Back to GetFilings.com
===========================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
______________________________
Commission File No. 0-12942
PARLEX CORPORATION
Massachusetts 04-2464749
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Parlex Place, Methuen, Massachusetts 01844
(Address of Principal Executive Offices, Zip Code)
978-685-4341
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
Common Stock ($.10 par value) NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates (without
admitting that any person whose shares are not included in the calculation
is an affiliate) of the registrant as of December 28, 2003 was
approximately $25,492,711. Such aggregate market value was computed by
reference to the closing price of the common stock as reported on the
Nasdaq National market on December 26, 2003 (the business day immediately
prior to December 28, 2003).
The number of shares outstanding of the registrant's common stock as of
September 21, 2004 was 6,435,933 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report on Form 10-K.
===========================================================================
1
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
PAGE
PART 1
ITEM 1. Business 3
ITEM 2. Properties 15
ITEM 3. Legal Proceedings 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
ITEM 6. Selected Consolidated Financial Data 20
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 39
ITEM 8. Financial Statements and Supplementary Data 40
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 41
ITEM 9A. Controls and Procedures 41
ITEM 9B Other Information 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant 41
ITEM 11. Executive Compensation 41
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 41
ITEM 13. Certain Relationships and Related Transactions 42
ITEM 14. Principal Accountant Fees and Services 42
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 42
SIGNATURES 43
2
References in this Annual Report on Form 10-K to "the Company", "we", "us"
or "our" include Parlex Corporation and its consolidated subsidiaries,
unless the context indicates otherwise.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this document and in the documents that are or
will be incorporated by reference into this document contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. This document
includes and incorporates forward-looking statements that are subject to a
number of risks and uncertainties. All statements, other than statements of
historical facts included or incorporated in this document, regarding our
strategy, future operations, financial position and estimated revenues,
projected costs, prospects, plans and objectives of management are forward-
looking statements. When used in this document, the words "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements and
you should not place undue reliance on our forward-looking statements. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic investments.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the
risks described in the section of this report entitled "Factors that May
Affect Future Results" and elsewhere in this document. Any or all of our
forward-looking statements in this document and in the documents we have
referred you to may turn out to be wrong. They can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties.
Therefore, you should not place undue reliance on any such forward-looking
statements. We do not intend to update publicly any forward-looking
statement, whether as a result of new information, future events, or
otherwise, except as required by law. This discussion is permitted by the
Private Securities Litigation Reform Act of 1995.
PART I
Item 1. Business
- ----------------
Overview
We believe that we are a leading provider of flexible interconnect solutions
to the automotive, telecommunications, computer, military, medical, home
appliance, electronic identification and diversified electronics markets. Our
product offerings, which we believe are the broadest of any company in the
flexible interconnect industry, include flexible circuits, laminated cable,
polymer thick film circuit, flexible interconnect hybrid circuits, and
flexible interconnect assemblies.
Our objective is to be a solutions provider for key customers in markets
where cost-effective flexible interconnects provide added value to our
customers' products. We believe that our creative engineering expertise, our
ability to advance the technology of manufacturing processes and materials
and our broad product portfolio allow us to provide the optimum solution that
meets the cost and performance requirements of our customers.
We have a long history of providing flexible interconnect solutions to some
of the leading original equipment manufacturers, or OEMs, in our target
markets, including Hewlett-Packard, Raytheon, Infineon, Motorola, Maytag,
Tyco, Delphi, Siemens, and Whirlpool. We also supply these products to major
electronic manufacturing services companies such as Flextronics, Solectron,
Sanmina, and JABIL. We have a global presence and operate seven manufacturing
facilities, which are located in China, Mexico, the United Kingdom and the
United States. Certain information related to revenues derived by geographic
location, major customers and product lines is included in Note 16 of our
financial statements and is incorporated herewith by reference.
3
Industry Background
Over the past two decades, electronic systems have become smaller, lighter
and more complex, while demand for increased performance at lower cost has
increased dramatically. As two-dimensional rigid printed circuit boards, a
conventional form of electronic interconnect packaging, limit the options
available to design engineers, the demand for three-dimensional, flexible
interconnect solutions has increased. In addition to their improved packaging
and performance characteristics, they offer superior heat dissipation
characteristics compared to conventional circuits, making flexible
interconnects attractive for use in advanced, high-speed electronics.
According to Allied Business Intelligence, a technology consulting firm, the
market size for flexible circuits was approximately $4.2 billion in 2003 and
is expected to grow to $7.1 billion by 2007.
Flexible interconnects provide an electrical connection between components in
electronic systems and are increasingly used as a platform to support the
attachment of electronic devices. Flexible interconnects offer several
advantages over rigid printed circuit boards and ceramic hybrid circuits,
particularly for small, complex electronic systems:
* Their ability to physically bend or flex and their three-dimensional
shape permit them to accommodate packaging contours and motion in a
manner that traditional two-dimensional rigid printed circuit boards
cannot;
* They provide improved heat dissipation and signal integrity as compared
to rigid printed circuit boards; and
* They permit the use of substrates for component attachment, as well as
connectors, cables and other interconnection devices, with reduced size,
weight and expense.
We consider the following trends important in understanding the flexible
interconnect industry:
Miniaturization, Portability and Complexity of Electronic Products
High-performance electronic products, such as mobile communications devices
including cellular phones, laptop computers and personal digital assistants,
continue to become more compact, portable and contain greater functionality.
The complexity of these new products requires flexible interconnects with
smaller size, lighter weight, greater circuit and component density, better
heat dissipation properties, higher frequencies and increased reliability. As
electronic products become increasingly sophisticated, electronic
interconnect suppliers will require greater engineering expertise and
investment in manufacturing and process technology to produce high-quality
electronic interconnect products on time, in volume and at acceptable cost.
Shorter Product Life Cycles and Time-to-Market Pressure
Rapid technological advances have significantly shortened the life cycle of
complex electronic products and increased pressure to develop and introduce
new products quickly. These time-to-market challenges have in turn increased
OEMs' emphasis on the development, design, engineering, prototype development
and ramp-to-volume capabilities of their suppliers.
Globalization and Reduction of Manufacturing Costs
Customers continue to demand increased electronic performance at lower
prices. Leading OEMs who often manufacture products in multiple geographic
regions are relying on suppliers with global sourcing capabilities. Local
sourcing can help to shorten the manufacturer's supply chain and provide
regionally competitive pricing. Our customers increasingly demand that their
suppliers provide infrastructure for local delivery of engineering,
manufacturing and sales support.
Increased Outsourcing
To avoid delays in new product introductions, reduce manufacturing costs and
avoid logistical complexities, OEMs are increasingly turning to suppliers
capable of producing electronic interconnect products from development,
4
design, quick-turn prototype and pre-production through volume production and
assembly. The accelerated time-to-market and ramp-to-volume needs of
manufacturers have resulted in increased collaboration with qualified
suppliers capable of providing a broad and integrated offering. Many OEMs now
seek to use a small number of technically qualified, strategically located
suppliers capable of providing both quick-turn prototype and pre-production
quantities as well as cost-competitive volume production quantities.
Our Solution
We combine creative engineering design capabilities with innovative
manufacturing processes and materials to provide our customers with a
complete and cost-effective flexible interconnect solution. We believe that
our processes and technologies allow us to produce superior flexible
interconnect solutions at a competitive cost. In addition, because we are
able to produce a broad range of flexible interconnects ranging from low-cost
laminated cable to more expensive high-performance multi-layer and rigid-
flexible interconnects, we are able to provide our customers with a product
that most efficiently meets their demands for functionality.
Our solution begins with the product design phase in which our engineers
typically work closely with customers to develop a technically advanced
flexible interconnect design. Although our customers generally provide the
initial engineering guidelines for a particular interconnect, our design
engineers are often called upon to work in tandem with a customer's design
team to develop a solution. An important part of the Parlex solution is
ensuring at an early stage, before time and money are spent on manufacturing,
that the design can be produced efficiently and cost-effectively.
Once the design is completed, we apply our experience with materials and
manufacturing processes to produce a flexible interconnect solution that
meets our customer's objectives. We have developed materials and processes
that provide customers improved performance at a competitive production cost.
In addition, we provide a dedicated quick-turn capability for producing
prototype flexible interconnects and supporting our customers' needs for
limited quantities of flexible interconnects on short notice. We believe that
we are one of the few volume manufacturers of flexible interconnects to offer
this valuable service in a dedicated facility. When customers come to us for
prototype development of a flexible interconnect, we believe that we enjoy a
competitive advantage in pursuing the subsequent volume production of that
flexible interconnect. Over the past several years we have gained substantial
experience in producing products in high volume, and we believe this
expertise is a key factor in our ability to provide customers with cost-
effective, flexible interconnect solutions.
We believe that our ability to supply worldwide a broad range of products
with a diverse mix of performance characteristics will enable us to capture
additional market share in the flexible interconnect industry. We are one of
a limited number of independent manufacturers that offers a range of flexible
interconnect solutions from design concept through high-volume production. By
offering a variety of products and services, we can provide design and
manufacturing solutions for our customers while reducing their time-to-market
and product development costs.
Our Strategy
Our objective is to be the flexible interconnect supplier of choice for
customers in our target markets. Our strategy to achieve this objective
includes the following key elements:
Develop Innovative Processes and Materials
We believe that our ability to develop innovative processes and materials
enhances our opportunity for growth within our target markets. We intend to
continue to focus our development efforts on proprietary flexible materials
and processes that have a broad range of applications. These materials and
processes enable us to produce, at reduced cycle times, cost-effective
flexible interconnects that are highly reliable and improve product
performance. Our PALFlex(R), PALCoat(R), U-Flex(R), PALCore(R) HP,
Polysolder(R), AutoNet(TM) and additive print and plate technologies are
examples of some of our innovative materials and manufacturing processes.
5
Offer the Broadest Range of Products and Services in the Flexible
Interconnect Industry
We offer product lines that service virtually all of our customers' flexible
interconnect needs. We are not aware of another company in the flexible
interconnect industry that provides a broader range of products and services.
Our product line includes flexible and rigid-flexible circuits from 1 to 24
layers, laminated cable, flexible interconnect hybrid circuits, flexible
interconnect assemblies and, surface mount assembly capabilities. We offer
products using a variety of materials, including adhesiveless and adhesive-
based polyimide, polyester, and polymer thick film technologies. We believe
this wide product range enables us to remain the flexible interconnect
solution provider of choice to customers even when their functional
requirements change.
