10-K/A 1 parl10ka.txt AMENDMENT NO. 1 TO FORM 10-K OF JUNE 30, 2002 =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-K/A Amendment No. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____ ______________________________ Commission File No. 0-12942 PARLEX CORPORATION Massachusetts 04-2464749 (State of incorporation) (I.R.S. ID) One Parlex Place, Methuen, Massachusetts 01844 978-685-4341 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered ------------------- ------------------------------------ Common Stock ($.10 par value) NASDAQ National Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common stock held by non-affiliates of the registrant as of September 19, 2002 was $74,377,949. The number of shares outstanding of the registrant's common stock as of September 19, 2002 was 6,303,216 shares. EXPLANATORY NOTE On September 30, 2002, we filed an Annual Report on Form 10-K with the Securities and Exchange Commission (the "Commission"). We have filed this amendment on Form 10-K/A to correct a scrivener's error by deleting the asterisks that were inadvertently placed next to the respective signatures of the Chief Executive Officer and the Chief Financial Officer to the Section 302 Certifications. This Annual Report on Form 10-K/A is identical to the Form 10-K in all other respects. DOCUMENTS INCORPORATED BY REFERENCE The information required in response to Part III of Form 10-K is hereby incorporated by reference to the specified portions of the definitive proxy statement to be filed with the Commission within 120 days after the close of the fiscal year. =========================================================================== FORWARD-LOOKING STATEMENTS This document includes and incorporates forward-looking statements that are subject to a number of risks and uncertainties. All statements, other than statements of historical facts included or incorporated in this document, regarding our strategy, future operations, financial position and estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this document, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in the section of this report entitled "Factors that May Affect Future Results" and elsewhere in this document. PART I Item 1. Business ---------------- Overview We are a leading provider of flexible interconnect solutions to the automotive, telecommunications and networking, diversified electronics, aerospace, home appliance, computer markets, radio frequency identification (RFID) and smart cards. Our product offerings, which we believe are the broadest of any company in the flexible interconnect industry, include flexible circuits, laminated cable, flexible interconnect hybrid circuits, and flexible interconnect assemblies. Our objective is to be the supplier of choice for key customers in markets where cost-effective flexible interconnects provide added value to our customers' products. We believe that our creative engineering expertise, our ability to advance the technology of manufacturing processes and materials and our broad product portfolio allow us to provide the lowest cost solution that meets the performance requirements of our customers. We have a long history of providing flexible interconnect solutions to some of the leading original equipment manufacturers, or OEMs, in our target markets, including Hewlett-Packard, Raytheon, Motorola, Dell Computer, Siemens, and Whirlpool. We have a global presence and operate seven manufacturing facilities, which are located in China, Mexico, the United Kingdom and the United States. Certain information related to revenues derived by geographic location, major customers and product lines is included in Note 14 of our financial statements and is incorporated herewith by reference. Industry Background Over the past two decades, electronic systems have become smaller, lighter and more complex, while demands for increased performance at lower costs have increased dramatically. The demand for more portable electronic packaging has also increased. As two-dimensional rigid printed circuit boards, a conventional form of electronic interconnect packaging, limit the options available to design engineers, the demand for three-dimensional, flexible interconnect solutions has increased. In addition to their improved packaging and performance characteristics, they offer superior heat dissipation characteristics compared to conventional circuits, making flexible interconnects attractive for use in advanced, high-speed electronics. The IPC - Association Connecting Electronics Industries, an international trade organization, estimates that worldwide sales of flexible circuits alone in 2000 were approximately $3.9 billion. Flexible interconnects provide electrical connection between components in electronic systems and are increasingly used as a platform to support the attachment of electronic devices. Flexible interconnects offer 2 several advantages over rigid printed circuit boards and ceramic hybrid circuits, particularly for small, complex electronic systems: * Their ability to physically bend or flex and their three-dimensional shape permit them to accommodate packaging contours and motion in a manner that traditional two-dimensional rigid printed circuit boards cannot; * They provide improved heat dissipation and signal integrity as compared to printed circuit boards; and * They permit the use of substrates for component attachment, as well as connectors, cables and other interconnection devices, with reduced size, weight and expense. We consider the following trends important in understanding the flexible interconnect industry: Miniaturization, Portability and Complexity of Electronic Products High-performance electronic products, such as cellular phones, laptop computers and personal digital assistants, continue to become more compact, portable and contain greater functionality. The complexity of these new products requires flexible interconnects with smaller size, lighter weight, greater circuit and component density, better heat dissipation properties, higher frequencies and increased reliability. As electronic products become increasingly sophisticated, electronic interconnect suppliers will require greater engineering expertise and investment in manufacturing and process technology to produce high-quality electronic interconnect products on time, in volume and at acceptable cost. Shorter Product Life Cycles and Time-to-Market Pressure Rapid technological advances have significantly shortened the life cycle of complex electronic products and increased pressure to develop and introduce new products quickly. These time-to-market challenges have in turn increased OEMs' emphasis on the development, design, engineering, prototype development and ramp-to-volume capabilities of their suppliers. Globalization and Reduction of Manufacturing Costs Customers continue to demand increased electronic performance at lower prices. Leading OEMs who often manufacture products in multiple geographic regions are relying more on suppliers with global sourcing capabilities. Local sourcing can help to shorten the manufacturer's supply chain and provide regionally competitive pricing. OEMs also increasingly demand that their suppliers provide infrastructure for local delivery of engineering, manufacturing and sales support. Increased Outsourcing To avoid delays in new product introductions, reduce manufacturing costs and avoid logistical complexities, OEMs are increasingly turning to suppliers capable of producing electronic interconnect products from development, design, quick-turn prototype and pre-production through volume production and assembly. The accelerated time-to-market and ramp-to-volume needs of manufacturers have resulted in increased collaboration with qualified suppliers capable of providing a broad and integrated offering. Many OEMs now seek to use a small number of technically qualified, strategically located suppliers capable of providing both quick-turn prototype and pre-production quantities as well as cost-competitive volume production quantities. Our Solution We combine creative engineering design capabilities with innovative manufacturing processes and materials to provide our customers with a complete and cost-effective flexible interconnect solution. We believe that 3 our processes and technologies allow us to produce superior flexible interconnect solutions at a competitive cost. In addition, because we are able to produce a broad range of flexible interconnects ranging from low-cost laminated cable to more expensive high-performance multilayer and rigid- flexible interconnects, we are able to provide our customers with a product that most efficiently meets their demands for functionality. Our solution begins with the product design phase, in which our engineers typically work closely with customers to develop a technically advanced flexible interconnect design. Although our customers generally provide the initial engineering guidelines for a particular interconnect, our design engineers are often called upon to work in tandem with a customer's design team to develop a solution. An important part of the Parlex solution is ensuring at an early stage, before time and money are spent on manufacturing, that the design can be produced efficiently and cost-effectively. Once the design is completed, we apply our experience with materials and manufacturing processes to produce a flexible interconnect solution that meets our customer's objectives. We have developed materials and processes that provide customers improved performance at a competitive production cost. In addition, we provide a dedicated quick-turn capability for producing prototype flexible interconnects and supporting our customers' needs for limited quantities of flexible interconnects on short notice. We believe that we are one of the few volume manufacturers of flexible interconnects to offer this valuable service in a dedicated facility. When customers come to us for prototype development of a flexible interconnect, we believe that we enjoy a competitive advantage in pursuing the subsequent volume production of that flexible interconnect. Over the past several years we have gained substantial experience in producing products in high volume, and we believe this expertise is a key factor in our ability to provide customers with cost- effective, flexible interconnect solutions. We believe that our capability to supply worldwide a broad range of products with a diverse mix of performance characteristics will enable us to capture additional market share in the flexible interconnect industry. We are one of a limited number of independent manufacturers that offers a range of flexible interconnect solutions from design concept through high-volume production. By offering a variety of products and services, we can provide design and manufacturing solutions for our customers while reducing their time-to-market and product development costs. Our Strategy Our objective is to be the flexible interconnect supplier of choice for customers in our target markets. Our strategy to achieve this objective includes the following key elements: Develop Innovative Processes and Materials We believe that our ability to develop innovative processes and materials enhances our opportunity for growth within our target markets. We intend to continue to focus our development efforts on proprietary flexible materials and processes that have a broad range of applications. These materials and processes enable us to produce, at reduced cycle times, cost-effective flexible interconnects that are reliable and improve product performance. Our PALFlex(R), PALCoat(R), U-Flex(R), PALCore(R) HP, Polysolder(R) and AutoNet(R) technologies are examples of some of our innovative materials and manufacturing processes. Offer the Broadest Range of Products and Services in the Flexible Interconnect Industry We offer product lines that service virtually all of our customers' flexible interconnect needs. We are not aware of another company in the flexible interconnect industry that provides a broader range of products and services. Our product line includes flexible and rigid-flexible circuits from 1 to 24 layers, laminated cable, flexible interconnect hybrid circuits, flexible interconnect assemblies and, surface mount assembly capabilities. We offer products using a variety of materials, including adhesiveless and adhesive- based 4 polyimide, polyester, and polymer thick film technologies. This wide product range enables us to remain the flexible interconnect supplier of choice to customers even when their functional requirements change. Develop Strategic Relationships with Key Customers We seek to develop strategic relationships with key customers in targeted industries. As a value-added strategic partner with our customers, we work with a customer's technology roadmap to design and develop cost-effective flexible interconnect solutions. We believe that these relationships are most effective when we provide a significant portion of a customer's flexible interconnect needs. Through these strategic relationships, we achieve greater visibility into our customers' entire range of flexible interconnect requirements. As a result of our relationships with key customers, we developed PALFlex(R), PALCore(R), PALCore(R) HP, PALCoat(R), and HIS+(C) with the knowledge that successful development would result in immediate market acceptance. Diversify Customer Base across Specific Markets We seek to serve a variety of markets to help mitigate the effects of economic cycles in any one industry. We believe our diversification among the major segments provides greater insight into emerging technological requirements. For example, we applied our proprietary knowledge of shielding and impedance control which was developed for the laptop computer market to gain a competitive advantage in the telecommunications and networking market. Expand Global Presence We believe that our customers will increasingly require service and support on a global basis. To address these requirements, we have continued to expand our global presence in emerging markets and throughout the world. We now have facilities in Asia, Europe, and the east and west coasts of North America. In 1995 we established a joint venture in China, Parlex (Shanghai) Circuit Co., Ltd. ("Parlex Shanghai") , to serve the emerging flexible circuit market throughout Asia and to produce specific products more cost-effectively for North America's customers. In May 1998, we leased a facility in Mexico that performs the finishing and, in some instances, assembly operations for flexible interconnects manufactured at our other facilities. In April 1999, we purchased a facility in San Jose, California to produce low to medium volumes of flexible circuits and provide our customers with quick-turn and prototyping services. This facility also supports several customers who use Parlex