
Industrial. The industrial market, which the Company defines to
include medical electronics, encompasses many applications. Virtually any
electronic device in which tight packaging, light weight or high
reliability is a priority is a candidate for flexible interconnects.
Typical applications include electronic scales, industrial controls,
metering devices, scanners, sensors and medical monitoring equipment.
The Parlex Solution
Parlex combines creative engineering design capabilities with
innovative manufacturing processes to provide its customers with a
complete and cost-effective flexible interconnect solution. The solution
begins in the design phase, where Parlex engineers typically work closely
with customers to develop a technically superior flexible interconnect
design. Although the Company's customers generally provide the initial
engineering guidelines for a particular interconnect, the Company's design
engineers are often called upon to work in tandem with a customer's design
team to develop a solution. An important part of the Parlex solution is
ensuring the produceability of a design at an early stage-before time and
money are spent on manufacturing.
Once the design is completed, the Company applies its experience
with innovative materials and manufacturing processes to produce a
flexible interconnect solution that meets the customer's needs and cost
objectives. The Company has developed materials and processes that
provide its customers improved performance at a lower cost. Over the past
several years the Company has gained substantial experience in introducing
programs for high-volume products, and it believes this expertise is a key
factor in its ability to provide its customers with cost-effective
flexible interconnect solutions.
The Company believes manufacturers with the capability to supply a
broad range of products with a diverse mix of performance characteristics
and with a global presence will capture additional market share in the
flexible interconnect industry. The Company is one of a limited number of
independent manufacturers that offers a range of flexible interconnect
solutions from design concept through high-volume production. By offering
its broad range of products and services, the Company can provide design
and manufacturing solutions for its customers while reducing its
customers' time-to-market and product development costs.
Strategy
The Company's objective is to be the flexible interconnect supplier
of choice for key customers in its target markets. The Company's strategy
to achieve this objective includes the following key elements:
* Develop Innovative Processes and Materials. The Company
believes that its ability to develop innovative materials and
processes enhances the opportunity for growth within its
targeted markets. The Company intends to continue to focus its
development efforts on proprietary flexible materials and
processes that have a broad range of applications. These
materials and processes enable the Company to produce cost
-effective flexible interconnects, at reduced cycle time, that
are reliable and improve its customers' product performance.
The Company's PALFlex, PALCoat, Polyamber, U-Flex and PALCore
technologies are examples of materials and manufacturing
processes that have resulted from the Company's focus on
innovation.
* Develop Strategic Relationships with Target Customers. The
Company seeks to develop strategic relationships with key
customers in targeted industries. As a value-added strategic
partner with its customers, the Company works with a customer's
technology roadmap to design and develop cost-effective flexible
interconnect solutions. The Company believes that these
relationships are most effective where the Company is providing
a significant portion of a customer's flexible interconnect
requirements. Through these strategic relationships, the
Company achieves greater visibility into the customer's entire
range of flexible interconnect requirements.
* Diversify Customer Base across Specified Markets. The Company
seeks to serve a variety of markets to help mitigate the effects
of economic cycles in any one industry. The Company's business
units are aligned to specific market segments in order to better
understand and service customers within particular industries.
In addition, the Company believes its diversification among the
major segments provides greater insight into emerging
technological requirements. For example, the Company has
applied its knowledge of shielding requirements in the computer
industry to gain a competitive advantage in the
telecommunications market.
* Offer the Broadest Range of Products in the Flexible
Interconnect Industry. The Company intends to continue to
provide a broad product offering that allows it to service
virtually all of its customers' flexible interconnect
requirements. Parlex is not aware of any other company in the
flexible interconnect industry that offers a broader range of
products. The Company's product line includes flexible and
rigid-flexible circuits from one to 24 layers, laminated cables,
flexible/cable hybrid circuits and flexible interconnect
assemblies. The Company uses a variety of materials in its
products, including adhesiveless and adhesive-based polyimide as
well as polyester.
* Expand Global Presence. The Company believes that flexible
interconnect customers will increasingly require service on a
global basis. To address these requirements, the Company has
continued to expand its global presence in emerging markets and
throughout the world. For example, the Company established a
joint venture company in China as a base for its operations in
that region and to serve the emerging market in China. The
Company has also developed, and plans to continue to develop,
strategic relationships and alliances that it believes are
necessary for the success of its international business. The
Company is also exploring the formation of a joint venture to
produce laminated cables in Asia where it believes the market
for this product is substantially greater than in North America.
Current Products
The Company's current products include flexible circuits, laminated
cables, flexible/cable hybrid circuits and flexible interconnect
assemblies. The products are produced to customers' application-specific
requirements and are designed by the Company, the customer or jointly.
Lead times for the design and manufacture of the Company's products
generally range from one week for some products to three months for more
sophisticated products.
Flexible Circuits
Flexible circuits, which consist of conductive copper patterns that
are laminated to flexible substrate materials such as polyimide or
polyester, are used to provide connections between electronic components
and as a substrate to support these electronic devices. The circuits are
manufactured by passing base materials through multiple processes such as
drilling, photo imaging, etching, copper plating and finishing. Flexible
circuits can be produced in single or multiple layers. The Company
produces a wide range of flexible circuits including:
* Single-Sided Flexible Circuits have a conductive pattern only on
one side and are commonly used for cellular phones, batteries
for portable electronics and dashboard displays. Parlex has
converted many double-sided flexible circuits to single-sided by
incorporating its HSI+ (high speed interconnect) screening
technology that incorporates superior shielding qualities and
eliminates a separate shield layer. The Company manufactures
single-sided circuitry in both the United States and at Parlex
Shanghai, where substantially all of the production to date has
been single-sided.
* Double-Sided Flexible Circuits have conductive patterns on both
sides which are interconnected by a drilled and copper-plated
hole. The Company's double-sided circuits are used primarily in
the automotive market. Other applications include high
definition displays, instrumentation products and digital data
converters.
* Multilayer and Rigid-Flexible Circuits consist of layers of
circuitry that are stacked and laminated. These circuits are
used where the complexity of the electronic design demands
multiple layers of flexible circuitry. If some of the layers
are rigid board material, the product becomes a rigid-flexible
circuit. Multilayer and rigid-flexible circuits are common in
military applications for flight computers, multipurpose
displays and flight control systems. In commercial
applications, these products are used on high speed telephone
distribution equipment, computer networking electronics and
patient monitoring devices. The Company has manufactured these
circuits with up to 40 layers in prototype programs and 24
layers in production.
Laminated Cables
The Company manufactures laminated cables in an efficient roll
process proprietary to Parlex. Substantially all of the laminated cable
that the Company produces uses flat wire. Approximately 70% of the
laminated cable that the Company produces is insulated with polyester
material allowing for maximum flexibility while the remainder is insulated
with polyimide material for its enhanced performance at elevated
temperatures. The Company's laminated cables are capable of handling both
power (high current) and signal (low current) levels.
Improving the process by which laminated cable is manufactured can
increase functionality and lower the cost of production. To this end, the
Company has developed U-Flex, a technique that forms conductors into a
u-shape, followed by an injection molding process which provides the
function of a connector. This technique improves electrical performance
and eliminates the need for a separate costly connector. The Company has
also developed Pemacs shielding, which adds a specially designed silver
ink to laminated cable to meet stringent electronic shielding requirements
without compromising flexibility. The Company's Autoline cable process
incorporates pushpins into the laminated cable to provide for automatic
alignment to a printed circuit board for subsequent soldering.
Flexible/Cable Hybrid Circuits
In many cases, although a laminated cable is capable of carrying the
necessary signals, etched circuitry is required for termination. For
these applications the Company manufactures flexible/cable hybrid
circuits, which take advantage of the lower cost of laminated cables and
the technology of flexible circuits by combining them into a single
interconnect. Flexible/cable hybrid circuits are currently used in
switching stations, postage metering devices and electronic scales. On
some products, Parlex adds its HSI+ process to the flexible/cable hybrid
circuit to provide signal clarity and shielding to the cable and the
flexible circuit.
Flexible Interconnect Assemblies
Both flexible circuits and laminated cables can be converted into an
electronic assembly by adding electronic components. This process can be
as simple as adding a connector or as complex as assembling and soldering
many components such as capacitors, resistors and integrated circuits. In
some cases, the Company subcontracts with electronic manufacturing service
companies for component placement and attachment.