Develop Strategic Relationships with Key Customers
We seek to develop strategic relationships with key customers in targeted
industries. As a value-added strategic partner with our customers, we work
with a customer's technology roadmap to design and develop cost-effective
flexible interconnect solutions. We believe that these relationships are most
effective when we provide a significant portion of a customer's flexible
interconnect needs. Through these strategic relationships, we achieve greater
visibility into our customers' entire range of flexible interconnect
requirements. As a result of our relationships with key customers, we
developed PALFlex(R), PALCore(R), PALCore(R) HP, PALCoat(R), Polysolder(R)
and HSI+(R) with the knowledge that successful development would result in
immediate market acceptance.
Diversify Customer Base across Specific Target Markets
We seek to serve a variety of markets to help mitigate the effects of
economic cycles in any one industry. We believe our diversification among the
major segments of the electronics industry provides greater insight into
emerging technological requirements. For example, we applied our proprietary
knowledge of shielding and impedance control which was developed for the
laptop computer market to gain a competitive advantage in the
telecommunications and networking market.
Expand Global Presence
We believe that our customers will increasingly require service and support
on a global basis. To address these requirements, we have continued to expand
our global presence in emerging markets and throughout the world. We now have
facilities in Asia, Europe, and both the east and west coasts of North
America. We established a presence in China to address the emerging flexible
circuit market throughout Asia and to produce specific products more cost-
effectively for North American and European customers. Asia continues to be
the fastest growing market for electronic manufacturing. Over the past 9
years, we have significantly expanded our China operations. We currently have
approximately 170,000 square feet of manufacturing and assembly space under
lease in Shanghai and Kunshan. In May 1998, we opened a facility in Mexico
that performs the finishing and, in some instances, assembly operations for
flexible interconnects manufactured at our other facilities and shipped to
North American markets. In 1999, we purchased a business in San Jose,
California to produce low to medium volumes of flexible circuits and provide
our customers with quick-turn and prototyping services. In addition, we have
developed, and plan to continue to develop, strategic relationships and
alliances that we believe are necessary for the success of our international
business. In March 2000, we acquired the polymer thick film operations of
Cookson Electronics with manufacturing facilities in Rhode Island and the
United Kingdom. We believe these transactions have positioned us to further
expand our sales presence in Asia and Europe. We will continue to explore
appropriate expansion opportunities as demand for our solutions increases.
The additional expenses and risks related to our existing international
operations, as well as any expansion of our global operations, could
adversely affect our business. See "Factors That May Affect Future Results"
within Item 7 of the "Management Discussion and Analysis of Financial
Condition and Results of Operations" section of this document for a
discussion of the inherent risks associated with our international
operations.
6
Our Markets
Flexible interconnects are used in most segments of the electronics industry.
The primary market segments that place high value on superior, cost-effective
flexible interconnect solutions include:
Telecommunications and Networking
The telecommunications and networking market includes infrastructure
equipment and subscriber equipment sub-markets. Infrastructure equipment
consists of support electronics for the distribution of voice and data
transmission. Infrastructure equipment employs sophisticated electronics
which usually require the use of complex flexible interconnects. Subscriber
equipment consists of cellular devices such as handsets and battery
assemblies. Tight packaging, increased functionality and the need to reduce
weight have dramatically driven the demand for flexible interconnects in this
sub-market. Laminated cable and single and double-sided flexible circuits are
generally used in subscriber equipment. Recent design changes to incorporate
cell phone antennas within the cellular device has opened a rapidly growing
market opportunity for Parlex.
Computer
Demand for flexible circuits and laminated cable in the computer market is
driven by short product life cycles as consumers demand increasingly
powerful, less expensive, smaller, faster and lighter equipment. Disk drives
represent the largest application for flexible circuits in this market. Other
applications include personal computers, notebook displays, personal digital
assistants, mass storage devices and peripheral equipment such as scanners,
printers and docking stations. Parlex has secured a strong presence in the
printer market for circuits that employ our proprietary polysolder assembly
technology.
Automotive
Automobile manufacturers increasingly use electronics to enhance vehicle
performance and functionality, while at the same time reducing electronic
component size, weight and manufacturing and assembly costs. Flexible
circuits and laminated cable can provide cost-effective interconnect
solutions for such applications as dashboard instrumentation, automotive
entertainment systems, electronic engine control units, steering wheel
controls, power distribution, intelligent airbag deployment systems, sensors
and anti-lock brakes. Providers of flexible interconnects typically work
closely with the companies that supply these electronic systems to the
vehicle manufacturers. Because automotive production cycles generally last
three to five years and designs are unlikely to change during that period, a
flexible interconnect that is designed into an automobile model or platform
provides a relatively predictable source of demand over an extended time
period.
Military
Military electronics were at one time the primary applications for flexible
circuitry. Because of product complexity and space restrictions, military
applications often require multi-layer rigid-flexible circuits. Typical
applications are navigation systems, flight controls, displays,
communications equipment and smart munitions. We believe that procurement of
flexible interconnects in this market will experience growth. We believe that
the trend toward "smart" military systems will drive demand for flexible
interconnects in this segment.
Home Appliance
The home appliance market is beginning to make the transition from electro-
mechanical controls to electronic controls containing intelligence and
display. Over time, appliances are expected to become more technologically
advanced. The utility and ease of use and repair associated with flexible
interconnects make them especially suitable for these applications. Our
primary application today is the dishwasher market but we have recently
secured new business for the range and laundry markets.
Electronic Identification
The emerging identification and tracking market is based upon next generation
identification tags, which in some cases are attached to an antenna, emitting
radio frequency signals. Advancing technology at lower prices,
7
increasing cooperation among industry participants and high volume
applications such as automated fuel payment, ATM and credit cards, electronic
ticketing, baggage handling and parcel tracking are expected to be the growth
drivers for this market. The size, cost and performance requirements demanded
by this market are expected to drive the use of flexible circuits and
assemblies in these applications. In 2002, we entered into a multiyear
agreement to provide substrates for the world's leading producer of smart
cards utilizing our proprietary technology. This agreement has not produced
significant revenues through June 30, 2004, but is forecasted to provide
significant revenues beginning in fiscal 2005.
Diversified Electronics
The diversified electronics market encompasses many applications. Virtually
any electronic device which requires tight packaging, lightweight or high
reliability is a product that could incorporate flexible interconnects.
Typical applications include electronic scales, industrial controls, postal
metering devices/scanners and camera products.
Medical
Healthcare continues to be a rapidly growing market, particularly in North
America. Electronics have become increasingly important with trends toward
increased computing power and smaller size electronic components resulting in
medical devices that are smaller, mechanically simpler and more reliable.
Medical device companies often rely heavily on design and manufacturing
services of local manufacturing solutions providers in an effort to lower
costs, focus on core competencies and speed FDA regulatory approvals. In
addition, Parlex is uniquely positioned with proprietary technologies to
address the disposable diagnostic segment of the medical market. In fiscal
year 2004, the medical market grew by more than 90% and now represents our
second largest market.
Our Products
Our current flexible interconnect products include flexible circuits,
laminated cable, flexible interconnect hybrid circuits and flexible
interconnect assemblies. We manufacture our products, which are designed by
us, our customers or jointly, to our customers' application-specific
requirements. Lead times for the design and manufacture of our products
generally range from one week for some products to three months for more
sophisticated products.
Flexible Circuits
Flexible circuits, which consist of conductive patterns that are etched or
printed onto flexible substrate materials such as polyimide or polyester, are
used to provide connections between electronic components and as a substrate
to support these electronic devices. The circuits are manufactured by passing
base materials through multiple processes such as drilling, screening, photo
imaging, etching, plating and finishing. Flexible circuits can be produced in
single or multiple layers. We produce a wide range of flexible circuits
including:
* Single-Sided Flexible Circuits, which have a conductive pattern only on
one side. Single-sided flexible circuits are usually less costly and more
flexible than double-sided flexible circuits. Through our proprietary
high-speed interconnect screening technology, HSI+(R), which eliminates
the need for a separate shield layer, we can produce single-sided
flexible circuits that provide the same functionality as double-sided
flexible circuits at a lower cost. We manufacture single-sided circuitry
in both the United States and Shanghai, China, where a large percentage
of our production is single-sided.
* Double-Sided Flexible Circuits, which have conductive patterns or
materials on both sides that are interconnected by a drilled and copper-
plated hole. Double-sided flexible circuits can provide either more
functionality than a single-sided flexible circuit by containing
conductive patterns on both sides, or can provide greater shielding than
a single-sided flexible circuit by having a conductive pattern on one
side and a layer of shielding material on the other. While most double
sided circuits are produced on polyimide film, Parlex is unique in
offering lower cost PET (polyester) material as an alternative.
8
* Multilayer and Rigid-Flexible Circuits, which consist of layers of
circuitry that are stacked and then laminated. These circuits are used
where the complexity of the electronic design demands multiple layers of
flexible circuitry. If some of the layers are rigid printed circuit board
material, the product becomes a rigid-flexible circuit. We have
manufactured these circuits with up to 40 layers in prototype programs
and 24 layers in production.
* Polymer Thick Film Flexible Circuits, which are flexible circuits
manufactured using a technology that uses a low-cost thick film polyester
dielectric substrate and a silver screen-printed conductive pattern.
These circuits are made with an additive process involving the high-speed
screen printing of conductive traces utilizing internally developed ink
systems. We are able to produce multilayer circuits using proprietary
dielectric materials and double-sided circuits using proprietary printed
through-hole technologies. Polymer thick film flexible circuits are used
in low-cost, low-temperature, low-power interconnect applications.
Laminated Cable
Laminated cable, which consist of flat or round wire laminated to a flexible
substrate material, provides connections between electronic sub-systems and
replace conventional wire harnesses. We manufacture laminated cable in an
efficient, proprietary roll process. Substantially all of the laminated cable
that we produce uses flat wire. Approximately 95% of the laminated cable that
we produce is insulated with polyester material, which meets or exceeds our
customers performance requirements and cost parameters. Our laminated cable
is capable of handling both power (high current) and signal (low current).
Improving the process by which laminated cable is manufactured can increase
functionality and lower the cost of production. To this end, we have
developed U-Flex(R), a proprietary technique that forms flat wire into a u-
shape, followed by an injection molding process that enables the u-shaped end
to function as a connector. This technique improves electrical performance
and eliminates the need for a separate costly connector. We have also
developed Pemacs(R) shielding, which adds a specially designed silver ink to
laminated cable to meet stringent electronic shielding requirements without
compromising flexibility.
