-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BLnd7Ow5UcZ2E0gXRzg3m6TDGvzA18Tg/7hMj+ZFirM/fQhOK3Xnf88MnfWdBczd IJE9eMHUHTEZL38bIRsOKw== 0000910647-98-000261.txt : 19980929 0000910647-98-000261.hdr.sgml : 19980929 ACCESSION NUMBER: 0000910647-98-000261 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARLEX CORP CENTRAL INDEX KEY: 0000724988 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 042464749 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12942 FILM NUMBER: 98716573 BUSINESS ADDRESS: STREET 1: 145 MILK ST CITY: METHUEN STATE: MA ZIP: 01844 BUSINESS PHONE: 5086854341 10-K 1 BODY OF 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File No. 0-12942 PARLEX CORPORATION (Exact Name of Registrant as Specified in its Charter) Massachusetts 04-2464749 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 145 Milk Street, Methuen, Massachusetts 01844 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 978-685-4341 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of exchange on Title of each Class which registered ------------------- ------------------- Common Stock ($.10 par value) National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of shares of the Registrant's Common Stock, par value $.10 per share, held by non-affiliates of the Registrant at September 1, 1998 as computed by reference to the closing price of such stock was approximately $34,727,571. The number of shares of the Registrant's Common Stock, par value $.10 per share, outstanding at September 1, 1998 was 4,640,649 shares. Documents Incorporated By Reference Portions of the definitive proxy statement to be filed with the Commission within 120 days after the close of the fiscal year are incorporated by reference into Part III of this report. Part I Item 1. Business - ---------------- Parlex is a leading supplier of flexible interconnects principally for sale to the automotive, military/aerospace, computer, telecommunications and industrial markets. The Company's product offering, which the Company believes is the broadest of any company in the flexible interconnect industry, includes flexible circuits, laminated cable, flexible/cable hybrid circuits and flexible interconnect assemblies. Flexible circuits, which consist of conductive copper patterns that are laminated to flexible substrate materials such as polyimide or polyester, are used to provide connections between components and electronic systems and as a substrate to support electronic devices. Laminated cables, which consist of flat or round wire laminated to a flexible substrate material, provide connections between electronic sub-systems and replace conventional wire harnesses. Flexible/cable hybrid circuits combine the lower cost of laminated cable with the technology of flexible circuits into a single cost-effective interconnect. Flexible interconnect assemblies are formed by adding components such as integrated circuits, connectors, resistors and capacitors to flexible circuits or laminated cables. The advantages of flexible interconnects over alternative technologies such as rigid printed circuits include three-dimensional packaging and superior thermal qualities as well as reduced size and weight. The Institute for Interconnecting and Packaging of Electronic Circuits ("IPC"), an international trade organization, estimates that worldwide sales of flexible circuits in 1997 exceeded $2.5 billion. The IPC has reported that the flexible circuit industry in North American has grown at rates between 17% and 19% in each of the past three years. The Company believes that its creative engineering expertise and its ability to advance the technology of manufacturing processes and materials allow it to provide its customers with a comprehensive range of flexible interconnect solutions. Beginning at the design phase, the Company's design engineers work closely with its customers to ensure the produceabilty of a design. Once a design has been completed, the Company utilizes its innovative materials and processes, including PALFlex, PALCoat, U-Flex, Pemacs and PALCore, to produce a flexible interconnect product that meets its customers' performance needs and cost objectives. The Company's objective is to be the supplier of choice for key customers in markets where cost-effective flexible interconnects provide added value to the customers' products. Within its targeted market segments, the Company believes that its ability to develop strategic customer relationships and provide a broad product offering serves as a competitive advantage. These relationships have enabled the Company to work closely with its customers from the design phase through production to ensure that its customers' flexible interconnect requirements are met. In fiscal 1998, the Company's top customers in terms of revenues were Motorola, Northern Telecom, Allied-Signal, AMP and Hewlett Packard. An important element of the Company's growth strategy has been diversification among its targeted markets. Since 1992, the Company has reduced revenues from military/aerospace applications from approximately 53% to 20% of total revenues, while increasing overall revenues by approximately 111% through June 30, 1998. As a result of the Company's growth in recent years, the Company has expanded its manufacturing operations to better accommodate its customers' geographic and cost requirements. In 1995, the Company established Parlex (Shanghai) Circuit Co., Ltd. ("Parlex Shanghai"), a joint venture in China designed to serve the Asian market with flexible circuits as well as to produce certain products more cost-effectively for North American customers. The Company has opened an interconnect finishing facility in Empalme, Mexico which will begin to ship product in fiscal year 1999. The Company has also established logistic support capabilities in Singapore and France. Industry Overview Over the past two decades, electronic systems have become smaller, lighter and more reliable, while demands for performance at lower costs have increased dramatically. Although rigid printed circuits are a conventional form of electronic packaging, their two-dimensional form limits the options available to the design engineer. As the demand for more portable electronic packaging has increased, so too has the demand for flexible, three-dimensional circuits. In addition to the improved packaging and performance characteristics, flexible circuits offer superior thermal dissipation characteristics compared to rigid circuits, making flexible circuits attractive for use in advanced, high-speed electronics. Flexible interconnects are used in most segments of the electronics industry. The primary market segments that place high value on superior, cost-effective flexible interconnect solutions include: Automotive. Automobile manufacturers increasingly use electronics to enhance vehicle performance and functionality, while at the same time reducing electronic component size, weight and manufacturing and assembly costs. Flexible circuits and laminated cables can provide cost-effective interconnect solutions for such applications as dashboard instrumentation, automotive entertainment systems, electronic engine control units, steering wheel controls, power distribution, sensors and anti-lock brakes. Providers of flexible interconnects typically work closely with the companies that supply these electronic systems to the vehicle manufacturers. Because automotive production cycles generally last three to five years and designs are unlikely to change during that period, a flexible interconnect that is designed into an automobile model or platform provides a relatively predictable source of demand over an extended time period. Telecommunications. The telecommunications market has two distinct segments: infrastructure equipment and subscriber equipment. Infrastructure equipment consists of support electronics for the distribution of voice and data transmission. The growth of data transfer via the internet has dramatically increased demand for this type of equipment. Infrastructure equipment employs sophisticated electronics which usually require the use of complex flexible interconnects. Subscriber equipment consists of cellular devices including battery assemblies. Tight packaging and the need to reduce weight have driven the demand for flexible interconnects in this segment. Laminated cables and single and double-sided flexible circuits are generally used in subscriber equipment. Computer. The IPC has reported that the computer market represents approximately 37% of the worldwide consumption of flexible interconnects. Demand for flexible circuits and laminated cable in this market is driven by short product life cycles as consumers demand increasingly powerful, less expensive, smaller, faster and lighter equipment. Disk drives represent the largest application for flexible circuits in this market. Other applications include notebook displays, mass storage devices and interconnects for peripheral equipment such as scanners, printers and docking stations. Military/Aerospace. Military/Aerospace electronics were at one time the primary applications for flexible circuitry. Because of product complexity and space restrictions, aerospace requirements often demand multilayer rigid-flexible circuits. Typical applications are navigation systems, flight controls, displays, communications equipment and munitions. Although overall spending in this segment has decreased, the Company estimates procurement of flexible interconnects will continue to experience modest growth. The Company believes that the trend toward "smart" military systems will continue to drive demand for flexible interconnects in this segment. Industrial. The industrial market, which the Company defines to include medical electronics, encompasses many applications. Virtually any electronic device in which tight packaging, light weight or high reliability is a priority is a candidate for flexible interconnects. Typical applications include electronic scales, industrial controls, metering devices, scanners, sensors and medical monitoring equipment. The Parlex Solution Parlex combines creative engineering design capabilities with innovative manufacturing processes to provide its customers with a complete and cost-effective flexible interconnect solution. The solution begins in the design phase, where Parlex engineers typically work closely with customers to develop a technically superior flexible interconnect design. Although the Company's customers generally provide the initial engineering guidelines for a particular interconnect, the Company's design engineers are often called upon to work in tandem with a customer's design team to develop a solution. An important part of the Parlex solution is ensuring the produceability of a design at an early stage before time and money are spent on manufacturing. Once the design is completed, the Company applies its experience with innovative materials and manufacturing processes to produce a flexible interconnect solution that meets the customer's needs and cost objectives. The Company has developed materials and processes that provide its customers improved performance at a lower cost. Over the past several years, the Company has gained substantial experience in introducing programs for high- volume products, and it believes this expertise is a key factor in its ability to provide its customers with cost-effective flexible interconnect solutions. The Company believes manufacturers with the capability to supply a broad range of products with a diverse mix of performance characteristics and with a global presence will capture additional market share in the flexible interconnect industry. The Company is one of a limited number of independent manufacturers that offers a range of flexible interconnect solutions from design concept through high-volume production. By offering its broad range of products and services, the Company can provide design and manufacturing solutions for its customers while reducing its customers' time - -to-market and product development costs. Strategy The Company's objective is to be the flexible interconnect supplier of choice for key customers in its target markets. The Company's strategy to achieve this objective includes the following key elements: * Develop Innovative Processes and Materials. The Company believes that its ability to develop innovative materials and processes enhances the opportunity for growth within its targeted markets. The Company intends to continue to focus its development efforts on proprietary flexible materials and processes that have a broad range of applications. These materials and processes enable the Company to produce cost-effective flexible interconnects, at reduced cycle time, that are reliable and improve its customers' product performance. The Company's PALFlex, PALCoat, U-Flex and PALCore technologies are examples of materials and manufacturing processes that have resulted from the Company's focus on innovation. * Develop Strategic Relationships with Target Customers. The Company seeks to develop strategic relationships with key customers in targeted industries. As a value-added strategic partner with its customers, the Company works with a customer's technology roadmap to design and develop cost-effective flexible interconnect solutions. The Company believes that these relationships are most effective where the Company is providing a significant portion of a customer's flexible interconnect requirements. Through these strategic relationships, the Company achieves greater visibility into the customer's entire range of flexible interconnect requirements. * Diversify Customer Base across Specific Markets. The Company seeks to serve a variety of markets to help mitigate the effects of economic cycles in any one industry. The Company's business units are aligned to specific market segments in order to better understand and service customers within particular industries. In addition, the Company believes its diversification among the major segments provides greater insight into emerging technological requirements. For example, the Company has applied its knowledge of shielding requirements in the computer industry to gain a competitive advantage in the telecommunications market. * Offer the Broadest Range of Products in the Flexible Interconnect Industry. The Company intends to continue to provide a broad product offering that allows it to service virtually all of its customers' flexible interconnect requirements. Parlex is not aware of any other company in the flexible interconnect industry that offers a broader range of products. The Company's product line includes flexible and rigid-flexible circuits from one to 24 layers, laminated cables, flexible/cable hybrid circuits and flexible interconnect assemblies. The Company uses a variety of materials in its products, including adhesiveless and adhesive-based polyimide as well as polyester. * Expand Global Presence. The Company believes that flexible interconnect customers will increasingly require service on a global basis. To address these requirements, the Company has continued to expand its global presence in emerging markets and throughout the world. For example, the Company established a joint venture company in China as a base for its operations in that region and to serve the emerging market in China. The Company has also developed, and plans to continue to develop, strategic relationships and alliances that it believes are necessary for the success of its international business. The Company is also exploring the formation of a joint venture to produce laminated cables in Asia where it believes the market for this product is substantially greater than in North America. Additionally, in May 1998, the Company established a facility in Mexico. This branch will be performing the finishing, and, in some instances, assembly operations to parts being manufactured at the Company's flexible circuit and laminated cable facilities. Current Products The Company's current flexible interconnect products include flexible circuits, laminated cables, flexible/cable hybrid circuits and flexible interconnect assemblies. The products are produced to customers' application-specific requirements and are designed by the Company, the customer or jointly. Lead times for the design and manufacture of the Company's products generally range from one week for some products to three months for more sophisticated products. Flexible Circuits Flexible circuits, which consist of conductive copper patterns that are laminated to flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic devices. The circuits are manufactured by passing base materials through multiple processes such as drilling, photo imaging, etching, copper plating and finishing. Flexible circuits can be produced in single or multiple layers. The Company produces a wide range of flexible circuits including: * Single-Sided Flexible Circuits have a conductive pattern only on one side and are commonly used for cellular phones, batteries for portable electronics and dashboard displays. Parlex has converted many double- sided flexible circuits to single-sided by incorporating its HSI+ (high speed interconnect) screening technology that incorporates superior shielding qualities and eliminates a separate shield layer. The Company manufactures single-sided circuitry in both the United States and at Parlex Shanghai, where substantially all of the production to date has been single-sided. * Double-Sided Flexible Circuits have conductive patterns on both sides which are interconnected by a drilled and copper-plated hole. The Company's double-sided circuits are used primarily in the automotive market. Other applications include high definition displays, instrumentation products and digital data converters. * Multilayer and Rigid-Flexible Circuits consist of layers of circuitry that are stacked and laminated. These circuits are used where the complexity of the electronic design demands multiple layers of flexible circuitry. If some of the layers are rigid board material, the product becomes a rigid-flexible circuit. Multilayer and rigid- flexible circuits are common in military applications for flight computers, multipurpose displays and flight control systems. In commercial applications, these products are used on high speed telephone distribution equipment, computer networking electronics and patient monitoring devices. The Company has manufactured these circuits with up to 40 layers in prototype programs and 24 layers in production. Laminated Cables The Company manufactures laminated cables in an efficient roll process proprietary to Parlex. Substantially all of the laminated cable that the Company produces uses flat wire. Approximately 70% of the laminated cable that the Company produces is insulated with polyester material allowing for maximum flexibility while the remainder is insulated with polyimide material for its enhanced performance at elevated temperatures. The Company's laminated cables are capable of handling both power (high current) and signal (low current) levels. Improving the process by which laminated cable is manufactured can increase functionality and lower the cost of production. To this end, the Company has developed U-Flex, a technique that forms conductors into a u- shape, followed by an injection molding process which provides the function of a connector. This technique improves electrical performance and eliminates the need for a separate costly connector. The Company has also developed Pemacs shielding, which adds a specially designed silver ink to laminated cable to meet stringent electronic shielding requirements without compromising flexibility. The Company's auto line cable process incorporates pushpins into the laminated cable to provide for automatic alignment to a printed circuit board for subsequent soldering. Flexible/Cable Hybrid Circuits In many cases, although a laminated cable is capable of carrying the necessary signals, etched circuitry is required for termination. For these applications the Company manufactures flexible/cable hybrid circuits, which take advantage of the lower cost of laminated cables and the technology of flexible circuits by combining them into a single interconnect. Flexible/cable hybrid circuits are currently used in switching stations, postage metering devices and electronic scales. On some products, Parlex adds its HSI+ process to the flexible/cable hybrid circuit to provide signal clarity and shielding to the cable and the flexible circuit. Flexible Interconnect Assemblies Both flexible circuits and laminated cables can be converted into an electronic assembly by adding electronic components. This process can be as simple as adding a connector or as complex as assembling and soldering many components such as capacitors, resistors and integrated circuits. In some cases, the Company subcontracts with electronic manufacturing service companies for component placement and attachment. The following table describes applications in which the Company's products are used:
Product Applications ------- ------------ Flexible Circuits Automotive Displays Single-Sided Batteries for Cell Phones Printers Computer Networks Double-Sided Engine Controls Laptop Computers Cellular Phones Multilayer & Rigid-Flexible Computer Networks Telecom Switching Systems Aircraft Displays Automotive Transmission Systems Laminated Cables Postage Meters Automotive Sound Systems Laptop Computers Industrial Controls Electronic Scales Flexible/Cable Hybrid Circuits Printers Sensors Scanning Devices Night Vision Systems