Shanghai for high volume production. In addition, we have developed, and plan to continue to develop, strategic relationships and alliances that we believe are necessary for the success of our international business. In March 2000, we acquired Poly-Flex which has manufacturing facilities in Rhode Island and the United Kingdom. This acquisition positions us to further expand our sales presence in Europe. We will continue to explore appropriate expansion opportunities as demand for our solutions increases. Our Markets Flexible interconnects are used in most segments of the electronics industry. The primary market segments that place high value on superior, cost-effective flexible interconnect solutions include: Automotive Automobile manufacturers increasingly use electronics to enhance vehicle performance and functionality, while at the same time reducing electronic component size, weight and manufacturing and assembly costs. Flexible circuits and laminated cable can provide cost-effective interconnect solutions for such applications as dashboard instrumentation, automotive entertainment systems, electronic engine control units, steering wheel controls, power distribution, 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 5 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 and Networking The telecommunications and networking market includes infrastructure equipment and subscriber equipment submarkets. Infrastructure equipment consists of support electronics for the distribution of voice and data transmission. Infrastructure equipment employs sophisticated electronics which usually require the use of complex flexible interconnects. Subscriber equipment consists of cellular devices such as handsets and battery assemblies. Tight packaging and the need to reduce weight have driven the demand for flexible interconnects in this submarket. Laminated cable and single and double-sided flexible circuits are generally used in subscriber equipment. Diversified Electronics The diversified electronics market, which we define to include medical electronics, encompasses many applications. Virtually any electronic device which requires tight packaging, lightweight or high reliability is a product that could incorporate flexible interconnects. Typical applications include electronic scales, industrial controls, metering devices, scanners, sensors and medical monitoring and testing equipment. Aerospace Aerospace electronics were at one time the primary applications for flexible circuitry. Because of product complexity and space restrictions, aerospace applications often require multilayer rigid-flexible circuits. Typical applications are navigation systems, flight controls, displays, communications equipment and munitions. We believe that procurement of flexible interconnects will experience modest growth. We believe that the trend toward "smart" military systems will continue to drive demand for flexible interconnects in this segment. Home Appliance The home appliance market is beginning to make the transition from electro- mechanical controls to electronic controls containing intelligence and display. Over time, appliances are expected to become more technologically advanced. The utility and ease of use and repair associated with flexible interconnects make them especially suitable for these applications. Our primary application today is the dishwasher market but we have targeted the laundry market for growth. Computer Demand for flexible circuits and laminated cable in the computer market is driven by short product life cycles as consumers demand increasingly powerful, less expensive, smaller, faster and lighter equipment. Disk drives represent the largest application for flexible circuits in this market. Other applications include personal computers, notebook displays, personal digital assistants, mass storage devices and peripheral equipment such as scanners, printers and docking stations. Radio Frequency Identification (RFID) and Smart Cards The emerging identification and tracking market is based upon next generation identification tags generating radio frequency signals which in some cases are attached to an antenna. Advancing technology at lower prices, increasing cooperation among industry participants and high volume applications such as automated fuel payment, ATM and credit cards, electronic ticketing, baggage handling and parcel tracking are expected to be the growth drivers for this market. The size, cost and performance requirements demanded by this market are expected to drive the use of flexible circuits and assemblies in these applications. We have recently entered into a multiyear agreement to provide substrates for a major producer of smartcards. 6 Our Products Our current flexible interconnect products include flexible circuits, laminated cable, flexible interconnect hybrid circuits and flexible interconnect assemblies. We manufacture our products, which are designed by us, our customers or jointly, to our customers' application-specific requirements. Lead times for the design and manufacture of our products generally range from one week for some products to three months for more sophisticated products. Flexible Circuits Flexible circuits, which consist of conductive patterns that are etched or printed onto flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic devices. The circuits are manufactured by passing base materials through multiple processes such as drilling, screening, photo imaging, etching, plating and finishing. Flexible circuits can be produced in single or multiple layers. We produce a wide range of flexible circuits including: * Single-Sided Flexible Circuits, which have a conductive pattern only on one side. Single-sided flexible circuits are usually less costly and more flexible than double-sided flexible circuits. Through our proprietary high-speed interconnect screening technology, HSI+(c), which eliminates the need for a separate shield layer, we can produce single-sided flexible circuits that provide the same functionality as double-sided flexible circuits at a lower cost. We manufacture single-sided circuitry in both the United States and at Parlex Shanghai, where substantially all of our production to date has been single-sided. * Double-Sided Flexible Circuits, which have conductive patterns or materials on both sides that are interconnected by a drilled and copper- plated hole. Double-sided flexible circuits can provide either more functionality than a single-sided flexible circuit by containing conductive patterns on both sides, or can provide greater shielding than a single-sided flexible circuit by having a conductive pattern on one side and a layer of shielding material on the other. * Multilayer and Rigid-Flexible Circuits, which consist of layers of circuitry that are stacked and then laminated. These circuits are used where the complexity of the electronic design demands multiple layers of flexible circuitry. If some of the layers are rigid printed circuit board material, the product becomes a rigid-flexible circuit. We have manufactured these circuits with up to 40 layers in prototype programs and 24 layers in production. * Polymer Thick Film Flexible Circuits, which are flexible circuits manufactured using a technology that uses a low-cost thick film polyester dielectric substrate and a silver screen-printed conductive pattern. These circuits are made with an additive process involving the high-speed screen printing of conductive traces utilizing internally developed ink systems. We are able to produce multilayer circuits using proprietary dielectric materials and double-sided circuits using proprietary printed through-hole technologies. Polymer thick film flexible circuits are used in low-cost, low-temperature, low-power interconnect applications. Laminated Cable Laminated cable, which consist of flat or round wire laminated to a flexible substrate material, provide connections between electronic sub-systems and replace conventional wire harnesses. We manufacture laminated cable in an efficient, proprietary roll process. Substantially all of the laminated cable that we produce uses flat wire. Approximately 95% of the laminated cable that we produce is insulated with polyester material, allowing for maximum flexibility, while the remainder is insulated with polyimide material for its enhanced performance at elevated temperatures. Our laminated cable is capable of handling both power (high current) and signal (low current). 7 Improving the process by which laminated cable is manufactured can increase functionality and lower the cost of production. To this end, we have developed U-Flex(R), a proprietary technique that forms flat wire into a u- shape, followed by an injection molding process that enables the u-shaped end to function as a connector. This technique improves electrical performance and eliminates the need for a separate costly connector. We have also developed Pemacs(R) shielding, which adds a specially designed silver ink to laminated cable to meet stringent electronic shielding requirements without compromising flexibility. Flexible Interconnect Hybrid Circuits In many cases, although a laminated cable is capable of carrying the necessary signals, etched circuitry is required for termination. For these applications we manufacture flexible interconnect hybrid circuits, which take advantage of the lower cost of laminated cable and the technology of flexible circuits by combining them into a single interconnect. On some products, we apply our HSI+(C) process to the flexible interconnect hybrid circuit in order to provide signal clarity and shielding. Flexible Interconnect Assemblies Both flexible circuits and laminated cable can be converted into an electronic assembly by adding electronic components. This process can be as simple as adding a connector or as complex as attaching components such as capacitors, resistors or integrated circuits onto a flexible circuit using surface mount assembly. We attach surface mount components to both copper and polymer thick film circuits with either solder paste or our patented Polysolder(R) conductive adhesive. We can place a full range of electronic devices, from passive components to computing devices, on our flexible interconnects. The following table sets forth representative applications in which our products are used:
Flexible Circuits ----------------- Single-Sided Automotive Displays Batteries for Cell Phones Printers Personal Digital Assistants Data Storage Double-Sided Engine Control Units Laptop Computers Cellular Phones (Including Batteries) Engine Sensors Smart Cards Multilayer and Rigid-Flexible Engine Control Units Computer Networks Network Switching Systems Aircraft Displays Automotive Transmission Systems Polymer Thick Film Business Phones Disposable Medical Devices Appliances Radio Frequency Identification Laminated Cable Postage Meters --------------- Automotive Sound Systems Notebook Computers Industrial Controls 8 Electronic Scales Flexible Interconnect Hybrid Circuits Total Vehicle Interconnection ------------------------------------- Printers Sensors Scanning Devices Night Vision Systems Flexible Interconnect Assemblies Aircraft Identification Systems -------------------------------- Sensors Scanning Devices Batteries for Portable Products Disk Drives Night Vision Systems Personal Computers
New Process and Material Technologies An important part of our strategy is development of new processes and materials for use in our products. Our proprietary processes and materials include: PALFlex(R) - PALFlex(R) is both an adhesiveless polyimide-based material and a manufacturing process that we believe provides superior performance at a lower cost than traditional copper-clad materials. PALFlex(R) provides additional cost benefits by allowing us to combine several material manufacturing steps with circuit manufacturing and eliminating several major process steps. We developed PALFlex(R) for high volume automotive applications and are now adapting it for use across a number of other product lines. Because PALFlex(R) is produced in roll form and the copper thickness can be controlled to tight tolerances, we believe that it may serve as the foundation for products in the emerging high density substrate market. We shipped our first product incorporating the current version of PALFlex(R) in fiscal 1998. PALCoat(R) - Working closely with a materials manufacturer and an equipment manufacturer we developed PALCoat(R), a new material for coating the outside of flexible circuits. PALCoat(R) 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 now commercially available. PALCoat(R) entered volume production in fiscal 1999. PALCore(R) HP - PALCore(R) HP is a low-cost multilayer flexible material that is designed to minimize the difference between the cost of materials used in flexible circuits and those used in conventional rigid circuits. We have received patents on our latest, more flexible version of PALCore(R)HP, which entered production in January 2000. Polysolder(R) - Polysolder(R) is both a patented lead-free, conductive adhesive used to attach electronic components onto flexible interconnects and a patented manufacturing process that enables the attachment of electronic devices onto substrates at low temperatures. Polysolder(R) has been used in the production of polymer thick film flexible circuit assemblies for several years. We plan to apply the Polysolder(R) process to etched flexible circuits and laminated cable. This technology will enable us to use polyester, instead of the more expensive polyimide, as a substrate in the production of these flexible interconnect assemblies. RFID Flip Chip Attachment Process - We have developed a low-cost process that we believe will be an enabling technology in the RFID market. Our high-speed flip chip attachment process is up to ten times faster at placing semiconductors on low-cost materials than conventional process alternatives. This process allows us to meet our customer's goals for cost and reliability. This process entered production in September 1999. 