The following table describes applications in which the Company's
products are used:
Product Applications
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Flexible Circuits
Single-Sided Batteries for Cell Phones
VCRs
Computer Networks
Double-Sided Engine Controls
Laptop Computers
Cellular Phones
Multilayer and Rigid-Flexible Computer Networks
Telecom Switching Stations
Aircraft Displays
Portable Medical Monitors
Laminated Cables
Standard Postage Meters
U-Flex Automotive Sound Systems
ZIF Laptop Computers
Pemacs Industrial Controls
Autoline Automotive Sound Systems
Flexible/Cable Hybrid Circuits Printers
Electronic Scales
Switching Stations
Flexible Interconnect Assemblies Aircraft Identification Systems
Sensors
Scanning Devices
Batteries for Portable Products
Disk Drives
Night Vision Systems
New Product Development
An important part of the Company's strategy is development of new
materials, processes and products. During the past three fiscal years,
the Company has invested an aggregate of $7.3 million in research and
development. The Company believes that its commitment to innovation is
evidenced by the fact that it has developed new materials for use in its
products even though it is not considered a materials supplier. The
Company has developed the following new products:
PALFlex. The Company has developed an adhesiveless polyimide-based
material, PALFlex (Parlex Adhesiveless Laminate for Flex). PALFlex is
both a material and a manufacturing process that the Company believes is
an enabling technology that provides superior performance at a lower cost
than with traditional copper-clad materials. PALFlex provides additional
cost benefits by allowing the Company to combine certain material
manufacturing steps with circuit manufacturing, eliminating several major
process steps including conventional drilling, plasma etching, copper
deposition and copper plating. PALFlex has been developed for high volume
automotive applications but could potentially be used across a number of
product lines. Because PALFlex is produced in roll form and the copper
thickness can be controlled to tight tolerances, the Company believes that
PALFlex may serve as the foundation for the Company's development of
products to serve the emerging fine line, micro-via market. The Company
shipped its first product incorporating the current version of PALFlex in
September 1997.
PALCoat. Working closely with Coates ASI, a materials manufacturer,
and Teledyne HALCO, an equipment manufacturer, the Company developed
PALCoat, a new material for coating the outside of the circuit. PALCoat
has been designed to provide the electrical and physical characteristics
required for a new generation of products but at a substantially lower
cost than what is commercially available. PALCoat is in production
validation testing with two of the Company's automotive customers, and the
Company currently expects to begin production in November 1997.
Polyamber. Parlex has worked closely with a materials manufacturer
to develop an alternative dielectric to polyimide and polyester. The
Company recognized that polyimide is too expensive to compete with
alternative materials when the performance of polyimide is not required,
and that less expensive polyester has limited soldering capability and is
unsuitable in extreme cold. The Company's solution was to develop
Polyamber, a polyethylene napthalate, made to look like polyimide, as a
lower cost alternative to polyimide but with better thermal
characteristics than polyester. The Company believes that Polyamber may
be a cost-effective solution in applications such as cellular battery
products and industrial controllers. The first product incorporating
Polyamber was shipped in September 1997.
PALCore. The Company developed PALCore as a low-cost multilayer
flexible material to minimize the difference between the cost of materials
used in flexible circuits and those used in conventional rigid circuits.
The Company has licensed PALCore to Allied-Signal and Polyclad Laminates
for thin core rigid board applications, which are products that the
Company does not produce. Parlex receives a royalty in connection with
sales by the licensees. The Company first shipped product in low volumes
using PALCore in fiscal 1996.
Joint Venture and Strategic Relationships
Parlex Shanghai Joint Venture. In 1995 the Company established a
joint venture company in China, Parlex Shanghai, to manufacture and sell
flexible circuits. The participants in Parlex Shanghai are the Company
(50.1% equity), the Shanghai 20th Radio Factory, a Chinese printed circuit
board company (40.0% equity), and Mascon, Inc., a Massachusetts-based
international marketing and manufacturing company (9.9% equity). The
Company established Parlex Shanghai to better serve customers and
potential customers that have manufacturing facilities in Asia and to more
cost effectively manufacture certain products for worldwide distribution.
Parlex Shanghai commenced operations in September 1995 and serves
customers both in North America and Asia. Parlex Shanghai's largest
China-based customer is a General Motors Chinese joint venture and its
largest United States-based customer is Thomas & Betts. In addition to
serving customers in Asia, Parlex Shanghai provides the Company with a
competitive production capability for lower technology products to serve
the Company's customers in other parts of the world.
Samsung Agreement. In September 1994, the Company entered into a
five-year manufacturing and sales agreement with Samsung Electro-Mechanics
Co., Ltd. of Korea ("Samsung") whereby Samsung was granted the exclusive
right to manufacture flexible multilayer and rigid-flexible products in
Korea using the Company's PALCore technology. Under the terms of the
agreement, Samsung may only sell PALCore products to the Company,
customers designated by the Company or to pre-existing Samsung customers
approved by the Company.
Pucka Agreements. In 1996 the Company granted Pucka Industrial Co.,
Ltd. of Taiwan ("Pucka") a five-year exclusive, area specific license to
design, manufacture and sell flexible circuits using the Parlex HSI+
shielding process in Taiwan and, with the prior approval of the Company,
other territories. During the term of the agreement and for a period of
three years thereafter, Pucka may not sell, manufacture or distribute any
flexible circuit technology product which competes with the Company's
products using the Company's HSI+ shielding processes. Under a separate
agreement, the Company appointed Pucka as its sole and exclusive
distributor and independent sales representative for laminated cable in
Taiwan and, with prior approval of the Company, other territories.
Customers
The Company's customers are a diverse group of original equipment
manufacturers that serve a variety of industries. A list of
representative customers appears below:
Automotive Computer Industrial
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Delco AMP Foxboro
Delphi Compaq Hewlett Packard
Motorola EMC Pitney Bowes
Siemens Thomas & Betts Texas Instruments
Military/Aerospace Telecommunications
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Allied-Signal Motorola
Lockheed Northern Telecom
Raytheon
Textron
In fiscal 1997, the Company sold products to approximately 700
customers, counting divisions within certain major companies as separate
customers. In fiscal 1995, 1996 and 1997, sales to several divisions of
Motorola comprised approximately 12%, 29% and 20%, respectively, of the
Company's total revenues. The Company's top 20 customers accounted for
approximately 61%, 66% and 69% of total revenues in fiscal 1995, 1996 and
1997, respectively.
Sales and Customer Service
The Company has organized its sales and customer service into
business units that are tied to the following specific industry segments:
automotive, military/aerospace, telecommunications, computer and
industrial. The Company believes that this organizational structure
allows its business unit managers to increase their focus on a specific
industry and develop targeted customers within those industries. Business
unit managers are assigned customer service representatives to support
their customers' day-to-day requirements. The business unit managers draw
upon the expertise of the Company's engineering staff as an integral part
of the sales process. In the United States, business unit managers
coordinate the efforts of a network of 19 independent manufacturers'
representative organizations. In fiscal 1997, manufacturers'
representative organizations accounted for approximately 60% of total
revenues.
The sales process involves extensive work with the customer's design
engineers and the Company's design and engineering staff. The business
unit manager then works closely with the Company's applications engineers
to prepare a feasibility study to assess the cost of producing the
interconnect solution to the customer's specifications. The process can
often involve multiple design and manufacturing iterations to assure that
the product can be produced to specifications at the lowest possible cost.
The business unit manager leads the Company's effort to become the
preferred supplier with target customers. The manager's ability to
understand the quality, cost, delivery, technology and service objectives
of target customers is critical to the Company's goal of achieving the
highest level of customer satisfaction. In order to develop strategic
relationships with target customers, the Company has participated in joint
training, engineering seminars, manufacturing intern programs and as
members of customers' problem solving teams. The Company often has access
to a customer's materials resource planning schedule, which allows the
Company to better forecast the customer's near- and mid-term requirements.
The Company has direct sales and customer support offices in
Austin, Texas and San Diego, California. The Company uses these offices
to provide applications engineering, logistical support and coordination
of activities between the customer and the Company. The Company has
entered into agreements with distribution companies in Singapore and in
France to provide forward stocking and inventory coordination for regional
customers. These relationships obviate the requirement to establish a
local presence, while providing the customer with service comparable to
that of a local provider.
Under the terms of the Chinese joint venture agreement, Parlex
Shanghai has agreed that it will sell its products outside China only
through the Company and Mascon. In turn, the Company has agreed that it
will sell flexible circuits in China only through the joint venture.
Manufacturing Processes
The Company's manufacturing processes are designed to accommodate
high throughput, as well as to minimize cost and maximize yield. All of
the Company's manufacturing facilities are certified to the international
standard ISO 9002. The Company is in the process of having its facilities
certified to the automotive standard QS 9002.
The manufacturing process varies a great deal from product to
product. While the production of laminated cable is a "dry" process
incorporating virtually no chemical treatment, a multilayer flexible
circuit is processed through a dozen or more chemical operations.
Although there is no standard process, significant elements of production
are highlighted in the following chart:
"Dry" "Wet" Laminated
Flexible Circuit Flexible Circuit Cable
Processes Processes Processes
---------------------------- ----------------- -----------------
Drilling Copper deposition Lamination
Automated optical inspection Carbon coating Slitting
Lamination Chemical cleaning Conductor forming
Electrical testing Developing Injection molding
Routing Etching Shielding
Die cutting Solder leveling Laser skiving
Assembly Gold plating Assembly
The Company's computer aided manufacturing system takes the
customer's design and programs the various steps that will be required to
manufacture the particular product. The product then follows the
appropriate production flow until finally released for shipment by the
quality organization.
The Company believes that its substantial capital investment and its
manufacturing expertise in a number of specialized areas have contributed
to its position as an industry leader. A substantial amount of the
Company's production equipment is unique to its processes and
technologies. Examples include cable laminators, roll plating, roll
etching, precision cable slitters and automatic punching equipment.
The Company is planning to add capacity at all of its facilities.