New Product Development An important part of the Company's strategy is development of new materials, processes and products. During the past three fiscal years, the Company has invested an aggregate of $8.2 million in research and development. The Company believes that its commitment to innovation is evidenced by the fact that it has developed new materials for use in its products even though it is not considered a materials supplier. The Company has developed the following new products: PALFlex. The Company has developed an adhesiveless polyimide-based material, PALFlex (Parlex Adhesiveless Laminate for Flex). PALFlex is both a material and a manufacturing process that the Company believes is an enabling technology that provides superior performance at a lower cost than with traditional copper-clad materials. PALFlex provides additional cost benefits by allowing the Company to combine certain material manufacturing steps with circuit manufacturing, eliminating several major process steps including conventional drilling, plasma, etching, copper deposition and copper plating. PALFlex has been developed for high volume automotive applications but could potentially be used across a number of product lines. Because PALFlex is produced in roll form and the copper thickness can be controlled to tight tolerances, the Company believes that PALFlex may serve as the foundation for its development of products to serve the emerging fine line, micro-via market. The Company shipped its first product incorporating the current version of PALFlex in fiscal year 1998. PALCoat. Working closely with Coates ASI, a materials manufacturer, and Teledyne HALCO, an equipment manufacturer, the Company developed PALCoat, a new material for coating the outside of the circuit. PALCoat has been designed to provide the electrical and physical characteristics required for a new generation of products but at a substantially lower cost than what is commercially available. PALCoat is in production validation testing with two of the Company's automotive customers, and the Company currently expects to begin production in November 1998. PALCore HP. The Company developed PALCore as a low-cost multilayer flexible material to minimize the difference between the cost of materials used in flexible circuits and those used in conventional rigid circuits. The Company has licensed PALCore to Allied-Signal and Polyclad Laminates for thin core rigid board applications, which are products that the Company does not produce. Parlex receives a royalty in connection with sales by the licensees. The Company has recently applied for patents for a new cost reduced version of PALCore which should enter production in calendar year 1999. Joint Venture, Mexico Operations, and Strategic Relationships Parlex Shanghai Joint Venture. In 1995, the Company established a joint venture company in China, Parlex Shanghai, to manufacture and sell flexible circuits. The participants in Parlex Shanghai are the Company (50.1% equity), Jin Ling, Inc., a Chinese printed circuit board company (40.0% equity), and Mascon, Inc., a Massachusetts-based international marketing and manufacturing company (9.9% equity). The Company established Parlex Shanghai to better serve customers and potential customers that have manufacturing facilities in Asia and to more cost effectively manufacture certain products for worldwide distribution. Parlex Shanghai commenced operations in September 1995 and serves customers both in North America and Asia. Parlex Shanghai's largest China- based customer is General Motors Chinese joint venture and its largest United States-based customer is Thomas & Betts. In addition to serving customers in Asia, Parlex Shanghai provides the Company with a competitive production capability for lower technology products to serve the Company's customers in other parts of the world. Parlex Mexico. Parlex established a Mexican operation for use in the finishing, assembly and testing for its flexible circuit and laminated cable products. The leased facility is in the Maquilas Teta-Kawi Industrial Park located in Empalme(, Sonora, Mexico. This facility allows Parlex to perform labor intensive operations in a competitive and highly skilled labor market. Samsung Agreement. In September 1994, the Company entered into a five-year manufacturing and sales agreement with Samsung Electro-Mechanics Co., Ltd. of Korea ("Samsung") whereby Samsung was granted the exclusive right to manufacture flexible multilayer and rigid-flexible products in Korea using the Company's PALCore technology. Under the terms of the agreement, Samsung may only sell PALCore products to the Company, customers designated by the Company or to pre-existing Samsung customers approved by the Company. Pucka Agreements. In 1996 the Company granted Pucka Industrial Co., Ltd. of Taiwan ("Pucka") a five year exclusive, area specific license to design, manufacture and sell flexible circuits using the Parlex HIS+ shielding process in Taiwan and, with the prior approval of the Company, other territories. During the term of the agreement and for a period of three years thereafter, Pucka may not sell, manufacture or distribute any flexible circuit technology product which competes with the Company's products using the Company's HSI+ shielding processes. Under a separate agreement, the Company appointed Pucka as its sole and exclusive distributor and independent sales representative for laminated cable in Taiwan and, with prior approval of the Company, other territories. Customers The Company's customers are a diverse group of original equipment manufacturers that serve a variety of industries. A list of representative customers appears below:
Automotive Computer Industrial ---------- -------- ---------- Delco Iomega AMP Delphi Dell Foxboro Motorola Compaq Hewlett Packard Siemens EMC Pitney Bowes Texas Instruments Military/Aerospace Telecommunications ------------------ ------------------ Allied-Signal Motorola Lockheed-Martin Northern Telecom Textron Ericsson General Dynamics Raytheon
In Fiscal 1998, the Company sold products to approximately 700 customers, counting divisions within certain major companies as separate customers. In fiscal year 1996, 1997 and 1998, sales to several divisions of Motorola comprised approximately 29%, 20% and 23%, respectively, of the Company's total revenues. The Company's top 20 customers accounted for approximately 66%, 69% and 66% of total revenues in fiscal 1996, 1997 and 1998, respectively. Sales and Customer Service The Company has organized its sales and customer service into business units that are tied to the following specific industry segments: automotive, military/aerospace, telecommunications, computer and industrial. The Company believes that this organizational structure allows its business unit managers to increase their focus on a specific industry and develop targeted customers within those industries. Business unit managers are assigned customer service representatives to support their customers' day- to-day requirements. The business unit managers draw upon the expertise of the Company's engineering staff as an integral part of the sales process. In the United States, business unit managers coordinate the efforts of a network of 19 independent manufacturers' representative organizations. In fiscal 1998, manufacturers' representative organizations accounted for approximately 70% of total revenues. The sales process involves extensive work with the customer's design engineers and the Company's design and engineering staff. The business unit manager then works closely with the Company's applications engineers to prepare a feasibility study to assess the cost of producing the interconnect solution to the customer's specifications. The process can often involve multiple design and manufacturing iterations to assure that the product can be produced to specifications at the lowest possible cost. The business unit manager leads the Company's effort to become the preferred supplier with target customers. The manager's ability to understand the quality, cost, delivery, technology and service objectives of target customers is critical to the Company's goal of achieving the highest level of customer satisfaction. In order to develop strategic relationships with target customers, the Company has participated in joint training, engineering seminars, manufacturing intern programs and as members of customers' problem solving teams. The Company often has access to a customer's materials resource planning schedule, which allows the Company to better forecast the customer's near and mid-term requirements. The Company has direct sales and customer support offices in Austin, Texas and San Diego, California. The Company uses these offices to provide applications engineering, logistical support and coordination of activities between the customer and the Company. The Company has entered into agreements with distribution companies in Singapore and in France to provide forward stocking and inventory coordination for regional customers. These relationships obviate the requirement to establish a local presence, while providing the customer with service comparable to that of a local provider. Under the terms of the Chinese joint venture agreement, Parlex Shanghai has agreed that it will sell its products outside China only through the Company and Mascon. In turn, the Company has agreed that it will sell flexible circuits in China only through the joint venture. Manufacturing Processes The Company's manufacturing processes are designed to accommodate high throughput, as well as to minimize cost and maximize yield. All of the Company's manufacturing facilities are certified to the international standard ISO 9002. In Fiscal 1998, the Company's US facilities were certified to the automotive standard QS 9002. The manufacturing process varies a great deal from product to product. While the production of laminated cable is a "dry" process incorporating virtually no chemical treatment, a multilayer flexible circuit is processed through a dozen or more chemical operations. Although there is a no standard process, significant elements of production are highlighted in the following chart:
"Dry" "Wet" Laminated Flexible Circuit Flexible Circuit Cable Processes Processes Processes - ---------------- ---------------- --------- Drilling Copper deposition Lamination Automated optical inspection Carbon coating Slitting Lamination Chemical cleaning Conductor forming Electrical testing Developing Injection molding Routing Etching Shielding Die cutting Solder leveling Laser skiving Assembly Gold plating Assembly
The Company's computer aided manufacturing system takes the customer's design and programs the various steps that will be required to manufacture the particular product. The product then follows the appropriate production flow until finally released for shipment by the quality organization. The Company believes that its substantial capital investment and its manufacturing expertise in a number of specialized areas have contributed to its position as an industry leader. A substantial amount of the Company's production equipment is unique to its processes and technologies. Examples include cable laminators, roll plating, roll etching, precision cable slitters and automatic punching equipment. The Company has added or is in the process of adding capacity at all of its facilities. In the Methuen, Massachusetts facility, the Company is adding an additional 60, 000 square feet to its current manufacturing space of 125,000 square feet. In the Salem, New Hampshire facility, the Company's manufacturing space has been expanded by 12,000 square feet to a total of 46,000 square feet. Parlex Shanghai has a leased facility in Shanghai, China which has been expanded 11,000 square feet to a total of 35,000 square feet. The Company is also well along in a major equipment acquisition program. When the building and equipment programs are complete, the total capacity will have increased by over 35%. Materials and Materials Management The Company aggressively attempts to control the cost of purchased materials and the level of inventories. The Company believes it benefits from long-term relationships with its suppliers. The Company's goal is to attain a competitive price from suppliers and foster a shared vision towards advancing technology. The Company purchases raw circuit materials, process chemicals and various components from multiple outside sources. The Company often makes long-term purchasing commitments with key suppliers for specific customer programs. These suppliers commit to provide cooperative engineering as required and in some cases to maintain a local inventory in order to provide shorter lead times and reduced inventory levels for the Company. In many cases the Company's customers approve, and often specify, sources of supply. The Company relies on key suppliers for certain raw materials. Top Five Suppliers in Fiscal 1998
Supplier Items Supplied -------- -------------- Dupont Flexible Laminates Coverlay Film AMP Connectors Sheldahl Flexible Laminates Cable Insulation Steel Heddle Copper Wire Atotech Chemicals
The Company qualifies its suppliers through a vendor rating system which limits the number of suppliers to those that can provide the Company with the best total value and quality. The Company monitors each supplier's quality, delivery, service and technology to insure that the Company will receive materials that meet its objectives. Management Information Systems The Company presently has a mainframe-based information system that allows for integration of manufacturing, accounting, sales, material management and engineering data. The Company recently entered into a contract with a systems integrator to develop a client/server system that will enhance the timeliness and quality of information concerning the Company's operations. This system is designed to automate the Company's activity-based cost system and provide automatic quoting, quote tracking and MRP. The new system, which is scheduled to be fully implemented by January 1999, will enable the Company to make software changes more easily, allowing faster project completion and improved customer satisfaction. The new MIS system will be fully compliant with year 2000 requirements. Competition The Company's business is highly competitive. The Company competes against other manufacturers of flexible interconnects as well as against manufacturers of rigid-printed circuits. Competitive factors among flexible circuit and laminated cable suppliers are price, product quality, technological capability and service. The Company believes that it competes favorably with respect to these competitive factors, but believes that its competitive strength is in its ability to apply technology to reduce cost. The Company competes against rigid board products on the basis of product versatility, although price can also be a competitive factor if the difference between the cost of a rigid circuit and a flexible circuit becomes too great. The principal competitors for flexible circuits are Sheldahl (automotive), AdFlex (telecommunications), M-Flex (computer) and Flex Circuits, Inc. (aerospace). For laminated cable, the principal competitors are AMP and Fujikura Ltd. (a Japanese company). Backlog The Company's backlog consists of orders for which a written purchase order has been received. In situations where the order requires an engineering effort, it will be included in backlog even though a delivery schedule will not be finalized until this phase is completed. On some major multi-year contracts, such as with Motorola, the customer's forecast for a 13-week period is added to backlog at the end of each quarter. The Company's standard purchase orders are cancelable, but require the payment of certain costs upon cancellation. A certain portion of the Company's backlog may be subject to cancellation without significant penalty. The Company's backlog as of June 30, 1998 increased to $26 million from $23 million in the immediately preceding year ended June 30, 1997. Due to the timing of orders, delivery intervals, product mix and the possibility of customer changes in delivery schedules, the Company's backlog at any particular date may not be indicative of actual sales for any succeeding period. Intellectual Property The Company has acquired patents and it seeks patents on new products and processes where it believes patents would be appropriate to protect the Company's interests. Although the Company believes that patents are an important part of its competitive position, it does not believe that any single patent or group of patents is critical to its success. Due to the rapid technological change in its business, the success of its business depends more on its design creativity and manufacturing expertise than on patents and other intellectual property. The Company owns 17 patents issued in the United States and has applied for corresponding patents with certain relevant foreign patent offices. Federal trademark registrations have been obtained for PALFlex, PALCore and U-Flex and Company has applied for registration of PALCoat. The Company also relies on internal security measures and on confidentiality agreements for protection of trade secrets and proprietary know-how. There can be no assurance the Company's efforts to protect its intellectual property will be effective to prevent misappropriation or that others may not independently develop similar technology. Under the terms of the Chinese joint venture agreement, the Company transferred certain technology to Parlex Shanghai and has agreed to provide it with additional technology and expertise as the joint venture's capabilities and markets develop. Certain technology, including PALFlex, is excluded from the arrangement. Environmental Regulations Flexible circuit manufacturing requires the use of metals and chemicals. Water used in the manufacturing process must be treated to remove metal particles and other contaminants before it can be discharged into the municipal sanitary sewer system. The Company operates and maintains water effluent treatment systems and uses approved laboratory testing procedures to monitor the effectiveness of those systems at its Methuen, Massachusetts facility. The Company operates those treatment systems under effluent discharge permits issued by a number of governmental authorities. Air emissions resulting from the Company's manufacturing processes are regulated by permits issued to the Company by government authorities. These permits must be renewed periodically and are subject to revocation in the event of violations of environmental laws. The Company believes that the waste treatment equipment at its facility is currently in compliance with the requirements of environmental laws in all material respects and that its air emissions are within the limits established in the relevant permit. However, there can be no assurance that violations will not occur in the future. The Company is also subject to other environmental laws including those relating to the storage, use and disposal of chemicals, solid waste and other hazardous materials, as well as to work place health and safety and indoor air quality emissions. Furthermore, environmental laws could become more stringent or might apply to additional aspects of the Company's operations over time, and the costs of complying with such laws could be substantial. Compliance with state and federal laws did not have a material impact on the Company's capital expenditures, earnings or competitive position in fiscal 1998. In fiscal 1999, capital expenditures associated with environmental compliance are estimated to be $300,000. Employees As of September 1, 1998, the Company employed 605 people in the United States including 521 in production, 59 in marketing, sales, engineering, and customer support and 25 in administration. Of the 605 employees, 558 were direct employees of Parlex and 47 worked for interim staffing agencies. Parlex Shanghai employs approximately 185 people. The United States employees of Parlex are not represented by a collective bargaining unit and the Company believes its relations with its workforce are good. Item 2. Properties - ------------------ The Company's executive offices and its product and process development and primary flexible circuit manufacturing facilities are located in a single 125,000 square feet facility in Methuen, Massachusetts which the Company owns subject to no encumbrances. The facility currently operates three shifts, six days a week. The Company is in the process of adding 60,000 square feet to this facility. See "Item 1-Business- Manufacturing Processes." The Company's laminated cable operations are housed in a single 46,000 square feet facility in Salem, New Hampshire, which is leased through 2007. The Salem, New Hampshire facility is approximately nine miles from the Methuen facility. During construction in the Methuen, Massachusetts facility, corporate offices have been temporarily relocated to the Salem, New Hampshire facility. Parlex Shanghai has a leased facility in Shanghai, China of approximately 35,000 square feet. The Company leases a 16,000 square foot finishing facility in Empalme(, Sonora, Mexico. Item 3. Legal Proceedings - ------------------------- The Company has no material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- This item is inapplicable. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------------------------- (a) Price Range of Common Stock The Company's Common Stock is listed on the Nasdaq National Market, under the symbol "PRLX". The following table sets forth reported high and low sale prices for the Common Stock for the periods indicated. The information reflects the Company's declaration of a three-for-two spilt of its Common Stock effected as a 50% stock dividend on April 27, 1997.
High Low ---- --- Fiscal 1998 ----------- First Quarter $24.00 $13.88 Second Quarter 31.25 11.25 Third Quarter 19.50 14.00 Fourth Quarter 21.50 12.75 Fiscal 1997 ----------- First Quarter 9.67 5.33 Second Quarter 7.83 5.83 Third Quarter 16.33 6.67 Fourth Quarter 15.25 10.00
(b) Approximate Number of Holder of Common Stock As of September 1, 1998, there were approximately 101 holders of record of the Common Stock. (c) Dividends The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain further earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Board of Directors and will be based on the Company's earnings, capital, financial condition and other factors deemed relevant by the Board of Directors. Item 6. Selected Consolidated Financial Data - --------------------------------------------
Year Ended June 30, 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (in thousands, except per share data) Statement of income data: Total revenues $34,926 $40,251 $47,257 $55,087 $60,275 Cost of products sold 29,150 32,946 40,308 44,137 47,304 ----------------------------------------------- Gross profit 5,776 7,305 6,949 10,950 12,971 Selling, general and administrative expenses 4,637 4,998 5,518 7,288 8,272 ----------------------------------------------- Operating income 1,139 2,307 1,431 3,662 4,699 Income from operations before income taxes 1,007 2,240 1,170 3,381 5,130 Net income 1,007 1,486 770 2,120 3,157 Basic income per share(1) $0.29 $0.41 $0.22 $0.59 $0.73 ============================================= Diluted income per share (1) $0.28 $0.40 $0.21 $0.57 $0.71 ============================================= Weighted average shares-basic 3,466 3,651 3,556 3,569 4,296 ============================================= Weighted average shares-diluted3,605 3,762 3,675 3,715 4,466 ============================================= Information reflects the Company's declaration of a three-for-two split of Common Stock effected as a 50% stock dividend on April 21, 1997.