9 AutoNet(TM) - AutoNet(TM) is a proprietary flexible interconnect designed specifically to meet the emerging needs of the automotive industry. As each generation of vehicles incorporates greater electronic content, interconnection becomes both more important and more difficult. AutoNet(TM) draws upon our flexible interconnect process and materials technology to provide a cost-effective interconnect for placement in the headliners, trunks and doors of automobiles. AutoNet(TM) is designed to replace traditional wire harnesses and is lighter, smaller, more reliable and provides shielding necessary to control the emission of electronic signals. We believe that the potential market for AutoNet(TM) is substantial and will develop over the next few years. Our Customers Our customers are a diverse group of OEMs that serve a variety of industries. Our largest 20 customers based on sales accounted for approximately 60% of total revenues in fiscal 2000, 55% in fiscal 2001, and 44% in fiscal 2002. Our major end-customers include: BAE, Dell Computer, Delphi, Hewlett-Packard, Hitachi, Infineon, Johnson Controls, Maytag, Motorola, Pitney Bowes, Raytheon, Samsung, Siemens, Visteon, and Whirlpool. To support these end customers, we work closely with major electronics manufacturing services (EMS) companies such as Flextronics, Solectron, and Celestica. Sales and Customer Service In fiscal 2002, we realigned our sales and marketing organization to support a very dispersed customer base. We established a corporate sales organization that is regionally focused and provides local support to the various customer engineering, procurement, and operations teams. The transition to a regionally based sales organization improves program support throughout the entire product life cycle. The regional sales teams are responsible for marketing and selling the entire Parlex product offering to existing and potential customers within their territories. These regional organizations include direct sales engineers and independent manufacturers' representatives. To support the sales effort, we have established field applications engineering offices in Arizona, Michigan, and New York. Complementing the restructured sales force are robust product line organizations within each of the manufacturing organizations. Led by a product line manager, this group provides technical marketing, research and development input, and sustaining customer support for our customer base. Manufacturing We believe that our manufacturing expertise in a number of specialized areas, together with our investment in process research and development and equipment, have contributed to our position as an industry leader. A significant amount of our production equipment is proprietary, including cable laminators, precision cable slitters and roll plating, roll etching and automatic punching equipment. Our computer-aided manufacturing system takes the customer's design and programs the various steps that will be required to manufacture the particular product. The manufacturing process varies a great deal from product to product. Although there is no standard process, significant elements of production are highlighted below:
Polymer Thick Film Etched Flexible Circuit Flexible Circuit Laminated Cable ----------------------- ------------------ ------- Drilling Convert/Condition Substrate Lamination Plating Screen Print Slitting Photoimaging Diecut Conductor Forming Etching Conductive Adhesive Injection Molding Lamination Surface Mount/Flip Chip Assembly Shielding Electrical Testing Electrical Testing Laser Skiving Assembly Assembly
10 In fiscal 1999, we added 60,000 square feet to our Methuen, Massachusetts facility, 12,000 square feet to our Salem, New Hampshire facility and 10,000 square feet to our Shanghai, China facility. Additionally, we purchased over $6.7 million of new equipment in fiscal 2002. Our acquisitions of Dynaflex in fiscal 1999 and Poly-Flex in fiscal 2000 gave us a full complement of flexible circuit manufacturing equipment and an additional 19,000 and 95,500 square feet of facility capacity, respectively. In fiscal 2001, we added capacity in Shanghai of 52,000 square feet and relocated our Dynaflex operations to a more efficient 16,800 square foot facility. During fiscal 2002, we continued to focus on cost reduction initiatives. Core to this strategy is relocation of high volume low cost manufacturing from the U.S. to China and Mexico. In June 2002, we agreed to close our Salem, New Hampshire facility and transfer our laminated cable business to Methuen, better utilizing our excess capacity. We believe that we now have sufficient capacity to meet forecast demand in the U.S. operations for the next several years. Six of our manufacturing facilities are certified to the international standard ISO 9001 or ISO 9002 and to the automotive standard QS 9000. Materials and Materials Management We aggressively attempt to control our cost of purchased materials and our level of inventories through long-term relationships with our suppliers. Our goal is to attain a competitive price from suppliers and foster a shared vision towards advancing technology. We purchase raw materials, process chemicals and various components from multiple outside sources. We often make long-term purchasing commitments with key suppliers for specific customer programs. These suppliers commit to provide cooperative engineering as required and in some cases to maintain a local inventory to provide shorter lead times and reduced inventory levels. In many cases our customers approve, and often specify, sources of supply. We qualify our suppliers through a vendor rating system that limits the number of suppliers to those that can provide the best total value and quality. We monitor each supplier's quality, delivery, service and technology so that the materials we receive meet our objectives. Competition Our business is highly competitive. We compete against other manufacturers of flexible interconnects as well as against manufacturers of rigid-printed circuits. In addition to competing with industry peers who produce flexible circuitry (etched), laminated cable, and polymer think film products, we also compete with alternative technology leaders in the rigid printed circuit, wire harness and cable, and connector industries. Competitive factors among flexible circuit and laminated cable suppliers are price, product quality, technological capability and service. We believe that we compete favorably on all of these competitive factors, but believe that our competitive strength is in our ability to apply technology to reduce cost. We compete against rigid board products on the basis of product versatility, although price can also be a competitive factor if the difference between the cost of a rigid circuit and a flexible circuit becomes too great. Intellectual Property We have acquired patents and we seek patents on new products and processes where we believe patents would be appropriate to protect our interests. Although patents are an important part of our competitive position, we do not believe that any single patent or group of patents is critical to our success. We believe that, due to the rapid technological change in the flexible interconnect business, our success depends more on design creativity and manufacturing expertise than on patents and other intellectual property. We own 22 patents issued, and have 21 patent applications pending, in the United States and have several corresponding foreign patent applications pending. We have obtained federal trademark registrations for PALFlex(R), 11 PALCore(R), U-Flex(R), PALCoat(R), Polysolder(R), and HSI and have one trademark application pending. We also rely on internal security measures and on confidentiality agreements for protection of trade secrets and proprietary know-how. We cannot be sure that our efforts to protect our intellectual property will be effective to prevent misappropriation or that others may not independently develop similar technology. In January 2000, we sold two U.S. patents for PALCore(R), a low-cost multilayer material, to Polyclad Laminates, Inc., a subsidiary of Cookson Electronics, for approximately $1.3 million. We had previously licensed PALCore(R) to Isola Laminate Systems Corp. (f/k/a Allied Signal Laminate Systems) and will transfer royalties received in connection with the license to Polyclad Laminates, Inc. as part of the sale. We have retained a perpetual, royalty-free, non-exclusive license to use the PALCore(R) material in our products. We also hold a patent, which we have not licensed to anyone, which covers the process of using PALCore(R) in the production of flexible interconnects. Environmental Regulations Flexible interconnect manufacturing requires the use of metals and chemicals. Water used in the manufacturing process must be treated to remove metal particles and other contaminants before it can be discharged into the municipal sanitary sewer system. We operate and maintain water effluent treatment systems and use approved laboratory testing procedures to monitor the effectiveness of these systems at our San Jose, California and Methuen, Massachusetts facilities. We operate these treatment systems under an effluent discharge permit issued by the local governmental authority. Air emissions resulting from our manufacturing processes are regulated by permits issued by government authorities. These permits must be renewed periodically and are subject to revocation in the event of violations of environmental laws. We believe that the waste treatment equipment at our facilities is currently in compliance with the requirements of environmental laws in all material respects and that our air emissions are within the limits established in the relevant permit. However, violations may occur in the future. We are also subject to other environmental laws including those relating to the storage, use and disposal of chemicals, solid waste and other hazardous materials, as well as to work place health and safety and indoor air quality emissions. Furthermore, environmental laws could become more stringent or might apply to additional aspects of our operations over time, and the costs of complying with such laws could be substantial. Compliance with local, state and federal laws did not have a material impact on our capital expenditures, earnings or competitive position in fiscal 2002. We estimate that the total capital expenditures in fiscal 2002 and 2003 associated with environmental compliance will be $100,000. Employees As of June 30, 2002, we employed approximately 601 people in the United States. Of these employees, 562 were direct employees of Parlex and 39 worked for interim staffing agencies. In addition, we employed approximately 241 people in Mexico, approximately 117 people in the United Kingdom and approximately 1,033 people in China. We are not party to any collective bargaining agreement and we believe our relations with our employees are good. 12 Item 2. Properties ------------------ Facilities Our facilities at June 30, 2002 are:
Approximate Location Square Feet Leased/Owned Description -------- ----------- ------------ ----------- Methuen, Massachusetts 185,000 Owned Corporate headquarters, product and process development and flexible circuit manufacturing Cranston, Rhode Island 55,500 Owned Polymer thick film and surface mount assembly operations Salem, New Hampshire 46,000 Leased (lease expires Laminated cable manufacturing in June 2007) Newport, Isle of Wight, 40,000 Leased (lease expires Polymer thick film and surface United Kingdom in November 2009) mount assembly operations Shanghai, China 55,000 Leased (lease expires Single- and double-sided in August 2004) flexible circuit manufacturing Shanghai, China 34,000 Leased (month-to-month) Single- and double-sided flexible circuit manufacturing Empalme, Sonora, Mexico 38,000 Leased (lease expires Finishing and assembly operations in January 2005) San Jose, California 16,800 Leased (lease expires Prototype and quick-turn operations in December 2008)
In December 2001, Parlex (Shanghai) Interconnect Products Co., Ltd. ("Parlex Interconnect"), our second tier subsidiary, purchased land use rights for a parcel of land located in the People's Republic of China. The purchase of the land use rights will allow Parlex Interconnect to expand its operations within China. The purchase price of the land use rights was approximately $1.1 million. Item 3. Legal Proceedings ------------------------- From time to time we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently involved in any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- No matter was submitted to a vote of our stockholders during the fourth quarter of the fiscal year covered by this report. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ----------------------------------------------------------------------------- (a) PRICE RANGE OF COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol "PRLX." The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported on the Nasdaq National Market.
High Low ---- --- Fiscal Year Ended June 30, 2002 First Quarter $13.47 $ 8.90 Second Quarter $15.80 $ 8.70 Third Quarter $15.80 $12.00 Fourth Quarter $13.11 $11.50 Fiscal Year Ended June 30, 2001 First Quarter $44.75 $15.00 Second Quarter $17.19 $11.75 Third Quarter $13.38 $ 9.50 Fourth Quarter $13.61 $ 8.91
On June 30, 2002, the closing sale price of our common stock as reported on the Nasdaq National Market was $12.10 per share and there were 98 holders of record of our common stock. (b) DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We presently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends. Future cash dividends, if any, will be determined by our Board of Directors and will be based on our earnings, capital, financial condition and other factors that the Board deems relevant. Our credit agreement permits us to pay cash dividends to the extent such payment would not cause us to violate financial covenants contained in the credit agreement. 14 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA --------------------------------------------
Fiscal Year Ended June 30, 2002 2001 2000(a) 1999(b) 1998 ---- ---- ------- ------- ---- (in thousands, except per share data) Consolidated Statements of Operations Data: Total revenues $ 87,056 $103,620 $101,839 $ 67,047 $ 60,275 Cost of products sold 90,294 97,460 76,614 52,785 47,304 -------- -------- -------- -------- -------- Gross (loss) profit (3,238) 6,160 25,225 14,262 12,971 Selling, general and administrative expenses 14,049 17,706 14,097 9,715 8,272 -------- -------- -------- -------- -------- Operating (loss) income (17,287) (11,546) 11,128 4,547 4,699 (Loss) income from operations before income taxes and minority interest (17,724) (11,517) 10,473 4,681 5,130 Net (loss) income $(10,388) $ (6,199) $ 6,335 $ 3,020 $ 3,157 ======== ======== ======== ======== ======== Net (loss) income per share: Basic $ (1.65) $ (0.99) $ 1.31 $ 0.65 $ 0.73 ======== ======== ======== ======== ======== Diluted $ (1.65) $ (0.99) $ 1.28 $ 0.63 $ 0.71 ======== ======== ======== ======== ======== Weighted average shares outstanding: Basic 6,303 6,289 4,842 4,662 4,296 Diluted 6,303 6,289 4,940 4,771 4,466 Fiscal Year Ended June 30, 2002 2001 2000(a) 1999(b) 1998 ---- ---- ------- ------- ---- (in thousands) Consolidated Balance Sheet Data: Working capital $ 22,320 $ 31,016 $ 38,752 $ 18,762 $ 26,286 Total assets 106,054 110,864 115,341 63,521 56,181 Current portion of long-term debt 3,561 10,710 1,483 619 432 Long-term debt, less current portion 12,000 119 360 1,632 1,166 Stockholders' equity 70,141 81,351 87,790 45,333 41,591 (a) Includes Poly-Flex beginning March 1, 2000. (b) Includes Dynaflex beginning April 30, 1999.