Flexible Interconnect Hybrid Circuits
In many cases, although a laminated cable is capable of carrying the
necessary signals, etched circuitry is required for termination. For these
applications we manufacture flexible interconnect hybrid circuits, which take
advantage of the lower cost of laminated cable and the technology of flexible
circuits by combining them into a single interconnect. On some products, we
apply our HSI+(C) process to the flexible interconnect hybrid circuit in
order to provide signal clarity and shielding.
Flexible Interconnect Assemblies
Both flexible circuits and laminated cable can be converted into an
electronic assembly by adding electronic components. This process can be as
simple as adding a connector or as complex as attaching components such as
capacitors, resistors or integrated circuits onto a flexible circuit using
high volume surface mount assembly. We attach surface mount components to
both copper and polymer thick film circuits with either solder paste or our
patented Polysolder(R) lead-free conductive adhesive. We can place a full
range of electronic devices, from passive components to computing devices, on
our flexible interconnects. We believe we are one of a limited number of
manufacturers who provide a seamless integration from design and initial
prototype through high volume circuit manufacturing and value added assembly.
We further believe our value added capabilities, including the use of
proprietary technologies, to be a significant differentiation versus our
competitors.
9
The following table sets forth representative applications in which our
products are used:
Flexible Circuits
-----------------
Single-Sided Automotive Displays
Batteries for Cellular Phones
Printers
Personal Digital Assistants
Data Storage
Cell Phone Antennas
Double-Sided Engine Control Units
Laptop Computers
Cellular Phones Engine Sensors
Smart Cards
Multilayer and Rigid-Flexible Engine Control Units
Computer Networks
Network Switching Systems
Aircraft Displays
Automotive Transmission Systems
Polymer Thick Film Business Phones
Disposable Medical Devices
Appliances
Radio Frequency Identification
(RFID)
Laminated Cable Postage Meters
--------------- Automotive Sound Systems
Notebook Computers
Industrial Controls
Electronic Scanning Devices
Touch Screen Displays
Flexible Interconnect Hybrid Circuits Total Vehicle Interconnection
------------------------------------- Printers
Sensors
Scanning Devices
Night Vision Systems
Flexible Interconnect Assemblies Aircraft Identification Systems
-------------------------------- Sensors
Scanning Devices
Batteries for Portable Products
Disk Drives
Night Vision Systems
Personal Computers
New Process and Material Technologies
An important part of our strategy is development of new processes and
materials for use in our products. Our proprietary processes and materials
include:
PALCore(R) HP - PALCore(R) HP is a low-cost multilayer flexible material that
is designed to minimize the difference between the cost of materials used in
flexible circuits and those used in conventional rigid circuits. We have
received patents on our latest, more flexible version of PALCore(R) HP, which
entered production in January 2000.
10
Polysolder(R) - Polysolder(R) is both a patented lead-free, conductive
adhesive used to attach electronic components onto flexible interconnects and
a patented manufacturing process that enables the attachment of electronic
devices onto substrates at low temperatures. Polysolder(R) has been used in
the production of polymer thick film flexible circuit assemblies for several
years. We plan to apply the Polysolder(R) process to etched flexible circuits
and laminated cable. This technology will enable us to use polyester, instead
of the more expensive polyimide, as a substrate in the production of these
flexible interconnect assemblies.
Electronic Identification Flip Chip Attachment Process - We have developed a
low-cost process that we believe will be an enabling technology in the
electronic identification market. Our high-speed flip chip attachment process
is up to ten times faster at placing semiconductors on low-cost materials
than conventional process alternatives. This process allows us to meet our
customer's goals for cost and reliability. This process entered production in
September 1999.
AutoNet(TM)- AutoNet(TM)is a proprietary flexible interconnect designed
specifically to meet the emerging needs of the automotive industry. As each
generation of vehicles incorporates greater electronic content,
interconnection becomes both more important and more difficult.
AutoNet(TM)draws upon our flexible interconnect process and materials
technology to provide a cost-effective interconnect for placement in the
headliners, trunks and doors of automobiles. AutoNet(TM)is designed to
replace traditional wire harnesses and is lighter, smaller, more reliable and
provides shielding necessary to control the emission of electronic signals.
We believe that the potential market for AutoNet(TM)is substantial and will
develop over the next few years.
Print - Plate - Through a joint development project with Nashua Corporation,
we have developed a method of printing circuit patterns using a proprietary
silver conductive ink on high-speed commercial printing presses. A
proprietary copper plating on the circuit patterns follows this process. This
technology dramatically reduces the cost of flexible circuits for certain
applications. We began marketing this technology to our customers in late
fiscal 2004 and will commence volume production in early fiscal 2005. Initial
target markets are cell phone antennas, automotive interiors and RFID
antennas.
Our Customers
Our customers are a diverse group of OEMs that serve a variety of industries.
Our largest 20 customers based on sales accounted for approximately 52% of
total revenues in 2004, 50% in 2003 and 44% in 2002. In addition, two
customers individually accounted for more than 10% of our accounts receivable
at June 30, 2002.
The loss of more than one of our largest customers may have a significant
impact on our operations. However, the loss of any one customer is not
expected to have a significant impact on our business as the individual
receivable balances are closely monitored and no single customer represented
10% or more of our total revenues in 2004, 2003 or 2002.
Our major end-customers include: BAE, Delphi, Hewlett-Packard, Hitachi,
Infineon, Johnson Controls, Maytag, Motorola, Pitney Bowes, Raytheon,
Samsung, Siemens, Visteon, Hypoguard, Intier and Whirlpool. To support these
end customers, we work closely with major electronics manufacturing services
(EMS) companies such as Flextronics, Solectron, Sanmina, JABIL, Plexus, and
Celestica.
Sales and Customer Service
Our sales and marketing organization is structured to support a very
geographically dispersed customer base. Our corporate sales organization is
regionally focused and provides local support to the various customer
engineering, procurement, and operations teams. We believe that a regionally-
based sales organization improves program support throughout the entire
product life cycle. Our regional sales teams are responsible for marketing
and selling the entire Parlex product offering to existing and potential
customers within their territories. These regional organizations include
direct sales engineers and independent manufacturers' representatives. Parlex
currently has sales or engineering support offices in eight locations in the
United States, two locations in Europe and three locations in Asia.
11
Complementing the sales force are robust product line organizations within
each of the manufacturing operations. Led by a product line manager, this
group provides technical marketing, research and development input, and
sustaining customer support for our customer base on a worldwide basis.
Manufacturing
We believe that our manufacturing expertise in a number of specialized areas,
together with our investment in process research and development and
equipment, have contributed to our position as an industry leader. A
significant amount of our production equipment is proprietary, including
cable laminators, precision cable slitters and roll plating, roll etching and
automatic punching equipment.
Our computer-aided manufacturing system takes the customer's design and
programs the various steps that will be required to manufacture the
particular product. The manufacturing process varies a great deal from
product to product. Although there is no standard process, significant
elements of production are highlighted below:
Polymer Thick Film
Etched Flexible Circuit Flexible Circuit Laminated Cable
- ----------------------- ----------------- ---------------
Drilling Convert/Condition Substrate Lamination
Plating Screen Print Slitting
Photo Imaging Diecut Conductor Forming
Etching Conductive Adhesive Injection Molding
Lamination Surface Mount/Flip Chip Assembly Shielding
Electrical Testing Electrical Testing Laser Skiving
Assembly Assembly
During 2004, 2003 and 2002, we continued to focus on cost reduction
initiatives. Core to this strategy is relocation of high-volume low-cost
manufacturing to China and Mexico and better utilization of our excess
capacity. In June 2002, we decided to close our Salem, New Hampshire facility
and the transfer our laminated cable business to Methuen, Massachusetts,
better utilizing our excess capacity. In January 2003, we completed the
closure of our Salem, New Hampshire facility and transfer of our laminated
cable business to Methuen, Massachusetts and Mexico. In February 2003, we
completed the transfer of our PALFlex manufacturing business to China and
discontinued production in the U.S. In May 2004, we completed the transfer of
our high volume surface mount assembly capability to China. We believe that
we have sufficient capacity to meet forecast demand in the U.S. operations
for the next several years.
In January 2004, we expanded our China facilities, leasing an additional
25,000 square feet of assembly space in Kunshan. Further, in January 2004, we
completed a strategic reorganization of our China facilities by consolidating
our engineering intensive wet process operations in our two Shanghai
locations and relocating our assembly and finishing operations to our lower
cost facility in Kunshan. Kunshan is approximately 45 miles from our Shanghai
location. In May 2004, we also relocated our Smart Card production line from
Suzhou, China to our main facility in Shanghai.
In 2003, we expanded our China facilities by leasing an additional 12,000
square feet of manufacturing space in Suzhou and an additional 50,000 square
feet of assembly and finishing space in Kunshan.
Five of our manufacturing facilities are certified to the international
standard ISO 9001-2000 or ISO 9002 and to the automotive standard QS 9000.
One facility is certified to the automotive standard TS 16949 and the
environmental standard ISO 14001.
Materials and Materials Management
We aggressively attempt to control our cost of purchased materials and our
level of inventories through long-term relationships with our suppliers. Our
goal is to attain a competitive price from suppliers and foster a shared
vision towards advancing technology.
12
We purchase raw materials, process chemicals and various components from
multiple outside sources. We often make long-term purchasing commitments with
key suppliers for specific customer programs. These suppliers commit to
provide cooperative engineering as required and in some cases to maintain a
local inventory to provide shorter lead times and reduced inventory levels.
In many cases our customers approve, and often specify, sources of supply.
We qualify our suppliers through a vendor rating system that limits the
number of suppliers to those that can provide the best total value and
quality. We monitor each supplier's quality, delivery, service and technology
so that the materials we receive meet our objectives.
Competition
Our business is highly competitive. We compete against other manufacturers of
flexible interconnects as well as against manufacturers of rigid-printed
circuits. In addition to competing with industry peers who produce flexible
circuitry (etched), laminated cable, and polymer think film products, we also
compete with alternative technology leaders in the rigid printed circuit,
wire harness and cable, and connector industries. Competitive factors among
flexible circuit and laminated cable suppliers are price, product quality,
technological capability and service. We believe that we compete favorably on
all of these competitive factors, and believe that our competitive strength
is in our ability to apply technology to reduce cost and/or increase
functionality. We compete against rigid board products on the basis of
product versatility, although price can also be a competitive factor if the
difference between the cost of a rigid circuit and a flexible circuit becomes
too great. Our ability to develop alternative material and process solutions
continues to reduce the inherent cost advantage rigid printed circuit
manufacturing has held.