Year Ended June 30, 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (in thousands, except per share data) Balance Sheet Data: Working capital $ 6,704 $ 8,466 $ 9,148 $ 9,592 $26,286 Total assets 20,845 24,517 29,662 32,234 56,181 Short-term debt, including current portion of long-term debt 200 200 501 1,000 432 Long-term debt, less current portion 950 2,300 3,650 2,500 1,166 Stockholders' equity 12,880 14,667 15,455 17,788 41,591
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------ Overview The Company is a leading suppler of flexible interconnects principally for sale to the automotive, military/aerospace, computer, telecommunications and industrial markets. Prior to 1990, substantially all of the Company's sales were for military/aerospace applications. Beginning in 1990, the Company developed a business strategy of pursuing broader commercial applications for its products. The execution of this strategy has resulted in a reduction of revenues from the military/aerospace sector as a percentage of the Company's total revenue from 53% in fiscal year 1992 to 20% in fiscal year 1998, while increasing overall revenues approximately 111%. The Company believes that its development of innovative materials and processes provides it with a competitive advantage in the markets in which it competes. During the past three years, the Company has invested over $8.0 million (or approximately 5% of total revenues) in research and development to develop materials and enhance its manufacturing processes. The Company includes in cost of products sold its expenditures for its research and development activities. To better serve customers that have production facilities in Asia and to more cost effectively manufacture certain products for worldwide distribution, the Company formed a Chinese joint venture, Parlex (Shanghai) Circuit Co., Ltd., in 1995. The Company owns 50.1% of the equity interest in Parlex Shanghai. Accordingly, Parlex Shanghai's results of operations, cash flows and financial position are included in the Company's consolidated financial statements (see Note 1 to the Consolidated Financial Statements). In May 1998, the Company entered into an agreement to lease a facility in Mexico to perform the finishing and, in some cases, assembly operations to parts being manufactured at its other production facilities. The Company anticipates that significant benefit will be realized from the performance of these labor intensive operations in Mexico. The start-up costs did have a negative impact on the margins in the fourth quarter ended June 30, 1998, and an impact on margins is anticipated for the first quarter in the year that commenced July 1, 1998. The Company is currently involved in an expansion program. As a result of the follow-on common stock offering completed in October 1997, approximating $20.4 million, the Company now has sufficient resources to expand its Methuen, Massachusetts facility by an additional 60,000 square feet, of which 40,000 will be used for additional manufacturing capacity, with the remaining space to be used for administrative needs. The Company has also increased its manufacturing space at its production facilities in Salem, New Hampshire and Shanghai, China. The Company has also invested in equipment that will increase its manufacturing capacity, and allow for the introduction of new technologies. Results of Operations The following table sets forth, for the periods indicated, selected items in the Company's Statements of Income as a percentage of total revenues. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto:
Year Ended June 30, ------------------------------ 1998 1997 1996 ---- ---- ---- Total revenues 100.0% 100.0% 100.0% Cost of products sold 78.5% 80.1% 85.3% Gross profit 21.5% 19.9% 14.7% Selling, general and administrative expenses 13.7% 13.2% 11.7% Operating income 7.8% 6.6% 3.0% Income from operations before income taxes 8.5% 6.1% 2.5% Net income 5.2% 3.8% 1.6%
Results of Operations for the Past Three Fiscal Years Total Revenues Total revenues rose to $60,275,171in fiscal year 1998, a 9% increase from the $55,086,853 reported in fiscal 1997, while revenues rose 17% in fiscal 1997 from the $47,257,025 reported in fiscal year 1996. Revenues grew in each of the Company's principal product lines - flexible circuits, laminated cable, flexible/cable hybrid circuits and flexible interconnect assemblies. The increase in total revenues in each year was primarily attributable to an increase in the volume of units shipped. Total revenues included licensing and royalty fees of $226,835, $109,710, and $155,000 in fiscal 1998, 1997 and 1996, respectively. Although the Company intends to continue its practice of developing materials and processes that it can license to third parties, it does not expect that royalty revenues will represent a significant portion of total revenues in the near term. Cost of Products Sold Cost of products sold in fiscal 1998, 1997, and 1996 was $47.3 million, $44.1 million, and $40.3 million, respectively. As a percentage of revenue, cost of products sold was 78.5%, 80.1%, and 85.3% in each of fiscal 1998, 1997, and 1996, respectively. The improvement in the current fiscal year resulted from assigning production to the facility most economically suited to manufacture a particular type of product. The decrease in the percentage in fiscal 1997 from fiscal 1996 was primarily the result of manufacturing yield improvements, particularly in connection with a major automotive program for Motorola, while general productivity gains and increased absorption of overhead also contributed to the reduction. These improvements were made possible by enhancements to the manufacturing process, the acquisition of additional production equipment and cost savings on materials and supplies. Selling, General and Administrative Expenses Selling, general and administrative expenses in fiscal 1998, 1997, and 1996 were $8.3 million, $7.3 million, and $5.5 million, respectively. As a percentage of total revenues, selling, general and administrative expenses were 13.7%, 13.2%, and 11.7% in fiscal years 1998, 1997, and 1996, respectively. The dollar increase in the past two fiscal years is primarily attributable to the opening of field offices in Texas and San Diego, hiring of additional sales personnel, additional commissions associated with incremental sales, and additional costs being incurred by the Chinese joint venture. The Company anticipates that selling, general, and administrative expenses as a percentage of revenues will decrease as revenues increase. Other Income Other income of $684,000 this year is comprised, for the most part, of interest income ($610,000) and, to a lesser extent, the gain on the sale of equipment, and items of a miscellaneous nature. In 1997, other income of $156,000 was principally the result of a gain on the sale of equipment, while the $91,000 in 1996 was comprised entirely of items of a miscellaneous nature. Interest Expense Interest expense was $254,000 this year versus $436,000 in fiscal 1997. The reduction in expense is attributable to a lower level of average borrowings under the Company's revolving credit facility. The increase in fiscal 1997 to $436,000 from $351,000 in 1996 was principally the result of increased borrowings to finance capital expenditures. Interest rates during the period remained relatively constant. Provision for Taxes The Company's effective tax rate in fiscal 1998 was 30% versus 37% and 33% in fiscal years 1997 and 1996, respectively. This year the Company benefited from the income generated by the Chinese joint venture, which currently is not subject to tax. Items of a miscellaneous nature are attributed to the increase in 1997 from 1996. Liquidity and Capital Resources In fiscal 1998, the Company had net income of $3.2 million, as well as depreciation and amortization of $2.4 million, thus adding $5.6 million to cash flow. Cash flow was reduced by $3.4 million relating to increased working capital, resulting in a positive cash flow from operations of $2.2 million. In October 1997, the Company completed a stock offering of 1,000,000 shares of its common stock, priced at $22.00 per share. After deducting underwriting discounts, commissions and offering expenses paid by the Company, the net proceeds to the Company approximated $20.4 million. During fiscal year 1998, the Company paid off its revolver loan balance and has spent approximately $8.5 million to expand its manufacturing facilities and purchase capital equipment that will increase its manufacturing capacity and accommodate various new technological processes. It is anticipated that in fiscal 1999 an additional $9.0 million will be expended to complete the Company's planned expansion. The Company has a $10,000,000 unsecured revolving line of credit. As of June 30, 1998, no monies were borrowed against this line. The Company believes that its cash on hand, its anticipated cash flow from operations, and the amount available under its revolving credit facility, should be sufficient to meet its foreseeable needs. The Company has a deferred compensation obligation that is owed to the Chairman of the Board of Directors. Under the current arrangement, monthly payments begin in June 1999, or the first month after the termination of employment, whichever occurs first, and continues for no fewer than 60 months or, at the election of the employee prior to his termination of employment, for up to 120 months. Amounts to be paid within one year are not expected to be material. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 130 will be adopted by the Company during the first quarter of fiscal 1999 and SFAS NO. 131 will be adopted by the Company during the fourth quarter of fiscal 1999. These standards are not expected to have a material effect on its consolidated financial position and results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 will be adopted by the Company during fiscal year 2000. This standard is not expected to have a material effect on its consolidated financial position, results of operations and financial statement disclosures. Year 2000 Disclosure Statement The Year 2000 will effect not only the Company's internal computer systems, but also those external systems with which the Company exchanges any date related information, its customers, suppliers, banks, insurance companies, stockholders, etc. In order to properly assess the extent this problem may have on its operations, the Company has and is continuing to survey its key suppliers, service providers, and trading partners as to their level of preparedness and the effect it will have on the Company's operations.. The Company is confident that its enterprise system will be fully Year 2000 compliant by the first quarter of 1999. Quite apart from the Year 2000 problem, the Company is in the process of replacing its legacy computer system with a client server system for which both the hardware and software has been certified as Year 2000 compliant. The total cost of this project is approximately $1,050,000 of which approximately $300,000 was expended during fiscal 1998. The Company is in the process of inventorying all its mission critical manufacturing systems in order to determine any Year 2000 issues that may exist. While the Company anticipates that some software upgrades will be required, it does not believe that any issues exist which will prevent these systems from operating as expected after January 1, 2000. This inventory will be completed by the beginning of the fourth quarter of 1998 and testing to identify needed remediation will be completed by the end of that quarter. Any required remediation of all mission critical systems will be completed by the end of the first quarter of 1999 and the testing necessary to validate compliance is scheduled to be completed by mid 1999. The Year 2000 issue does present some risk that the company's operation may suffer disruption as a result of either a computer malfunction or a corruption of date sensitive data. If this does occur, the Company believes that it most likely will be due to factors external to the company. Because of the Company's internal Year 2000 program, the Company does not believe there is a significant risk of disruption of operations due to malfunction of its internal systems or equipment. CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Report contains certain forward-looking statements that involve risks and uncertainties. When used in this Report, the worked "believes," "expects," "anticipates," "intends," "estimates," "should," "will likely" and similar expressions are intended to identify such forward-looking statements. The cautionary statements made in this Report should be read as being applicable to all related forward-looking statements wherever they appear herein. The Company's actual results could differ materially from those discussed here. Important factors that could cause or contribute to such differences include those herein. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Fluctuations in Operating Results; Variability of Orders. The Company's operating results have historically been subject to fluctuations, and the Company expects that they will continue to fluctuate due to a variety of factors, including the timing and volume of orders from, and shipments to, customers, the timing of introductions of and market acceptance of new products and general economic trends. Typically, in the flexible interconnect industry, a substantial portion of sales in a given quarter depends on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. Although the Company monitors its customers' needs, it often has limited knowledge of the magnitude or timing of future orders. As a result, the timing of revenues may be affected by the need to ramp up to or down from volume production in response to fluctuations in customer demand, the introduction of replacement products or the balancing of inventory. A significant decrease in the number, magnitude or timing of orders in any given quarter could have a material adverse effect on the Company's business, financial condition and operating results. Because it is difficult for the Company to readily reduce spending on certain operating expenses, such as fixed manufacturing costs, development costs and ongoing customer service, a reduction in sales could have a material adverse effect on near-term profit margins. Results of operations in any given period are therefore not necessarily indicative of the results to be expected for any future period. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. Expansion of Manufacturing Capacity. The Company believes its long- term competitive position depends in part on its ability to increase its manufacturing capacity. The Company's business, financial condition and operating results could be materially and adversely affected if the Company is not able to obtain sufficient manufacturing capacity to meet increases in demand for its products. The Company intends in the future to expand its manufacturing capacity. The failure of the Company to complete the expansion on schedule and within budget could have a material adverse effect on its business, financial condition and operating results. In addition, the Company is in the process of implementing new operations control and accounting information systems, which may temporarily impact the Company's operations. Market and Customer Concentration. Applications for flexible interconnects include automotive electronics, military/aerospace products, computers and computer peripherals, telecommunications subscriber and infrastructure equipment, as well as circuits and cables for medical and industrial applications. Although the Company markets products for each of these applications in order to avoid a dependency on any one sector, a significant downturn in any of these market sectors could have a material adverse effect on the Company's business, financial condition and operating results. Historically, the Company has sold a substantial portion of its flexible interconnects to a limited number of customers. In fiscal 1996, 1997, and 1998, sales to Motorola accounted for approximately 29%, 20% and 23% respectively, of the Company's total revenues and the Company's top 20 customers accounted for approximately 66%, 69% and 66% of the Company's total revenues, respectively. The Company expects that a limited number of customers will continue to account for a high percentage of its total revenues in the foreseeable future. The loss of a significant customer or a substantial reduction in orders by any significant customer could reduce the Company's cash flow and have a material adverse effect on the Company's business, financial condition and operating results. Current and Future Capital Needs. The development and manufacture of flexible interconnects is highly capital intensive. In order to remain competitive, the Company must continue to make significant expenditures for capital equipment, expansion of operations and research and development. The Company expects that substantial capital will be required to expand its manufacturing capacity and fund working capital for anticipated growth. To the extent the Company's financial resources are insufficient to fund these activities, the Company will need to raise additional funds either through borrowings or further equity financings. There can be no assurance that such additional capital will be available on reasonable terms or at all. The inability of the Company to obtain adequate additional financing on reasonable terms when needed would have a material adverse effect on the Company's business, financial condition and operating results. Furthermore, the Company's credit facility contains various financial covenants predicated on the Company's present and future financial condition. In the event the Company is no longer able to meet the covenants contained in the credit facility, it may be required to repay the debt incurred thereunder. Foreign Operations. The Company is currently expanding its operations globally. The Company owns a 50.1% equity interest in a joint venture in China. Manufacturing and sales operations outside the United States are accompanied by a number of risks inherent in international operations, including imposition of governmental controls, compulsory licensure requirements, compliance with a wide variety of foreign and United States export laws, currency fluctuations, unexpected changes in trade restrictions, tariffs and barriers, political and economic instability, longer payment cycles typically associated with foreign sales, difficulties in administering business overseas, labor union issues and potentially adverse tax consequences. Although the Company's current products are designed to meet the regulatory standards of certain foreign countries, any inability to meet foreign regulatory approvals on a timely basis could have an adverse effect on the Company's business, financial condition and operating results. Competition. The Company's business is highly competitive. The flexible interconnect industry is differentiated by customers, markets and geography, with each niche having its own combination of complex packaging and interconnect requirements. The Company experiences competition worldwide in the flexible interconnect market from a number of foreign and domestic providers as well as from alternative technologies such as rigid printed circuits. Many of the Company's competitors are larger and have greater financial resources than the Company. There can be no assurance that existing or future competitors will not be able to duplicate the Company's strategies or that the Company will continue to be able to compete successfully. Limited Sources of Supply. The Company purchases raw materials, process chemicals and various components from multiple outside sources. In fiscal 1998, the Company's largest supplier of raw materials was Dupont, from which it purchased in excess of 40% of its materials and supplies. Any unanticipated disruption in shipments from Dupont would have a material adverse effect on the Company's business, financial condition and operating results. Although there exist alternate suppliers for the raw materials, process chemicals and various components that the Company currently purchases from its suppliers, because of the Company's limited inventory of raw materials and tight manufacturing cycles, any unanticipated interruption of supply could have a short-term material adverse effect on the Company's business, financial condition and operation results. Intellectual Property. The Company relies on a combination of patent and trade secret laws and non-disclosure and other contractual agreements to protect its proprietary rights. There can be no assurance that the Company's efforts to protect its intellectual property will be effective in preventing misappropriation or that others may not independently develop similar technology. In addition, litigation may be necessary to protect the Company's proprietary rights or to defend against claims of infringement. Although no claims have been asserted against the Company for