In the Methuen, Massachusetts facility, the Company plans to add an
additional 35,000 square feet to its current manufacturing space of
125,000 square feet. In the Salem, New Hampshire facility, the Company's
manufacturing space will be expanded by 12,000 square feet to a total of
46,000 square feet. Parlex Shanghai has a leased facility in Shanghai,
China of approximately 24,000 square feet and intends to expand or move to
a larger facility in order to support growth. The Company also plans to
acquire equipment including additional PALFlex roll process lines for
automotive and potential fine line micro via applications, and to build
related clean rooms, fine line imaging and roll develop-etch-strip and
inspection lines. At its laminated cable facility, the Company plans to
add two lamination lines as well as additional injection molding and
finishing equipment.
Materials and Materials Management
The Company aggressively attempts to control the cost of purchased
materials and the level of inventories. The Company believes it benefits
from long-term relationships with its suppliers. The Company's goal is to
attain a competitive price from suppliers and foster a shared vision
towards advancing technology.
The Company purchases raw circuit materials, process chemicals and
various components from multiple outside sources. The Company often makes
long-term purchasing commitments with key suppliers for specific customer
programs. These suppliers commit to provide cooperative engineering as
required and in some cases to maintain a local inventory in order to
provide shorter lead times and reduced inventory levels for the Company.
In many cases the Company's customers approve, and often specify, sources
of supply. The Company relies on key suppliers for certain raw materials.
Top Five Suppliers in Fiscal 1997
Supplier Items Supplied
-------- --------------
Dupont Flexible Laminates
Coverlay Film
AMP Connectors
Sheldahl Flexible Laminates
Cable Insulation
Steel Heddle Copper Wire
JAE Connectors
The Company qualifies its suppliers through a vendor rating system
which limits the number of suppliers to those that can provide the Company
with the best total value and quality. The Company monitors each
supplier's quality, delivery, service and technology to insure that the
Company will receive materials that meet its objectives.
Management Information Systems
The Company presently has a mainframe-based information system that
allows for integration of manufacturing, accounting, sales, material
management and engineering data. The Company recently entered into a
contract with a systems integrator to develop a client/server system that
will enhance the timeliness and quality of information concerning the
Company's operations. This system is designed to automate the Company's
activity-based cost system and provide automatic quoting and quote
tracking. The new system, which is scheduled to be fully implemented by
July 1998, will enable the Company to make software changes more easily,
allowing faster project completion and improved customer satisfaction.
Competition
The Company's business is highly competitive. The Company competes
against other manufacturers of flexible interconnects as well as against
manufacturers of rigid printed circuits. Competitive factors among
flexible circuit and laminated cable suppliers are price, product quality,
technological capability and service. The Company believes that it
competes favorably with respect to these competitive factors, but believes
that its competitive strength is in its ability to apply technology to
reduce cost. The Company competes against rigid board products on the
basis of product versatility, although price can also be a competitive
factor if the difference between the cost of a rigid circuit and a
flexible circuit becomes too great. The principal competitors for
flexible circuits are Sheldahl (automotive), AdFlex (telecommunications),
M-Flex (computer) and Flex Circuits, Inc. (aerospace). For laminated
cable, the principal competitors are AMP and Fujikura Ltd. (a Japanese
company).
Backlog
The Company's backlog consists of orders for which a written
purchase order has been received. In situations where the order requires
an engineering effort, it will be included in backlog even though a
delivery schedule will not be finalized until this phase is completed. On
some major multi-year contracts, such as with Motorola, the customer's
forecast for a 13-week period is added to backlog at the end of each
quarter. The Company's standard purchase orders are cancelable, but
require the payment of certain costs upon cancellation. A certain portion
of the Company's backlog may be subject to cancellation without
significant penalty. The Company's backlog as of June 30, 1996 and June
30, 1997 was constant at approximately $23 million despite a 17% increase
in revenues, reflecting the Company's shorter manufacturing cycle times.
Due to the timing of orders, delivery intervals, product mix and the
possibility of customer changes in delivery schedules, the Company's
backlog at any particular date may not be indicative of actual sales for
any succeeding period.
Intellectual Property
The Company has acquired patents and it seeks patents on new
products and processes where it believes patents would be appropriate to
protect the Company's interests. Although the Company believes that
patents are an important part of its competitive position, it does not
believe that any single patent or group of patents is critical to its
success. Due to the rapid technological change in its business, the
success of its business depends more on its design creativity and
manufacturing expertise than on patents and other intellectual property.
The Company owns 17 patents issued in the United States and has applied
for corresponding patents with certain relevant foreign patent offices.
Federal trademark registrations have been obtained for PALFlex, PALCore
and U-Flex and the Company has applied for registration of PALCoat. The
Company also relies on internal security measures and on confidentiality
agreements for protection of trade secrets and proprietary know-how.
There can be no assurance the Company's efforts to protect its
intellectual property will be effective to prevent misappropriation or
that others may not independently develop similar technology.
Under the terms of the Chinese joint venture agreement, the Company
transferred certain technology to Parlex Shanghai and has agreed to
provide it with additional technology and expertise as the joint venture's
capabilities and markets develop. Certain technology, including PALFlex,
is excluded from the arrangement.
Environmental Regulations
Flexible circuit manufacturing requires the use of metals and
chemicals. Water used in the manufacturing process must be treated to
remove metal particles and other contaminants before it can be discharged
into the municipal sanitary sewer system. The Company operates and
maintains water effluent treatment systems and uses approved laboratory
testing procedures to monitor the effectiveness of those systems at its
Methuen, Massachusetts facility. The Company operates those treatment
systems under effluent discharge permits issued by a number of
governmental authorities. Air emissions resulting from the Company's
manufacturing processes are regulated by permits issued to the Company by
government authorities. These permits must be renewed periodically and
are subject to revocation in the event of violations of environmental
laws. The Company believes that the waste treatment equipment at its
facility is currently in compliance with the requirements of environmental
laws in all material respects and that its air emissions are within the
limits established in the relevant permit. However, there can be no
assurance that violations will not occur in the future. The Company is
also subject to other environmental laws including those relating to the
storage, use and disposal of chemicals, solid waste and other hazardous
materials, as well as to work place health and safety and indoor air
quality emissions. Furthermore, environmental laws could become more
stringent or might apply to additional aspects of the Company's operations
over time, and the costs of complying with such laws could be substantial.
Compliance with state and federal laws did not have a material impact on
the Company's capital expenditures, earnings or competitive position in
fiscal 1997, nor is it expected to have a material impact in fiscal 1998.
Employees
As of September 13, 1997, the Company employed 573 people in the
United States including 482 in production, 71 in marketing, sales,
engineering, and customer support and 20 in administration. Of the 573
employees, 474 were direct employees of Parlex and 99 worked for interim
staffing agencies. Parlex Shanghai employs approximately 80 people. The
United States employees of Parlex are not represented by a collective
bargaining unit and the Company believes its relations with its workforce
are good.
Item 2. Properties.
- -------------------
The Company's executive offices and its product and process
development and primary flexible circuit manufacturing facilities are
located in a single 125,000 square feet facility in Methuen, Massachusetts
which the Company owns subject to no encumbrances. The facility currently
operates three shifts, six days a week. The Company plans to add
approximately 35,000 square feet to this facility. See "Item 1-Business-
Manufacturing Processes."
The Company's laminated cable operations are housed in a single
34,000 square feet facility in Salem, New Hampshire, leased through 2007.
The Company intends to expand the facility to approximately 46,000 square
feet during fiscal 1998. The Salem, New Hampshire facility is
approximately nine miles from the Methuen facility.
Parlex Shanghai has a leased facility in Shanghai, China of
approximately 24,000 square feet. The Company is currently considering a
larger facility in order to support growth.
The Company is investigating the establishment of a small finishing
facility in Mexico and a laminated cable facility in Taiwan. No
commitments have been made with respect to these facilities.
Item 3. Legal Proceedings.
- --------------------------
The Company has no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
This item is inapplicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
(a) Price Range of Common Stock
The Company's Common Stock is listed on the Nasdaq National Market,
under the symbol "PRLX". The following table sets forth the reported high and
low sale prices for the Common Stock for the periods indicated. The
information reflects the Company's declaration of a three-for-two split of its
Common Stock effected as a 50% stock dividend on April 21, 1997.
High Low
------ ------
Fiscal 1996
First Quarter $ 9.00 $ 6.17
Second Quarter 7.50 4.83
Third Quarter 6.67 5.00
Fourth Quarter 10.17 5.50
Fiscal 1997
First Quarter 9.67 5.33
Second Quarter 7.83 5.83
Third Quarter 16.33 6.67
Fourth Quarter 15.25 10.00
(b) Approximate Number of Holders of Common Stock
As of September 24, 1997, there were approximately 87 holders of record
of the Common Stock.
(c) Dividends
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future. Future cash
dividends, if any, will be determined by the Board of Directors and will
be based on the Company's earnings, capital, financial condition and other
factors deemed relevant by the Board of Directors. In addition, the
Company's revolving line of credit limits the amount available for cash
dividends (as of June 30, 1997, $4.3 million was available for cash
dividends).
Item 6. Selected Consolidated Financial Data.