Intellectual Property
We have acquired patents and we seek patents on new products and processes
where we believe patents would be appropriate to protect our interests.
Although patents are an important part of our competitive position, we do not
believe that any single patent or group of patents is critical to our
success. We believe that, due to the rapid technological change in the
flexible interconnect business, our success depends more on design creativity
and manufacturing expertise than on patents and other intellectual property.
We own 20 patents issued, and have 9 patent applications pending, in the
United States and several foreign countries. We have obtained federal
trademark registrations for PALFlex(R), PALCore(R), U-Flex(R), PALCoat(R),
Polysolder(R), and HSI and have one trademark application pending. We also
rely on internal security measures and on confidentiality agreements for
protection of trade secrets and proprietary know-how. We cannot be sure that
our efforts to protect our intellectual property will be effective to prevent
misappropriation or that others may not independently develop similar
technology.
Environmental Regulations
Flexible interconnect manufacturing requires the use of metals and chemicals.
Water used in the manufacturing process must be treated to remove metal
particles and other contaminants before it can be discharged into the
municipal sanitary sewer system. We operate and maintain water effluent
treatment systems and use approved laboratory testing procedures to monitor
the effectiveness of these systems at our San Jose, California and Methuen,
Massachusetts facilities. We operate these treatment systems under an
effluent discharge permit issued by the local governmental authority. Air
emissions resulting from our manufacturing processes are regulated by permits
issued by government authorities. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental
laws. We believe that the waste treatment equipment at our facilities is
currently in compliance with the requirements of environmental laws in all
material respects and that our air emissions are within the limits
established in the relevant permit. However, violations may occur in the
future. We are also subject to other environmental laws including those
relating to the storage, use and disposal of chemicals, solid waste and other
hazardous materials, as well as to work place health and safety and indoor
air quality emissions. Furthermore, environmental laws could become more
stringent or might apply to additional aspects of our operations over time,
and the costs of complying with such laws could be substantial. Compliance
with local, state and federal laws did not have a material impact on our
capital expenditures, earnings or competitive position in
13
2004. We estimate that the total capital expenditures in 2005 associated with
environmental compliance will be approximately $100,000.
Employees
As of June 30, 2004, we employed approximately 585 people in the United
States. Of these employees, 508 were direct employees of Parlex and 77 worked
for interim staffing agencies. In addition, we employed approximately 85
people in Mexico, approximately 146 people in the United Kingdom and
approximately 1,785 people in China. We are not a party to any collective
bargaining agreement and we believe our relations with our employees are
good.
Available Information
We are subject to the informational requirements of the Securities Exchange
Act, and in accordance with those requirements file reports, proxy
statements and other information with the Securities and Exchange
Commission. You may read and copy the reports, proxy statements and other
information that we file with the Commission at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call 1-800-SEC-0330 for information about the Commission's Public Reference
Room. The Commission also maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the Commission's
Web site is http: //www.sec.gov.
A copy of our code of ethics may be obtained free of charge by writing to
our Investor Relations Department, Parlex Corporation, One Parlex Place,
Methuen, MA 01844.
14
Item 2. Properties
- ------------------
Facilities
Our facilities at June 30, 2004 are:
Approximate
Location Square Feet Leased/Owned Description
- -------- ----------- ------------ -----------
Methuen, Massachusetts 172,000 Leased (lease expires in Corporate headquarters, product
June 2018) and process development,
flexible circuit and laminated cable
manufacturing
Cranston, Rhode Island 55,000 Leased (lease expires in Polymer thick film and surface
June 2008) mount assembly operations
Newport, Isle of Wight, 40,000 Leased (lease expires in Polymer thick film and surface
United Kingdom November 2009) mount assembly operations
Shanghai, China 47,000 Leased (lease expires in Single- and double-sided
August 2007) flexible circuit manufacturing
Shanghai, China 55,000 Leased (lease expires in Single- and double-sided
August 2007) flexible circuit manufacturing
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
February 2008)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
June 2008)
Kunshan, China 25,000 Leased (lease expires in Flexible circuit assembly and finishing
December 2009)
Empalme, Sonora, Mexico 18,700 Leased (lease expires in Finishing and assembly operations
January 2005)
San Jose, California 16,800 Leased (lease expires in Prototype and quick-turn operations
December 2008)
Our facilities are well maintained and suitable for the operations conducted.
We believe that the space available at our facilities is adequate to meet our
current needs.
In December 2001, one of our subsidiaries, Parlex (Shanghai) Interconnect
Products Co., Ltd. ("Parlex Interconnect"), purchased land use rights for a
parcel of land located in the People's Republic of China. The purchase price
of the land use rights was approximately $1.1 million. In July 2003, Parlex
Interconnect sold its land use rights for approximately $1.2 million.
15
Item 3. Legal Proceedings
- -------------------------
From time to time we are involved in litigation relating to claims arising
out of our operations in the normal course of business. We are not currently
involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
Price Range of Common Stock
Our common stock is quoted on the NASDAQ National Market under the symbol
"PRLX." The following table sets forth, for the periods indicated, the high
and low closing sale prices for our common stock as reported on the NASDAQ
National Market.
High Low
---- ---
Fiscal Year Ended June 30, 2004
First Quarter $ 8.63 $ 6.79
Second Quarter $ 8.92 $ 7.60
Third Quarter $ 9.01 $ 5.81
Fourth Quarter $ 7.12 $ 5.98
Fiscal Year Ended June 30, 2003
First Quarter $12.90 $10.46
Second Quarter $11.80 $ 8.61
Third Quarter $10.50 $ 7.28
Fourth Quarter $ 8.10 $ 6.32
On September 21, 2004, the closing sale price of our common stock as reported
on the NASDAQ National Market was $5.40 per share and there were 88 holders
of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and we
presently intend to retain future earnings, if any, for our business. Our
credit agreement prohibits us from paying or declaring any cash dividends on
our common stock without the bank's prior written consent.
Recent Sales of Unregistered Securities
Series A Preferred Stock and Warrants
On May 7, 2004 and June 8, 2004, we entered into stock and warrant purchase
agreements with a small number of accredited investors to purchase shares
of our Series A Preferred Stock (the "Preferred Stock") and related
warrants to purchase our common stock. The purchase agreements provided for
the purchase and sale of 40,625 shares of Preferred Stock, and warrants
which will entitle holders to purchase up to
16
203,125 shares of common stock, for the aggregate amount of $3.25 million.
We received net proceeds of approximately $2.95 million, after payment of
placement agent fees, legal expenses and related costs.
The Preferred Stock and warrants were sold for $80.00 per unit. The
Preferred Stock may be converted in whole but not in part at any time by
the purchasers into shares of common stock at an initial conversion price
of $8.00 per share. In the event the trading price of our common stock
exceeds 150% of the conversion price for 20 consecutive trading days, then
all outstanding shares of Preferred Stock shall be automatically converted
into common stock. The Series A Preferred Stockholders have no voting
rights.
The Preferred Stock has a fixed dividend rate of 8.25% per annum, payable
quarterly, at our sole discretion, in either cash or shares of common
stock. If we do not redeem the Preferred Stock on the third anniversary
date of the issuance date (as discussed below), then the fixed dividend
rate shall thereafter be increased to 14% per annum, and shall be payable
solely in cash.
The Preferred Stock also entitles the holders thereof to a preferential
payment in the event of our voluntary or involuntary liquidation,
dissolution or winding up. Specifically, in any such case, the holders of
Preferred Stock shall be entitled to be paid, out of our assets that are
available for distribution to our shareholders, the sum of $80.00 per share
of Preferred Stock held, plus all accrued and unpaid dividends thereon,
prior to any payments being made to holders of our common stock. The $80.00
per share liquidation preference payment amount is
subject to equitable adjustment for stock splits, stock dividends,
combinations, reorganizations and similar events effecting the shares of
Preferred Stock.
On the third anniversary of the issuance date, we may in our sole
discretion redeem all, but not less than all, of the then-outstanding
Preferred Stock. The redemption price shall be equal to the initial
purchase price of the Preferred Stock, subject to equitable adjustments for
stock splits or similar actions, plus all accrued and unpaid dividends to
the redemption date. We must provide the purchasers with notice of our
intent to redeem at least 30 days prior to the third anniversary date.
Following receipt of such notice, the purchasers may elect to convert their
Preferred Stock into common stock prior to the redemption date, provided
that they perform such conversion within 20 days of receipt of the
redemption notice.
In connection with the transaction, we also issued warrants to purchase up
to 203,125 shares of our common stock. The warrants, which expire in three
years, are exercisable:
* at an initial exercise price of $8.00 per share;
* commencing six months after their issuance date; and
* on a cashless basis, whereby the holder, rather than pay the
exercise price in cash, may surrender that number of warrants
based on the than current fair value of our common stock equal to
the exercise price of the warrants being exercised.
The conversion price of the Preferred Stock and the exercise price of the
warrants are subject to adjustment in the event of:
* stock splits, dividends and certain combinations;
* certain distributions on account of our common stock; and/or
* certain reclassifications, exchanges or substitutions affecting
our common stock.
Each of the purchasers also received an option to purchase a number of
additional shares of Preferred Stock and warrants equal to 20% of the
number initially purchased by such investor (the "Over-Allotment Option").
The Over-Allotment Option may be exercised in whole or in part (but only
once) on or before 180 days following the closing date. The Over-Allotment
Option is exercisable at $80.00 per unit of Preferred Stock and warrant
purchased.
17
We filed a registration statement on Form S-3 (File No. 333-116314)
covering resale of the shares issuable upon conversion of the Preferred
Stock and exercise of the warrants with the Securities and Exchange
Commission. The registration statement was declared effective by the
Commission on June 28, 2004.
7% Convertible Subordinated Notes and Warrants
On July 28, 2003, Parlex entered into a securities purchase agreement with
Tate Capital Partners Fund, LLC, SF Capital Partners Ltd., Midsummer
Investment, Ltd., Islandia L.P. and Heartland Group, Inc. (solely on behalf
of Heartland Value Fund). The securities purchase agreement provided for
the purchase and sale of our 7% convertible subordinated notes in the
aggregate amount of $6.0 million. The notes were sold at 100% of face
value, and we received net proceeds of approximately $5.5 million, after
payment of finder's fees and legal expenses.
These convertible notes mature on July 28, 2007, with the interest payable
quarterly in shares of our common stock so long as we maintain the
effectiveness of this registration statement. The notes are convertible
immediately by the investors, in whole or in part, into shares of our
common stock at an initial conversion price equal to $8.00.