15 Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial information included in this Annual Report on Form 10-K and with "Factors That May Affect Future Results" set forth on page 22. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements as a result of many factors, including those discussed below and elsewhere in this Annual Report on Form 10-K. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10- K, and in Part IV, Item 14 "Exhibits, Financial Statement Schedule and reports on Form 8-K". However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgement by our management which subjects them to an inherent degree of uncertainty. In applying our accounting policies, our management uses its best judgement to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers, information available from other outside sources, and on various other factors that we believe to be appropriate under the circumstances. We believe that the critical accounting policies discussed below involve more complex management judgement due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts. Critical Accounting Policies ---------------------------- The preparation of consolidated financial statements requires that we make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, property, plant and equipment, intangible assets, income taxes, and other accrued expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions. Revenue recognition and accounts receivable. We recognize revenue when persuasive evidence of an agreement exists, the price is fixed and determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. We generally obtain written purchase authorizations from our customers for a specified amount of product, at a specified price and consider delivery to have occurred at the time of shipment. License fees and royalty income are recognized when earned. We have demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with SFAS No. 48 and of allowances for doubtful accounts based on significant historical experience. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory and record a provision for excess or obsolete inventory based primarily on our estimate of expected and future product demand. Our estimates of future product demand will differ from actual demand and, as such our estimate of the provision required for excess and obsolete inventory will change, which we will record in the period such determination was made. Income Taxes. We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our valuation allowance and by adjusting the amount of such allowance, as necessary. In the determination of the valuation allowance, we have considered future taxable income and the feasibility of tax planning initiatives. Should we determine that it is more likely than not that we will realize certain of our deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance. Conversely, if we determine that we would not be able to realize our recorded net deferred tax asset, an adjustment to increase the valuation allowance would be charged to our results of operations in the period such conclusion was reached. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that adequate consideration has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the results of our operations. 16 Overview We are a leading supplier of flexible interconnects principally for sale to the automotive, telecommunications and networking, diversified electronics, aerospace and computer markets. We believe that our development of innovative materials and processes provides us with a competitive advantage in the markets in which we compete. During the past three fiscal years, we have invested approximately $24.8 million in property and equipment and approximately $17.3 million in research and development to develop materials and enhance our manufacturing processes. We believe that these expenditures will help us to meet customer demand for our products, and enable us to continue to be a technological leader in the flexible interconnect industry. Our research and development expenses are included in our cost of products sold. We formed a Chinese joint venture, Parlex Shanghai, in 1995 to better serve our customers that have production facilities in Asia and to more cost effectively manufacture products for worldwide distribution. Effective October 22, 2001, we purchased the 40% share of Parlex Shanghai held by one of our joint venture partners, Shanghai Jinling Co., Ltd's ("Jinling"), increasing our equity interest in Parlex Shanghai to 90.1%. Parlex Shanghai's results of operations, cash flows and financial position are included in our consolidated financial statements. We are in the process of transferring the production of our automotive related products utilizing our PalFlex(R) technology from our Methuen, Massachusetts facility to Parlex Interconnect, a wholly owned subsidiary of Parlex Asia Pacific Limited, which is located in China. Recent Acquisitions On March 1, 2000, we acquired the businesses of Poly-Flex Circuits, Inc. and Poly-Flex Circuits Limited (collectively "Poly-Flex"), wholly owned subsidiaries of Cookson Group plc, for a purchase price, including acquisition costs, of approximately $19.7 million. This acquisition further diversified our product offerings by providing us with polymer thick film and surface mount assembly capabilities. Poly-Flex has manufacturing facilities in Cranston, Rhode Island and the United Kingdom. Results of Operations The following table sets forth, for the periods indicated, selected items in our statements of income as a percentage of total revenue. You should read the table and the discussion below in conjunction with our Consolidated Financial Statements and the Notes thereto.
Fiscal Year Ended June 30, ------------------------------ 2002 2001 2000 ---- ---- ---- Total revenues 100.0% 100.0% 100.0% Cost of products sold 103.7% 94.1% 75.2% Gross (loss) profit (3.7%) 5.9% 24.8% Selling, general and administrative expenses 16.1% 17.1% 13.8% Operating (loss) income (19.9%) (11.1%) 10.9% (Loss) income from operations before income taxes and minority interest (20.4%) (11.1%) 10.3% Net (loss) income (11.9%) (6.0%) 6.2%
Comparison of years ended June 30, 2002, 2001, and 2000 Total Revenues. Total revenues for fiscal 2002 were $87.1 million, a decrease of 16% from $103.6 million reported in fiscal 2001. Revenues were generated primarily from product sales with decreases in each of our principal product lines, flexible circuits (14%) and laminated cable (23%). Reductions in revenues are attributable to the general decline in customer demand within the global electronics industry and a general downturn of the U.S. economy. This downturn has had a significant 17 impact on Parlex's customers and their end markets. We experienced significant reductions in revenues from our customers in the telecommunications and networking, and computer peripheral markets, which affected all of our manufacturing operations. While sales are expected to increase, we are not able to predict the time frame within which there will be renewed sales due to the economic uncertainty in these markets, and there is no assurance that sales will not fluctuate significantly in the future. Revenue decline was partially offset by improved performance in the military, automotive, and home appliance markets. In fiscal 2001, total revenues were $103.6 million, an increase of 2% from $101.8 million reported in fiscal 2000. Our flex circuit operation in Methuen experienced a reduction in product sales of $16.8 million or 31% for fiscal 2001 compared to the same period in fiscal 2000. The decrease in product sales at the Methuen facility was due primarily to a decrease in purchases from customers in the telecommunications industry as a result of excess inventory held by these customers. The decline in product sales from our Methuen operation was offset by the inclusion of additional revenues of $15.6 million from our Poly-Flex operation, acquired in March 2000, and increased sales from our other operations of $4.7 million. Total revenues included licensing and royalty fees of approximately $50,000 for fiscal 2002, $194,000 for fiscal 2001 and $1,887,000 in fiscal 2000. Licensing and royalty fees for fiscal 2000 included amounts related to our $1.3 million patent assignment agreement with Polyclad Laminates, Inc. The final installment of the Polyclad agreement was recognized in fiscal 2001. Although we intend to continue developing materials and processes that we can license to third parties, we do not expect that licensing and royalty revenues will represent a significant portion of total revenues in the near term. Cost of Products Sold. Cost of products sold was $90.3 million, or 104% of total revenues, for fiscal 2002, versus $97.5 million, or 94% of total revenues for fiscal 2001. The increase includes $1.5 million for the elimination of excess facilities, $209,000 for severance costs associated with reductions in workforce, and $3.4 million for increases in inventory reserves and inventory write-downs. In addition, the Methuen operation continued to experience low capacity utilization and correspondingly, significant unfavorable manufacturing variances. In fiscal 2002 these variances totaled approximately $11 million and have been charged to cost of products sold. To improve utilization in fiscal 2003, we will relocate our Salem, New Hampshire laminated cable business to Methuen. In fiscal 2002, a reduction in force eliminated approximately 82 employees, primarily in the United States, through proactive cost controls, improved operational efficiency and reduced manufacturing volume. Inventory reserves were recorded to reflect increased risk from sustained economic downturn in the electronics industry and in particular the telecommunications market. During the past year, we have made a significant investment to improve our margins through the transfer of labor intensive manufacturing operations to more cost-effective locations. A large portion of the final assembly, inspection, and test procedures previously performed in our Methuen and Salem, New Hampshire facilities are now performed in Mexico. During fiscal 2002 we continued to transfer a significant share of our PalFlex operations to China. The transfer of manufacturing capabilities is costly, however this investment is core to our long-term strategy for cost effective manufacturing. Although these cost reduction measures are expected to improve our gross margins, a return to profitability is predicated upon operational performance, a favorable product mix and increased sales. In fiscal 2001, cost of products sold was $97.5 million, or 94% of total revenues versus $76.6 million, or 75% of total revenues in fiscal 2000. The increase includes a $2.7 million charge for severance and inventory reserves associated with the slowdown in the technology markets. In addition, the Methuen operation experienced unfavorable manufacturing variances of approximately $12 million or 32% of its total revenues. The manufacturing variances are due to excess manufacturing capacity associated with a 31% decrease in product sales for fiscal 2001. The increase in the cost of products sold in 2001 also includes costs associated with our Poly- Flex operation, which was acquired in March 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $14.0 million in fiscal 2002, or 16% of total revenues, and $17.7 million or 17% of total revenues for the 18 comparable period in the prior year. The decreases were primarily the result of continued cost controls mandated by current economic conditions. Decreases were partially offset by investment in a regionally focused corporate sales organization. These sales teams are responsible for marketing and selling the entire Parlex product offering to existing and potential customers within their territories. In fiscal 2001, selling, general and administrative expenses were $17.7 million, or 17% of total revenues and $14.1 million or 14% of total revenues for the comparable period in the prior year. The increase in selling, general and administrative expenses was primarily due to the inclusion of the Poly-Flex operation, which was $3.3 million for fiscal 2001 versus $1.9 million in fiscal 2000. In addition, selling, general and administrative expenses included a charge of $1.4 million for severance and bad debt allowance associated with the slowdown in our technology markets. Other Income and Interest Expense and Provision for Income Taxes. Other income of $207,000 was primarily comprised of interest income on short-term investments. In fiscal 2001, other income of $501,000 was comprised of interest income from short-term investments and $110,000 received relative to the settlement of legal claims associated with our Methuen building addition. Interest expense was $644,000 for fiscal 2002, $472,000 for fiscal 2001 and $892,000 for fiscal 2000. The interest expense represents interest incurred on our short and long-term borrowings for working capital needs and interest expense associated with deferred compensation. The increase in fiscal 2000 represents the interest on our borrowings required to finance our Poly-Flex acquisition. Our loss before income taxes and the minority interest in our Chinese joint venture, Parlex Shanghai, was $17.7 million and $11.5 million for fiscal years 2002 and 2001 respectfully. We earned income of $10.5 million for fiscal 2000. We own 90.1% of the equity interest in Parlex Shanghai and, accordingly, include Parlex Shanghai's results of operations, cash flows and financial position in our consolidated financial statements. Our effective tax rate was approximately (39%) for fiscal 2002, (47%) for fiscal 2001 and 28% for fiscal 2000. The decrease in the effective tax rate resulted from net operating losses generated in lower tax jurisdictions and a decreased amount of available tax credits. Liquidity and Capital Resources As of June 30, 2002, we had approximately $1.8 million in cash and short- term investments. Net cash used in operations during fiscal 2002 was $2.5 million. Operating losses of $10.4 million adjusted for minority interest, depreciation and amortization, used $4.4 million of operating cash. This was offset by $1.9 million generated from a reduction in our working capital requirements. Net cash used by investing activities was $3.7 million in fiscal 2002. These funds were used to purchase $5.2 million of capital equipment and other assets, and to acquire our joint venture partner's 40% minority interest in Parlex Shanghai for $4.5 million. Cash generated from investing activities included the sale of higher-yielding investment grade corporate and United States Government debt securities of $5.5 million and $525,000 received from Cookson Group plc as a final settlement related to our fiscal 2000 acquisition of the Poly-Flex business. Cash provided by financing activities was $4.7 million during fiscal 2002, and represented the net borrowings and repayments on our bank debt. Net cash used in operations during fiscal 2001 was $5.5 million. The decrease in operating cash resulted from an increase in working capital including $4.2 million in payments to our suppliers. Cash used in investing activities was $12.3 million for fiscal 2001. These funds were used to purchase $5.5 million of higher-yielding investment grade corporate and United States Government debt securities and $7.3 million of capital equipment expenditures net of $525,000 received from Cookson Group plc as partial settlement of certain purchase price adjustments related to the Poly-Flex acquisition. Cash provided by financing activities was $9.1 million for fiscal 2001 and represented the net borrowings and repayments of our bank debt and cash received through the exercise of stock options. 