- ---------------------------------------------
Year Ended June 30,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands, except per share data)
Statement of Income Data:
Total revenues $31,392 $34,926 $40,251 $47,257 $55,087
Cost of products sold 26,636 29,150 32,946 40,308 44,137
-----------------------------------------------
Gross profit 4,756 5,776 7,305 6,949 10,950
Selling, general and administrative expenses 4,432 4,637 4,998 5,518 7,288
-----------------------------------------------
Operating income 324 1,139 2,307 1,431 3,662
Income from operations before income taxes 252 1,007 2,240 1,170 3,381
Net income 302 1,007 1,486 770 2,120
Net income per share (1) $ 0.09 $ 0.29 $ 0.41 $ 0.21 $ 0.57
===============================================
Weighted average number of common and
common equivalent shares outstanding (1) 3,466 3,466 3,651 3,675 3,716
Information reflects the Company's declaration of a three-for-two
split of Common Stock effected as a 50% stock dividend on April 21,
1997.
June 30,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Working capital $ 5,257 $ 6,704 $ 8,466 $ 9,148 $ 9,592
Total assets 18,906 20,845 24,517 29,662 32,234
Short-term debt, including current portion of
long-term debt 875 200 200 501 1,000
Long-term debt, less current portion 500 950 2,300 3,650 2,500
Stockholders' equity 11,848 12,880 14,667 15,455 17,788
Item 7. Management's Discussion and Analysis of
- -----------------------------------------------
Financial Condition and Results of Operations.
----------------------------------------------
Overview
The Company is a leading supplier of flexible interconnects
principally for sale to the automotive, military/aerospace, computer,
telecommunications and industrial markets. Prior to 1990, substantially
all of the Company's sales were for military/aerospace applications.
Beginning in 1990, the Company developed a business strategy of pursuing
broader commercial applications for its products. The execution of this
strategy has resulted in a reduction of revenues from the
military/aerospace sector as a percentage of the Company's total revenues
from 53% in fiscal 1992 to 21% in fiscal 1997, while increasing overall
revenues approximately 92%.
The Company believes that its development of innovative materials
and processes provides it with a competitive advantage in the markets in
which it competes. During the past three years, the Company has invested
over $7.3 million (or approximately 5% of total revenues) in research and
development to develop materials and enhance its manufacturing processes.
The Company includes in cost of products sold its expenditures for the
development of materials and processes.
To better serve customers that have production facilities in Asia
and to more cost effectively manufacture certain products for worldwide
distribution, the Company formed a Chinese joint venture, Parlex Shanghai,
in 1995. Parlex owns 50.1% of the equity interest in Parlex Shanghai.
Accordingly, Parlex Shanghai's results of operations, cash flows and
financial position are included in the Company's consolidated financial
statements.
Results of Operations
The following table sets forth, for the periods indicated, selected
items in the Company's statements of income as a percentage of total
revenues. The table and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
Year Ended June 30,
--------------------------
1995 1996 1997
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 81.9 85.3 80.1
Gross profit 18.1 14.7 19.9
Selling, general and administrative expenses 12.4 11.7 13.2
Operating income 5.7 3.0 6.6
Income from operations before income taxes 5.6 2.5 6.1
Net income 3.7% 1.6% 3.8%
Results of Operations For the Past Three Fiscal Years
Total Revenues. Total revenues increased approximately 17% over the
previous year in each of fiscal 1996 and fiscal 1997, from $40.3 million
to $47.3 million to $55.1 million. Revenues grew in each of the Company's
principal product lines-flexible circuits, laminated cables,
flexible/cable hybrid circuits and flexible interconnect assemblies. The
increase in total revenues in each period was primarily attributable to an
increase in the volume of units shipped.
Total revenues included licensing and royalty fees of $495,000,
$155,000 and $110,000 in fiscal 1995, 1996 and 1997, respectively.
Although the Company intends to continue its practice of developing
materials and processes that it can license to third parties, it does not
expect that royalty revenues will represent a significant portion of total
revenues in the near term.
Cost of Products Sold. Cost of products sold in fiscal 1995, 1996
and 1997 was $32.9 million, $40.3 million and $44.1 million, respectively.
As a percentage of total revenues, cost of products sold was 81.9%, 85.3%
and 80.1% in each of fiscal 1995, 1996 and 1997, respectively. The
decrease in the percentage in fiscal 1997 was primarily the result of
manufacturing yield improvements, particularly in connection with a major
automotive program for Motorola, while general productivity gains and
increased absorption of overhead also contributed to the reduction. These
improvements were made possible by enhancements to the manufacturing
process, the acquisition of additional production equipment and cost
savings on materials and supplies.
In fiscal 1996, the increase in the cost of products sold as a
percentage of total revenues was substantially attributable to the
introduction of the Motorola program described above. Although the
Company made progress in reducing costs throughout fiscal 1996, it was not
until March 1996 that the Company overcame most of the technical issues
affecting yields and costs in this program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1995, 1996 and 1997 were $5.0 million,
$5.5 million and $7.3 million, respectively. As a percentage of total
revenues, selling, general and administrative expenses remained relatively
constant during the three-year period, rising slightly in fiscal 1997 to
13.2%. The dollar increase was the result of increased expenses
associated with the hiring of additional sales personnel, increased sales
commissions on the incremental sales, additional costs associated with
incentive compensation and the inclusion of Parlex Shanghai's expenses for
twelve months in fiscal 1997 versus seven months in fiscal 1996. The
Company believes that it has added sufficient sales resources to
accommodate its near-term growth prospects, and management expects that
selling, general and administrative expenses will increase at a rate less
than the growth in revenues.
Other Income and Interest Expense. Other income of $88,000 and
$91,000 in fiscal 1995 and 1996, respectively, was comprised entirely of
items of a miscellaneous nature. The increase in other income in fiscal
1997 to $156,000 was principally the result of a gain on the sale of
equipment.
Interest expense increased from $155,000 in fiscal 1995 to $351,000
in fiscal 1996 and $436,000 in fiscal 1997. Interest expense increased in
fiscal 1996 and fiscal 1997, principally as a result of increased
borrowings to finance capital expenditures. Interest rates during the
period remained relatively constant.
Liquidity and Capital Resources
In fiscal 1997, the Company generated $3.4 million in cash flow from
operations. In addition to net income of $2.1 million, depreciation and
amortization of $1.9 million as well as changes in inventories and
payables of $1.0 million added to cash flow. Cash flow was reduced, in
part, by an increase in accounts receivable of $1.6 million associated
with the Company's increased revenues.
During fiscal 1997, the Company's investing and financing activities
included an investment of $2.6 million in property, plant and equipment,
repayment of $650,000 under its revolving credit facility and payment at
maturity of $100,000 on an industrial revenue bond.
The Company has a $5 million unsecured revolving line of credit with
a bank. Borrowings under the unsecured line bear interest at the bank's
corporate base rate (8.5% at September 15, 1997), and the Company pays an
annual commitment fee of 0.5% on the average daily unused portion of the
bank's commitment. Amounts available for borrowings are reduced by
$500,000 due to the Company's guarantee of a loan made to Parlex Shanghai.
At September 15, 1997, $3.0 million was outstanding under the line of
credit and $1.4 million remained available for borrowing. On January 1,
1998, the unsecured line converts to a term loan with principal and
interest payments due monthly over a 36-month period. The agreement
establishing the line of credit has restrictive covenants, which include
restrictions on payment of cash dividends and requirements or limitations
as to tangible net worth, current ratio, working capital, debt service
ratio, capital expenditures and the ratio of total liabilities to equity.
Under these restrictive covenants, amounts available for dividends or
other distributions at June 30, 1997 approximated $4.3 million. The
Company also has a $2 million unsecured equipment financing line of credit
that expires on October 24, 1997, although amounts outstanding on that
date may be converted to a three-year term loan. No amounts were
outstanding under the equipment line at September 15, 1997.
The Company has received a commitment letter from the bank for a $10
million unsecured revolving line of credit to replace the two existing
facilities. The Company expects this new credit facility to be in place
before the end of the second quarter in fiscal 1998.
The Company believes that its cash flow from operations, its
available line of credit, and other financing alternatives available to it
should be sufficient to satisfy its operating and capital needs for the
foreseeable future.
The Company has a deferred compensation obligation of approximately
$941,000 as of June 30, 1997 that is owed to the Chairman of its Board of
Directors. Under the current arrangement, monthly payments begin in June
1999, or the first month after the termination of his employment,
whichever occurs first, and continue for no fewer than 60 months or, at
the election of the Chairman prior to his termination of employment, for
up to 120 months. Amounts to be paid within one year are not expected to
be material.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share," and SFAS No. 129, "Disclosure
of Information About Capital Structure." SFAS No. 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or common stock equivalents.
SFAS No. 129 establishes standards for disclosing information about an
entity's capital structure and applies to all entities. The Company will
adopt both SFAS Nos. 128 and 129 in the second quarter of fiscal 1998 as
required by those standards. The implementation of SFAS No. 128 will not
have a material effect on previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 131 establishes standards for the
manner in which public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company has not yet completed the analysis of which
operating systems, if any, it will report on. Both standards will be
adopted by the Company during the first quarter of fiscal year 1999.
CERTAIN FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS
This Report contains certain forward-looking statements that involve
risks and uncertainties. When used in this Report, the words "believes,"
"expects," "anticipates," "intends," "estimates," "should," "will likely" and
similar expressions are intended to identify such forward-looking statements.