infringement of the proprietary rights of others, there can be no assurance that third parties will not assert such claims in the future. If any infringement claim is asserted, the Company may be required to obtain a license of such rights. There can be no assurance that any such license would be available on reasonable terms, if at all. Litigation with respect to patents and other intellectual property matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company's business, financial and operating results. Technological Change. The market for the Company's products and services is characterized by rapidly changing technology and continuing process development. The future success of the Company's business will depend in large part upon its ability to maintain and enhance its technological capabilities, develop and market products and services that meet changing customer needs and successfully anticipate or respond to technological changes on a cost-effective and timely basis. In addition, the flexible interconnect industry could in the future encounter competition from new technologies that render interconnect technology less competitive or obsolete. There can be no assurance that the Company will effectively respond to the technological requirements of the changing market. Moreover, there can be no assurance that the materials and processes that the Company is currently developing will result in commercially viable technological processes or that there will be commercial applications for these technologies. To the extent that the Company determines that new technologies and equipment are required to remain competitive, the development, acquisition and subsequent implementation of such technologies and equipment are likely to continue to require significant capital investment. The Company's failure to keep pace with technological change could have a material adverse effect on its business, financial condition and operating results. Dependence on Key Personnel. The Company is dependent upon a number of its key management personnel. In addition, the future success of the Company depends on its continuing ability to attract and retain highly- qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of service of one or more key individuals, or the inability to attract additional qualified personnel, could have a material adverse effect on the Company's business, financial condition and operating results. The Company maintains a key person life insurance policy in the amount of $1.0 million on each of Mr. Herbert W. Pollack and Mr. Peter J. Murphy. Environmental Regulations. The Company is subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, the Company's products. The Company cannot predict the nature, scope or effect of future legislation or regulatory requirements to which its operations might be subject or the manner in which existing or future laws or regulations will be administered or interpreted, including whether they will be applied in the future to materials, product or activities to which they have not been applied previously. Complying with a new or more stringent laws or regulations, or to more vigorous enforcement of the current or future policies of regulatory agencies, could require substantial expenditures by the Company and could have a material adverse effect on its business, financial condition and operating results. Environmental laws and regulations require the Company to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in its processes. Violations of those requirements could result in financial penalties and other enforcement actions, and could require the Company to halt one or more portions of its operations until a violation is cured. Although the Company works to operate in compliance with these environmental laws, there can be no assurance that the Company will succeed in that effort at all times. The combined costs of curing incidents of non-compliance, resolving enforcement actions that might be initiated by government authorities or satisfying business requirements following any period affected by the need to take such actions could have a material adverse effect on the Company's business, financial condition and operating results. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- As of June 30, 1998, the Company is exposed to market risks which include changes in U.S. and foreign interest rates and fluctuations in exchange rates. The Company maintains a portion of its cash and cash equivalents in financial instruments with purchased maturities of three months or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates decrease. Due to the short duration of these financial instruments, an immediate decrease in interest rates would not have a material effect upon the Company's financial position. The Company's outstanding bank loan bears interest at a rate of 125 basis points over the Singapore Interbank Offer Rate ("SIBOR") and is therefore affected by changes in market interest rates. However, the Company has the option to pay the balance in full at any time without penalty. As a result, the Company believes that the market risk is not material. The Company also has a revolving credit agreement which bears interest at the bank's corporate base rate which is also affected by changes in market interest rates. The Company does not have any outstanding borrowings at June 30, 1998 and has the option to repay borrowings at anytime without penalty and therefore believes that the market risk is not material. The remainder of the Company's long term debt bears interest at fixed rates and are therefore not subject to market risk. The Company has a subsidiary located in Shanghai, China. Sales are typically denominated in the local currency (functional currency), thereby creating exposure to changes in exchange rates. The changes in the Chinese/U.S. exchange rate may positively or negatively impact the Company's sales, gross margins and retained earnings. Based upon the current volume of transactions in China and the stable nature of the exchange rate between China and the U.S., the Company does not believe the market risk is material. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- See the Consolidated Financial Statements included in this report; also see Note 12 to Consolidated Financial Statements. Parlex Corporation and Subsidiaries Consolidated Balance Sheets as of June 30, 1998 and 1997 and Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Stockholders and Directors of Parlex Corporation: We have audited the accompanying consolidated balance sheets of Parlex Corporation and its Subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Parlex Corporation and its Subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. August 5, 1998 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1997
- ------------------------------------------------------------------------------------------------ ASSETS 1998 1997 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 5,824,233 $ 596,614 Short-term investments 6,789,469 - Accounts receivable - less allowance for doubtful accounts of $252,000 in 1998 and $143,000 in 1997 11,145,750 9,029,388 Inventories 9,346,657 7,262,477 Refundable income taxes 323,626 - Deferred income taxes 372,725 294,033 Other current assets 1,706,367 850,956 ---------------------------- Total current assets 35,508,827 18,033,468 ============================ PROPERTY, PLANT AND EQUIPMENT: Land 468,864 468,864 Buildings 7,724,022 7,017,478 Machinery and equipment 27,200,755 22,823,785 Leasehold improvements and other 2,270,658 2,178,499 Construction in progress 4,390,805 1,795,559 ---------------------------- Total 42,055,104 34,284,185 Less accumulated depreciation and amortization (22,031,645) (20,671,859) ---------------------------- Property, plant and equipment - net 20,023,459 13,612,326 ---------------------------- OTHER ASSETS 649,198 588,098 ---------------------------- TOTAL $ 56,181,484 $ 32,233,892 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 121,158 $ 500,000 Bank loan 310,577 500,000 Accounts payable 6,437,169 5,047,284 Accrued liabilities 2,353,800 2,150,228 Income taxes payable - 244,404 ---------------------------- Total current liabilities 9,222,704 8,441,916 ---------------------------- LONG-TERM DEBT 1,165,751 2,500,000 ---------------------------- OTHER NONCURRENT LIABILITIES 2,247,444 1,986,924 ---------------------------- MINORITY INTEREST IN PARLEX SHANGHAI 1,954,472 1,521,362 ---------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value - authorized, 1,000,000 shares; none issued - - Common stock, $.10 par value - authorized, 10,000,000 shares; issued, 4,850,649 and 3,798,750 shares in 1998 and 1997, respectively 485,065 379,875 Additional paid-in capital 23,872,745 3,334,424 Retained earnings 18,268,743 15,111,769 Unrealized gain on short-term investments 10,192 - Cumulative translation adjustments (8,007) (4,753) Less treasury stock, at cost - 210,000 shares in 1998 and 1997 (1,037,625) (1,037,625) ---------------------------- Total stockholders' equity 41,591,113 17,783,690 ---------------------------- TOTAL $ 56,181,484 $ 32,233,892 ============================
See notes to consolidated financial statements. PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ---------------------------------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- REVENUES: Product sales $60,048,336 $54,977,143 $47,102,025 License fees and royalty income 226,835 109,710 155,000 ------------------------------------------- Total revenues 60,275,171 55,086,853 47,257,025 =========================================== COSTS AND EXPENSES: Cost of products sold 47,304,136 44,136,738 40,307,894 Selling, general and administrative expenses 8,271,704 7,288,544 5,518,292 ------------------------------------------- Total costs and expenses 55,575,840 51,425,282 45,826,186 ------------------------------------------- OPERATING INCOME 4,699,331 3,661,571 1,430,839 OTHER INCOME, Net 683,776 155,604 90,588 INTEREST EXPENSE (253,509) (436,008) (351,125) ------------------------------------------- INCOME FROM OPERATIONS BEFORE INCOME TAXES 5,129,598 3,381,167 1,170,302 PROVISION FOR INCOME TAXES (1,539,514) (1,249,202) (386,961) ------------------------------------------- INCOME BEFORE MINORITY INTEREST 3,590,084 2,131,965 783,341 MINORITY INTEREST (433,110) (11,509) (12,855) ------------------------------------------- NET INCOME $ 3,156,974 $ 2,120,456 $ 770,486 =========================================== BASIC INCOME PER SHARE $ .73 $ .59 $ .22 =========================================== DILUTED INCOME PER SHARE $ .71 $ .57 $ .21 ===========================================
See notes to consolidated financial statements. PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------------------------------- Unrealized Common Stock Additional Cumulative Gain on ------------------- Paid-in Retained Treasury Translation Short-Term Shares Amount Capital Earnings Stock Adjustments Investments Total ------ ------ ----------- -------- -------- ----------- ----------- ----- BALANCE, JULY 1, 1995 2,579,409 $257,941 $ 3,226,316 $12,220,827 $(1,037,625) $ - $ - $14,667,459 Exercise of stock options (pre-split basis) 3,250 325 17,175 - - - - 17,500 Translation adjusment - - - (162) - (162) Net income - - - 770,486 - - - 770,486 ------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1996 2,582,659 258,266 3,243,491 12,991,313 (1,037,625) (162) - 15,455,283 Stock dividend 1,186,311 118,631 (118,631) - - - - - Tax benefit arising from the exercise of nonqualified stock options - - 114,309 - - - - 114,309 Exercise of stock options 29,780 2,978 95,255 - - - - 98,233 Translation adjustment - - - - (4,591) - (4,591) Net income - - - 2,120,456 - - - 2,120,456 ------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1997 3,798,750 379,875 3,334,424 15,111,769 (1,037,625) (4,753) - 17,783,690 Tax benefit arising from the exercise of nonqualified stock options - - 97,702 - - - - 97,702 Stock offering, net of expenses 1,000,000 100,000 20,281,799 - - - - 20,381,799 Exercise of stock options 51,899 5,190 158,820 - - - - 164,010 Translation adjustment - - - - - (3,254) - (3,254) Unrealized gain on short-term investments - 10,192 10,192 Net income - - - 3,156,974 - - - 3,156,974 ------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1998 4,850,649 $485,065 $23,872,745 $18,268,743 $(1,037,625) $(8,007) $10,192 $41,591,113 =================================================================================================
See notes to consolidated financial statements. PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,156,974 $ 2,120,456 $ 770,486 ------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of equipment and other assets 2,426,831 1,899,325 1,678,150 (Gain) loss on sale of equipment (68,573) (129,269) 13,652 Amortization on investments available for sale 49,761 - - Gain on sale of investments available for sale (8,133) - - Deferred income taxes 98,640 86,375 37,510 Deferred compensation 83,188 74,999 70,341 Minority interest 433,110 11,509 12,855 Changes in current assets and liabilities: Accounts receivable - net (2,116,362) (1,576,055) (681,780) Inventories (2,084,180) 490,947 (1,669,348) Refundable income taxes (225,924) 17,794 188,875 Other current assets (855,411) (151,570) (257,520) Accounts payable and accrued liabilities 1,593,457 220,520 1,314,166 Income taxes payable (244,404) 358,713 - ------------------------------------------ Total adjustments (918,000) 1,303,288 706,901 ------------------------------------------ Net cash provided by operating activities 2,238,974 3,423,744 1,477,387 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments available for sale (27,010,059) - - Maturities of investments available for sale 15,893,751 - - Sales of investments available for sale 4,295,403 - - Additions to property, plant and equipment (8,463,111) (2,619,074) (2,968,713) Increase in other assets (86,841) (206,449) (122,146) Proceeds from sale of equipment 77,800 164,220 10,198 ------------------------------------------ Net cash used for investing activities (15,293,057) (2,661,303) (3,080,661) ------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common shares - net 20,381,799 - - Proceeds from bank loan - 99,332 400,668 Payment of bank loan (189,423) - - Capital contributions to joint venture - minority interest - - 160,322 Issuance of long-term debt 1,000,000 - - Borrowings (payments) under revolving credit agreement (3,000,000) (650,000) 1,450,000 Payments of other long-term debt (72,020) (100,000) (200,000) Exercise of stock options 164,010 98,233 17,500 ------------------------------------------ Net cash provided by (used for) financing activities 18,284,366 (552,435) 1,828,490 ------------------------------------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,664) - - ------------------------------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,227,619 210,006 225,216 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 596,614 386,608 161,392 ------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,824,233 $ 596,614 $ 386,608 ========================================== SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS: Property and equipment contributed as capital by joint venture partner $ - $ 277,000 $ 1,060,000 ========================================== Property, plant and equipment acquired in exchange for accounts receivable $ - $ - $ 400,000 ========================================== Property and equipment purchased under capital lease $ 358,929 $ - $ - ==========================================
See notes to consolidated financial statements. PARLEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - Parlex Corporation ("Parlex" or the "Company") is a world leader in the design and manufacture of flexible interconnect products. Parlex produces custom flexible circuits and laminated cables utilizing proprietary processes and patented technologies which are designed to satisfy the unique requirements of a wide range of customers. Parlex provides its products and engineering services to a variety of markets including automotive, computer, military-aerospace, telecommunications, industrial control, medical and consumer. Basis of Consolidation - The consolidated financial statements include the accounts of Parlex, its wholly owned subsidiaries and its 50.1% investment in Parlex (Shanghai) Circuit Co., Ltd. (see Note 2), whose fiscal year end is March 31. This entity is consolidated on a three- month time lag. Intercompany transactions have been eliminated. Foreign Currency Translation - The functional currency of foreign operations is deemed to be the local country's currency. Assets and liabilities of operations outside the United States are translated into United States dollars using current exchange rates at the balance sheet date. Results of operations are translated at average exchange rates prevailing during each period. Cash and Cash Equivalents - Cash and cash equivalents include short- term highly liquid investments purchased with remaining maturities of three months or less. Inventories - Inventories of raw materials are stated at the lower of first-in, first-out cost or market. Work in process represents costs accumulated under a job-cost accounting system less the estimated cost of shipments to date, in the aggregate not in excess of net realizable value. At June 30, inventories consisted of: 1998 1997 ---- ---- Raw materials $3,413,657 $2,706,302 Work in process 5,933,000 4,556,175 ----------------------------- Total $9,346,657 $7,262,477 ============================= Property, Plant and Equipment - Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives: buildings - 40 years; machinery and equipment - 5-15 years; and leasehold improvements over the terms of the leases. Revenue Recognition - Product sales are recognized upon shipment. License fees and royalty income are recognized when earned and as related costs are incurred. Research and Development - Research and development costs are expensed as incurred and amounted to $3,123,000, $2,717,000 and $2,380,000 for the years ended June 30, 1998, 1997 and 1996, respectively. These amounts are reflected in the Company's cost of products sold. Income Taxes -The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement requires an asset and liability approach to accounting for income taxes based upon the future expected values of the related assets and liabilities. Deferred income taxes are provided for items which are recognized in different years for tax and financial reporting purposes. Income Per Share - The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share," which became effective in the second quarter of fiscal 1998. Under the provisions of SFAS No. 128, basic income per share is calculated on the weighted-average number of common shares outstanding. Diluted income per share is calculated on the weighted-average number of common shares and common share equivalents resulting from options outstanding. All prior period amounts have been restated to reflect the adoption of SFAS No. 128. Both basic and diluted income per share give retroactive effect to the three-for-two stock split in 1997. A reconciliation between shares used for computation of basic and dilutive income per share is as follows: 1998 1997 1996 ---- ---- ---- Shares of basic computation 4,295,706 3,569,052 3,556,458 Effect of dilutive stock options 169,821 145,987 118,272 --------------------------------------- Shares for dilutive computation 4,465,527 3,715,039 3,674,730 ======================================= Use of Estimates - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates. Estimates include reserves for accounts receivable, useful lives of properties, accrued liabilities including health insurance claims, and deferred income taxes. Actual results could differ from those estimates. Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature. The carrying amounts of the Company's debt instruments approximate fair value because of the relative consistency of interest rates since its issuance. Stock-Based Compensation - During 1997, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but does not require, the recognition of compensation expense for the fair value of stock options and other equity instruments issued to employees and nonemployee directors. The Company continues to account for stock- based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, using the intrinsic value method. The difference between accounting for stock-based compensation under APB Opinion No. 25 and SFAS No. 123 is disclosed in Note 8. New Accounting Pronouncements - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 130 will be adopted by the Company during the first quarter of fiscal 1999 and SFAS No. 131 will be adopted by the Company during the fourth quarter of fiscal 1999. These standards are not expected to have a material effect on its consolidated financial position and results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 will be adopted by the Company during fiscal year 2000. This standard is not expected to have a material effect on its consolidated financial position, results of operations and financial statement disclosures. 2. JOINT VENTURE In May 1995, the Company entered into an agreement to establish a limited liability company in the form of a joint venture in the People's Republic of China. The Company owns 50.1% of the joint venture. The joint venture manufactures flexible printed circuits and commenced operations in September 1995. 3. CASH AND SHORT-TERM INVESTMENTS A summary of the Company's investments available for sale by major security type at June 30, 1998 was as follows:
Gross Gross Amortized Unrealized Unrealized Fair Security Type Cost Gains Losses Value ------------- --------- ---------- ---------- ----- Corporate Debt Securities $12,150,064 $23,588 $(12,892) $12,160,760 U.S. Government Obligations 500,034 - (504) 499,530 -------------------------------------------------------- $12,650,098 $23,588 $(13,396) $12,660,290 ========================================================
The fair value of debt securities at June 30, 1998, by contractual maturity, was as follows: Due in one year or less (including approximately $5,800,000 classified as cash equivalents) $10,943,337 1,716,953 ----------- Due in one to five years $12,660,290 =========== 4. ACCRUED LIABILITIES Accrued liabilities at June 30 consisted of: 1998 1997 ---- ---- Payroll and related expenses $1,489,205 $1,421,872 Accrued health insurance 202,353 256,916 Other 662,242 471,440 -------------------------- Total $2,353,800 $2,150,228 ========================== 5. INDEBTEDNESS The Company's China joint venture has a short-term bank loan bearing interest at 1.25% over the Singapore Interbank Offer Rate ("SIBOR"). Long-term debt at June 30 consisted of: 1998 1997 ---- ---- Revolving Credit Agreement $ - $3,000,000 Capital lease obligations 286,909 - China joint venture bank note 1,000,000 - -------------------------- Total long-term debt 1,286,909 3,000,000 Less current portion 121,158 500,000 -------------------------- Long-term debt - net $1,165,751 $2,500,000 ========================== On November 12, 1997, the Company renegotiated its unsecured Revolving Credit Agreement (the "Agreement") (originally dated June 22, 1994) making available up to a total of $10,000,000 through September 30, 2000. On October 1, 2000, the Agreement converts to a term loan with principal and interest payments due monthly over a sixty-month period to September 30, 2005. Borrowings under the Agreement are at the bank's corporate base rate (8.5% at June 30, 1998), and carry an annual commitment fee of 1/4% on the average daily unused portion of the bank's commitment. Interest is payable monthly. At June 30, 1998, there was no outstanding debt and the unused commitment amounted to $10,000,000. The Agreement has restrictive covenants related to tangible net worth, current ratio, working capital, debt service ratio, and the ratio of total liabilities to equity. During fiscal 1998 the Company's China joint venture entered into a long-term bank loan agreement for $1,000,000, bearing interest at 9.45%. The loan is payable in installments through 2002. The maturities for long-term debt at June 30, 1998 are as follows: 1999 $ 121,158 2000 312,326 2001 447,677 2002 405,748 ---------- $1,286,909 ========== Interest paid during the years ended June 30, 1998, 1997 and 1996 was approximately $115,000, $394,000 and, $251,000, respectively. 6. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities at June 30 consisted of: 1998 1997 ---- ---- Deferred income taxes (Note 7) $1,223,121 $1,045,789 Deferred compensation 1,024,323 941,135 -------------------------- $2,247,444 $1,986,924 ========================== The timing of deferred compensation payments cannot presently be determined. Amounts, if any, which may be paid within one year are not material. 7. INCOME TAXES The provision for income taxes consisted of: 1998 1997 1996 ---- ---- ---- Current: State $ (172,771) $ (157,115) $ (57,943) Federal (1,268,103) (1,005,712) (291,508) Deferred (98,640) (86,375) (37,510) --------------------------------------------- Total $(1,539,514) $(1,249,202) $(386,961) ============================================= A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: 1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 34 % 34 % 34 % State income taxes, net of federal tax benefit 2 3 3 Foreign income - not subject to taxation (5) - - Foreign Sales Corporation (1) (1) (1) Tax credits (1) (1) - Other 1 2 (3) ---------------------- Effective income tax rate 30 % 37 % 33 % ====================== Deferred income tax assets and liabilities at June 30 are attributable to the following: 1998 1997 ---- ---- Deferred tax liabilities: Depreciation $1,597,409 $1,421,917 Prepaid expenses 29,918 29,807 -------------------------- 1,627,327 1,451,724 -------------------------- Deferred tax assets: Inventories 63,730 44,084 Allowance for doubtful accounts 63,341 46,760 Accruals 110,148 126,398 Self-insurance 79,836 101,831 Deferred compensation 409,404 376,128 Tax credit carryforwards 50,472 4,767 -------------------------- 776,931 699,968 -------------------------- Net deferred tax liability $ 850,396 $ 751,756 ========================== Deferred taxes have not been recorded on undistributed earnings of the China Joint Venture (approximately $460,000) because such amounts are considered permanently invested. Income tax payments of approximately $1,557,000, $751,500 and $445,000 were made in 1998, 1997 and 1996, respectively. 8. STOCKHOLDERS' EQUITY The Board of Directors is authorized to establish one or more series of preferred stock and to fix and determine the number and conditions of preferred shares, including dividend rates, redemption and/or conversion provisions, if any, preference and voting rights. At June 30, 1998, the Board of Directors has not authorized any series of preferred stock. In October 1997, the Company sold 1,000,000 shares of its common stock in an underwritten public offering. Proceeds to the Company totaled $20.4 million, net of expenses associated with the offering. The proceeds are being used to expand manufacturing facilities and purchase capital equipment. A portion of the proceeds was also used to repay all the outstanding indebtedness under the Company's Revolving Credit Agreement. The Company has incentive and nonqualified stock option plans covering officers, key employees and directors who are not otherwise employees. The options are generally exercisable commencing one year from the date of grant and typically expire in either five or ten years, depending on the plan. The option price for the incentive stock options and for the directors' plan is fair market value at the date of grant. Nonqualified stock options are granted at fair market value or at a price determined by the Board of Directors, depending on the plan. In certain cases, the Company may, at the option of the Board of Directors, reimburse the employees for the tax cost associated with their options. Effective August 20, 1996 the Company established the 1996 Outside Directors' Stock Option Plan (the "1996 Plan"). The 1996 Plan provides for the automatic grant of 1,500 options annually to each member of the Board of Directors who is not an employee of the Company. Discretionary grants of up to 2,250 options annually per director may also be made at the discretion of the Board of Directors. All grants are made at the market value of the stock on the date of the grant and there are 150,000 shares available for grant under the 1996 Plan, of which 7,500 were granted during the year. At June 30, 1998, there were 293,693 shares reserved for future grants for all of the above-mentioned plans. The following is a summary of activity for all of the Company's stock option plans: Weighted- Average Shares Exercise Under Price Per Shares Option Share Exercisable ------ --------- ----------- July 1, 1995 290,814 $ 4.32 94,872 Granted 39,750 5.84 Surrendered (9,375) 3.59 Exercised (4,875) 2.77 --------------------- June 30, 1996 316,314 4.56 148,778 Granted 10,500 6.67 Surrendered (6,000) 3.30 Exercised (29,780) 4.70 --------------------- June 30, 1997 291,034 4.77 191,085 Granted 95,750 18.50 Surrendered (1,315) 5.13 Exercised (51,899) 3.16 --------------------- June 30, 1998 333,570 $ 8.96 199,375 ==================================== The following table sets forth information regarding options outstanding at June 30, 1998: Options Outstanding Options Exercisable ----------------------------------------- ------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Exercise Number Contractual Exercise Exercise Prices Outstanding Life (Years) Price Number Price - -------- ----------- ------------ -------- ------ --------- $ 2.67 22,500 1.2 $ 2.67 22,500 $ 2.67 4.00 15,000 0.6 4.00 15,000 4.00 4.17 48,814 0.9 4.17 48,626 4.17 4.59 75,000 0.9 4.59 75,000 4.59 5.67 22,500 1.2 5.67 13,500 5.67 5.84 29,256 2.7 5.84 11,249 5.84 6.67 9,750 7.0 6.67 7,500 6.67 12.35 15,000 7.6 12.35 6,000 12.35 15.50 7,500 9.4 15.50 - - 18.75 88,250 4.1 18.75 - - ------------------------------------------------------------- 333,570 2.6 $ 8.96 199,375 $ 4.68 ============================================================= As described in Note 1, the Company uses the intrinsic value method in accordance with APB No. 25 to measure compensation expense associated with grants of stock options to employees. Had the Company used the fair value method to measure compensation, the Company's net income and diluted income per share would have been $2,944,591 or $.66 per share in 1998, $2,029,904 or $.55 per share in 1997 and $752,847 or $.20 per share in 1996. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. Key assumptions used to apply this pricing model are as follows:
1998 1997 1996 ---- ---- ---- Average risk-free interest rate 5.2% 6.2% 6.2% Expected life of option grants 2.5 years 2.5 years 2.5 years Expected volatility of underlying stock 72% 143% 143% Expected dividend rate None None None
The weighted-average fair value of options granted in 1998, 1997 and 1996 was $8.34, $5.71 and $4.43, respectively. The option pricing model was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of ten years. However, management believes that the assumptions used and the model applied to value the awards yields a reasonable estimate of the fair value of the grants made under the circumstances. 9. BENEFIT PLANS The Company has a qualified profit-sharing retirement plan to provide benefits to eligible employees. Annual contributions to the plan are at the discretion of the Board of Directors and are discretionary in amounts. No contributions were made to the plan for the years ended June 30, 1998, 1997 and 1996. During fiscal 1995, the Company adopted a 401(k) Savings Plan (the "Plan") covering all employees of the Company who have six consecutive months of service and have attained the age of twenty-one. Matching employer contributions can be made to the Plan at the discretion of the Board of Directors. The Company contributed $90,000 to the Plan for the year ended June 30, 1998. No matching contributions were made to the Plan for the years ended June 30, 1997 and 1996. 10. COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment under agreements generally with initial terms from three to five years with renewal options. Rental expense for each of the years ended June 30, 1998, 1997 and 1996 approximated $263,000, $285,000 and $153,000, respectively. Future payments under noncancelable operating leases are: 1999 $361,000 2000 298,000 2001 213,000 2002 192,000 2003 192,000 From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management is not aware of any current legal matters that will have a material adverse effect on the Company's consolidated financial position or results of operations. 11. BUSINESS SEGMENT, MAJOR CUSTOMER AND INTERNATIONAL OPERATIONS The Company operates within a single segment of the electronics industry as a specialist in the interconnection and packaging of electronic equipment with its product lines of flexible printed circuits, laminated cable, and related assemblies. Sales to several divisions of one customer represented 23%, 20% and 29% and of total revenues in 1998, 1997 and 1996, respectively. Summarized information relating to international operations is as follows:
Year Ended June 30, --------------------------------------------- 1998 1997 1996 ---- ---- ---- Revenues: United States $48,521,351 $48,434,315 $43,662,143 China 5,192,052 2,309,103 1,218,795 Export sales from United States 8,445,678 5,533,199 2,376,087 Intercompany sales (1,883,910) (1,189,764) - --------------------------------------------- Total revenues from unaffiliated customers $60,275,171 $55,086,853 $47,257,025 ============================================= Operating income: United States $ 3,617,537 $ 3,502,468 $ 1,412,422 China 923,687 61,403 40,723 Eliminations 158,107 97,700 (22,306) --------------------------------------------- Total operating income $ 4,699,331 $ 3,661,571 $ 1,430,839 ============================================= Identifiable assets: United States $52,924,162 $29,879,581 $28,929,914 China 5,945,297 4,137,596 2,789,430 Eliminations (2,687,975) (1,783,285) (2,057,288) --------------------------------------------- Total identifiable assets $56,181,484 $32,233,892 $29,662,056 =============================================
The increase in identifiable assets in the United States during fiscal 1998 was primarily the result of the public offering of stock in October 1997 (see Note 8). 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data are as follows (in thousands except per share amounts): First Second Third Fourth ----- ------ ----- ------ 1998 Quarters Revenues $13,717 $14,184 $14,296 $18,078 Gross profit 3,178 2,869 3,027 3,897 Net income 728 587 823 1,019 Net income per share: Basic .19 .14 .18 .22 Diluted .18 .13 .17 .21 1997 Quarters Revenues $12,807 $14,068 $13,225 $14,987 Gross profit 1,895 2,595 2,985 3,475 Net income 188 558 643 731 Net income per share: Basic .06 .16 .18 .20 Diluted .05 .15 .17 .19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------- This item is inapplicable. Part III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information required by the Item is incorporated by reference from the information under the captions "Election of Directors", "Board of Directors Meetings and Committees of the Board", "Executive Officers" and "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive proxy statement to be filed with the Commission within 120 days of June 30, 1998. Item 11. Executive Compensation - -------------------------------- The information required by the Item is incorporated by reference from the information under the captions "Compensation of Executive Officers" and "Board of Directors Meetings and Committees of the Board", in the Company's definitive proxy statement to be filed with the Commission within 120 days from June 30, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information required by this Item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive proxy statement to be filed with the Commission within 120 days from June 30, 1998. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- This Item is not applicable. Part IV Item 14. Exhibits, Financial (a) Documents filed as a part of this Statement Schedules Form 10-K. And Reports on 1. Financial Statements. Form 8-K. The Financial Statements in the accompanying table of contents to Consolidated Financial Statements are filed as a part of this Form 10-K. 2. Financial Statement Schedules. Schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the Consolidated the absence of conditions under which they are required or because the required information Financial Statements or notes thereto. 3. Exhibits. The exhibits listed below are either filed herewith or, if not filed, are incorporated by reference from the filings noted in parathenses. (3)(A) Restated Articles of Organization as amended, (dated August 2, 1983); (filed as Exhibits 3-A and 3-B to the Company's Registration Statement on Form S-1, file No. 2-85588, and incorporated herein by reference). (3)(B) Articles of Amendment to Restated Articles of Organization, dated December 1, 1987; (filed as Exhibit 10-Q to Form 10-K for the fiscal year ended June 30, 1988). (3)(C) By-laws; (filed as Exhibit 3-C to the Company's Registration Statement on Form S-1, file No. 2-85588, and incorporated herein by reference). (3)(D) Articles of Amendment to Restated Articles of Organization,dated October 21, 1997; (filed as Exhibit 3-D to Form 10-Q for the quarter ended December 28, 1997). (10)(A) 1985 Employees' Nonqualified Stock Option Plan dated December 2, 1985*; (filed as Exhibit 10-L to Form 10-K for the fiscal year ended June 30, 1986). (10)(B) Employment Agreement between Parlex Corporation and Mr. Herbert W. Pollack, dated May 1, 1986;* (filed as Exhibit 10-M to Form 10-K for the fiscal year ended June 30, 1986). (10)(C) 1989 Outside Directors' Stock Option Plan;* (filed as Exhibit 10-Z to Form 10-K for the fiscal year ended June 30, 1991). (10)(D) 1989 Employees' Stock Option Plan*; (filed as Exhibit 10-AA to Form 10-K for the fiscal year ended June 30, 1991). (10)(E) Chinese Joint Venture Contract, Articles of Association, and Agreement of Technology License and Technical Service May 29, 1995; (filed as Exhibit 10-AH to Form 10-K for the fiscal year ended June 30, 1995). Confidential treatment has been granted for portions of this exhibit. (10)(F) Manufacturing and Sales Agreement between Samsung Electro-Mechanics Co., Ltd. and Parlex Corporation dated September 29, 1994; (filed as Exhibit 10-AK to Form 10-K for the fiscal year ended June 30, 1995). Confidential treatment has been granted for portions of this exhibit. (10)(G) Employment Agreement between Parlex Corporation and Peter J. Murphy dated June 26, 1996*; (filed as Exhibit 10-AM to Form 10-K for the fiscal year ended June 30, 1996). (10)(H) License Agreement between Parlex Corporation and Polyclad Laminates, Inc., effective June 1, 1996; (filed as Exhibit 10-AN to Form 10-K for the fiscal year ended June 30, 1996). Confidential treatment has been granted for portions of this exhibit. (10)(I) Agreement between Parlex Corporation and Allied Signal Laminate Systems, Inc., effective May 5, 1995; (filed as Exhibit 10-AO to Form 10-K for the fiscal year ended June 30, 1996). Confidential treatment has been granted for portions of this exhibit. (10)(J) License Agreement between Parlex Corporation and Pucka Industrial Co., Ltd., effective July 1, 1996; (filed as Exhibit 10-AP to Form 10-K for the fiscal year ended June 30, 1996). Confidential treatment has been granted for portions of this exhibit. (10)(K) Agreement of Lease between PVP- Salem Associates, L.P. and Parlex Corporation dated August 12, 1997; (filed as Exhibit 10-L to Form 10-K for the fiscal year ended June 30, 1997). (10)(L) Employment Agreement between Parlex Corporation and Herbert W. Pollack dated July 1, 1997*; (filed as Exhibit 10-M to Form 10-K for the fiscal year ended June 30, 1997). (10)(M) Patent Assignment Agreement between Parlex Corporation and Polyonics, Inc. dated June 16, 1997; (filed as Exhibit 10-N to Form 10-K for the fiscal year ended June 30, 1997). (10)(N) 1996 Outside Directors' Stock Option Plan*; (filed as Exhibit 10-O to Form 10-K for the fiscal year ended June 30, 1997). (10)(O) Shelter Service Agreement between Parlex Corporation and Offshore International Inc. dated March 6, 1998; filed herewith. (10)(P) Commercial Loan Agreement dated November 12, 1997; filed herewith. (11) Computation of Income per share; filed herewith. Subsidiaries of the Registrant; filed herewith. (23) Independent Auditors' Consent; filed herewith (24) Power of Attorney; filed herewith. (27) Financial Data Schedule; filed herewith. ___________________ *Denotes management contract or compensatory plan or arrangement. (B) Reports on Form 8-K The Company filed no reports on Form 8-K with the Securities and Exchange Commission during the quarter ended June 30, 1998. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Parlex Corporation */s/ Herbert W. Pollack - ----------------------------------------------------- Herbert W. Pollack, Chairman Date: September 29, 1998 ----------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. */s/ Steven M. Millstein - ----------------------------------------------------- Steven M. Millstein, Principal Accounting and Financial Officer Date: September 29, 1998 - ----------------------------------------------------- */s/ Sheldon A. Buckler - ----------------------------------------------------- Sheldon A. Buckler, Director */s/ Richard W. Hale - ----------------------------------------------------- Richard W. Hale, Director */s/ M. Joel Kosheff - ----------------------------------------------------- M. Joel Kosheff, Director */s/ Peter J. Murphy - ----------------------------------------------------- Peter J. Murphy, Director and Chief Executive Officer */s/ Lester Pollack - ----------------------------------------------------- Lester Pollack, Director */s/ Benjamin M. Rabinovici - ----------------------------------------------------- Benjamin M. Rabinovici, Director */s/ Steven M. Millstein - ----------------------------------------------------- * by Steven M. Millstein, Attorney-in-Fact Date: September 29, 1998 ----------------------------------------------- As of the date of submission of this filing, no annual report or proxy material with respect to the fiscal year ended June 30, 1998 has been sent to the security holders. Such annual report and proxy material will be submitted to the Commission at the time it is furnished to the security holders. EXHIBIT INDEX