19 In June 2002, our subsidiary, Parlex Interconnect, executed a $5,000,000 Loan Agreement (the "Loan Agreement") with CITIC Ka Wah Bank Limited, a Hong Kong bank. Proceeds received under the Loan Agreement are to be used exclusively for financing land, building, plant and machinery and other working capital requirements and to prepay Parlex Interconnect's two current short-term bank notes with combined outstanding balances of $1.2 million as of June 30, 2002. As of June 30, 2002, no amounts were outstanding under the Loan Agreement. Borrowings under the Loan Agreement accrue interest at a fixed rate equal to LIBOR plus a margin of 2.2%. Interest is payable at the end of each interest period which varies from one to six months. As a condition of the approval of this Loan Agreement, our subsidiary, Parlex Asia Pacific Ltd., and we have provided a guarantee of the payment of this loan. The Loan Agreement contains a cross default provision that would permit the lender to accelerate the repayment of our obligation under the Loan Agreement in the event of our default on other financing arrangements. As of August 31, 2002, total borrowings were $3.1 million. These borrowings were used to repay local short-term bank notes of $1.2 million and fund future equipment and working capital requirements. On April 16, 2002, we executed the Second Amendment to our Loan Agreement (the "Credit Agreement") (originally dated March 1, 2000). The Credit Agreement provided our bank with a secured interest in all of our assets with the exception of our real estate. We may borrow up to a total of $15,000,000, based on a borrowing base of eligible accounts receivable and marketable securities. No further advances of principal will be made under this Credit Agreement after December 30, 2003. At our discretion, borrowings under the Credit Agreement accrue interest at either a variable rate equal to the bank's prime rate (4.75% at June 30, 2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to 2.25%. As of June 30, 2002 we have, as provided for under our Credit Agreement, converted $9 million of our Credit Agreement borrowings into 4 LIBOR contracts with maturities of three months. The LIBOR plus margin for these contracts varies between 4.12% and 4.17875%. Interest on the LIBOR contracts is payable at the end of each LIBOR term. The Credit Agreement carries an annual commitment fee of 1/4% to 1/2% on the average daily-unused portion of the bank's commitment. Interest is payable monthly. The Credit Agreement allows us to issue letters of credit, which reduce our availability for borrowings under the Credit Agreement, and which a $100,000 letter of credit is outstanding at June 30, 2002. The Credit Agreement permits us to pay cash dividends to the extent that such payment would not cause us to violate the aforementioned covenants. The Credit Agreement has certain restrictive covenants related to current ratio, tangible net worth, total liabilities to tangible net worth, interest coverage ratio, debt service coverage ratio and income and capital expenditure targets. As of June 30, 2002, we were not in compliance with the restrictive covenants related to income targets and tangible net worth coverage and our outstanding advances under the Credit Agreement exceeded the allowable borrowing base. We received a waiver of all covenant violations at June 30, 2002. We have executed a third amendment to the Credit Agreement as of September 27, 2002 and are now in compliance with all covenants and our advances are within the borrowing base. On September 27, 2002, we executed the Third Amendment to our Loan Agreement (the "Third Amendment"). The Third Amendment increases our bank's security interest to include a first mortgage on our Methuen, Massachusetts facility. In addition, our total availability for borrowings under the Credit Agreement was reduced to $14,000,000 at September 30, 2002 and will be reduced to $12,000,000 by March 31, 2003. The borrowing base was amended so as to be calculated as 80% of eligible accounts receivable plus 70% of the appraised value of the Methuen facility, less amounts outstanding under letters of credit. The Third Amendment also amends the restrictive covenants for periods subsequent to June 30, 2002 to remove the interest coverage ratio, amend the definition of minimum tangible net worth, and amend the future income targets. At June 30, 2002 we are in compliance with the restrictive covenants, as amended, and anticipate being in compliance with the terms of the amended agreement for the foreseeable future. Throughout fiscal 2002 and into fiscal 2003, we took a series of steps to reduce operating expenses and to restructure operations, which consisted primarily of reductions in workforce and consolidating manufacturing operations. We continue to implement plans to control operating expenses, inventory levels, and capital expenditures as well as plans to manage accounts payable and accounts receivable to enhance cash flows and maintain compliance with the restrictive covenants under the Credit Agreement. Our plan includes the following actions: 1) consolidation of some of our manufacturing facilities, including the closing of the Salem, New Hampshire facility during fiscal 2003; 2) the transfer of certain manufacturing processes from our domestic operations to our lower cost international manufacturing operations, particularly those in the People's Republic of China; 3) expand our products in the home appliance, laptop computer, and radio identification frequency and smart card markets; and 4) the continued monitoring and reduction of selling, general and administrative expenses. Furthermore, we are exploring alternative financing arrangements to partially replace or supplement our financing arrangements to provide us with longer-term financing to support our current working capital needs. 20 We believe that our cash on hand and cash expected to be generated during fiscal 2003 will be sufficient to enable us to meet our financing and operating obligations for the foreseeable future. If we require alternative external financing to repay or refinance our existing financing obligations or fund our working capital requirements, we believe that we will be able to obtain new external financing. However, there can be no assurance that we will be successful in obtaining such new financing. Recent Accounting Pronouncements Effective July 1, 2001, we adopted the provisions of Statement on Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets"("SFAS 142"). Under the provisions of SFAS 142, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is not amortized but is tested for impairment, for each reporting unit, on an annual basis and between annual tests in certain circumstances. In accordance with the guidelines in SFAS 142, we determined we have one reporting unit. Upon adoption of SFAS 142, we performed an impairment review and concluded that there are no necessary adjustments. Future Adoption of Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, " and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 specifies accounting for long-lived assets to be disposed of by sale, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. We will adopt SFAS No. 144 as of July 1, 2002. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement amends, among others, the classification on the statement of operations for gains and losses from the extinguishment of debt. Currently such gains and losses are reported as extraordinary items, however the adoption of SFAS No. 145 may require the classification of the gains and losses from the extinguishment of debt within income or loss from continuing operations unless the transactions meet the criteria for extraordinary treatment as infrequent and unusual as described in Accounting Principles Board Opinion No. 30 Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We will adopt SFAS No. 145 on July 1, 2002. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". This statement supersedes Emerging Issues Task Force ("EITF") No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("SFAS No. 146"). Under this statement, a liability for a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. We are currently evaluating the impact, but do not expect a material impact, resulting from the adoption of SFAS Nos. 144, 145, and 146 on our consolidated financial position, results of operations, and cash flows. 21 FACTORS THAT MAY AFFECT FUTURE RESULTS Our prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K also contains certain forward-looking statements within the meaning of the Federal Securities Laws. Our future results may differ materially from the current results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to those set forth below, other one-time events and other important factors disclosed previously and from time to time in our other filings with the Securities and Exchange Commission. Our business could continue to be materially adversely affected as a result of general economic and market conditions. We are subject to the effects of general global economic and market conditions. Our operating results have been materially adversely affected as a result of recent unfavorable economic conditions and reduced electronics industry spending. If economic and market conditions do not improve, our business, results of operations or financial condition could continue to be materially adversely affected. If we cannot obtain additional financing when needed, we may not be able to expand our operations and invest adequately in research and development, which could cause us to lose customers and market share. The development and manufacturing of flexible interconnects is capital intensive. To remain competitive, we must continue to make significant expenditures for capital equipment, expansion of operations and research and development. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital for anticipated growth. We may need to raise additional funds either through borrowings or further equity financings. We may not be able to raise additional capital on reasonable terms, or at all. If we cannot raise the required funds when needed, we may not be able to satisfy the demands of existing and prospective customers and may lose revenue and market share. Our operating results fluctuate and may fail to satisfy the expectations of public market analysts and investors, causing our stock price to decline. Our operating results have fluctuated significantly in the past and we expect our results to continue to fluctuate in the future. Our results may fluctuate due to a variety of factors, including the timing and volume of orders from customers, the timing of introductions of and market acceptance of new products, changes in prices of raw materials, variations in production yields and general economic trends. It is possible that in some future periods our results of operations may not meet or exceed the expectations of public market analysts and investors. If this occurs, the price of our common stock is likely to decline. Our quarterly results depend upon a small number of large orders received in each quarter, so the loss of any single large order could harm quarterly results and cause our stock price to drop. A substantial portion of our sales in any given quarter depends on obtaining a small number of large orders for products to be manufactured and shipped in the same quarter in which the orders are received. Although we attempt to monitor our customers' needs, we often have limited knowledge of the magnitude or timing of future orders. It is difficult for us to reduce spending on short notice on operating expenses such as fixed manufacturing costs, development costs and ongoing customer service. As a result, a reduction in orders, or even the loss of a single large order, for products to be shipped in any given quarter could have a material adverse effect on our quarterly operating results. This, in turn, could cause our stock price to decline. Because we sell a substantial portion of our products to a limited number of customers, the loss of a significant customer or a substantial reduction in orders by any significant customer would harm our operating results. 22 Historically we have sold a substantial portion of our products to a limited number of customers. Our 20 largest customers based on sales accounted for approximately 60% of our total revenue in fiscal 2000, 55% in fiscal 2001, and 44% in fiscal 2002. We expect that a limited number of customers will continue to account for a high percentage of our total revenues in the foreseeable future. As a result, the loss of a significant customer or a substantial reduction in orders by any significant customer would cause our revenues to decline and have an adverse effect on our operating results. If we are unable to respond effectively to the evolving technological requirements of customers, our products may not be able to satisfy the demands of existing and prospective customers and we may lose revenues and market share. The market for our products is characterized by rapidly changing technology and continuing process development. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities. We will need to develop and market products that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis. There can be no assurance that the materials and processes that we are currently developing will result in commercially viable technological processes, or that there will be commercial applications for these technologies. In addition, we may not be able to make the capital investments required to develop, acquire or implement new technologies and equipment that are necessary to remain competitive. It is also possible that the flexible interconnect industry could encounter competition from new technologies in the future that render flexible interconnect technology less competitive or obsolete. If we fail to keep pace with technological change, our products may become less competitive or obsolete and we may lose customers and revenues. A significant downturn in any of the sectors in which we sell products could result in a revenue shortfall. We sell our flexible interconnect products principally to the automotive, telecommunications and networking, diversified electronics, aerospace, home appliance and computer markets. Although we serve a variety of markets to avoid a dependency on any one sector, a significant downturn in any of these market sectors could cause a material reduction in our revenues, which could be difficult to replace. We rely on a limited number of suppliers, and any interruption in our primary sources of supply, or any significant increase in the prices of materials, chemicals or components, would have an adverse effect on our short-term operating results. We purchase the bulk of our raw materials, process chemicals and components from a limited number of outside sources. In fiscal 2002, we purchased approximately 23% of our materials from DuPont and Northfield Acquisition Co. doing business as Sheldahl, our two largest suppliers. We operate under tight manufacturing cycles with a limited inventory of raw materials. As a result, although there are alternative sources of the materials that we purchase from our existing suppliers, any unanticipated interruption in supply from DuPont or Sheldahl, or any significant increase in the prices of materials, chemicals or components, would have an adverse effect on our short-term operating results. If we acquire additional businesses, these acquisitions will involve financial uncertainties as well as personnel contingencies, and may be risky and difficult to integrate. We have completed two acquisitions in the past four years and we may acquire additional businesses that could complement or expand our business. Acquired businesses may not generate the revenues or profits that we expect and we may find that they have unknown or undisclosed liabilities. In addition, if we do make acquisitions, we will face a number of other risks and challenges, including: the difficulty of integrating dissimilar operations or assets; potential loss of key employees of the acquired business; 23 assimilation of new employees who may not contribute or perform at the levels we expect; diversion of management time and resources; and additional costs associated with obtaining any necessary financing. These factors could hamper our ability to receive the anticipated benefits from any acquisitions we may pursue, and could adversely affect our financial condition and our stock price. The additional expenses and risks related to our existing international operations, as well as any expansion of our global operations, could adversely affect our business. We own a 90.1% equity interest in our joint venture in China, Parlex Shanghai, which manufactures and sells flexible circuits. We also operate a facility in Mexico for use in the finishing, assembly and testing of flexible circuit and laminated cable products. We have a facility in the United Kingdom where we manufacture polymer thick film flexible circuits and polymer thick film flexible circuits with surface mounted components and intend to introduce production of laminated cable within the next year. We will continue to explore appropriate expansion opportunities as demand for our products increases. Manufacturing and sales operations outside the United States carry a number of risks inherent in international operations, including: imposition of governmental controls, regulatory standards and compulsory licensure requirements; compliance with a wide variety of foreign and U.S. import and export laws; currency fluctuations; unexpected changes in trade restrictions, tariffs and barriers; political and economic instability; longer payment cycles typically associated with foreign sales; difficulties in administering business overseas; labor union issues; and potentially adverse tax consequences. International expansion may require significant management attention, which could negatively affect our business. We may also incur significant costs to expand our existing international operations or enter new international markets, which could increase operating costs and reduce our profitability. We face significant competition, which could make it difficult for us to acquire and retain customers. We face competition worldwide in the flexible interconnect market from a number of foreign and domestic providers, as well as from alternative technologies such as rigid printed circuits. Many of our competitors are larger than we are and have greater financial resources. New competitors could also enter our markets. Our competitors may be able to duplicate our strategies, or they may develop enhancements to, or future generations of, products that could offer price or performance features that are superior to our products. Competitive pressures could also necessitate price reductions, which could adversely affect our operating results. In addition, some of our competitors are based in foreign countries and have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause our dollar-priced products to be less competitive than our competitors' products priced in other currencies. We will need to make a continued high level of investment in product research and development and research, sales and marketing and ongoing customer service and support in order to remain competitive. We may not have sufficient resources to be able to make these investments. Moreover, we may not be able to make the technological advances necessary to maintain our competitive position in the flexible interconnect market. If we are unable to attract, retain and motivate key personnel, we may not be able to develop, sell and support our products and our business may lack strategic direction. We are dependent upon key members of our management team. In addition, our future success will depend in large part upon our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in hiring or retaining such personnel. We currently maintain a key person life insurance policy in the amount of $1.0 million on each of Herbert W. Pollack and Peter J. Murphy. If we lose the service of Messrs. Pollack or Murphy or one or more other key individuals, or are unable to attract additional qualified members of the management team, our ability to implement our business strategy may be impaired. If we 24 are unable to attract, retain and motivate qualified technical and sales personnel, we may not be able to develop, sell and support our products. If we are unable to protect our intellectual property, our competitive position could be harmed and our revenues could be adversely affected. We rely on a combination of patent and trade secret laws and non-disclosure and other contractual agreements to protect our proprietary rights. We own 22 patents issued and have 21 patent applications pending in the United States and have several corresponding foreign patent applications pending. Our existing patents may not effectively protect our intellectual property and could be challenged by third parties, and our future patent applications, if any, may not be approved. In addition, other parties may independently develop similar or competing technologies. Competitors may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. If we fail to adequately protect our proprietary rights, our competitors could offer similar products using materials, processes or technologies developed by us, potentially harming our competitive position and our revenues. If we become involved in a protracted intellectual property dispute, or one with a significant damages award or which requires us to cease selling some of our products, we could be subject to significant liability and the time and attention of our management could be diverted. Although no claims have been asserted against us for infringement of the proprietary rights of others, we may be subject to a claim of infringement in the future. An intellectual property lawsuit against us, if successful, could subject us to significant liability for damages and could invalidate our proprietary rights. A successful lawsuit against us could also force us to cease selling, or redesign, products that incorporate the infringed intellectual property. We could also be required to obtain a license from the holder of the intellectual property to use the infringed technology. We might not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our revenues could decline and our expenses could increase. We may in the future be required to initiate claims or litigation against third parties for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. Litigation with respect to patents and other intellectual property matters could result in substantial costs and divert our management's attention from other aspects of our business. Market prices of technology companies have been highly volatile, and our stock price may be volatile as well. From time to time the U.S. stock market has experienced significant price and trading volume fluctuations, and the market prices for the common stock of technology companies in particular have been extremely volatile. In the past, broad market fluctuations that have affected the stock price of technology companies have at times been unrelated or disproportionate to the operating performance of these companies. Any significant fluctuations in the future might result in a material decline in the market price of our common stock. Following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. If we were to become involved in this type of litigation, we could incur substantial costs and diversion of management's attention, which could harm our business, financial condition and operating results. The costs of complying with existing or future environmental regulations, and of curing any violations of these regulations, could increase our operating expenses and reduce our profitability. We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, our products. We 25 cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations could be applied to materials, product or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these regulations, could be significant. Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of these requirements could result in financial penalties and other enforcement actions. We could also be required to halt one or more portions of our operations until a violation is cured. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial. Our business could be materially adversely affected by the recent terrorist attacks. Since we sell our flexible interconnect products principally to the automotive, telecommunications and networking, diversified electronics, home appliances, aerospace and computer markets, our future success depends upon the viability of both the United States and global economy. As a result of the recent terrorist attacks and the economic uncertainty created by these events, there exist a significant number of risks which may cause a downturn in any of our market sectors thereby creating a material reduction in our revenues which could be difficult to replace. There can be no assurance that a continuation of the terrorist attacks will not have a material adverse effect upon our business, results of operations or financial condition. Undetected problems in our products could directly impair our financial results. If flaws in design, production, assembly or testing of our products were to occur by us or our suppliers, we could experience a rate of failure in our products that would result in substantial repair or replacement costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of material and manufacturing quality and costs and product testing, are critical factors in our future growth. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition. We may have exposure to additional income tax liabilities. As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. From time to time, we are subject to income tax audits. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse affect on our results of operations or financial condition. Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------- The following discussion about our market risk disclosures involves forward- looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in U.S. and foreign interest rates and fluctuations in exchange rates. We do not use derivative financial instruments for speculative or trading purposes. 26 We also have a $15,000,000 revolving credit line that bears interest, at our choice, at our lender's prime rate or LIBOR plus a margin that varies from 1.5% to 2.25%. Both the prime and LIBOR rates are affected by changes in market interest rates. As of June 30, 2002, we have an outstanding balance under our Credit Agreement of $12,160,000. We have the option to repay borrowings at anytime without penalty, other than breakage fees in the case of prepayment of LIBOR rate borrowings, and therefore believe that our market risk is not material. A 10% change in interest rates would impact interest expense by approximately $40,000. We do not consider this to be material or significant. The remainder of our long-term debt bears interest at fixed rates and is therefore not subject to market risk. Sales of Parlex Shanghai, Poly-Flex Circuits Limited and Parlex Europe are typically denominated in the local currency, which is also each company's functional currency. This creates exposure to changes in exchange rates. The changes in the Chinese/U.S. and U.K./U.S. exchange rates may positively or negatively impact our sales, gross margins and retained earnings. Based upon the current volume of transactions in China and the United Kingdom and the stable nature of the exchange rate between China and the U.S. and the United Kingdom and the U.S., we do not believe the market risk is material. We do not engage in regular hedging activities to minimize the impact of foreign currency fluctuations. Parlex Shanghai and Parlex Interconnect had combined net assets as of June 30, 2002, of approximately $12.5 million. Poly-Flex Circuits Limited and Parlex Europe had combined net assets as of June 30, 2002 of approximately $5.1 million. We believe that a 10% change in exchange rates may have a significant impact upon Parlex Shanghai's or Poly-Flex Circuits Limited's financial position, results of operation or outstanding debt. As of June 30, 2002, Parlex Shanghai and Parlex Interconnect had combined outstanding debt of $3.3 million. As of June 30, 2002, Poly-Flex Circuits Limited had no outstanding debt. Item 8. Financial Statements and Supplementary Data --------------------------------------------------- 27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Parlex Corporation Methuen, Massachusetts We have audited the accompanying consolidated balance sheets of Parlex Corporation and subsidiaries (the "Company") as of June 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Parlex Corporation and subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets. /s/ Deloitte & Touche LLP Boston, Massachusetts September 20, 2002 (September 27, 2002 as to paragraph 6 of Note 8) F-1 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2001 ---------------------------------------------------------------------------