The cautionary statements made in this Report should be read as being
applicable to all related forward-looking statements wherever they appear
herein. The Company's actual results could differ materially from those
discussed here. Important factors that could cause or contribute to such
differences include those herein. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Fluctuations in Operating Results; Variability of Orders. The
Company's operating results have historically been subject to
fluctuations, and the Company expects that they will continue to fluctuate
due to a variety of factors, including the timing and volume of orders
from, and shipments to, customers, the timing of introductions of and
market acceptance of new products and general economic trends. Typically,
in the flexible interconnect industry, a substantial portion of sales in a
given quarter depends on obtaining orders for products to be manufactured
and shipped in the same quarter in which those orders are received.
Although the Company monitors its customers' needs, it often has limited
knowledge of the magnitude or timing of future orders. As a result, the
timing of revenues may be affected by the need to ramp up to or down from
volume production in response to fluctuations in customer demand, the
introduction of replacement products or the balancing of inventory. A
significant decrease in the number, magnitude or timing of orders in any
given quarter could have a material adverse effect on the Company's
business, financial condition and operating results. Because it is
difficult for the Company to readily reduce spending on certain operating
expenses, such as fixed manufacturing costs, development costs and ongoing
customer service, a reduction in sales could have a material adverse
effect on near-term profit margins. Results of operations in any period
are therefore not necessarily indicative of the results to be expected for
any future period. Due to all of the foregoing factors, it is possible
that in some future quarter the Company's operating results may be below
the expectations of public market analysts and investors.
Expansion of Manufacturing Capacity. The Company believes its long-
term competitive position depends in part on its ability to increase its
manufacturing capacity. The Company's business, financial condition and
operating results could be materially and adversely affected if the
Company is not able to obtain sufficient manufacturing capacity to meet
increases in demand for its products. The Company intends in the future to
expand its manufacturing capacity. The failure of the Company to complete
the expansion on schedule and within budget could have a material adverse
effect on its business, financial condition and operating results. In
addition, the Company is in the process of implementing new operations
control and accounting information systems, which may temporarily impact
the Company's operations.
Market and Customer Concentration. Applications for flexible
interconnects include automotive electronics, military/aerospace products,
computers and computer peripherals, telecommunications subscriber and
infrastructure equipment, as well as circuits and cables for medical and
industrial applications. Although the Company markets products for each
of these applications in order to avoid a dependency on any one sector, a
significant downturn in any of these market sectors could have a material
adverse effect on the Company's business, financial condition and
operating results. Historically, the Company has sold a substantial
portion of its flexible interconnects to a limited number of customers.
In fiscal 1995, 1996 and 1997, sales to Motorola accounted for
approximately 12%, 29% and 20%, respectively, of the Company's total
revenues and the Company's top 20 customers accounted for approximately
61%, 66% and 69% of the Company's total revenues, respectively. The
Company expects that a limited number of customers will continue to
account for a high percentage of its total revenues in the foreseeable
future. The loss of a significant customer or a substantial reduction in
orders by any significant customer could reduce the Company's cash flow
and have a material adverse effect on the Company's business, financial
condition and operating results.
Current and Future Capital Needs. The development and manufacture
of flexible interconnects is highly capital intensive. In order to remain
competitive, the Company must continue to make significant expenditures
for capital equipment, expansion of operations and research and
development. The Company expects that substantial capital will be
required to expand its manufacturing capacity and fund working capital for
anticipated growth. To the extent the Company's financial resources are
insufficient to fund these activities, the Company will need to raise
additional funds either through borrowings or further equity financings.
There can be no assurance that such additional capital will be available on
reasonable terms or at all. The inability of the Company to obtain adequate
additional financing on reasonable terms when needed would have a material
adverse effect on the Company's business, financial condition and operating
results. Furthermore, the Company's credit facility contains various
financial covenants predicated on the Company's present and future financial
condition. In the event the Company is no longer able to meet the
covenants contained in the credit facility, it may be required to repay
the debt incurred thereunder.
Foreign Operations. The Company is currently expanding its
operations globally. The Company owns a 50.1% equity interest in a joint
venture in China. Manufacturing and sales operations outside the United
States are accompanied by a number of risks inherent in international
operations, including imposition of governmental controls, compulsory
licensure requirements, compliance with a wide variety of foreign and
United States export laws, currency fluctuations, unexpected changes in
trade restrictions, tariffs and barriers, political and economic
instability, longer payment cycles typically associated with foreign
sales, difficulties in administering business overseas, labor union issues
and potentially adverse tax consequences. Although the Company's current
products are designed to meet the regulatory standards of certain foreign
countries, any inability to meet foreign regulatory approvals on a timely
basis could have an adverse effect on the Company's business, financial
condition and operating results.
Competition. The Company's business is highly competitive. The
flexible interconnect industry is differentiated by customers, markets and
geography, with each niche having its own combination of complex packaging
and interconnect requirements. The Company experiences 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 the Company's competitors are larger and have
greater financial resources than the Company. There can be no assurance
that existing or future competitors will not be able to duplicate the
Company's strategies or that the Company will continue to be able to
compete successfully.
Limited Sources of Supply. The Company purchases raw materials,
process chemicals and various components from multiple outside sources.
In fiscal 1997, the Company's largest supplier of raw materials was
Dupont, from which it purchased approximately 44% of its materials and
supplies. Any unanticipated disruption in shipments from Dupont would
have a material adverse effect on the Company's business, financial
condition and operating results. Although there exist alternate suppliers
for the raw materials, process chemicals and various components that the
Company currently purchases from its suppliers, because of the Company's
limited inventory of raw materials and tight manufacturing cycles, any
unanticipated interruption of supply could have a short-term material
adverse effect on the Company's business, financial condition and
operating results.
Intellectual Property. The Company relies on a combination of
patent and trade secret laws and non-disclosure and other contractual
agreements to protect its proprietary rights. There can be no assurance
that the Company's efforts to protect its intellectual property will be
effective in preventing misappropriation or that others may not
independently develop similar technology. In addition, litigation may be
necessary to protect the Company's proprietary rights or to defend against
claims of infringement. Although no claims have been asserted against the
Company for infringement of the proprietary rights of others, there can be
no assurance that third parties will not assert such claims in the future.
If any infringement claim is asserted, the Company may be required to
obtain a license of such rights. There can be no assurance that any such
license would be available on reasonable terms, if at all. Litigation
with respect to patents and other intellectual property matters could
result in substantial costs and diversion of management and other
resources and could have a material adverse effect on the Company's
business, financial condition and operating results.
Technological Change. The market for the Company's products and
services is characterized by rapidly changing technology and continuing
process development. The future success of the Company's business will
depend in large part upon its ability to maintain and enhance its
technological capabilities, develop and market products and services that
meet changing customer needs and successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition,
the flexible interconnect industry could in the future encounter
competition from new technologies that render existing interconnect
technology less competitive or obsolete. There can be no assurance that
the Company will effectively respond to the technological requirements of
the changing market. Moreover, there can be no assurance that the
materials and processes that the Company is currently developing will
result in commercially viable technological processes or that there will
be commercial applications for these technologies. To the extent that the
Company determines that new technologies and equipment are required to
remain competitive, the development, acquisition and subsequent
implementation of such technologies and equipment are likely to continue
to require significant capital investment. The Company's failure to keep
pace with technological change could have a material adverse effect on its
business, financial condition and operating results.
Dependence on Key Personnel. The Company is dependent upon a number
of its key management personnel. In addition, the future success of the
Company depends on its continuing ability to attract and retain highly-
qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. The loss of
service of one or more key individuals, or the inability to attract
additional qualified personnel, could have a material adverse effect on
the Company's business, financial condition and operating results. The
Company maintains a key person life insurance policy in the amount of $1.0
million on each of Mr. Herbert W. Pollack and Mr. Peter J. Murphy.
Environmental Regulations. The Company is 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, the Company's
products. The Company cannot predict the nature, scope or effect of
future legislation or regulatory requirements to which its operations
might be subject or the manner in which existing or future laws or
regulations will be administered or interpreted, including whether they
will be applied in the future to materials, products or activities to
which they have not been applied previously. Complying with new or more
stringent laws or regulations, or to more vigorous enforcement of the
current or future policies of regulatory agencies, could require
substantial expenditures by the Company and could have a material adverse
effect on its business, financial condition and operating results.