Exhibit Description Page - ------- ----------- ---- 10-O Shelter Plan Service Agreement between Parlex 45 Corporation and Offshore International, Inc. dated March 6, 1998. 10-P Commercial Loan Agreement dated November 12, 1997. 63 11 Statement Regarding Computation of Per Share Earnings 77 21 Subsidiaries of the Registrant 78 23 Independent Auditors' Consent 79 24 Powers of Attorney 80 27 Financial Data Schedule 81
EX-10 2 EXHIBIT 10-O SHELTER PLAN SERVICE AGREEMENT OFFSHORE INTERNATIONAL, INC. Business With The World Through Mexico - --------------------------------------------------------------------------- 777 E. MacArthur Circle, #1 Tucson, AZ 85714 Ph 520-889-0022/ Fax 520-573-9316 S H E L T E R P L A N SERVICE AGREEMENT This AGREEMENT entered into by and between Parlex Corporation a corporation organized and existing under the laws of the State of Massachusetts having offices at 145 Milk St., Methuen, MA 01844 hereinafter referred to as CLIENT, and OFFSHORE INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Arizona, hereinafter referred to as OFFSHORE. RECITALS: OFFSHORE has an existing established contractual relationship with Maquilas Teta Kawi S.A. de C.V., a Mexican corporation, for the furnishing of manufacturing space, labor, and services in Guaymas/Empalme, Sonora, Mexico, and has sufficient receiving warehouse space in Tucson, Arizona, for consolidation of shipments. CLIENT is desirous of using OFFSHORE'S services in connection with the manufacture of CLIENT'S products, all on the terms and conditions set forth herein. AGREEMENTS: ARTICLE I - MANUFACTURING AND WAREHOUSE SPACE A. Within ten (10) days after the execution of this agreement, CLIENT will deliver to OFFSHORE a complete list of CLIENT'S requirements for the Mexican Facility and all other requirements for CLIENT'S manufacturing operation. OFFSHORE will undertake the necessary steps to provide facilities in Mexico and the United States that meet CLIENT'S requirements, and will provide all necessary coordination between the Mexican contractors and CLIENT. B. CLIENT will provide OFFSHORE a written description of all CLIENT'S equipment to be used in its manufacturing process in Mexico, together with an explanation of all electrical requirements, not later than 30 days prior to the date scheduled for installation of electrical utilities at the Mexican Facility, as agreed to by the parties. C. OFFSHORE will make available to CLIENT, for its use in carrying out the manufacturing process in Mexico pursuant to this Agreement, a Mexican Facility that consists of approximately 15,000* square feet of manufacturing space for a period of twelve (12) months commencing May 1, 1998. At OFFSHORE'S options, and with sixty days notice, CLIENT agrees to move into new manufacturing space of no less than 15,000 square feet, which OFFSHORE shall make available in its new Guaymas/Empalme facility, estimated to be completed in late 1998. In addition, OFFSHORE agrees to make available to CLIENT dock space that is sufficient for CLIENT'S receiving and shipping requirements. A compressor room, a chemical room, and a trash area, if any, are included in the manufacturing facility. In addition, a portion of the patio associated with the CLIENT'S space, if any, will be part of the CLIENT'S facility. ___________________ * Exact amount to be determined by OFFSHORE and CLIENT. D. OFFSHORE will provide an office for the CLIENT'S on-site manager within the Manufacturing Facility. E. Thirty (30) days prior to the scheduled date for commencement of its operations at the Mexican Facility pursuant to this Agreement, CLIENT may install in the Manufacturing Facility, its tools, machines, other equipment that is necessary or appropriate for its manufacturing process, and may stock the material, parts, and other property required in CLIENT'S manufacturing operations. F. OFFSHORE will also make available for CLIENT up to 1000 square feet of shipping and receiving space at a facility in Tucson, Arizona. Warehouse space or office space may be negotiated separately. G. OFFSHORE will provide fire, casualty and such other insurance that it deems necessary or appropriate for the building that will be the site of CLIENT'S manufacturing operations in Mexico (the "Mexican Facility"). CLIENT will obtain and maintain any and all insurance that it deems necessary or appropriate for its material and equipment, whether located in the Mexican Facility or elsewhere. Upon CLIENT'S written request, OFFSHORE will acquire, through qualified brokers and at CLIENT'S expense, Mexican insurance covering CLIENT'S material and equipment. ARTICLE II - SERVICES, REPAIR AND MAINTENANCE A. In addition to the foregoing, OFFSHORE agrees that the following items will be provided at the Mexican Facility during the term of this Agreement: Lighting, electric power for light assembly equipment, power tools, machines, and appliances; toilet rooms; water and adequate supplies for toilet rooms; heating and cooling as appropriate. B. OFFSHORE will furnish one (1) private telephone line and two (2) extensions in the Mexican Facility. CLIENT agrees to reimburse OFFSHORE its actual cost for any additional private lines installed at CLIENT'S request. C. OFFSHORE will keep the Mexican Facility in good repair at all times, it being expressly understood and agreed that all maintenance and repairs of the premises will be the responsibility of OFFSHORE. However, the cleaning of the production area within the Mexican Facility will be the responsibility of CLIENT. ARTICLE III - LABOR A. OFFSHORE agrees to provide for CLIENT'S screening, acceptance, and training, the personnel necessary to conduct CLIENT'S manufacturing operations under this Agreement. The personnel are and shall remain employees of OFFSHORE and are not in any sense employees of CLIENT. B. CLIENT will have the right to select from the potential workers provided by OFFSHORE, those who meet CLIENT'S minimum requirements. The labor force will include production line workers, material handlers, group leaders, and inspectors. In addition to the foregoing labor force, which will be paid on an hourly basis, OFFSHORE will provide CLIENT with a pool of workers from whom CLIENT can select such salaried personnel as CLIENT may deem necessary for the better implementation of this Agreement. Once CLIENT has accepted the workers, hourly or salaried, furnished by OFFSHORE, CLIENT will have full authority and responsibility to train, supervise, retain, and dismiss these workers. CLIENT represents, warrants and agrees that CLIENT has sole responsibility and authority for assuring that the manufacturing process and the products manufactured meet CLIENT'S standards for product quality. C. Since the workload hereunder may not be at a continuous and steady rate, it may become necessary from time to time to fluctuate the total work force utilized in CLIENT'S operations at the Mexican Facility. Accordingly, OFFSHORE agrees to use its best efforts to assist the CLIENT, when requested by CLIENT, in reducing the work force in order to minimize the labor charges to CLIENT hereunder. D. The labor rates paid by OFFSHORE to the Mexican workers are based on Mexican Labor Laws (as described in Exhibit "A" attached hereto) and include Social Security, taxes, and all other benefits prescribed by Mexican Law. It is agreed that any increase in such wage caused by an act of the Government of Mexico, or resulting from a collective bargaining agreement between Offshore and the Union, or by direction of the CLIENT, will be paid by CLIENT to OFFSHORE. E. OFFSHORE warrants that in providing CLIENT with personnel for the performance of this Agreement, it will in all respects conform to the laws, rules, regulations, and orders of appropriate Mexican governmental authorities. ARTICLE IV - SHIPPING, CUSTOMS AND PERMITS A. United States' Customs and Duties. CLIENT will retain title to all of its materials, products, machinery, and equipment used in connection with its operations hereunder. Therefore, for U.S. Customs purposes, CLIENT will be the importer and exporter of record and will be responsible for all U.S. tariffs, duties, bonds, and U.S. Customs broker's charges. B. Mexican Customs and Duties. OFFSHORE will assist CLIENT in arranging with Mexican officials the passage of CLIENT'S goods and equipment to and from Mexico. CLIENT understands and agrees that, in order for OFFSHORE to be able to fulfill its obligations under this subparagraph, CLIENT must supply OFFSHORE, on a timely basis, with all pertinent information, including, without limitation, complete descriptions, make, model and serial numbers, weights, costs, and country of origin, in order for OFFSHORE to process the shipments and obtain the necessary permits on behalf of CLIENT. CLIENT will pay, promptly when due, all Mexican Customs tariffs, duties, bonds, and Mexican Customs broker's charges. CLIENT hereby acknowledges that it takes approximately thirty (30) days to obtain the initial Mexican permits once the application process is commenced. Special permits needed to meet CLIENT'S specific requirements may take a longer period of time. C. Administrative Services. OFFSHORE will provide necessary administrative services to effect shipment of material to and from Guaymas/Empalme, Sonora, Mexico. D. Reimbursable Expenses. All freight charges, customs and brokerage fees, tariffs, duties, other payments to the government of Mexico, and other costs and expenses incurred by OFFSHORE in the performance of its duties under this Agreement, are incurred for the account of CLIENT. CLIENT will reimburse OFFSHORE for all amounts so paid for its account in accordance with Article VI, subparagraph A. ARTICLE V - FEES AND COSTS A. CLIENT agrees to pay the following fees during the term of this Agreement: (i) Facilities Fee. A fee (the "Facilities Fee") of $.42 sq. ft. for each month of CLIENT'S use of the Mexican Facility. The Facilities Fee will be billed in the first weekly billing of the month. In addition, OFFSHORE shall include in its first weekly bill of the month an amount equal to 15% of the Facilities Fee. This amount shall cover OFFSHORE'S obligation to Maquilas Teta Kawi to advance Mexico's value added tax (IVA) on the space. OFFSHORE shall credit CLIENT for the IVA paid on the Mexican facilities within 15 days of receiving reimbursement from the Mexican government. Credit will be given to CLIENT at the peso/US dollar exchange rate that applies on the date the IVA is credited to Maquilas Teta Kawi. (ii) Shelter Plan Fee. CLIENT agrees to pay OFFSHORE a weekly fee for its services hereunder (the "Shelter Plan Fee"), which will be calculated as follows: (1) By multiplying 1) the number of actual hours paid during the week by CLIENT in its manufacturing process, by 2) the applicable hourly rate set forth in the following schedule: Offshore Shelter Plan Fee Schedule per worker Hour * No. of Employees Shelter Plan Fee ---------------- ---------------- 1- 24 2.30 25- 49 2.05 50- 74 1.85 75- 99 1.65 100-124 1.50 125-149 1.40 150-199 1.35 200-299 1.25 300-400 1.10 ___________________ * CLIENT agrees that the rate to be used to determine the weekly Shelter Plan Fee will be the rate applicable to the highest number of workers employed in connection with the manufacture of CLIENT'S products during any single day of the week for which payment is being calculated. In calculating the Shelter Plan Fee, salaried personnel shall be deemed to work 48 hours per week. In no event shall the Shelter Plan Fee be less than $2,300.00 per week. The Shelter Plan Fee shall commence once CLIENT has accepted the workers, hourly or salaried, furnished by OFFSHORE, or by May 15th, 1998, whichever is earlier. B. Reimbursable Costs. CLIENT further agrees to reimburse OFFSHORE for the following costs and charges incurred by OFFSHORE in connection with this Agreement in accordance with the procedures described in Article VI hereof: (i) All payments made by OFFSHORE, for CLIENT'S account, for the performance of this Agreement. CLIENT understands and agrees that the payments for workers comprises wages, taxes, and personnel costs. An example of the composition of these payments is set forth on Exhibit "A" attached hereto. The actual amount of the payments (the "Weekly Compensation Amount") will be computed weekly, and the corresponding amount to be reimbursed to OFFSHORE will be based on the U.S. dollar-Mexican peso exchange rate at which OFFSHORE purchased pesos from a major Mexican and/or U.S. financial institution for the applicable week. CLIENT further agrees to reimburse OFFSHORE for any overtime hours authorized by CLIENT at the overtime premium paid by OFFSHORE for CLIENT'S account. This does not apply to salaried personnel. Overtime payments will be calculated by the sum of (1) the applicable Shelter Plan Fee, and (2) the wages and fringe benefits multiplied by 2 for double time (or multiplied by 3 for triple time). Double time Example for the 201-300 worker range: $1.30 + .733 + .733 = $2.766 Triple time Example for the 201-300 worker range: $1.30 + .733 + .733 + .733 = $3.499 (ii) All costs incurred by OFFSHORE in connection with services provided at CLIENT'S written request that are not otherwise referred to herein. CLIENT'S request for additional services must be made in writing on CLIENT'S "Purchase Requisition" form and must be signed by CLIENT'S representative. (iii) The cost of electrical power consumed by CLIENT in the Mexican facility. OFFSHORE (at CLIENT'S cost) shall coordinate the installation of an electrical meter for the facility. (iv) All other payments made by OFFSHORE, for CLIENT'S account, in the performance of this Agreement. C. Worker Termination Costs. CLIENT will have the sole responsibility to pay any and all costs associated with the severance or termination of any and all workers, including production line workers, material handlers, group leaders and inspectors, supervisory workers, monthly salaried administrative, technical workers and confidential workers hired at the request of the CLIENT. CLIENT will reimburse OFFSHORE for any and all costs that OFFSHORE incurs in connection with the severance or termination of any workers. CLIENT hereby agrees to post a bond, letter of credit, or cash deposit in favor of OFFSHORE in the amount of $50,000.00 to secure the payment of the termination fee. Said bond, letter of credit, or cash deposit shall be drawn upon in the event the CLIENT does not meet its obligation under this paragraph C. The form and terms of the bond and letter or credit shall be approved by OFFSHORE prior to the contracting of workers in Mexico. The initial amount of $50,000.00 assumes a work force of 100 people. If CLIENT shall contract more than 100 people, then CLIENT agrees to adjust upward the amount in a like ratio. D. Unless otherwise specifically stated herein, all monetary units referred to herein are U.S. Dollars. All amounts payable to OFFSHORE hereunder are to be paid in U.S. Dollars. ARTICLE VI - INVOICES AND PAYMENT A. OFFSHORE will submit invoices for amounts that it is owed under this Agreement to CLIENT on a weekly basis, except for the monthly Facilities Fee, which shall be included in the first weekly billing of the month. B. Each invoice will contain the following information: (i) The total number of basic, non-overtime hours worked during the relevant week; (ii) The total overtime hours and the associated overtime premium cost; and (iii) A summary of costs incurred by OFFSHORE for the CLIENT'S account pursuant hereto, including, but not limited to, a) freight for moving CLIENT'S materials, equipment, and finished products across the border; b) Mexican brokerage charges; and c) supplies. C. Each invoice will be accompanied by paid receipts or third party invoices for costs incurred by OFFSHORE for CLIENT'S account pursuant to this Agreement and for which OFFSHORE is seeking reimbursement. Additionally, with respect to costs incurred by OFFSHORE in Mexico (other than freight and customs charges), the invoice will be accompanied by a document signed by CLIENT'S on-site representative, whose signature will conclusively signify the accuracy of (i) the number of basic and overtime hours worked during the relevant work week, (ii) the number of workers utilized during the relevant period, and (iii) the costs incurred in Mexico (other than freight and customs charges) for which reimbursement is sought in the invoice. The approval of such Mexican costs, as evidenced by the signature of CLIENT'S on-site representative, will constitute the binding agreement of CLIENT to reimburse OFFSHORE for the such approved Mexican costs. D. CLIENT hereby agrees to pay OFFSHORE the amount of each such invoice within 10 days after the date of such invoice. If any portion of the invoice is disputed by CLIENT, CLIENT agrees that it will pay the undisputed portion of the invoice as if there were no such dispute about the remainder of the invoiced amount. ARTICLE VII - TERM AND TERMINATION A. The term of this Agreement is for a period of one (1) year commencing on the Contract Start Date. B. This Agreement may be terminated by CLIENT at any time during the first year of the term of this Agreement by giving OFFSHORE ninety (90) days written notice of its intention to terminate. At the time of giving such notice, CLIENT will pay OFFSHORE a termination fee equal to the immediately preceding 90-day billing for the Shelter Plan Fee and the Facilities Fee under Article V hereof. The parties agree that OFFSHORE will suffer damages as a result of CLIENT'S early termination of this Agreement, and that such damages will be difficult to accurately quantify. The termination fee is intended to approximate the damages to be suffered by OFFSHORE as a result of such termination and not as a penalty. CLIENT acknowledges that termination of this agreement, whether during the first or subsequent years, will give rise to certain termination and severance expenses relating to the workers Offshore has employed at the request of the CLIENT. Such expenses are the sole responsibility of the CLIENT, as stated in ARTICLE V, Section C of this agreement. These expenses are in addition to any termination fee owed by the CLIENT to Offshore as a result of the termination of this agreement. Offshore will attempt to minimize severance expenses by any means available including using it's best efforts to place client's employee's in other facilities with other Offshore client companies. ARTICLE VIII - OPTION TO RENEW A. As long as there has not theretofore occurred an event of default hereunder, CLIENT may renew this Agreement for four separate, additional periods of one (1) year each. CLIENT may exercise its right to renew this Agreement for the next succeeding year by giving OFFSHORE written notice of its intention no fewer than one hundred twenty (120) days prior to the then scheduled expiration of the Agreement. B. Within ten (10) business days after receipt of CLIENT'S notice of its intention to renew this Agreement, OFFSHORE will notify CLIENT of the Shelter Plan Fee that will be applicable during the renewal term. The rate modification will be determined in accordance with the procedure set forth herein and will equal the percentage increase (or decrease), if any, in the cost of living for the preceding year based upon the United States Consumer Price Index - All Items - U.S. City Average, All Urban Consumers issued by the Bureau of Labor Statistics of the United States Department of Labor (the base year and price for said Index is 1967 equals 100). In the event the Index ceases to be published, the most comparable substitute shall be used thereafter as selected by the mutual agreement of the parties. This Agreement may not be terminated by CLIENT during any renewal term of this Agreement without the consent of OFFSHORE. ARTICLE IX - PRODUCT LIABILITY CLIENT hereby indemnifies, and agrees to protect, defend and hold OFFSHORE harmless against all demands, obligations, claims, costs, expenses, judgments, awards and liabilities of any nature, claimed or asserted by any person, and against all losses in any way suffered, incurred, or paid or that may be suffered, incurred, or paid by OFFSHORE as a result of, or in any way arising out of, or consequential to the design, manufacture, use, delivery, consumption, or integration into other products of any of CLIENT'S products, whether such demands, obligations, claims, liabilities, or losses arise in the context of products liability or otherwise. ARTICLE X - LAWS, RULES AND REGULATIONS OFFSHORE and Maquilas Teta Kawi S.A. de C.V. will comply with all the laws, rules, and regulations of governmental authorities of Mexico. Nothing contained herein shall constitute a representation by OFFSHORE of favorable tax treatment