After two years from the date of issuance, under certain conditions we will
have the right to redeem all, but not less than all, of the notes at 100%
of the remaining principal of notes then outstanding, plus all accrued and
unpaid interest.
After three years from the date of issuance, the holder of any note may
require us to redeem the note in whole, but not in part. Such redemption
shall be at 100% of the remaining principal of such notes, plus all accrued
and unpaid interest. The holder must provide us with a notice of their
intent to redeem within 30 days of the third anniversary of the note.
In connection with the securities purchase agreement, we issued common
stock purchase warrants to each of the security holders to purchase up to
300,000 shares of our common stock. The warrants are exercisable:
* at an initial exercise price of $8.00 per share;
* during the four year period terminating July 28, 2007; and
* on a cashless basis, whereby the holder, rather than pay the
exercise price in cash, may surrender that number of warrants
based on the than current fair value of our common stock equal to
the exercise price of the warrants being exercised.
The conversion price of the notes and the exercise price of the warrants
are subject to adjustment in the event of:
* stock splits, dividends and certain combinations;
* distributions on account of our common stock; and/or
* our issuance of additional shares of common stock (or securities
convertible into common stock) at less than the conversion price
of the note or exercise price of the warrant.
There shall, however, be no adjustment to the conversion price of the notes
or exercise price of the warrants where the issuance of common stock, or
rights to acquire common stock, are:
* granted or issued pursuant to option plans for key employees and
consultants;
18
* granted or issued in connection with a merger or other
combination, or similar strategic transaction, where the primary
purpose for the grant or issuance is not capital raising; or
* issuable pursuant to that certain warrant to purchase common
stock granted to Silicon Valley Bank in connection with our
recent refinancing of our primary credit relationship.
In the event a price adjustment is required, both the conversion price of
the notes and the exercise price of the warrants will be reduced to:
* if the triggering transaction or event occurs within the first
eighteen months after July 28, 2003, such lower price; or
* thereafter, a reduced price representing a weighted average anti-
dilution price. Specifically, the new price shall be equal to the
price (calculated to the nearest cent) determined by dividing (A)
an amount equal to the sum of (1) the number of shares of our
common stock outstanding immediately prior to such issue or sale
(including for this purpose shares issuable upon conversion or
exercise of any convertible notes or warrants then outstanding)
multiplied by the conversion price or exercise price then in
effect, and (2) the consideration, if any, we received upon such
issue or sale, by (B) an amount equal to the sum of (1) the
number of shares of common stock then outstanding (including for
this purpose shares issuable upon conversion or exercise of any
convertible notes or warrants then outstanding) and (2) the
number of shares of common stock thus issued or sold.
We filed a registration statement on Form S-3 (File No. 333-109681)
covering resale of the shares issuable upon conversion of the notes and
upon exercise of the warrants with the Securities and Exchange Commission.
The registration statement was declared effective by the Commission on
November 21, 2003.
Both of these transactions were exempt from registration under the
Securities Act of 1933, as amended, by reason of Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder as
transactions by an issuer not involving any public offering. Each purchaser
represented that (a) it was acquiring the securities for investment
purposes only and not with a view to or for sale in connection with any
distribution thereof unless registered or exempt from registration, (b) it
was an "accredited investor," (c) it had such knowledge and experience in
business and financial matters that it was able to understand the risks and
merits of an investment in our securities, and (d) it did not acquire the
securities as a result of any general solicitation or advertising.
Moreover, appropriate restrictive legends were affixed to the securities
issued in these transactions and each purchaser had access to sufficient
information about us in order to make an informed investment decision.
19
Item 6. Selected Consolidated Financial Data
- --------------------------------------------
The following table sets forth financial data for the last five years. This
selected financial data should be read in conjunction with the Consolidated
Financial Statements and related notes and other financial data included
elsewhere herein.
Fiscal Year Ended June 30,
2004 2003 2002 2001 2000(a)
---- ---- ---- ---- -------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Total revenues $95,539 $ 82,821 $ 87,056 $103,620 $101,839
Cost of products sold 85,217 80,803 90,294 97,460 76,614
------- -------- -------- -------- --------
Gross profit (loss) 10,322 2,018 (3,238) 6,160 25,225
Selling, general and administrative expenses 15,820 14,484 14,049 17,706 14,097
------- -------- -------- -------- --------
Operating (loss) income (5,498) (12,466) (17,287) (11,546) 11,128
(Loss) income from operations before income
taxes and minority interest (8,066) (13,411) (17,724) (11,517) 10,473
Net (loss) income $(8,166) $(19,517) $(10,388) $ (6,199) $ 6,335
======= ======== ======== ======== ========
Net (loss) income attributable
to common stockholders $(8,337) $(19,517) $(10,388) $ (6,199) $ 6,335
======= ======== ======== ======== ========
Net (loss) income per share attributable
to common stockholders:
Basic $ (1.31) $ (3.09) $ (1.65) $ (0.99) $ 1.31
======= ======== ======== ======== ========
Diluted $ (1.31) $ (3.09) $ (1.65) $ (0.99) $ 1.28
======= ======== ======== ======== ========
Weighted average shares outstanding:
Basic 6,370 6,309 6,303 6,289 4,842
Diluted 6,370 6,309 6,303 6,289 4,940
Fiscal Year Ended June 30,
2004 2003 2002 2001 2000(a)
(in thousands)
Consolidated Balance Sheet Data:
Working capital $13,100 $12,722 $ 22,320 $ 31,016 $ 38,752
Total assets 95,250 86,033 106,054 110,864 115,341
Current portion of long-term debt 12,861 3,813 3,561 10,710 1,483
Long-term debt, less current portion 10,535 10,802 12,000 119 360
Stockholders' equity 49,462 51,248 70,141 81,351 87,790
(a) On March 1, 2000, we acquired Poly-Flex Circuits, Inc. ("Poly-Flex").
The acquisition was recorded under the purchase method of accounting.
Accordingly, the information for 2000 includes Poly-Flex's operations
beginning March 1, 2000.
20
Item 7. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
-------------------------
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the financial information
included elsewhere in this Annual Report on Form 10-K and with "Factors
That May Affect Future Results" set forth on page 32.
This discussion contains "forward-looking statements," as that term is
defined in the Private Securities Litigation Reform Act of 1995 and in
other federal securities laws. See "Cautionary Note Regarding Forward-
Looking Statements" on page 3 of this Annual Report on Form 10-K.
Overview
We believe we are a leading supplier of flexible interconnects principally
for sale to the automotive, telecommunications and networking, diversified
electronics, military, home appliance, electronic identification medical and
computer markets. We believe that our development of innovative materials and
processes provides us with a competitive advantage in the markets in which we
compete. During the past three years, we have invested approximately $12.4
million in property and equipment and approximately $17.7 million in research
and development to develop materials and enhance our manufacturing processes.
We believe that these expenditures will help us to meet customer demand for
our products, and enable us to continue to be a technological leader in the
flexible interconnect industry. Our research and development expenses are
included in our cost of products sold.
Over the past three years, we were adversely affected by the economic
downturn and its impact on our key customers and markets. In 2004 we
experienced sales growth in several strategic markets, particularly in the
second half of the year. Growth in the medical, appliance and military
markets has helped to reduce domestic losses. Significant investment over the
past three years has positioned us to capitalize on a rapidly expanding China
electronic manufacturing industry. In 2004 our China operations revenues
increased by over 65% with significant improvement in profitability.
Over the last three years we incurred operating losses of $35.3 million and
have used cash to fund operations and working capital of $13.7 million. We
have taken certain steps to improve operating margins, including the closure
of facilities, downsizing of our North American employee base, and transfer
of our manufacturing operations to lower cost locations, such as the People's
Republic of China. In addition, we have worked closely with our lenders to
manage through this difficult time and have obtained additional capital in
2003 and 2004 through sale-leasebacks of selected corporate assets, the
issuance of convertible debt and preferred stock and the execution of new
working capital borrowing agreements. As a result of the difficult economic
environment, we have had difficulty maintaining compliance with the terms and
conditions of certain of our financing facilities in prior years and
throughout 2004. At June 30, 2004, however, we were in compliance with all
financial covenants. Based upon our recent improvement in financial
performance, we are currently, and expect to remain, in compliance with all
of our financial covenants.
We have $8.9 million in existing short-term debt, associated with our
Chinese operations, that will be refinanced or repaid in 2005. We believe
that we will be able to obtain the necessary refinancing of this debt
because of our history of successfully refinancing our short-term Chinese
borrowings and our rapidly improving Chinese operating results. In fiscal
2004, revenues from our Chinese operations grew 65%. We expect similar
revenue growth and improved profitability in China during fiscal 2005.
Failure to obtain such financing may have a material adverse impact on our
operations.
We formed a Chinese joint venture, Parlex (Shanghai) Circuit Co., LTD
("Parlex Shanghai"), in 1995 to better serve our customers that have
production facilities in Asia and to more cost-effectively manufacture
products for worldwide distribution. Effective October 22, 2001, we purchased
the 40% share of Parlex Shanghai held by one of our joint venture partners,
increasing our equity interest in Parlex Shanghai to 90.1%. Parlex Shanghai's
results of operations, cash flows and financial position are included in our
consolidated financial statements. In 2003 we completed the transfer of the
production of our automotive related products utilizing our PALFlex(R)
technology from our Methuen, Massachusetts facility to Parlex Interconnect, a
wholly owned subsidiary of Parlex Asia Pacific Limited ("Parlex Asia"), which
is located in China. The transfer of this technology and manufacturing
capability was critical to exiting a very unprofitable North American
manufacturing business.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are, in
management's view, most important to the portrayal of the company's
financial condition and results of operations and most demanding of their
judgment.
21
We believe the following policies to be critical to an understanding of our
consolidated financial statements and the uncertainties associated with the
complex judgments made by us that could impact our results of operations,
financial position and cash flows. Our significant accounting policies are
more fully described in Note 2 to our consolidated financial statements for
the year ended June 30, 2004 included in Item 8 of this Form 10-K and in
Part IV, Item 15 "Exhibits, Financial Statement Schedules and Reports on
Form 8-K".
The preparation of consolidated financial statements requires that we make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures. On an ongoing
basis, we evaluate our estimates, including those related to bad debts,
inventories, property, plant and equipment, goodwill and other intangible
assets, valuation of stock options and warrants, income taxes and other
accrued expenses, including self-insured health insurance claims. We base
our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. In
applying our accounting policies, our management uses its best judgment to
determine the appropriate assumptions to be used in the determination of
certain estimates. Actual results would differ from these estimates.