Environmental laws and regulations require the Company 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 its processes. Violations of those requirements could result in
financial penalties and other enforcement actions, and could require the
Company to halt one or more portions of its operations until a violation
is cured. Although the Company works to operate in compliance with these
environmental laws, there can be no assurance that the Company will
succeed in that effort at all times. The combined costs of curing
incidents of non-compliance, resolving enforcement actions that might be
initiated by government authorities or satisfying business requirements
following any period affected by the need to take such actions could have
a material adverse effect on the Company's business, financial condition
and operating results.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors
of Parlex Corporation:
We have audited the accompanying consolidated balance sheets of Parlex
Corporation and its Subsidiaries as of June 30, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Parlex Corporation and its
Subsidiaries at June 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
August 5, 1997
Boston, Massachusetts
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1997
- ------------------------------------------------------------------------------
ASSETS 1996 1997
---- ----
CURRENT ASSETS:
Cash $ 386,608 $ 596,614
Accounts receivable--less allowance for
doubtful accounts of $80,000 in 1996
and $143,400 in 1997 7,453,333 9,029,388
Inventories 7,753,424 7,262,477
Refundable income taxes 17,794 --
Deferred income taxes 314,743 294,033
Other current assets 699,386 850,956
----------------------------
Total current assets 16,625,288 18,033,468
----------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 468,864 468,864
Buildings 6,838,391 7,017,478
Machinery and equipment 22,321,826 22,823,785
Leasehold improvements and other 2,422,084 3,974,058
----------------------------
Total 32,051,165 34,284,185
Less accumulated depreciation and
amortization (19,396,046) (20,671,859)
----------------------------
Property, plant and equipment--net 12,655,119 13,612,326
----------------------------
OTHER ASSETS 381,649 588,098
----------------------------
TOTAL $ 29,662,056 $ 32,233,892
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 100,000 $ 500,000
Bank loan 400,668 500,000
Accounts payable 5,179,769 5,047,284
Accrued liabilities 1,797,223 2,150,228
Income taxes payable -- 244,404
----------------------------
Total current liabilities 7,477,660 8,441,916
----------------------------
LONG-TERM DEBT 3,650,000 2,500,000
----------------------------
OTHER NONCURRENT LIABILITIES 1,846,260 1,986,924
----------------------------
MINORITY INTEREST IN PARLEX SHANGHAI 1,232,691 1,516,609
----------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value--authorized
1,000,000 shares; none issued
Common stock, $.10 par value--authorized,
5,000,000 shares; issued, 2,582,659 and
3,798,750 shares in 1996 and 1997,
respectively 258,266 379,875
Additional paid-in capital 3,243,491 3,334,424
Retained earnings 12,991,313 15,111,769
Less treasury stock, at cost--210,000 shares
in 1996 and 1997 (1,037,625) (1,037,625)
----------------------------
Total stockholders' equity 15,455,445 17,788,443
----------------------------
TOTAL $ 29,662,056 $ 32,233,892
============================
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997
---- ---- ----
REVENUES:
Product sales $39,756,799 $47,102,025 $54,977,143
License fees and royalty income 494,500 155,000 109,710
-----------------------------------------
Total revenues 40,251,299 47,257,025 55,086,853
-----------------------------------------
COSTS AND EXPENSES:
Cost of products sold 32,946,050 40,307,894 44,136,738
Selling, general and administrative expenses 4,998,262 5,518,292 7,288,544
-----------------------------------------
Total costs and expenses 37,944,312 45,826,186 51,425,282
-----------------------------------------
OPERATING INCOME 2,306,987 1,430,839 3,661,571
OTHER INCOME, Net 88,288 90,588 155,604
INTEREST EXPENSE (154,974) (351,125) (436,008)
-----------------------------------------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 2,240,301 1,170,302 3,381,167
PROVISION FOR INCOME TAXES (754,413) (386,961) (1,249,202)
-----------------------------------------
INCOME BEFORE MINORITY INTEREST 1,485,888 783,341 2,131,965
MINORITY INTEREST -- 12,855 11,509
-----------------------------------------
NET INCOME $ 1,485,888 $ 770,486 $ 2,120,456
=========================================
NET INCOME PER SHARE $ .41 $ .21 $ .57
=========================================
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 3,651,052 3,674,730 3,716,080
=========================================
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
Common Stock Additional
------------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------ ------ ------- -------- --------
BALANCE, JULY 1, 1994 2,521,859 $252,186 $2,930,620 $10,734,939 $(1,037,625)
Tax benefit arising from the
exercise of nonqualified stock
options -- -- 70,220 -- --
Issuance of stock (pre-split
basis) 57,550 5,755 225,476 -- --
Net income -- -- -- 1,485,888 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1995 2,579,409 257,941 3,226,316 12,220,827 (1,037,625)
Issuance of stock (pre-split
basis) 3,250 325 17,175 -- --
Net income -- -- -- 770,486 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,582,659 258,266 3,243,491 12,991,313 (1,037,625)
Stock dividend 1,186,311 118,631 (118,631) -- --
Tax benefit arising from the
exercise of nonqualified stock
options -- -- 114,309 -- --
Issuance of stock 29,780 2,978 95,255 -- --
Net income -- -- -- 2,120,456 --
--------------------------------------------------------------
BALANCE, JUNE 30, 1997 3,798,750 $379,875 $3,334,424 $15,111,769 $(1,037,625)
==============================================================
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,485,888 $ 770,486 $ 2,120,456
----------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,438,974 1,678,150 1,899,325
(Gain) loss on sale of equipment (500) 13,652 (129,269)
Deferred income taxes 75,006 37,510 86,375
Deferred compensation 64,015 70,341 74,999
Minority interest -- 12,855 11,509
Changes in current assets and liabilities:
Accounts receivable--net (1,009,837) (681,780) (1,576,055)
Inventories (897,710) (1,669,348) 490,947
Refundable income taxes (206,669) 188,875 17,794
Other current assets (140,501) (257,520) (151,570)
Accounts payable and accrued liabilities 811,262 1,314,166 220,520
Income taxes payable (292,721) -- 358,713
----------------------------------------
Total adjustments (158,681) 706,901 1,303,288
----------------------------------------
Net cash provided by operating activities 1,327,207 1,477,387 3,423,744
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,851,360) (2,968,713) (2,619,074)
Increase in other assets (90,234) (122,146) (206,449)
Proceeds from sale of equipment 500 10,198 164,220
----------------------------------------
Net cash used for investing activities (2,941,094) (3,080,661) (2,661,303)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loan -- 400,668 99,332
Capital contributions to joint venture--minority interest -- 160,322 --
Borrowings (payments) under revolving credit agreement 1,550,000 1,450,000 (650,000)
Payments of other long-term debt (200,000) (200,000) (100,000)
Exercise of stock options 231,231 17,500 98,233
----------------------------------------
Net cash provided by (used for) financing activities 1,581,231 1,828,490 (552,435)
----------------------------------------
NET INCREASE (DECREASE) IN CASH (32,656) 225,216 210,006
CASH, BEGINNING OF YEAR 194,048 161,392 386,608
----------------------------------------
CASH, END OF YEAR $ 161,392 $ 386,608 $ 596,614
=========================================
SUPPLEMENTARY DISCLOSURE OF NONCASH
TRANSACTIONS:
Property and equipment contributed as capital by
joint venture partner $ -- $1,060,000 $ 277,000
=========================================
Property, plant and equipment acquired in exchange
for accounts receivable $ -- $ 400,000 $ --
=========================================
See notes to consolidated financial statements.
PARLEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business--Parlex Corporation is a world leader in the design and
manufacture of flexible interconnect products. Parlex produces custom
flexible circuits and laminated cables utilizing proprietary processes
and patented technologies which are designed to satisfy the unique
requirements of a wide range of customers. Parlex provides its products
and engineering services to a variety of markets including automotive,
computer, military-aerospace, telecommunications, industrial control,
medical and consumer.
Basis of Consolidation--The consolidated financial statements include
the accounts of Parlex Corporation (the "Company"), its wholly owned
subsidiaries and its 50.1% investment in Parlex (Shanghai) Circuit Co.,
Ltd. (see Note 2) whose fiscal year end is March 31. This entity is
consolidated on a three-month time lag. Intercompany transactions have
been eliminated.
Foreign Currency Translation--The functional currency of the foreign
operation is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated into
United States dollars using current exchange rates at the balance sheet
date. Results of operations are translated at average exchange rates
prevailing during each period. Translation adjustments were not
material at June 30, 1996 and 1997 and were included in minority
interest.
Inventories--Inventories of raw materials are stated at the lower of
first-in, first-out cost or market. Work in process represents costs
accumulated under a job-cost accounting system less the estimated cost
of shipments to date, in the aggregate not in excess of net realizable
value. At June 30, inventories consisted of:
1996 1997
---- ----
Raw materials $2,419,744 $2,706,302
Work in process 5,333,680 4,556,175
------------------------
Total $7,753,424 $7,262,477
========================
Property, Plant and Equipment--Property, plant and equipment are stated
at cost and are depreciated using the straight-line method over their
estimated useful lives: buildings--40 years; machinery and equipment--
5-15 years; and leasehold improvements over the terms of the leases.
Revenue Recognition--Product sales are recognized upon shipment.
License fees and royalty income are recognized when earned and as
related costs are incurred.
Research and Development--Research and development costs are expensed as
incurred and amounted to $2,215,000, $2,380,000 and $2,717,000 for the
years ended June 30, 1995, 1996 and 1997, respectively. These amounts
are reflected in the Company's cost of products sold.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." This statement requires an asset and
liability approach to accounting for income taxes based upon the future
expected values of the related assets and liabilities. Deferred income
taxes are provided for items which are recognized in different years for
tax and financial reporting purposes.
Net Income Per Share--Net income per share has been computed based on
the weighted average number of common shares and common share
equivalents outstanding during the year.
Use of Estimates--The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the balance sheet
dates. Estimates include reserves for accounts receivable, useful lives
of properties, accrued liabilities including health insurance claims,
and deferred income taxes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments--SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair
value of certain financial instruments. The carrying amounts of cash,
accounts receivable, accounts payable and accrued expenses approximate
fair value because of their short-term nature. The carrying amounts of
the Company's debt instruments approximate fair value.