of CLIENT'S activities by the Government of Mexico. ARTICLE XI - APPLICABLE LAW This Agreement will be interpreted and construed in accordance with, and will be governed by, the laws of the State of Arizona. ARTICLE XII - OWNERSHIP; BAILMENT All right, title, and interest to materials, products, machinery, tools, and equipment used in connection with CLIENT'S manufacturing process at the Mexican Facility will remain at all times the property of CLIENT. If and to the extent that OFFSHORE takes possession of any such materials, products, machinery, tools, or equipment, it does so as bailee on behalf of CLIENT. At no time will OFFSHORE be deemed to have any ownership interest in such property. ARTICLE XIII - SUBCONTRACT Without in any way relieving it of any obligation or duty otherwise undertaken hereunder, OFFSHORE will have the right to enter into a subcontract with Maquilas Teta Kawi S.A. de C.V., a Mexican corporation, to provide services hereunder in Mexico. ARTICLE XIV - CONFIDENTIAL INFORMATION The parties acknowledge and agree that the performance of this Agreement by either of them, or of any subcontractor of either of them, will not entail the disclosure, whether voluntarily or involuntarily, by either party to the other of any trade secrets or any proprietary or confidential information. In the event that at any time during the term of this Agreement either party proposes to disclose to the other party, or to utilize in connection with its operations under this Agreement, any such trade secret or proprietary or confidential information, the disclosing party will promptly notify the other party prior to making such disclosure or utilization. The parties agree that, promptly after the receipt of such notice, they will negotiate an amendment hereto providing for safeguarding such trade secret or proprietary or confidential information. ARTICLE XV - ARBITRATION Any controversy arising between the parties or any person claiming under either of them relating to this Agreement or the performance or breach of any provisions hereof will be settled by arbitration in Pima County, Arizona, in accordance with the governing rules of the American Arbitration Association; provided, however, the parties will be entitled to pursue all the discovery that would be available to them under, and in accordance with the rules, applicable to actions in the Superior Court of Pima County, Arizona. Each party will be entitled to, and promptly after receipt of notice of the filing of an arbitration claim, will appoint a person to act as arbitrator from a panel of qualified arbitrators of the American Arbitration Association. The two selected arbitrators will promptly appoint a third arbitrator. Judgment may be entered by any court of competent jurisdiction upon any award or decree made by the arbitrators. The prevailing party in any such matter will be entitled to recover its costs and expenses, including attorneys' fees, from the non-prevailing party. Nothing contained in this Article XV will limit the right of any party to exercise self help remedies or to obtain any provisional or ancillary remedies, including, but not limited to, injunctive relief or appointment of a receiver, from a court of competent jurisdiction. ARTICLE XVI - TIMING; SECURITY A. Time is of the essence hereof of this Agreement. B. CLIENT hereby agrees to deposit with OFFSHORE at the time of execution of this Agreement the amount of $20,000.00(the "Security Deposit"), which OFFSHORE may use, from time to time and in OFFSHORE'S sole discretion, to pay amounts to be reimbursed by CLIENT hereunder. CLIENT is not hereby relieved of the responsibility to pay all reimbursable costs when requested by OFFSHORE in accordance with this Agreement. Any amount so reimbursed after OFFSHORE has used the Security Deposit to pay such reimbursable cost, will be used by OFFSHORE to replenish the Security Deposit. OFFSHORE may intermingle the Security Deposit with its own funds and is not required to pay interest thereon. As long as no Event of Default, then exists hereunder, OFFSHORE will release the Security Deposit to CLIENT at the termination of this Agreement. C. As collateral security for CLIENT'S faithful performance of its obligation hereunder, CLIENT hereby grants OFFSHORE a security interest in all property of CLIENT (the "Collateral") that is in the possession or control of OFFSHORE or Maquilas Teta Kawi S.A. de C.V., a Mexican corporation. ARTICLE XVII - DEFAULTS AND REMEDIES If any of the Parties fail to pay or perform their duties in a material manner under this Agreement, such material failure will be considered to be an Event of Default hereunder. Failure by either party to make a payment when due hereunder or to perform any other material obligation hereunder within seven (7) days after written notice of such failure to pay or perform from the non-defaulting party ( the "Default Notice"), shall constitute an Event of Default hereunder; provided, however, if the failure to perform a material obligation ( other than the payment of any amounts due hereunder) cannot reasonably be cured within seven (7) days after the Default notice, it shall not constitute an Event of Default if the defaulting party commences reasonable steps to correct such failure within such seven (7) day period and diligently pursues such corrective action to its logical conclusions as soon as practical. Upon the occurrence of an Event of Default, the non-defaulting party will be entitled to pursue all remedies available to it under this Agreement or under the common law of the State of Arizona, including but not limited to, the right of set-off. The Parties agree that the non-defaulting party may pursue such remedies through its agents. No failure or delay on the part of the aggrieved party to exercise any such right, power or remedy and no notice or demand which may be given to or made with respect to any such remedies shall operate as a waiver thereof, or limit or impair the aggrieved party's right to take any action or to exercise any power or remedy hereunder, without notice or demand, or prejudice its rights. ARTICLE XVIII - ENTIRE AGREEMENT The terms and provisions contained herein constitute the entire Agreement between the parties and supersede all previous communications and understandings, either oral or written, between the parties hereto with respect to the subject matter hereof. No agreements or understandings varying or extending the terms of this Agreement will be binding upon either party hereto unless in writing signed by a duly authorized officer or representative thereof of each party. For purposes of this Agreement, the CONTRACT START DATE shall be March 6, 1998. OFFSHORE INTERNATIONAL, INC. an Arizona corporation ____________________________ Paul Karon, President Date: May 3, 1998 Company: Parlex Corporation By: ________________________ Its: President [Client] Date: March 6, 1998 EX-10 3 EXHIBIT 10-P COMMERCIAL LOAN AGREEMENT FLEET NATIONAL BANK LOAN AGREEMENT THIS AGREEMENT made this _____ day of November, 1997, by and between Parlex Corporation, a Massachusetts corporation with an address and principal place of business at 145 Milk Street, Methuen, Massachusetts 01844 (hereinafter called the "Borrower") and Fleet National Bank, a national banking association organized and existing under the laws of the United States of America, with a principal place of business at One Federal Street, Boston, Massachusetts 02110-2010 (the "Bank"). W I T N E S S E T H : The following constitutes the agreement of the parties: SECTION 1 --------- AMOUNT AND TERMS OF CREDIT AND INTEREST --------------------------------------- 1.1 Subject to the terms and conditions of this Agreement, the Bank hereby establishes a revolving line of credit (the "Revolving Loan") of up to Ten Million ($10,000,000.00) Dollars (the "Credit Limit") to be advanced as hereinafter provided. The Bank shall, as long as no Event of Default has occurred hereunder, from time to time, make advances comprising the Revolving Loan (all of which shall be called "Loans" hereunder) to the Borrower upon the Borrower's request; provided, however, that no advance will be made if, after giving effect to the Borrower's request for such advance, the outstanding principal balance of the Revolving Loan would exceed the Credit Limit. 1.2 The Revolving Loan shall be evidenced by a Revolving Line of Credit Note executed by the Borrower made payable to the Bank of even date herewith, in the maximum principal amount of $10,000,000.00 (the "Revolving Note"). 1.3 Interest on advances under the Revolving Loan shall accrue and be payable as provided in a Revolving Note. 1.4 The principal balance of the Revolving Loan shall be payable as provided in the Revolving Note. 1.5 Prior to the Expiration Date (as defined below), the Borrower shall pay to the Bank quarterly in arrears, commencing on January 1, 1998 and continuing on the first day of each April, July, October and January thereafter, a commitment fee in an amount equal to one-quarter of one (1/4%) percent per annum (calculated on the basis of the actual number of days elapsed and a 360-day year) of the average daily unused principal amount of the Revolving Loan for the preceding calender quarter. 1.6 On any date on which a payment of interest or principal is due under the Revolving Note, the Bank may charge the Borrower's demand deposit account(s) with the amount thereof. The failure of the Bank to so charge such account shall not relieve the Borrower of its obligations to make payments hereunder. 1.7 The Bank need not enter payments of interest and principal upon the Revolving Note but may maintain a record thereof on a separate ledger maintained by the Bank. 1.8 No advance under the Revolving Loan will be made after September 30, 2000 (the "Expiration Date"). 1.9 At any time prior to the close of the Bank's business on the Expiration Date, the Borrower may repay, in whole or in part, the principal amount of the Revolving Loan and may, in the Bank's discretion, reborrow any such amounts repaid, all in accordance with this Section 1. 1.10 The Bank may, at any time and from time to time, upon the request of the Borrower, but in the Bank's sole and absolute discretion, extend the Expiration Date. SECTION 2 --------- WARRANTIES AND REPRESENTATIONS ------------------------------ 2.1 To induce the Bank to enter into this Loan Agreement and to make the Loans, the Borrower warrants and represents that, as of this date: (a) The Borrower is a duly organized and existing corporation under the laws of the Commonwealth of Massachusetts and is in good standing under the laws of said Commonwealth. (b) The Borrower is duly qualified to do business and in good standing as a foreign corporation in each state or other jurisdiction where the nature of the business conducted by it or the property owned by it requires such qualification, except where the failure to qualify would not have a material adverse effect on the business, assets or financial condition of the Borrower. (c) The Borrower has good and clear record and marketable title to all properties and assets which it purports to own, free and clear of all mortgages, liens, pledges, charges, security interests and encumbrances, other than those listed on Exhibit A attached hereto. (d) The Borrower owns and holds or leases all real and personal property necessary or incidental to the present and planned future (to the extent reasonably possible) conduct of its business, including, without limitation, patents, trademarks, service marks, trade names, copyrights and licenses and other rights with respect to the foregoing. (e) All books and records of the Borrower, including, but not limited to, minute books, by-laws and books of account are accurate and reflect all matters and transactions which should currently be reflected therein. (f) The general nature of the Borrower's business is as set forth on Exhibit A attached hereto. (g) The Borrower has no subsidiaries and no investments in the stock or securities of any other corporation, firm, trust or other entity, except as set forth on Exhibit A. (h) Except as set forth on Exhibit A, there are no actions, suits, investigations or proceedings pending, or to the actual knowledge of the Borrower threatened, against the Borrower or any of its properties in any court, before any governmental authority, arbitration board, or any other tribunal which, singly or in the aggregate, if decided adversely to the Borrower, would materially and adversely affect the business, properties or condition (whether financial or otherwise) of the Borrower. The Borrower is not, nor by execution and delivery of this Agreement and the performance of its obligations hereunder (with or without the passage of time) will the Borrower be in default with respect to any order of any court, governmental authority, arbitration board or other tribunal. (i) The Borrower has furnished to the Bank the financial statements for the time period indicated on Exhibit A attached hereto. Said statements fairly present the condition of the Borrower at the dates thereof, and the statements of operation contained therein fairly present the results of the operations of the Borrower for the periods indicated, all in conformity with generally accepted accounting principles consistently applied. (j) Except to the extent reflected or reserved against in the financial statements referred to above, the Borrower, as of the date of said financial statements, had no liabilities of any nature, whether accrued, absolute or contingent, including, without limitation, tax liabilities, due or to become due, or arising out of transactions entered into. (k) Since the date of the financial statements referred to in Section 2.1(i), and except as shown on Exhibit A, there has not been: (i) any change in the condition of the Borrower's assets or liabilities, other than changes in its ordinary course of business, none of which has been materially adverse, nor has there been any depletion of cash or decrease of working capital which has been materially adverse; (ii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the Borrower's properties or business; (iii) any declaration of, setting aside of, or making of a payment of any dividend or other distribution with respect to the Borrower's capital stock or any direct or indirect redemption, purchase or other acquisition of any such stock, except for distributions to its stockholders to satisfy federal and state tax liabilities on undistributed income (if Borrower is a Subchapter "S" corporation); or (iv) any materially adverse: (1) controversy with any labor organization or employees; (2) claim or controversy involving any federal, state or local governmental agencies; or (3) other event or condition materially affecting the business or properties of the Borrower. (l) The Borrower has filed all federal and state income tax returns, excise tax returns, and all other tax returns of every kind and nature which are required to be filed by the Borrower as of the date hereof and has paid all taxes shown to be due on said returns. (m) The Borrower has no other addresses at which the Borrower has an office, conducts business or at which any of the Borrower's property is located except as set forth on Exhibit A. (n) The execution and delivery of this Agreement, the borrowing by the Borrower as herein provided, the execution and delivery by the Borrower of all instruments, agreements and documents of every kind and nature pursuant hereto and the performance by the Borrower of all of its obligations to the Bank hereunder have been duly authorized by the Board of Directors of the Borrower and this Agreement and all instruments, agreements and documents executed pursuant hereto are valid and binding obligations of the Borrower enforceable in accordance with their terms except to the extent such enforceability may be limited by laws of general application affecting the rights of creditors. (o) There is no provision in the articles of organization, agreement of association or the by-laws of the Borrower, or any indenture, contract or agreement to which it is a party or by which it is bound, which prohibits the execution and delivery of this Agreement or the performance by the Borrower of its obligations hereunder. (p) No event has occurred and no condition exists, which, upon the execution and delivery of this Agreement would constitute a default or an Event of Default hereunder. Neither the nature of the Borrower or any of its business or properties, nor any relationships between the Borrower and any other person, nor any circumstances in connection with the execution or delivery of this Agreement, is such as to require a consent, approval, or authorization of or filing, registration, or qualification with, any governmental authority on the part of the Borrower as a condition of the execution and delivery of this Agreement or any other instrument, agreement or document contemplated hereby, or the performance by the Borrower of its obligations hereunder or thereunder. (q) The Borrower has no pension, profit sharing, stock option, Employee Stock Ownership Trust ("ESOT"), insurance or other similar plan providing for a program of deferred compensation or benefits for any employee or officer, except as indicated on Exhibit A hereto. SECTION 3 --------- AFFIRMATIVE COVENANTS --------------------- 3.1 The Borrower will duly and punctually pay all interest and principal becoming due to the Bank and will duly and punctually perform all things on its part to be done or performed under this Agreement, or pursuant to any instrument, document or agreement executed pursuant hereto. 3.2 The Borrower will, at all times, keep proper books of account in which full, true and correct entries will be made of its transactions in accordance with generally accepted accounting principles consistently applied. 3.3 The Borrower will, at all reasonable times, and upon reasonable notice from the Bank, make its books and records available, in its offices, for inspection, examination and copying by the Bank and the Bank's representatives and will, at all reasonable times, and upon reasonable notice from the Bank, permit inspection of its properties by the Bank and the Bank's representatives. 3.4 The Borrower will, at reasonable times, furnish the Bank with such information and statements as the Bank may reasonably request and with copies of all financial statements and reports that it shall send or make available to stockholders. 3.5 The Borrower will furnish the Bank quarterly, within forty-five (45) days after the close of each fiscal quarter, commencing with the quarterly period in which this Agreement is executed, a balance sheet and income statement reflecting the financial condition of the Borrower at the end of each such period and the results of its operations during each such period. Each statement shall also contain comparative statements for the same period during the prior fiscal year. Each balance sheet and income statement shall be prepared by the Borrower and certified by the President, Treasurer or Chief Financial Officer of the Borrower, such certification to state that such balance sheet and income statement fairly present the financial condition and the results of operations of the Borrower at the end of such period and during such period in accordance with generally accepted accounting principles consistently applied, subject, however, to year-end adjustments, none of which will be materially adverse. 3.6 The Borrower will furnish the Bank annually, within ninety (90) days after the close of each fiscal year, a balance sheet and income and surplus statement reflecting the financial condition of the Borrower at the end of each such fiscal year and the results of its operation during such fiscal year. Each such statement shall also contain comparative statements for the prior fiscal year. Each such balance sheet and income statement is to be audited by an independent certified public accountant selected by the Borrower and satisfactory to the Bank with an audit quality statement to be issued by the accountant and signed by the President and/or Treasurer and/or Chief Financial Officer representing that neither the accounting firm nor the President and/or Treasurer of the Borrower is aware of any material modifications necessary to the financial statements for them to be in conformity with generally accepted accounting principles consistently applied. The Bank hereby acknowledges that Deloitte & Touche is a satisfactory independent certified public accountant. In addition, the Borrower shall furnish to the Bank, in a timely manner, all reports filed with the Securities and Exchange Commission ("SEC"). 3.7 The Borrower will, on a quarterly basis, within forty-five (45) days of the end of each fiscal quarter, deliver to the Bank a Compliance Certificate in the form of Exhibit B attached hereto, signed by its President or Treasurer certifying that each such officer has reviewed the provisions of this Agreement (including, without limitation, the financial covenants contained in this Agreement, to the extent they are being tested at that time) and stating in his opinion, if such be the fact, that the Borrower has not been and is not in default as to any of the covenants and agreements of the Borrower contained in this Agreement, or in the event of any such default, setting forth the details thereof. 