Revenue recognition and accounts receivable. We recognize revenue on product
sales when persuasive evidence of an agreement exists, the price is fixed and
determinable, delivery has occurred and there is reasonable assurance of
collection of the sales proceeds. We generally obtain written purchase
authorizations from our customers for a specified amount of product, at a
specified price and consider delivery to have occurred at the time title to
the product passes to the customer. Title passes to the customer according to
the shipping terms negotiated between the customer and us. License fees and
royalty income are recognized when earned. We have demonstrated the ability
to make reasonable and reliable estimates of product returns in accordance
with SFAS No. 48 and of allowances for doubtful accounts based on significant
historical experience. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories. We value our raw material inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. Work in process and finished goods are valued
as a percentage of completed cost, not in excess of net realizable value. We
regularly review our inventory and record a provision for excess or obsolete
inventory based primarily on our estimate of expected and future product
demand. Our estimates of future product demand will differ from actual demand
and, as such, our estimate of the provision required for excess and obsolete
inventory will change, which we will record in the period such determination
was made. Raw material, work in process and finished goods inventory
associated with programs cancelled by customers are fully reserved for as
obsolete. Reductions in obsolescence reserves are recognized when realized
through disposal of reserved items, either through sale or scrapping.
Goodwill. We recorded goodwill in connection with our acquisition of a 40%
interest in Parlex Shanghai and our 1999 acquisition of Parlex Dynaflex
Corporation ("Dynaflex"). We account for goodwill under the provisions of
SFAS No.142, "Goodwill and Other Intangible Assets". Under the provisions
of SFAS No. 142, if an intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life is determined
to be no longer indefinite. An intangible asset that is not subject to
amortization shall be tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset might be
impaired. Goodwill is not amortized but is tested for impairment, for each
reporting unit, on an annual basis and between annual tests in certain
circumstances. In accordance with the guidelines in SFAS No. 142, we
determined we have one reporting unit. We evaluate goodwill for impairment
by comparing our market capitalization, as adjusted for a control premium,
to our recorded net asset value. If our market capitalization, as adjusted
for a control premium, is less than our recorded net asset value, we will
further evaluate the implied fair value of our goodwill with the carrying
amount of the goodwill, as required by SFAS No. 142, and we will record an
impairment charge against the goodwill, if required, in our results of
operations in the period such determination was made. Since our market
capitalization, as adjusted, exceeded our recorded net asset value upon
adoption of SFAS No. 142 and at the subsequent annual impairment analysis
dates, we have concluded that no impairment adjustments were required at
the time of adoption or at the annual impairment analysis date. The
carrying value
22
of the goodwill was $1,157,510 at June 30, 2004 and 2003.
Income Taxes. We determine if our deferred tax assets and liabilities are
realizable on an ongoing basis by assessing our valuation allowance and by
adjusting the amount of such allowance, as necessary. In the determination of
the valuation allowance, we have considered future taxable income and the
feasibility of tax planning initiatives. Should we determine that it is more
likely than not that we will realize certain of our net deferred tax assets
for which we previously provided a valuation allowance, an adjustment would
be required to reduce the existing valuation allowance. In addition, we
operate within multiple taxing jurisdictions and are subject to audit in
these jurisdictions. These audits can involve complex issues, which may
require an extended period of time for resolution. Although we believe that
we have adequately considered such issues, there is the possibility that the
ultimate resolution of such issues could have an adverse effect on the
results of our operations.
Off-Balance Sheet Arrangements. We have not created, and are not party to,
any special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating parts of our business that are not
consolidated into our financial statements. We do not have any arrangements
or relationships with entities that are not consolidated into our financial
statements that are reasonably likely to materially affect our liquidity or
the availability of capital resources, except as may be set forth below
under "Liquidity and Capital Resources." Our obligations under operating
leases are disclosed in the notes to our financial statements.
Results of Operations
The following table sets forth, for the periods indicated, selected items in
our statements of operations expressed as a percentage of total revenue. You
should read the table and the discussion below in conjunction with our
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Annual Report on Form 10-K.
Fiscal Year Ended June 30,
----------------------------
2004 2003 2002
---- ---- ----
Total revenues 100.0% 100.0% 100.0%
Cost of products sold 89.2% 97.6% 103.7%
Gross profit (loss) 10.8% 2.4% (3.7%)
Selling, general and administrative expenses 16.6% 17.5% 16.1%
Operating loss (5.8%) (15.1%) (19.9%)
Loss from operations before income taxes and minority interest (8.4%) (16.2%) (20.4%)
Net loss (8.5%) (23.5%) (11.9%)
Net loss attributable to common shareholders (8.7%) (23.5%) (11.9%)
Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003
Total Revenues. Total revenues for 2004 were $95.5 million, an increase of
15% from $82.8 million in 2003. Revenues from our China operations were
approximately $36 million, an increase of 65% over the prior year. Strong
growth occurred in the computer and peripherals, automotive,
telecommunications and electronic identification markets. During 2004 we
significantly expanded our China value added assembly operations which
included the transfer of our domestic high volume automated surface mount
capability to our Kunshan facility in May 2004.
Polymer thick film revenue increased 16% from $27.2 million in 2003 to
$31.6 million in 2004. Revenues from the appliance market, representing 13%
of total revenues in 2004, continued to be strong, largely driven by
laundry equipment product sales. Initial qualification was completed on two
new product opportunities (range and laundry equipment) during the fourth
quarter of 2004. Most significant increases occurred in the medical market,
primarily in disposable medical devices. Proprietary technologies including
silver-based conductive inks and gels have generated significant new
product opportunities including disposable blood glucose monitors and
sensors to detect carpal tunnel syndrome. Worldwide, medical revenues grew
to $16 million in 2004 from $8 million in 2003. In addition to the
importance to our market diversification strategy, growth in medical
revenues
23
is important to domestic and European facility utilization. Laminated cable
revenues were flat year over year but increased by 22% in the second half
of the year compared to the first half of 2004, indicative of a
strengthening North American electronics market.
Total revenues included licensing and royalty fees of approximately $54,000
for 2004 and $41,000 for 2003. Although we intend to continue developing
materials and processes that we can license to third parties, we do not
expect that licensing and royalty revenues will represent a significant
portion of total revenues in the near term.
Cost of Products Sold. Cost of products sold was $85.2 million, or 89% of
total revenues, for 2004, versus $80.8 million, or 98% of total revenues
for 2003. Revenue increases, of $18.6 million, in China and our polymer
thick film operations were responsible for gross margin increases of $12
million in 2004 compared to $7.5 million in 2003, or a year over year
increase in gross margin of 59%. China's gross margins were adversely
impacted by start-up costs associated with the initial production ramp of
our new smartcard manufacturing line. Smartcard revenues and cost of goods
sold were $1.6 million and $1.8 million respectively, in 2004. Initial
production of smartcards commenced in October 2003. Breakeven production
volumes of our smartcard business were achieved in June 2004. Margins
improved from 26% to 32% in our laminated cable operations. Material cost
reduction efforts coupled with increased utilization of lower cost Mexico
assembly and finishing capabilities contributed to improved gross margins.
In 2003, gross margins were significantly adversely impacted by shutdown
costs associated with the closing of our domestic PALFlex operations. In
2003, we recorded $13.1 million in costs of products sold from our PALFlex
operations on $6.4 million in revenue. Operations of our U.S. PALFlex
business ceased in February 2003.
The Methuen multilayer operation continued to experience low capacity
utilization and, correspondingly, significant unfavorable manufacturing
variances. Revenue in the multilayer operation was severely impacted by the
rapid decline in telecommunications network infrastructure market. In
fiscal 2001 this market represented over 75% of multilayer revenues. In
2004, revenues in this market were immaterial. Over the past two years we
have sought to replace this revenue by targeting markets demanding complex
North American design and manufacturing solutions. We believe the military
aerospace and medical markets represent two growing markets demanding such
services. In addition to a focused corporate sales effort targeting new
business development, we have continued to evaluate opportunities to
acquire business, particularly in the highly fragmented military aerospace
market. In June 2004, we completed a strategic sourcing agreement with
Delphi Corporation. Under the arrangement Delphi will transfer production
of its multilayer flexible circuit manufacturing to our Methuen operation.
We expect this will significantly improve facility utilization and further
reduce operating losses in the U.S.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $15.8 million in 2004, or 16.6 % of total
revenues, and $14.5 million, or 17.5% of total revenues, for the comparable
period in the prior year. Increases occurred in the following areas:
commissions ($500,000) primarily due to volume, headcount for direct sales
and China infra-structure ($250,000), insurance and public company costs
($350,000) and bad debt reserves associated with a customer dispute
($200,000).
Interest Income. Interest income was $84,000 in 2004 compared to $36,000 in
2003, and primarily consists of interest income on refunded tax payments
and interest income on our cash balances and short-term investments.
Interest Expense. Interest expense was $2.6 million in 2004 and $900,000 in
2003. Interest expense for 2004 includes $1.5 million related to amortized
deferred financing costs and $343,000 for interest payable in common stock
related to the issuance of convertible notes in July 2003. The deferred
financing costs are associated with the sale-leaseback of our Methuen
facility, the Loan Security Agreement and sale of convertible subordinated
notes. The balance of the interest expense represents interest incurred on
our short and long-term bank borrowings and deferred compensation.
Non operating income. Non operating income was $129,000 in 2004 and $3,000
in 2003. Non operating income primarily represents currency exchange rate
gains.
24
Non operating expense. Non operating expense was $186,000 in 2004 and
$84,000 in 2003. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese joint
venture, Parlex Shanghai, was $8.1 million in 2004 compared to $13.4
million in 2003. We own 90.1% of the equity interest in Parlex Shanghai
and, accordingly, include Parlex Shanghai's results of operations, cash
flows and financial position in our consolidated financial statements.
Income Taxes. Our effective tax rate benefit was approximately (1%) in 2004
compared to an effective tax rate of 46% in 2003. Our effective tax rate is
impacted by the proportion of our estimated annual income being earned in
domestic versus foreign tax jurisdictions, the generation of tax credits
and the recording of any valuation allowance. As a result of our history of
operating losses and uncertain future operating results, we determined that
it is more likely than not that certain historic and current year income
tax benefits would not be realized. Consequently, in 2003 we increased our
valuation allowance by $11.5 million resulting in an effective tax rate of
46%. In 2004, we realized and recognized $317,000 of state and federal tax
refunds, recognized $89,000 of federal refunds and recorded a $351,000
state and foreign tax provision resulting in a net tax rate benefit of
(1%).
Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002
Total Revenues. Total revenues for 2003 were $82.8 million, a decrease of
5% from $87.1 million in 2002. In February 2003, we closed our domestic
PALFlex operations in Methuen, Massachusetts. PALFlex is a proprietary
adhesiveless double-sided copper flexible circuit roll to roll
manufacturing process. Revenues generated from our PALFlex operations in
2003 were $6.4 million versus $15.0 million in 2002. Excluding PALFlex
revenues from both years, total revenues grew by 6%. Decreases in our
Multi-Layer ($4.7 million) and Laminated Cable ($2.2 million) operations
were offset by strong growth in our Polymer Thick Film ($5.4 million) and
China ($6.3 million) operations.
In 2003, we continued to emphasize a strategy of market diversification.
Our major markets, which represent growth from the prior year, include the
home appliance market with Whirlpool and Maytag as our largest customers,
the military market with Raytheon, BAE and General Dynamics and the
computer market with strong growth from Hewlett Packard. Reductions in
revenues occurred primarily in the automotive market driven by the closing
of our domestic PALFlex operations.
Total revenues included licensing and royalty fees of approximately $41,000
for 2003 and $50,000 for 2002. Although we intend to continue developing
materials and processes that we can license to third parties, we do not
expect that licensing and royalty revenues will represent a significant
portion of total revenues in the near term.
Cost of Products Sold. Cost of products sold was $80.8 million, or 98% of
total revenues, for 2003, versus $90.3 million, or 104% of total revenues
for 2002. In 2003, cost of products sold was adversely impacted by the cost
of closing the domestic PALFlex operation. In 2003, we recorded $13.1
million in costs of products sold from our PALFlex operations on $6.4
million in revenue. In addition to operating significantly under capacity
and therefore absorbing high fixed costs, we recorded severance costs for
60 people terminated in March and capital and inventory write-downs. In
addition, the Methuen operation continued to experience low capacity
utilization and, correspondingly, significant unfavorable manufacturing
variances. In 2003, these variances totaled approximately $13 million and
have been charged to cost of products sold. To improve utilization in 2003,
we relocated our Salem, New Hampshire laminated cable business to Methuen.
Relocation costs of approximately $500,000 were expensed as incurred in the
first half of the year. The move was completed in January 2003.
During the past year, we have made a significant investment to improve our
margins through the transfer of labor intensive manufacturing operations in
the United States to more cost-effective locations. A large portion of the
final assembly, inspection, and test procedures previously performed in our
Methuen, Massachusetts and Salem, New Hampshire facilities are now
performed in Mexico. During 2003, we completed the transfer of our PALFlex
operations to China. The transfer of manufacturing capabilities is costly,
however this investment is core to our long-term strategy for cost
effective manufacturing. Although these cost reduction measures are
25
expected to improve our gross margins, a return to profitability is
predicated upon operational performance, a favorable product mix and
increased sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.5 million in 2003, or 17.5% of total
revenues, and $14.0 million, or 16% of total revenues, for the comparable
period in the prior year. Due to the reorganization of our sales force in
mid-2002 and the staffing of several open regional positions, selling
expenses increased $753,000 in 2003. The increase in selling expenses was
partially offset by a $317,000 decrease in administrative expenses.
Interest Income. Interest income was $36,000 in 2003 compared to $207,000
in 2002 and primarily consists of interest income on short-term
investments. The reduction in interest income is due to lower average
investment balances and lower interest rates.
Interest Expense. Interest expense was $900,000 in 2003 and $644,000 in
2002. The interest expense represents interest incurred on our short and
long-term borrowings for working capital needs, interest expense associated
with deferred compensation and, beginning in 2003, interest associated with
the sale-leaseback of our corporate headquarters and manufacturing facility
in Methuen, Massachusetts ("Methuen Facility") which has been accounted for
as a financing obligation. The increase in interest expense in 2003 is due
to higher average borrowing levels and to the interest associated with the
sale-leaseback of the Methuen Facility.
Non operating income. Non operating income was $3,000 in 2003 and $105,000
in 2002. Non operating income in 2002 represents currency exchange rate
gains.
Non operating expense. Non operating expense was $84,000 in 2003 and
$105,000 in 2002. Non operating expense primarily represents currency
exchange rate losses.
Our loss before income taxes and the minority interest in our Chinese joint
venture, Parlex Shanghai, was $13.4 million in 2003 compared to $17.7
million in 2002. We own 90.1% of the equity interest in Parlex Shanghai
and, accordingly, include Parlex Shanghai's results of operations, cash
flows and financial position in our consolidated financial statements.
Income Taxes. Our effective tax rate was approximately 46% in 2003 compared
to an effective tax rate benefit of (39%) in 2002. Our effective tax rate
is impacted by the proportion of our estimated annual income being earned
in domestic versus foreign tax jurisdictions, the generation of tax credits
and the recording of any valuation allowance. As a result of our recent
history of operating losses, uncertain future operating results, and the
non-compliance with certain of our debt covenants requirements, which has
subsequently been waived, we determined that it is more likely than not
that certain historic and current year income tax benefits will not be
realized. Consequently, we increased our valuation allowance by $11.5
million in 2003.
Liquidity and Capital Resources
As of June 30, 2004, we had approximately $1.6 million in cash and short-
term investments.
Net cash used by operations during 2004 was $11.4 million. Net losses of
$8.2 million after adjustment for depreciation and amortization, deferred
income taxes, facility exit cost, interest payable in common stock, gain on
sale of land use rights and minority interest, used $1.0 million of
operating cash. Working capital consumed $10.4 million of cash. Cash used
for working capital included $8.0 million for accounts receivable, $3.1
million for inventory and $900,000 for other working capital needs which
was in part offset by cash provided from increases in accounts payable of
$1.6 million.
Net cash used for investing activities was $1.3 million in 2004. This
included $2.5 million used to purchase capital equipment and other assets
offset by $1.2 million received for the sale of our Chinese land use
rights.
26
Capital expenditures largely occurred in China and represent our investment
in our new smartcard manufacturing line and expanded volume capacity.
Cash provided by financing activities was $12.8 million during 2004. This
included net proceeds of $5.5 million from the sale of our convertible
subordinated notes, $3.0 million from the sale of our Series A Preferred
Stock and $3.2 million, which represented the net repayments and borrowings
on our bank debt. The bank borrowings include $57.2 million from our
primary lender, Silicon Valley Bank, and $9.1 million from our Parlex
Shanghai lenders. Payments include $56.9 million to Silicon Valley Bank,
$2.5 million to retire three of Parlex Shanghai's local short-term bank
notes and $3.8 million to retire Parlex Interconnect's Citic Ka Wah Bank
loan. In December 2003, one of the note holders of our convertible debt
exercised 100% of their warrants to purchase Parlex common stock at $8.00
per share. We received proceeds totaling $600,000 upon exercise of the
warrants and issued 75,000 shares of Parlex common stock. In 2004, we
received $885,000 from the Methuen sale-leaseback note receivable of which
$135,000 was interest payments and $750,000 was principal. We expect to
continue to receive interest payments on our Methuen sale-leaseback note,
but do not expect any additional principal payments before June 30, 2006.
Improved financial performance in the fourth quarter significantly reduced
operating losses and cash used in operations. Increased sales in the fourth
quarter of 2004, however, have placed additional cash demands on working
capital with growth in account receivables. The strong credit ratings of
our large OEM and EMS customer base has allowed us to successfully finance
this growth through asset based working capital lines of credit. We
recently completed stand alone financing for our China operations through a
new line of credit with Bank of China which will allow us to continue
financing our growth plans. See "Factors That May Affect Future Results"
on page 32 of this Annual Report on Form 10-K.
Series A Convertible Preferred Stock - On June 8, 2004, we completed a
private placement of 40,625 shares of Series A Convertible Preferred Stock
and warrants entitling holders to purchase an aggregate of 203,125 shares
of common stock at $80.00 per unit for proceeds of approximately
$2,950,000, net of issuance costs of approximately $300,000. In connection
with the private placement, the investors received rights to purchase
additional shares of the Series A Preferred Stock. For additional
information relating to the Series A Convertible Preferred Stock, please
see the section of this Annual Report on Form 10-K entitled "Market for
Registrant's Common Equity and Related Stockholder Matters -- Recent Sales
of Unregistered Securities -- Series A Preferred Stock and Warrants".
Loan and Security Agreement (the "Loan Agreement") - We executed the Loan
Agreement with Silicon Valley Bank on June 11, 2003. The Loan Agreement
provided Silicon Valley Bank with a secured interest in substantially all
of our assets. We may borrow up to $10,000,000, based on a borrowing base
of eligible accounts receivable. Borrowings may be used for working capital
purposes only. The Loan Agreement allows us to issue letters of credit,
enter into foreign exchange forward contracts and incur obligations using
the bank's cash management services up to an aggregate limit of $1,000,000,
which reduces our availability for borrowings under the Loan Agreement. The
Loan Agreement contains certain restrictive covenants, including but not
limited to, limitations on debt incurred by our foreign subsidiaries,
acquisitions, sales and transfers of assets, and prohibitions against cash
dividends, mergers and repurchases of stock without prior bank approval.
The Loan Agreement also has financial covenants, which among other things
require us to maintain $750,000 in minimum cash balances or excess
availability under the Loan Agreement.
On September 23, 2003, we executed a Modification Agreement (the
"Modification Agreement") with Silicon Valley Bank. The Modification
Agreement increased the interest rate on borrowings to the bank's prime
rate plus 1.5% and amended the financial covenants. On February 18, 2004,
we executed a Second Modification Agreement (the "Second Modification
Agreement") with Silicon Valley Bank. The Second Modification Agreement
removed the fixed charge coverage ratio from the Loan Agreement and
required us to report EBITDA of at least $50,000 on a three month trailing
basis, beginning January 31, 2004. The minimum EBITDA requirement will be
increased to $250,000 at June 30, 2004. The Second Modification Agreement
increased the interest rate on borrowings to the bank's prime rate plus
2.0% (decreasing to prime plus 1.25% after two consecutive quarters of
positive operating income and to prime plus 0.75% after two consecutive
quarters of positive net income, respectively) and amended the financial
covenants. On March 28, 2004, we entered into a Third Loan Modification
Agreement with Silicon Valley Bank, which permitted certain of our
27
subsidiaries to increase the amount of indebtedness they could incur from
$8 million to $13 million, so long as such indebtedness was without
recourse to Parlex and our principal subsidiaries. On May 10, 2004, we
executed a Fourth Loan Modification Agreement (the "Fourth Modification
Agreement") with Silicon Valley Bank. The Fourth Modification Agreement
changed the EBITDA requirement to $1.00 as of April 30, 2004 and May 31,
2004 and $250,000 on a three month trailing basis beginning June 30, 2004.