Long-Lived Assets--During 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
This statement had no effect on the consolidated financial position and
results of operations of the Company.
Stock-Based Compensation--During 1997, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options
and other equity instruments issued to employees and nonemployee
directors. The Company continues to account for stock-based
compensation in accordance with APB Opinion No. 25, using the intrinsic
value method. The difference between accounting for stock-based
compensation under APB Opinion No. 25 and SFAS No. 123 is disclosed in
Note 7.
New Accounting Pronouncements--In February 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per
Share," and SFAS No. 129, "Disclosure of Information About Capital
Structure." SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure
and applies to all entities. The Company will adopt both SFAS Nos. 128
and 129 in the second quarter of fiscal 1998. The implementation of
these standards is not expected to have a material effect on its
consolidated financial position and results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Both standards will be adopted by the Company during the
first quarter of fiscal 1999 and are not expected to have a material
effect on its consolidated financial position and results of operations.
2. JOINT VENTURE
In May 1995, the Company entered into an agreement to establish a
limited liability company in the form of a joint venture in the People's
Republic of China. The Company owns 50.1% of the joint venture. The
joint venture manufactures flexible printed circuits and commenced
operations in September 1995.
3. ACCRUED LIABILITIES
Accrued liabilities at June 30 consisted of:
1996 1997
---- ----
Payroll and related expenses $1,279,112 $1,421,872
Accrued health insurance 222,170 256,916
Other 295,941 471,440
------------------------
Total $1,797,223 $2,150,228
========================
4. INDEBTEDNESS
The Company's China joint venture has a short-term bank loan bearing
interest at 1.25% over Singapore Interbank Offer Rate ("SIBOR"). This
is guaranteed by the Company.
Long-term debt at June 30 consisted of:
1996 1997
---- ----
Revolving Credit Agreement $3,650,000 $3,000,000
Industrial Revenue Development Bond 100,000 --
------------------------
Total long-term debt 3,750,000 3,000,000
Less current portion 100,000 500,000
------------------------
Long-term debt - net $3,650,000 $2,500,000
========================
During 1997, the Company repaid its Industrial Revenue Development Bond
which it had with a bank. The bond carried a varying interest rate
which annually approximated 65% of prime.
On December 18, 1995, the Company renegotiated its unsecured Revolving
Credit Agreement (the "Agreement") (originally dated June 22, 1994)
making available up to a total of $5,000,000 through December 31, 1997.
On January 1, 1998, the Agreement converts to a term loan with principal
and interest payments due monthly over a thirty-six-month period to
December 31, 2000. Accordingly, the outstanding balance at June 30,
1997 is presented as long-term except for the current portion of
$500,000 payable during fiscal 1998. Borrowings under the Agreement are
at the bank's corporate base rate (8.50% at June 30, 1997), and carry an
annual commitment fee of 1/2% on the average daily unused portion of the
bank's commitment. Interest is payable monthly. At June 30, 1997, the
unused commitment amounted to $1,500,000.
In October 1996, the Company received an additional unsecured line of
credit of $2,000,000 to be used exclusively for the purchase of capital
equipment. Advances made pursuant to the line will be due and payable
in full on October 24, 1997 unless the Company elects to convert the
principal balance of the line into a term loan payable in 36 monthly
installments commencing November 1, 1997. The line bears interest at
prime. As of June 30, 1997, the unused commitment amounts to
$2,000,000.
The Agreement has restrictive covenants, which include restrictions on
payment of cash dividends and requirements as to tangible net worth,
current ratio, working capital, debt service ratio, capital expenditures
limitation and the ratio of total liabilities to equity. Under the most
restrictive covenants, amounts available for dividends or other
distributions at June 30, 1997 approximated $4,303,000.
Interest paid during the years ended June 30, 1995, 1996 and 1997 was
approximately $97,000, $251,000 and $394,000, respectively.
5. Other Noncurrent Liabilities
Other noncurrent liabilities at June 30 consisted of:
1996 1997
---- ----
Deferred income taxes (Note 6) $ 980,124 $1,045,789
Deferred compensation 866,136 941,135
------------------------
$1,846,260 $1,986,924
========================
The timing of deferred compensation payments cannot presently be
determined. Amounts, if any, which may be paid within one year are not
material.
6. INCOME TAXES
The provision for income taxes consisted of:
1995 1996 1997
---- ---- ----
Current:
State $ (78,567) $ (57,943) $ (157,115)
Federal (600,840) (291,508) (1,005,712)
Deferred (75,006) (37,510) (86,375)
---------------------------------------
Total $(754,413) $(386,961) $(1,249,202)
=======================================
A reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
1995 1996 1997
---- ---- ----
Statutory federal income tax rate 34 % 34 % 34 %
State income taxes, net of federal tax benefit 4 3 3
Foreign Sales Corporation -- (1) (1)
Tax credits (4) -- (1)
Other -- (3) 2
------------------
Effective income tax rate 34 % 33 % 37 %
==================
Deferred income tax assets and liabilities at June 30 are attributable
to the following:
1996 1997
---- ----
Deferred tax liabilities:
Depreciation $1,326,252 $1,421,917
Prepaid expenses -- 29,807
------------------------
1,326,252 1,451,724
------------------------
Deferred tax assets:
Inventories 36,281 44,084
Allowance for doubtful accounts 31,991 46,760
Accruals 114,584 126,398
Self-insurance 87,920 101,831
Deferred compensation 346,128 376,128
State net operating loss and credit carryforwards 43,967 4,767
------------------------
660,871 699,968
------------------------
Net deferred tax liability $ 665,381 $ 751,756
========================
Income tax payments of approximately $1,162,000, $445,000 and $751,500
were made in 1995, 1996 and 1997, respectively.
7. STOCKHOLDERS' EQUITY
On February 25, 1997, the Board of Directors approved a three-for-two
common stock split in the form of a stock dividend. Distribution of the
dividend was made on April 21, 1997 to shareholders of record at the
close of business on March 18, 1997. Per share amounts for all years
have been restated to reflect the stock split. The following
information with respect to the Company's option plans has also been
restated to reflect the stock split.
The Company has incentive and nonqualified stock option plans covering
officers, key employees and directors who are not otherwise employees.
The options are generally exercisable commencing one year from the date
of grant and typically expire in either five or ten years, depending on
the plan. The option price for the incentive stock options and for the
directors' plan is fair market value at the date of grant. Nonqualified
stock options are granted at fair market value or at a price determined
by the Board of Directors, depending on the plan. In certain cases, the
Company may, at the option of the Board of Directors, reimburse the
employees for the tax cost associated with their options.
Effective August 20, 1996 the Company established the 1996 Outside
Directors' Stock Option Plan (the "1996 Plan"). The 1996 Plan provides
for the automatic grant of 1,500 options annually to each member of the
Board of Directors that is not an employee of the Company.
Discretionary grants of up to 2,250 options annually per director may
also be made at the discretion of the Board of Directors. All grants
are made at the market value of the stock on the date of the grant and
there are 150,000 shares available for grant under the 1996 Plan, of
which 7,500 were granted during the year.
At June 30, 1997, there were 388,128 shares reserved for future grants
for all of the above-mentioned plans.
The following is a summary of activity for all of the Company's stock
option plans:
Weighted
Average
Shares Exercise
Under Price Per Shares
Option Share Exercisable
------ --------- -----------
July 1, 1994 357,639 $3.43 109,949
=======
Granted 38,250 8.26
Surrendered (18,750) 2.68
Exercised (86,325) 2.89
------------------
June 30, 1995 290,814 4.32 94,872
=======
Granted 39,750 5.84
Surrendered (9,375) 3.59
Exercised (4,875) 2.77
------------------
June 30, 1996 316,314 4.56 148,778
=======
Granted 10,500 6.67
Surrendered (6,000) 3.30
Exercised (29,780) 4.70
------------------
June 30, 1997 291,034 $4.77 191,085
=================================
The following table sets forth information regarding options outstanding
at June 30, 1997:
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life (Years) Price Number Price
-------- ----------- ------------ -------- ------ --------
$ 2.17 1,500 0.1 $ 2.17 1,500 $ 2.17
2.67 62,721 1.3 2.67 62,721 2.67
4.00 15,000 1.6 4.00 11,250 4.00
4.17 53,375 1.9 4.17 36,681 4.17
4.59 75,000 1.9 4.59 56,250 4.59
5.67 22,500 7.2 5.67 9,750 5.67
5.84 35,438 3.7 5.84 6,933 5.84
6.67 10,500 7.7 6.67 -- 6.67
12.35 15,000 7.6 12.35 6,000 12.35
-----------------------------------------------------------
291,034 2.9 $ 4.77 191,085 $ 4.17
===========================================================
As described in Note 1, the Company uses the intrinsic value method in
accordance with APB No. 25 to measure compensation expense associated
with grants of stock options to employees. Had the Company used the
fair value method to measure compensation, the Company's net income and
net income per share for the years ended June 30, 1997 and 1996 would
have been $2,029,904 or $.55 per share in 1997, and $752,847 or $0.21
per share in 1996.
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions in 1997 and 1996: an expected life of 2.5
years, expected volatility of 143%, a dividend yield of 0%, and a risk-
free interest rate of 6.2%. The weighted average fair value of options
granted in 1997 and 1996 was $5.71 and $4.43, respectively.