3.8 The Borrower shall make its books and records available to the Bank, upon reasonable request, for audit at such reasonable times as the Bank deems necessary, in its reasonable business judgment. 3.9 The Borrower will maintain its corporate existence in good standing, comply with all laws and regulations of the United States, of any state or states thereof, of any political subdivision thereof and of any governmental authority which may be applicable to the Borrower or to the Borrower's business. 3.10 The Borrower will pay all real and personal property taxes, assessments and charges and all franchise, income, unemployment, old age benefit, withholding, sales and other taxes assessed against it or payable by it at such times and in such manner to prevent any lien or charge from attaching to its properties which in each instance would exceed $175,000.00. The provisions of this section, however, shall not preclude the Borrower from contesting in good faith and diligently prosecuting any such tax, provided, however, that the Borrower shall, upon reasonable request of the Bank, maintain reserves sufficient to discharge such tax in the event such contest is resolved against the Borrower. The Borrower shall not be in default under this Section by reason of the existence of a lien for taxes not then due. 3.11 The Borrower will put and maintain its properties in good repair, working condition and order and, from time to time, make all needful and proper repairs, renewals and replacements. 3.12 The Borrower will maintain insurance at all times covering such risks and in such amounts as the Bank may reasonably require in accordance with industry standards, all such insurance to be in such form and for such periods and written by such companies as shall be reasonably acceptable to the Bank. 3.13 The Borrower will pay or reimburse the Bank, on demand, for all reasonable expenses (including, without limitation, counsel fees and expenses) incurred or paid by the Bank in connection with the preparation, amendment, interpretation, extension or negotiation of this Agreement, and any instrument, agreement or document to be delivered pursuant hereto; the enforcement by the Bank of its rights as against the Borrower; and in the defense of any action against the Bank with respect to its rights or liabilities hereunder or thereunder if the Bank prevails in such action. 3.14 The Borrower will punctually and promptly make all payments and perform all other obligations which may be required of it with respect to any indebtedness (whether for money borrowed, goods purchased, services rendered or however such indebtedness may otherwise arise) owing to persons, firms or corporations other than the Bank, including, without limitation, indebtedness which may be secured by a security interest in assets of the Borrower or property of the Borrower, and all obligations under the terms of any lease in which the Borrower is the lessee. The provisions of this section shall not preclude the Borrower from contesting in good faith and diligently prosecuting any such indebtedness or obligation. 3.15 The Borrower shall pay or cause to be paid when due all amounts necessary to fund in accordance with their terms all the Borrower's deferred compensation plans whether now in existence or hereafter created, and the Borrower will not withdraw from participation in, permit the termination or partial termination of, or permit the occurrence of any other event with respect to any deferred compensation plan maintained for the benefit of its employees under circumstances that could result in liability to the Pension Benefit Guaranty Corporation, or any of its successors or assigns, or to the entity which provides funds for such deferred compensation plan. SECTION 4 --------- NEGATIVE COVENANTS ------------------ 4.1 The Borrower (not including Parlex Shanghai) will not issue evidences of indebtedness or create, assume, become contingently liable for, or suffer to exist indebtedness in addition to indebtedness to the Bank, except for debt to its officers, directors and stockholders that is subordinated to the Loans on terms reasonably satisfactory to the Bank (the "Subordinated Debt"); provided, however, that the Borrower may incur liabilities which are incurred or arise in the ordinary course of the Borrower's business (other than liabilities incurred or arising with respect to money borrowed. 4.2 The Borrower will not declare or pay dividends (unless payable in capital stock of the Borrower, which shall be allowed) or authorize or make any other distribution with respect to its shares of capital stock of the Borrower, whether now or hereafter outstanding (unless all financial covenants contained herein have been satisfied and such action would not cause the Borrower to violate any such covenants). 4.3 The Borrower will not make any loans or advances to any individual, firm or corporation, including, without limitation, its officers and employees; provided, however, that (a) the Borrower may make advances to its employees, including its officers, with respect to expenses incurred by such employees, which expenses are reimbursable by the Borrower and directly related to the conduct of the Borrower's business; and (b) the Borrower may make loans to Parlex Shanghai. 4.4 The Borrower will not invest in or purchase any stock or securities of any individual, firm or corporation, provided, however, that the Borrower may invest in (a) direct obligations of the United States of America having a maturity of one year or less from the date of investment; (b) investment grade bonds; (c) any other security for the purpose of obtaining 10-K's and other financial reports, provided that such investment does not exceed One Thousand ($1,000.00) Dollars; (d) the Parlex Shanghai joint venture; and (e) the proposed "Chinese" joint venture. In addition, the Borrower may buy back shares of its own stock. 4.5 The Borrower will not, without the Bank's prior written consent (which shall not be unreasonably withheld), merge or consolidate or be merged or consolidated with or into any other corporation. 4.6 The Borrower will not sell or dispose of any of its assets, except that the Borrower may: (a) sell inventory in the ordinary and usual course of its business;(b) dispose of (or trade in) equipment which is no longer required for the conduct of the Borrower's business so long as the Borrower receives therefor a sum (or credit) substantially equal to such equipment's fair value; and (c) sell any of its other assets, provided that the net book value thereof does not exceed $300,000.00 in any fiscal year. 4.7 Except as set forth on Exhibit A, the Borrower will not grant or suffer to exist any mortgage, pledge, title retention agreement, security interest, lien, charge or encumbrance with respect to any of its assets, tangible or intangible, whether now owned or hereafter acquired, or subject any of such assets to the prior payment of any indebtedness, or transfer in any manner any of such assets with the intent or purpose, directly or indirectly, of subjecting such assets to the payment of indebtedness, except for purchase money security interests in the Borrower's equipment. 4.8 The Borrower will not engage in any business other than the business in which it is currently engaged or a business reasonably allied thereto. 4.9 (Minimum Current Ratio). The Borrower will not permit the ratio of its current assets to its current liabilities, determined on a consolidated basis, to be less than 1.5 to 1 as at the last day of each fiscal quarter of the Borrower. 4.10 (Minimum Tangible Net Worth). The Borrower will not permit its tangible net worth, determined on a consolidated basis, to be less than $30,000,000.00 as at the last day of each fiscal quarter of the Borrower. The term "tangible net worth" shall mean stockholders' equity determined in accordance with generally accepted accounting principles, consistently applied, subtracting therefrom: (i) intangibles (as determined in accordance with such principles so applied), including, without limitation, goodwill, purchased technology and capitalized software development costs; and (ii) accounts and indebtedness owing from any employee or parent, subsidiary or other affiliate. 4.11 (Maximum Total Liabilities to Tangible Net Worth Ratio). The Borrower will not permit the ratio of its total liabilities (including, without limitation, all deferred taxes and contingent liabilities such as guarantees) to its tangible net worth, determined on a consolidated basis, to be more than 1.0 to 1 as at the last day of each fiscal quarter of the Borrower. 4.12 (Minimum Debt Service Coverage Ratio). The Borrower will not permit the ratio of its: (a) EBITDA, minus unfinanced capital expenditures, minus dividends and distributions; to (b) interest, plus current maturities of long term indebtedness; determined on a consolidated basis, to be less than 2.0 to 1 for the twelve-month period ending on the last day of each fiscal quarter of the Borrower. For the purposes of this Section, the term "EBITDA" shall mean, for the applicable period, income from operations before the payment of interest and taxes, plus depreciation and amortization. Prior to the Expiration Date, outstanding balances under the Revolving Loan shall not be considered current maturities of long term indebtedness. 4.13 (Maximum Senior Indebtedness to EBITDA). The Borrower will not permit the ratio of its senior indebtedness to its EBITDA, determined on a consolidated basis, to be more than 2.0 to 1 for the twelve-month period ending on the last day of each fiscal quarter of the Borrower. For the purposes of this Section, the term "senior indebtedness" shall mean all funded indebtedness owing by the Borrower to the Bank and any other institutional lender. 4.14 All accounting terms not otherwise specifically defined herein shall be construed and interpreted in accordance with generally accepted accounting principles consistently applied. SECTION 5 --------- DEFAULT ------- 5.1 The occurrence of any of the following events (after the expiration of any applicable grace period) shall be an Event of Default hereunder: (a) The Borrower shall fail to pay any installment of principal or interest on account of the Loans when such payment is due, which failure remains uncured for five (5) business days. (b) The Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement or in any instrument, document or agreement executed pursuant hereto, and in the event that such failure can be cured, such failure remains uncured for ten (10) business days. (c) Any warranty, representation or statement made or furnished to the Bank by or on behalf of the Borrower proves to have been false in any material respect when made or furnished. (d) Any event which results in the acceleration of the maturity of the indebtedness of the Borrower to others under any indenture, agreement, undertaking or otherwise. (e) Dissolution, termination of existence or insolvency of the Borrower. (f) The Borrower shall: (i) cease, be unable, or admit in writing its inability to pay its debts as they mature, or make a general assignment for the benefit of, or enter into any composition, trust mortgage or other arrangement with creditors; (ii) apply for, or consent (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee or liquidator of the Borrower or of a substantial part of its assets, or authorize such application or consent, or proceedings seeking such appointment shall be commenced against the Borrower; or (iii)the filing of any complaint, application or petition by the Borrower or with the Borrower's consent (by admission of material allegations of a petition or otherwise) initiating any matter in which the Borrower is or may be granted any relief from its debts pursuant to Title 11 of the United States Code entitled "Bankruptcy" (the "Bankruptcy Code") or any other bankruptcy, reorganization, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction. (g) The filing against the Borrower of a petition under the Bankruptcy Code naming the Borrower as debtor, which is not dismissed within sixty (60) days thereafter. (h) The calling or sufferance by the Borrower of a meeting of the creditors of the Borrower or the occurrence of a meeting by the Borrower or a representative thereof with a formal or informal committee of creditors of the Borrower. 5.2 Upon the occurrence of any Event of Default, all Loans of the Borrower to the Bank shall, at the Bank's option and without notice or demand, and notwithstanding any terms of payment in any note or other instrument evidencing such Loans, become immediately due and payable, and any obligation of the Bank to consider making Loans pursuant to Section 1 shall terminate. SECTION 6 --------- NOTICE ------ 6.1 All notices and other communications hereunder shall be made by facsimile, overnight air courier, or certified or registered mail, return receipt requested, and shall be deemed to be received by the party to whom it was sent one (1) business day after sending, if sent by facsimile, or overnight air courier, and three (3) business days after mailing if sent by certified or registered mail. All such notices and other communications to a party hereto shall be addressed to such party at the address set forth at the beginning of this Agreement or to such other address as such party may designate for itself in a notice to the other party given in accordance with this section. 6.2 The addresses to which such communications shall be sent are as follows: (a) If intended for the Borrower, to: Parlex Corporation 145 Milk Street Methuen, MA 01844 ATTN: Peter J. Murphy, President Phone: (978) 685-4341 Fax: (978) 685-7867 with copies to: Edward D. Kutchin, Esq. Kutchin & Rufo, P.C. One Liberty Square Boston, MA 02109 Phone: (617) 542-3000 Fax: (617) 542-3001 (b) If intended for the Bank, to: Fleet National Bank One Federal Street Boston, MA 02110 ATTN: David M. Farwell, Assistant Vice President Phone: (617) 346-0658 Fax: (617) 346-0600 with copies to: Brian T. Garrity, Esq. Shapiro, Israel & Weiner, P.C. 100 North Washington Street Boston, MA 02114 Phone: (617) 742-4200 Fax: (617) 742-2355 6.3 The addresses set forth herein may be changed by notice hereunder. SECTION 7 --------- MISCELLANEOUS ------------- 7.1 The Borrower will from time to time execute and deliver to the Bank all such other and further instruments and documents and take or cause to be taken all such other and further action as the Bank may reasonably request in order to effect and confirm or vest more securely in the Bank all rights contemplated in this Agreement. 7.2 The Borrower may take any action herein prohibited or omit to perform any act required to be performed by the Borrower if the Borrower shall obtain the Bank's prior written consent to each such action, or omission to act, which consent shall not be unreasonably withheld. No waiver on the Bank's part on any one occasion shall be deemed a waiver on any other occasion. The Bank shall not be deemed to have waived any of its rights hereunder unless such waiver shall be in writing and duly signed by an authorized officer of the Bank. 7.3 This Agreement may be amended only by an instrument in writing and duly signed by an authorized officer of the Borrower and an authorized officer of the Bank. 7.4 All covenants, agreements, representations and warranties contained in this Agreement shall bind the Borrower, its respective successors and assigns, and shall inure to the Bank's benefit and the benefit of the Bank's successors and assigns, whether expressed or not. 7.5 All rights of the Bank hereunder shall be cumulative. The Borrower and any guarantor hereby waives presentment and protest of any instrument and any notice thereof. 7.6 If any provisions of this Agreement shall be held to be illegal or unenforceable, such illegality or unenforceability shall relate solely to such provision and shall not affect the remainder of this Agreement. 7.7 This Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. 7.8 This Agreement shall take effect as an instrument under seal. 7.9 BORROWER AND BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. Borrower hereby certifies that neither Bank nor any of its representatives, agents or counsel has represented, expressly or otherwise, that Bank would not, in the event of any such suit, action or proceeding, seek to enforce this waiver of right to trial by jury. Borrower acknowledges that Bank has been induced to enter into this Agreement by, among other things, this waiver. Borrower acknowledges that it has read the provisions of this Agreement and in particular, this Section; has consulted legal counsel; understands the right it is granting in this Agreement and is waiving in this Section in particular, and makes the above waiver knowingly, voluntarily and intentionally. 7.10 Borrower and Bank agree that any action or proceeding to enforce or arising out of this Agreement may be commenced in any court of the Commonwealth of Massachusetts sitting in the counties of Suffolk or Middlesex, or in the District Court of the United States for the District of Massachusetts. 7.11 The exhibits annexed hereto as Exhibit A and Exhibit B are the only exhibits to be annexed to this Agreement, and the material contained therein shall be incorporated herein. 7.12 The captions herein contained are inserted as a matter of convenience only and such captions do not form a part of this Agreement and shall not be utilized in the construction hereof. WITNESS: PARLEX CORPORATION ______________________________ By:____________________________________ Peter J. Murphy, President FLEET NATIONAL BANK By:____________________________________ David M. Farwell, Assistant Vice President EXHIBIT A --------- 2.1(c) Encumbrances SECURED PARTY OR LESSOR: COLLATERAL: - ------------------------ ----------- 2.1(f) General Nature of Borrower's Business 2.1(g) Subsidiaries and Investments 2.1(h) Litigation 2.1(i) Date and Period Covered of Most Recent Financial Statements Furnished to the Bank 2.1(k) Material Changes in Operations 2.1(m) Other Locations 2.1(q) Deferred Compensation Plans EX-11 4 EXHIBIT 11 PER SHARE EARNINGS EXHIBIT 11 Parlex Corporation and Subsidiaries Computation of Net Income Per Common Share
June 30, 1998 June 30, 1997 ------------- ------------- Basic earnings per share $.73 $.59 Weighted average number of shares outstanding - Basic 4,295,706 3,569,052 Diluted earnings per share $.71 $.57 Weighted average number of shares outstanding - Basic 4,295,706 3,569,052 Effect of dilutive stock options 169,821 145,987 Weighted average number of shares outstanding - Dilutive 4,465,527 3,715,039
EX-21 5 EXHIBIT 21 SUBSIDIARIES EXHIBIT 21 PARLEX CORPORATION Listing of Subsidiaries ----------------------- Parlex International Corp. Incorporated - St. Thomas, U.S. Virgin Islands Organized as a Foreign Sales Corporation January 8, 1985 Parlex (Shanghai) Circuit Co., Ltd. Incorporated in Shanghai, China Date of Incorporation - May 29, 1995 EX-23 6 EXHIBIT 23 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-10250, 33-39648, 33-88470, 33-88472 and 333-18869 of Parlex Corporation on Form S-8 of our report dated August 5, 1998, appearing in this Annual Report on Form 10-K of Parlex Corporation for the year ended June 30, 1998. Deloitte & Touche LLP Boston, Massachusetts September 28, 1998 EX-24 7 EXHIBIT 24 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY We the undersigned, officers and directors of Parlex Corporation, hereby severally constitute Herbert W. Pollack and Steven M. Millstein, and each of them singly, our true and lawful attorneys, with full power indicated below, to sign for us the Report on Form 10-K of Parlex Corporation for the fiscal year ended June 30, 1998 and any required amendments thereto, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to said Report and any and all such amendments. Witness our hands on the dates set forth below: Dated: ------------------------- */s/ Sheldon A. Buckler Director - ------------------------------- Sheldon A. Buckler */s/ Richard W. Hale Director - ------------------------------- Richard W. Hale */s/ M. Joel Kosheff Director - ------------------------------- M. Joel Kosheff */s/ Peter J. Murphy Director - ------------------------------- Peter J. Murphy */s/ Lester Pollack Director - ------------------------------- Lester Pollack */s/ Benjamin Rabinovici Director - ------------------------------- Benjamin Rabinovici EX-27 8 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 This schedule contains a summary of financial information extracted from the condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 12-MOS JUN-30-1998 JUN-30-1998 5,824,233 6,789,469 11,397,750 252,000 9,346,657 35,508,827 42,055,104 22,031,645 56,181,484 9,222,704 0 0 0 485,065 0 56,181,484 60,048,336 60,275,171 47,304,136 55,575,840 0 0 253,509 5,129,598 1,539,514 3,156,974 0 0 0 3,156,974 .73 .71
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