On June 25, 2004, we executed a Fifth Loan Modification Agreement (the
"Fifth Modification Agreement") with Silicon Valley Bank. The Fifth
Modification Agreement permitted certain of our subsidiaries to borrow up
to $5,000,000 in the aggregate from the Bank of China. The Fifth
Modification Agreement increased the interest rate on borrowings to the
bank's prime rate (4.0% at June 30, 2004) plus 2.25% (decreasing to prime
plus 1.25% after two consecutive quarters of positive operating income and
to prime plus 0.75% after two consecutive quarters of positive net income,
respectively). On September 24, 2004, we executed a Sixth Loan Modification
Agreement with Silicon Valley Bank to extend the maturity date of the Loan
Agreement from June 10, 2005 to July 11, 2005. All other terms and
conditions of the Loan Agreement remain the same. As of June 30, 2004, we
were in compliance with our financial covenants. At June 30, 2004, we had
available borrowing capacity under the Loan Agreement of approximately $4.4
million. Since the available borrowing capacity exceeded $750,000 at June
30, 2004, none of our cash balance was subject to restriction at June 30,
2004.
The Loan Agreement includes both a subjective acceleration clause and a
lockbox arrangement that requires all lockbox receipts to be used to pay
down the revolving credit borrowings. Accordingly, borrowings under the
Loan Agreement have been classified as current liabilities in the
accompanying consolidated balance sheets as of June 30, 2004 as required by
Emerging Issues Task Force Issue No. 95-22, " Balance Sheet Classification
of Borrowings Outstanding Under Revolving Credit Agreements that include
both a Subjective Acceleration Clause and a Lockbox Arrangement". However,
such borrowings will be excluded from current liabilities in future periods
and considered long-term obligations if such borrowing are: 1) refinanced
on a long-term basis, 2) the subjective acceleration terms of the Loan
Agreement are modified, or 3) will not require the use of working capital
within one year. At June 30, 2003, the balance outstanding under the Loan
Agreement was properly classified as long-term debt as a result of the
refinancing of such debt on a long-term basis with the proceeds of the 7%
Convertible Notes.
Parlex Shanghai Term Notes - On August 20, 2003, Parlex Shanghai entered
into a short-term bank note, due August 20, 2004, bearing interest at
5.841% and guaranteed by Parlex Interconnect. Amounts outstanding under
this short-term note totaled $1.2 million as of June 30, 2004. The note was
retired in August 2004. On December 15, 2003, Parlex Shanghai entered into
a short-term bank note, due December 15, 2004, bearing interest at 5.31%
and guaranteed by Parlex Interconnect. Amounts outstanding under this
short-term note totaled $605,000 as of June 30, 2004. On January 14, 2004,
Parlex Shanghai entered into two short-term bank notes, due October 12,
2004 and November 10, 2004, totaling $1.8 million, bearing interest at
5.31% and guaranteed by Parlex Interconnect. On February 13, 2004 and March
2, 2004, Parlex Shanghai entered into two short-term bank notes, due
January 12, 2005 and March 1, 2005, bearing interest at 5.31% and
guaranteed by Parlex Interconnect. Amounts outstanding under these short-
term notes as of June 30, 2004 totaled $3.8 million. These notes replaced a
similar short-term note that terminated on February 25, 2004. On March 5,
2004, Parlex Shanghai entered into a short-term bank note, due January 5,
2005, bearing interest at LIBOR plus 2.5% and guaranteed by Parlex Asia.
Amounts outstanding under this short-term note as of June 30, 2004 totaled
$1.5 million. We believe that we will be able to obtain the necessary
refinancing of our Parlex Shanghai short-term debt because of our history
of successfully refinancing our Chinese debt and our improving operating
results.
Parlex Interconnect Term Notes - In June 2002, Parlex Interconnect executed
a $5,000,000 Loan Agreement (the "CITIC Loan Agreement") with CITIC Ka Wah
Bank. As a condition of the approval of this CITIC Loan Agreement, our
subsidiary, Parlex Asia, and we provided a guarantee of the payment of this
loan. Under the provisions of the guarantee, we are required to comply with
certain financial covenants. In March 2004, Parlex Interconnect retired the
outstanding balance of the CITIC term note.
Parlex Asia Banking Facility - Subsequent to June 30, 2004, on September
15, 2004 Parlex Asia entered into an agreement with the Bank of China for a
$5 million banking facility guaranteed by Parlex. Under the terms of the
banking facility, Parlex Asia may borrow up to $5 million based on a
borrowing base of eligible account receivables. The banking facility bears
interest at LIBOR plus 2%. We anticipate utilizing borrowings from this
financing for the refinancing of certain Parlex Shanghai term notes or for
working capital needs.
28
Finance Obligation on Sale Leaseback of Methuen Facility - In June 2003, we
sold our Methuen Facility for a purchase price of $9,000,000 which
consisted of $5,350,000 in cash at the closing, a promissory note in the
amount of $2,650,000 (the "Note") and up to $1,000,000 in additional cash
under the terms of an Earn Out Clause. In June 2004, we received $750,000
reducing the principal balance of the promissory note to $1,900,000. Under
the terms of the Purchase and Sale Agreement, we simultaneously entered
into a lease agreement relating to the Methuen Facility with a minimum
lease term of 15 years.
As the repurchase option contained in the lease and the receipt of the Note
from the buyer provide us with a continuing involvement in the Methuen
Facility, we have accounted for the sale-leaseback of the Methuen Facility
as a financing transaction. Accordingly, we continue to report the Methuen
Facility as an asset and continue to record depreciation expense. We record
all cash received under the transaction as a finance obligation. The Note
and related interest thereon, and the $1,000,000 in additional cash under
the terms of an Earn Out Clause will be recorded as an increase to the
finance obligation as cash payments are received. We record the principal
portion of the monthly lease payments as a reduction to the finance
obligation and the interest portion of the monthly lease payments is
recorded as interest expense. The closing costs for the transaction have
been capitalized and are being amortized as interest expense over the
initial 15-year lease term. Upon expiration of the repurchase option (June
30, 2015), we will reevaluate our accounting to determine whether a gain or
loss should be recorded on this sale-leaseback transaction.
Convertible Subordinated Notes - On July 28, 2003, we sold an aggregate
$6,000,000 of our 7% convertible subordinated notes (the "Notes") with
attached warrants to several institutional investors. We received net
proceeds of approximately $5.5 million from the transaction, after
deducting approximately $500,000 in finders' fees and other transaction
expenses. Net proceeds were used to pay down amounts borrowed under our
Loan Agreement and utilized for working capital needs. No principal
payments are due until maturity on July 28, 2007. The Notes are unsecured.
The Notes bear interest at a fixed rate of 7%, payable quarterly in shares
of our common stock. The number of shares of common stock to be issued is
calculated by dividing the accrued quarterly interest by a conversion
price, which was initially established at $8.00 per share. The conversion
price is subject to adjustment in the event of stock splits, dividends and
certain combinations.
Interest expense is recorded quarterly based on the fair value of the
common shares issued. Accordingly, interest expense may fluctuate from
quarter to quarter. We have concluded that the interest feature does not
constitute an embedded derivative as it does not currently meet the
criteria for classification as a derivative. We recorded accrued interest
payable on the Notes of $87,924 within stockholders' equity at June 30,
2004, as the interest is required to be paid quarterly in the form of
common stock. Based on the conversion price of $8.00 per common share at
June 30, 2004, we issued a total of 35,594 shares of common stock in
October 2003, January 2004 and April 2004 in satisfaction of previously
recorded interest. We also issued 13,123 shares of common stock in July
2004 as payment for the interest accrued in the fourth quarter.
The Notes contained a beneficial conversion feature reflecting an effective
initial conversion price that was less than the fair market value of the
underlying common stock on July 28, 2003. The fair value of the beneficial
conversion feature was approximately $1,035,000, which has been recorded as
an increase to additional paid-in capital and as an original issue discount
on the Notes which is being amortized to interest expense over the 4-year
life of the Notes.
After two years from the date of issuance, we have the right to redeem all,
but not less than all, of the Notes at 100% of the remaining principal of
Notes then outstanding, plus all accrued and unpaid interest, under certain
conditions. After three years from the date of issuance, the holder of any
of the Notes may require us to redeem the Notes in whole, but not in part.
Such redemption shall be at 100% of the remaining principal of such Notes,
plus all accrued and unpaid interest. In the event of a Change in Control
(as defined therein), the holder has the option to require that the Notes
be redeemed in whole (but not in part), at 120% of the outstanding unpaid
principal amount, plus all unpaid interest accrued.
29
Payments Due Under Contractual Obligations - The following table summarizes
the payments due under our contractual obligations at June 30, 2004,
adjusted to include the cash commitments associated with the 7% convertible
subordinated notes, and the effect such obligations are expected to have on
liquidity and cash flow in future periods:
Payments due by period
---------------------------------------------------------------------
Contractual Less than 1 - 3 3 - 5 More than
Obligations Total 1 year years years 5 years
----------- ----- --------- ----- ----- ---------
Long-term debt
obligations $12,488,883 $12,488,883 $ - $ - $ -
Capital lease obligations,
including Methuen
facility finance
obligation 18,611,155 1,210,426 2,564,602 2,663,210 12,172,917
Operating leases,
including Poly-Flex
Facility 6,645,550 1,663,306 2,458,821 1,888,951 634,472
Deferred compensation 854,553 182,000 381,829 290,724 -
Convertible sub-
ordinated notes 6,000,000 - - 6,000,000 -
----------- ----------- ---------- ----------- -----------
Total $44,600,141 $15,544,615 $5,405,252 $10,842,885 $12,807,389
=========== =========== ========== =========== ===========
In response to the worldwide downturn in the electronics industry, we have
taken a series of actions to reduce operating expenses and to restructure
operations, consisting primarily of reductions in workforce and
consolidation of manufacturing operations. During 2004, we transferred our
high volume automated surface mount assembly line from our Cranston, Rhode
Island facility to China. In August 2004, we announced a new strategic
relationship with Delphi Corporation to supply all multilayer