The option pricing model was designed to value readily tradable stock
options with relatively short lives. The options granted to employees
are not tradable and have contractual lives of ten years. However,
management believes that the assumptions used and the model applies to
value the awards yields a reasonable estimate of the fair value of the
grants made under the circumstances.
8. SEGMENT AND MAJOR CUSTOMER
The Company operates within a single segment of the electronics industry
as a specialist in the interconnection and packaging of electronic
equipment with its product lines of flexible printed circuits, laminated
cable, and related assemblies.
Sales to several divisions of one customer represented 12%, 29% and 20%
of total revenues, in 1995, 1996 and 1997, respectively.
9. RENTAL COMMITMENTS
The Company leases certain property and equipment under agreements
generally with initial terms from three to five years with renewal
options. Rental expense for each of the years ended June 30, 1995, 1996
and 1997 approximated $153,000, $153,000 and $285,000, respectively.
Future payments under noncancelable operating leases are:
1998 $344,000
1999 344,000
2000 297,000
2001 213,000
2002 192,000
10. BENEFIT PLANS
The Company has a qualified profit-sharing retirement plan to provide
benefits to eligible employees. Annual contributions to the plan are at
the discretion of the Board of Directors and are discretionary in
amounts. No contributions were made to the plan for the years ended
June 30, 1995, 1996 and 1997.
During fiscal 1995, the Company adopted a 401(k) Savings Plan (the
"Plan") covering all employees of the Company that have six consecutive
months of service and have attained the age of twenty-one. Matching
employer contributions can be made to the Plan at the discretion of the
Board of Directors. No matching contributions were made to the Plan for
the years ended June 30, 1995, 1996 and 1997.
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows (in thousands except
per share amounts):
First Second Third Fourth
----- ------ ----- ------
1997 Quarters
Revenues $12,807 $14,068 $13,225 $14,987
Gross profit 1,895 2,595 2,985 3,475
Net income 188 558 643 731
Net income per share .05 .15 .17 .19
1996 Quarters
Revenues $11,611 $11,685 $11,703 $12,258
Gross profit 1,316 1,539 1,820 2,274
Net income 24 91 196 460
Net income per share .01 .02 .05 .12
All per share amounts have been restated to give effect to the three-
for-two stock dividend (see Note 7).
Item 9. Changes in and Disagreements with Accountants on Accounting
- -------------------------------------------------------------------
and Financial Disclosure.
-------------------------
This item is inapplicable.
Part III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
The information required by this Item is incorporated by reference from
the information under the captions "Election of Directors", "Board of
Directors Meetings and Committees of the Board", "Executive Officers" and
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement to be filed with the Commission within
120 days of June 30, 1997.
Item 11. Executive Compensation.
- --------------------------------
The information required by this Item is incorporated by reference from
the information under the captions "Compensation of Executive Officers" and
"Board of Directors Meetings and Committees of the Board", in the Company's
definitive proxy statement to be filed with the Commission within 120 days of
June 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement to be filed
with the Commission within 120 days of June 30, 1997.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
This Item is not applicable.
Part IV
Item 14. Exhibits, Financial (a) Documents filed as a part
Statement Schedules, of this Form 10-K.
And Reports on 1. Financial Statements.
Form 8-K. ---------------------
The Financial Statements
listed in the accompanying
table of contents to
Consolidated Financial
Statements are filed as a
part of this Form 10-K.
2. Financial Statement Schedules.
------------------------------
Schedules are omitted because
of the absence of conditions
under which they are required
or because the required
information is included in
the Consolidated Financial
Statements or notes thereto.
3. Exhibits.
---------
The exhibits listed below are
either filed herewith or, if
not filed, are incorporated by
reference from the filings
noted in parentheses.
(3)(A) Restated Articles of
Organization, as amended;
(dated August 2, 1983),
(filed as exhibits 3-A and 3-B
to the Company's Registration
Statement on Form S-1, file
No. 2-85588, and incorporated
herein by reference).
(3)(B) Articles of Amendment to
Restated Articles of
Organization, dated December
1, 1987; (filed as Exhibit 10-Q
to Form 10-K for the fiscal
year ended June 30, 1988).
(3)(C) By-laws; (filed as exhibit 3-C
to the Company's Registration
Statement on Form S-1, file No.
2-85588, and incorporated
herein by reference).
(10)(A) 1985 Employees' Nonqualified
Stock Option Plan, dated
December 2, 1985*; (filed as
exhibit 10-L to Form 10-K for
the fiscal year ended June 30,
1986).
(10)(B) Employment Agreement between
Parlex Corporation and Herbert
W. Pollack, dated May 1, 1986*;
(filed as exhibit 10-M to Form
10-K for the fiscal year ended
June 30, 1986).
(10)(C) 1989 Outside Directors' Stock
Option Plan*; (filed as
exhibit 10-Z to Form 10-K for
the fiscal year ended June
30, 1991).
(10)(D) 1989 Employees' Stock Option
Plan*; (filed as exhibit 10-AA
to Form 10-K for the fiscal
year ended June 30, 1991).
(10)(E) Joint Venture Contract,
Articles of Association, and
Agreement of Technology
License and Technical Service
dated May 29, 1995; (filed as
Exhibit 10-AH to Form 10-K for
the fiscal year ended June 30,
1995). Confidential
treatment has been granted
for portions of this exhibit.
(10)(F) Manufacturing and Sales
Agreement between Samsung
Electro-Mechanics Co., Ltd. and
Parlex Corporation dated
September 29, 1994; (filed as
Exhibit 10-AK to Form 10-K for
the fiscal year ended June 30,
1995). Confidential treatment
has been granted for portions
of this exhibit.
(10)(G) Employment Agreement between
Parlex Corporation and Peter
J. Murphy dated June 26,
1996*; (filed as Exhibit 10-AM
to Form 10-K for the fiscal
year ended June 30, 1996).
(10)(H) License Agreement between
Parlex Corporation and
Polyclad Laminates, Inc.,
effective June 1, 1996; (filed
as Exhibit 10-AN to Form 10-K
for the fiscal year ended June
30, 1996). Confidential
treatment has been granted for
portions of this exhibit.
(10)(I) Agreement between Parlex
Corporation and Allied Signal
Laminate Systems, Inc.,
effective May 5, 1995; (filed
as Exhibit 10-AO to Form 10-K
for the fiscal year ended June
30, 1996). Confidential
treatment has been granted for
portions of this exhibit.
(10)(J) License Agreement between
Parlex Corporation and Pucka
Industrial Co., Ltd.,
effective July 1, 1996; (filed
as Exhibit 10-AP to Form 10-K
for the fiscal year ended June
30, 1996). Confidential
treatment has been granted for
portions of this exhibit.
(10)(K) Commercial Loan Agreement dated
December 18, 1995; (filed as
Exhibit 10-AQ to Form 10-K for
the fiscal year ended June 30,
1996).
(10)(L) Agreement of Lease between PVP
- Salem Associates, L.P. and
Parlex Corporation dated August
12, 1997; Filed herewith.
(10)(M) Employment Agreement between
Parlex Corporation and
Herbert W. Pollack dated July
1, 1997*; Filed herewith.
(10)(N) Patent Assignment Agreement
between Parlex Corporation
and Polyonics, Inc. dated
June 16, 1997; Filed herewith.
(10)(O) 1996 Outside Directors' Stock
Option Plan;* Filed herewith.
(21) Subsidiaries of the
Registrant; Filed herewith.
(23) Independent Auditors'
Consent; Filed herewith.
(24) Power of Attorney; Filed
herewith.
(27) Financial Data Schedule; Filed
herewith.
- --------------------
* Indicates management contract or compensatory plan or arrangement.
(B) Reports on Form 8-K.
--------------------
The Company filed no reports
on Form 8-K with the Commission
during the quarter ended
June 30, 1997.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Parlex Corporation
/s/ Herbert W. Pollack
_____________________________________________________________
Herbert W. Pollack, Chairman
Date: September 29, 1997
_______________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Steven M. Millstein
_____________________________________________________________
Steven M. Millstein, Principal Accounting
and Financial Officer
Date: September 29, 1997
-------------------------------------------------------
*/s/ Sheldon A. Buckler
- -------------------------------------------------------------
Sheldon A. Buckler, Director
*/s/ Richard W. Hale
- -------------------------------------------------------------
Richard W. Hale, Director
*/s/ M. Joel Kosheff
- -------------------------------------------------------------
M. Joel Kosheff, Director
*/s/ Peter J. Murphy
- -------------------------------------------------------------
Peter J. Murphy, Director and Chief Executive Officer
*/s/ Lester Pollack
- -------------------------------------------------------------
Lester Pollack, Director
*/s/ Benjamin M. Rabinovici
- -------------------------------------------------------------
Benjamin M. Rabinovici, Director
/s/ Steven M. Millstein
- -------------------------------------------------------------
* by Steven M. Millstein, Attorney-in-Fact
Date: September 29, 1997
-------------------------------------------------------
As of the date of submission of this filing, no annual report or proxy
material with respect to the fiscal year ended June 30, 1997, has been sent
to the security holders. Such annual report and proxy material will be
submitted to the Commission at the time it is furnished to the security
holders.