ASSETS 2002 2001 CURRENT ASSETS: Cash and cash equivalents $ 1,785,025 $ 3,203,990 Short-term investments - 5,533,703 Accounts receivable - less allowance for doubtful accounts of $1,215,200 in 2002 and $1,896,100 in 2001 17,665,808 17,434,115 Inventories - net 17,588,589 19,318,522 Refundable income taxes 1,810,102 2,921,145 Deferred income taxes 3,595,659 2,901,201 Other current assets 2,030,210 2,634,085 ------------ ------------ Total current assets 44,475,393 53,946,761 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 1,018,822 1,018,822 Buildings 22,209,273 22,109,721 Machinery and equipment 58,267,902 56,174,718 Leasehold improvements and other 7,499,054 6,806,493 Construction in progress 6,467,541 3,843,792 ------------ ------------ Total 95,462,592 89,953,546 Less accumulated depreciation and amortization (39,480,757) (34,379,848) ------------ ------------ Property, plant and equipment - net 55,981,835 55,573,698 ------------ ------------ INTANGIBLE ASSETS - NET 1,155,827 41,530 GOODWILL - NET 1,157,510 906,708 DEFERRED INCOME TAXES 2,850,876 - OTHER ASSETS 432,488 395,255 ------------ ------------ TOTAL $106,053,929 $110,863,952 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 3,560,855 $ 10,710,299 Accounts payable 13,729,201 8,330,461 Accrued liabilities 4,865,058 3,889,540 ------------ ------------ Total current liabilities 22,155,114 22,930,300 ------------ ------------ LONG-TERM DEBT 12,000,000 118,762 ------------ ------------ OTHER NONCURRENT LIABILITIES 1,327,490 2,442,274 ------------ ------------ MINORITY INTEREST IN PARLEX SHANGHAI 430,204 4,021,485 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value - authorized, 1,000,000 shares; none issued - - Common stock, $.10 par value - authorized, 30,000,000 shares in 2002 and 2001; issued 6,513,216 shares in 2002 and 2001 651,321 651,321 Additional paid-in capital 60,897,275 60,897,275 Retained earnings 9,911,794 21,467,585 Accumulated other comprehensive (loss) income (281,644) (627,425) Less treasury stock, at cost - 210,000 shares in 2002 and 2001 (1,037,625) (1,037,625) ------------ ------------ Total stockholders' equity 70,141,121 81,351,131 ------------ ------------ TOTAL $106,053,929 $110,863,952 ============ ============
See notes to consolidated financial statements. F-2 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ---------------------------------------------------------------------------
2002 2001 2000 REVENUES: Product sales $ 87,005,253 $103,426,642 $ 99,952,142 License fees and royalty income 50,311 193,547 1,886,602 ------------ ------------ ------------ Total revenues 87,055,564 103,620,189 101,838,744 ------------ ------------ ------------ COSTS AND EXPENSES: Cost of products sold 90,293,843 97,460,179 76,613,787 Selling, general and administrative expenses 14,049,040 17,706,049 14,096,704 ------------ ------------ ------------ Total costs and expenses 104,342,883 115,166,228 90,710,491 ------------ ------------ ------------ OPERATING (LOSS) INCOME (17,287,319) (11,546,039) 11,128,253 OTHER INCOME, Net 206,995 501,036 236,812 INTEREST EXPENSE (643,722) (471,882) (891,805) ------------ ------------ ------------ (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (17,724,046) (11,516,885) 10,473,260 BENEFIT (PROVISION) FOR INCOME TAXES 6,855,127 5,453,245 (2,906,219) (LOSS) INCOME BEFORE MINORITY INTEREST (10,868,919) (6,063,640) 7,567,041 MINORITY INTEREST 481,091 (135,845) (1,231,705) ------------ ------------ ------------ NET (LOSS) INCOME $(10,387,828) $( 6,199,485) $ 6,335,336 ============ ============ ============ BASIC (LOSS) INCOME PER SHARE $ (1.65) $ (0.99) $ 1.31 ============ ============ ============ DILUTED (LOSS) INCOME PER SHARE $ (1.65) $ (0.99) $ 1.28 ============ ============ ============
See notes to consolidated financial statements. F-3 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ---------------------------------------------------------------------------
Accumulated Compre- Additional Other hensive Common Stock Paid-in Retained Treasury Comprehensive Income Shares Amount Capital Earnings Stock Income (Loss) (Loss) Total BALANCE, JULY 1, 1999 4,991,149 $499,115 $24,568,566 $ 21,288,296 $(1,037,625) $ 14,878 $45,333,230 Comprehensive income (loss): Net income - - - 6,335,336 - - $ 6,335,336 6,335,336 ------------ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment - - - - - - (136,020) (136,020) Unrealized loss on short-term investments - - - - - - (1,886) (1,886) ------------ Other comprehensive income (loss) - - - - - (137,906) (137,906) ------------ Comprehensive income (loss) $ 6,197,430 ============ Exercise of stock options 42,235 4,223 256,921 - - - 261,144 Tax benefit arising from the exercise of stock options - - 132,735 - - - 132,735 Stock offering, net of expenses 1,452,500 145,250 35,719,787 - - - 35,865,037 --------- -------- ----------- ----------- ----------- --------- ----------- BALANCE, JUNE 30, 2000 6,485,884 648,588 60,678,009 27,623,632 (1,037,625) (123,028) 87,789,576 Comprehensive income (loss): Net loss - - - (6,199,485) - - $ (6,199,485) (6,199,485) ------------ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment - - - - - - (539,149) (539,149) Unrealized gain on short-term investments - - - - - - 34,752 34,752 ------------ Other comprehensive income (loss) - - - - - (504,397) (504,397) ------------ Comprehensive income (loss) $ (6,703,882) ============ Effect of subsidiary accounting period change - - - 43,438 - - 43,438 Tax benefit arising from the exercise of stock options - - 71,773 - - - 71,773 Exercise of stock options and other 27,332 2,733 147,493 - - - 150,226 --------- -------- ----------- ----------- ----------- --------- ----------- BALANCE, JUNE 30, 2001 6,513,216 651,321 60,897,275 21,467,585 (1,037,625) (627,425) 81,351,131 Comprehensive income (loss): Net loss - - - (10,387,828) - - $(10,387,828) (10,387,828) ------------ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment - - - - - - 380,533 380,533 Unrealized loss on short-term investments - - - - - - (34,752) (34,752) ------------ Other comprehensive income (loss) - - - - - 345,781 345,781 ------------ Comprehensive income (loss) $(10,042,047) ============ Distribution of earnings in consideration for - - - - - - 40% interest in Parlex Shanghai Circuits Corp. - - - (1,167,963) - - (1,167,963) --------- -------- ----------- ----------- ----------- --------- ----------- BALANCE, JUNE 30, 2002 6,513,216 $651,321 $60,897,275 $ 9,911,794 $(1,037,625) $(281,644) $70,141,121 ========= ======== =========== =========== =========== ========= ===========
See notes to consolidated financial statements. F-4 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ---------------------------------------------------------------------------
2002 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (10,387,828) $ (6,199,485) $ 6,335,336 Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities: Depreciation and amortization of property, plant and equipment and other assets 6,422,514 6,260,344 4,757,235 Facility exit costs 1,480,000 - - Loss on property, plant and equipment 173,828 74,369 - Tax benefit arising from the exercise of stock options - 71,773 132,735 Minority interest (481,091) 135,845 1,231,705 Changes in current assets and liabilities: Accounts receivable - net (115,019) 1,664,805 (1,905,970) Inventories 1,771,999 1,729,045 (7,758,203) Refundable income taxes 1,111,043 (2,921,145) - Other assets and deferred taxes (5,701,113) (2,132,200) (681,175) Accounts payable and accrued liabilities 3,195,360 (4,215,370) 2,593,122 ------------- ------------ ------------ Net cash (used in) provided by operating activities (2,530,307) (5,532,019) 4,704,785 ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Poly-Flex subsidiary 525,000 525,000 (20,682,061) Acquisition of minority interest in Parlex Shanghai (4,485,095) - - Maturities (purchases) of investments available for sale, net 5,498,951 (5,498,951) 1,605,067 Additions to property, plant, equipment and other assets (5,243,605) (7,311,625) (10,386,405) ------------- ------------ ------------ Net cash used for investing activities (3,704,749) (12,285,576) (29,463,399) ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common shares - net - - 35,865,037 Proceeds from bank loans 28,975,378 23,580,184 30,584,673 Payment of bank loans (24,243,584) (14,594,033) (31,042,251) Exercise of stock options and other - 150,226 261,144 ------------- ------------ ------------ Net cash provided by financing activities 4,731,794 9,136,377 35,668,603 ------------- ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 84,297 (64,650) (136,020) ------------- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,418,965) (8,745,868) 10,773,969 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,203,990 11,949,858 1,175,889 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,785,025 $ 3,203,990 $ 11,949,858 ============= ============ ============ SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Liabilities assumed in acquisition $ - $ - $ 5,506,000 ============= ============ ============ Property, plant, equipment and other asset purchases financed under capital lease obligations, long-term debt, and accounts payable $ 1,474,311 $ 293,530 $ 49,500 ============= ============ ============
See notes to consolidated financial statements. F-5 PARLEX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 --------------------------------------------------------------------------- 1. BUSINESS AND BASIS OF PRESENTATION Business - Parlex Corporation ("Parlex" or the "Company") is a world leader in the design and manufacture of flexible interconnect products. Parlex produces 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, telecommunications and networking, diversified electronics, aerospace and computer. Basis of Presentation - As shown in the consolidated financial statements, the Company incurred net losses of $10,387,828 and $6,199,485 and used $2,530,307 and $5,532,019 of cash in operations for the fiscal years ended June 30, 2002 and 2001, respectively, and at June 30, 2002, was out of compliance with certain financial covenants of its principal external financing agreement, and its outstanding advances under such arrangement exceeded the allowable borrowing base. These results are primarily attributable to the worldwide downturn in the electronics industry. The Company has received a waiver of all covenant violations at June 30, 2002 and on September 27, 2002, executed an amendment to its principal external financing arrangement. As a result of this amendment, the Company is now in compliance with all financial covenants and its advances are within the amended borrowing base at June 30, 2002. The Company anticipates being in compliance with the terms of the amended Agreement for the forseeable future (see Note 8). Throughout fiscal 2002 and into fiscal 2003, management has taken a series of actions to reduce operating expenses and to restructure operations, which consisted primarily of reductions in workforce and consolidating manufacturing operations. Moreover, management continues to implement plans to control operating expenses, inventory levels, and capital expenditures as well as manage accounts payable and accounts receivable to enhance cash flow and return the Company to profitability. Management's plans include the following actions: 1) continuing to consolidate manufacturing facilities, including the closing of the Salem, New Hampshire facility during fiscal 2003; 2) continuing to transfer certain manufacturing processes from its domestic operations to lower cost international manufacturing locations, primarily those in the People's Republic of China; 3) expanding its products in the home appliance, laptop computer, and radio frequency identification and smart card markets; and 4) continuing to monitor and reduce selling, general and administrative expenses. Furthermore, management is exploring alternative financing arrangements to partially replace or supplement those currently in place in order to provide the Company with long-term financing to support its current working capital needs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The consolidated financial statements include the accounts of Parlex, its wholly owned subsidiaries and its 90.1% investment in Parlex (Shanghai) Circuit Co., Ltd. ("Parlex Shanghai") (see Note 4). Prior to October 2, 2000, the Company consolidated Parlex Shanghai and its wholly owned subsidiary, Parlex Asia Pacific Limited ("PAPL") on a three- month time lag. Beginning with the quarter ended December 31, 2000, the Company conformed the reporting of Parlex Shanghai and PAPL with its December quarter financial results. Accordingly, the Parlex Shanghai and PAPL net income for the quarter ended September 26, 2000 is reported as an adjustment to retained earnings in the amount of $43,000. Intercompany transactions have been eliminated. Use of Estimates - The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates. Estimates include reserves for accounts receivables, inventory and deferred taxes, useful lives of property, plant, and equipment, certain accrued liabilities including health insurance claims, and the Company's effective tax rate. Actual results could differ from those estimates. Foreign Currency Translation - The functional currency of foreign operations is deemed to be the local country's currency. Assets and liabilities of operations outside the United States are translated into United States dollars using current exchange rates at the balance sheet date. Results of operations are translated at average exchange rates prevailing during each period. Gains or losses on translation are accumulated as a component of other comprehensive income or loss. Cash and Cash Equivalents - Cash and cash equivalents include short-term highly liquid investments purchased with remaining maturities of three months or less. F-6 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Short-Term Investments - The Company follows Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At June 30, 2001, the Company had categorized all securities as "available-for-sale", since the Company could liquidate these investments currently. In calculating realized gains and losses, cost is determined using the specific-identification method. SFAS No. 115 requires that unrealized gains and losses on available-for-sale securities be excluded from earnings and reported in a separate component of stockholders' equity. Inventories - Inventories of raw materials are stated at the lower of cost, first-in, first-out or market. Work in process and finished goods are valued as a percentage of completed cost, not in excess of net realizable value. At June 30, inventories consisted of:
2002 2001 Raw materials $ 7,240,945 $ 6,766,359 Work in process 7,382,378 8,861,718 Finished goods 2,965,266 3,690,445 ----------- ----------- Total $17,588,589 $19,318,522 =========== ===========
Property, Plant and Equipment - Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives: buildings - 30-40 years; machinery and equipment - 2-15 years; and leasehold improvements over the terms of the lease. The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell. The Company has not recorded any impairment losses during 2002, 2001, or 2000. Revenue Recognition - Revenue on product sales is recognized when persuasive evidence of an agreement exists, the price is fixed or determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains written purchase authorizations from its customers for a specified amount of product, at a specified price and considers delivery to have occurred at the time of shipment. License fees and royalty income are recognized when earned. Research and Development - Research and development costs are expensed as incurred and amounted to $6,145,000, $6,906,000 and $4,237,000 for the years ended June 30, 2002, 2001 and 2000, respectively. These amounts are reflected in the Company's cost of products sold. Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This statement requires an asset and liability approach to accounting for income taxes based upon the future expected values of the related assets and liabilities. Deferred income taxes are provided for basis differences between assets and liabilities for financial reporting and tax purposes. (Loss) Income Per Share - Basic (loss) income per share is calculated on the weighted-average number of common shares outstanding during the year. Diluted income per share is calculated on the weighted-average number of common shares and common share equivalents resulting from options outstanding except where such items would be antidilutive. F-7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (Loss) Income Per Share (Continued) A reconciliation between shares used for computation of basic and dilutive income per share is as follows:
2002 2001 2000 Shares for basic computation 6,303,216 6,289,117 4,842,055 Effect of dilutive stock options - - 98,429 --------- --------- --------- Shares for dilutive computation 6,303,216 6,289,117 4,940,484 ========= ========= =========
Antidilutive potential shares not included in per-share calculations for 2002 and 2001 were approximately 471,00 and 320,000 due to the net losses recorded in these years. Antidilutive potential shares not included in the per-share calculation for 2000 were approximately 65,000 as the exercise price of these options exceeded the average market price of the Company's stock for that year. 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, short-term investments, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature. The carrying amounts of the Company's debt instruments approximate fair value since the majority of long-term debt bears interest at a rate similar to the prevailing market rate. Goodwill - Under the provisions of SFAS No.142, "Goodwill and Other Intangible Assets"("SFAS 142"), if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually. Goodwill associated with the acquisition of a 40% interest in Parlex Shanghai (see Note 4), and the acquisitions of the Poly-Flex and Parlex- Dynaflex businesses was determined to have an indefinite useful life and is therefore not amortized. The Company tests for impairment on an annual basis and between annual tests in certain circumstances. In accordance with the guidelines in SFAS 142, the Company determined it has one reporting unit and concluded that there are no necessary adjustments for impairment at June 30, 2002. The accumulated amortization of goodwill totaled $234,477, $234,477 and $220,100 at June 30, 2002, 2001 and 2000, respectively. Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25 using the intrinsic-value method as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." 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 difference between accounting for stock-based compensation under APB Opinion No. 25 and SFAS No. 123 is disclosed in Note 11. Reclassifications - Certain prior period amounts have been reclassified to conform to the current year presentation. Recent Accounting Pronouncements -Effective July 1, 2001, the Company adopted the provisions of SFAS No.142. Under the provisions of SFAS 142, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is not amortized but is tested for impairment, for each reporting unit, on an annual basis and between F-8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (Continued) annual tests in certain circumstances. In accordance with the guidelines in SFAS 142, the Company determined it has one reporting unit. Upon adoption of SFAS 142 the Company performed an impairment review and concluded that there are no necessary adjustments. Intangible assets as of June 30, 2002, are as follows:
Land Use Rights Patents Total Gross cost $1,145,784 $ 58,560 $1,204,344 Accumulated amortization (28,559) (19,958) (48,517) ---------- -------- ---------- Intangible assets, net $1,117,225 $ 38,602 $1,155,827 ========== ======== ==========
The Company has reassessed the useful lives of other intangible assets and determined the useful lives are appropriate in determining amortization expense. Amortization expense for the year ended June 30, 2002 was $14,376. The estimated amortization expense for each of the fiscal years subsequent to June 30, 2002 is as follows:
Amortization Expense For year ended June 30, 2003 $ 30,403 For year ended June 30, 2004 30,403 For year ended June 30, 2005 30,403 For year ended June 30, 2006 30,403 For year ended June 30, 2007 30,403 Thereafter 1,003,812 ---------- $1,155,827 ==========
F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (Continued) If SFAS 142 had been adopted on July 1, 1999, the adjusted net income (loss) and adjusted net income (loss) per share would be as follows:
Year Ended June 30, ------------------------------------------------ 2002 2001 2000 ---- ---- ---- Reported net income (loss) $(10,387,828) $ (6,199,485) $ 6,335,336 Add back: Goodwill amortization - 250,284 219,162 ------------ ------------ ----------- Adjusted net income (loss) $(10,387,828) $ (5,949,201) $ 6,554,498 ============ ============ =========== Basic net income (loss) per share: Reported net income (loss) $ (1.65) $ (0.99) $ 1.31 Goodwill amortization - 0.04 0.04 ------------ ------------ ----------- Adjusted net income (loss) $ (1.65) $ (0.95) $ 1.35 ============ ============ =========== Diluted net income (loss) per share: Reported net income (loss) $ (1.65) $ (0.99) $ 1.28 Goodwill amortization - 0.04 0.05 ------------ ------------ ----------- Adjusted net income (loss) $ (1.65) $ (0.95) $ 1.33 ============ ============ ===========
Future Adoption of Accounting Pronouncements - In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, " and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 specifies accounting for long-lived assets to be disposed of by sale, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The Company will adopt SFAS No. 144 on July 1, 2002. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). This statement amends, among others, the classification on the statement of operations for gains and losses from the extinguishment of debt. Currently such gains and losses are reported as extraordinary items, however, the adoption of SFAS No. 145 may require the classification of the gains and losses from the extinguishment of debt within income or loss from continuing operations unless the transactions meet the criteria for extraordinary treatment as infrequent and unusual as described in APB Opinion No. 30, "Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The Company will adopt SFAS No. 145 on July 1, 2002. F-10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Future Adoption of Accounting Pronouncements (Continued) In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This statement supersedes Emerging Issues Task Force ("EITF") No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Under this statement, a liability for a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of an entity's commitment to an exit plan as required under EITF 94-3. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company is currently evaluating the impact resulting from the adoption of SFAS Nos. 144, 145, and 146 on the Company's consolidated financial position and results of operations, but does not expect a material impact. 3. POLY-FLEX ACQUISITION On March 1, 2000, pursuant to a Stock Purchase Agreement (the "Agreement") dated as of January 21, 2000, by and among the Company and Cookson Group plc and Cookson Investment, Inc. (together, "Cookson"), the Company completed its acquisition of the stock of two Cookson wholly-owned subsidiaries, Poly-Flex Circuits Limited and Poly-Flex Circuits, Inc. (collectively, "Poly-Flex"), for $19,650,000 in cash. Costs associated with the transaction approximated $1,000,000. The acquisition was recorded under the purchase method of accounting. On December 15, 2000, the Company jointly filed with Cookson a tax election with the Internal Revenue Service to account for the transaction as an asset acquisition for tax purposes whereby the assets acquired would be recorded, for tax purposes, at fair value versus their carryover tax basis. Accordingly, the Company adjusted purchase price related to deferred tax liabilities and goodwill in the amount of $2,495,000. In addition, on June 28, 2001, the Company entered into a settlement agreement with Cookson resolving any purchase price or contingent purchase price adjustment between the two companies. The terms of the settlement agreement provided that Cookson pay Parlex $1,050,000 in full settlement of all outstanding claims by both companies relative to any purchase price adjustment. The Company received $525,000 in cash prior to June 30, 2001 and recorded a receivable for an additional $525,000 within other current assets in the consolidated balance sheet at June 30, 2001, which was subsequently received. The final purchase price after this settlement and the tax election is approximately $19,765,000 including acquisition costs of approximately $1,165,000. Accordingly the Company reallocated the purchase price as follows: Accounts receivable $ 3,208,000 Inventories 2,447,000 Other current assets 436,623 Property, plant and equipment 16,533,681 Accounts payable and accrued liabilities (2,551,000) Deferred tax liabilities (309,000) ----------- Net assets of Poly-Flex $19,765,304 ===========
The results of operations of Poly-Flex are included in the consolidated results of the Company from the acquisition date. F-11 3. POLY-FLEX ACQUISITION (CONTINUED) The following unaudited pro forma summary presents information as if Poly- Flex had been acquired as of the beginning of the Company's fiscal year 2000. The pro forma amounts include certain adjustments, primarily to recognize depreciation and amortization based on the preliminary allocation of the purchase price of Poly-Flex's net assets, interest expense associated with the debt used to acquire Poly-Flex and adjustments for various allocated charges from Poly-Flex's previous parent. The adjustments do not reflect any benefits from economies which might be achieved from combining operations. The pro forma information does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies:
Unaudited 2000 Revenue $116,908,000 Income from operations 10,525,000 Net income 5,680,000 Net income per share: Basic $ 1.17 Diluted 1.15 Shares used to compute net income per share Basic 4,842,000 Diluted 4,940,000
4. JOINT VENTURE In 1995, the Company formed a joint venture, Parlex Shanghai. At its formation, the Company had a 50.1% controlling interest and as such has been consolidating Parlex Shanghai's financial results within its financial statements with minority interest recorded to reflect its partners' 49.9% interest. On October 22, 2001, the Company executed an agreement (the "Agreement") to purchase Shanghai Jinling Co., Ltd's ("Jinling") 40% joint venture interest in Parlex Shanghai , bringing the Company's interest to 90.1%. The Agreement required the Company to pay Jinling the sum of $2.2 million. The purchase price has been allocated to acquired accounts receivable, inventory, property, plant and equipment, accounts payable, accrued liabilities and debt, and resulted in goodwill of approximately $251,000. Prior to the acquisition, a distribution of retained earnings was declared based upon each joint venture partners' proportional share of Parlex Shanghai's registered capital as of December 30, 2000. Jinling's distribution approximated $2.3 million and was payable in cash. As of June 30, 2002, all amounts due Jinling have been paid. Minority interest in the consolidated statements of operations represents the minority shareholder's share of the income or loss of Parlex Shanghai. The minority interest in the consolidated balance sheets reflect the original investment, net of any distributions, by these minority shareholders in Parlex Shanghai, along with their proportional share of the earnings or losses of Parlex Shanghai. 5. OTHER INTANGIBLE ASSETS - LAND USE RIGHTS In December 2001, Parlex (Shanghai) Interconnect Products Co., Ltd., the Company's second tier subsidiary, purchased land use rights for a parcel of land located in the People's Republic of China. The purchase of the land use rights will allow the Company to expand its operations within China. The purchase price of the land use rights was approximately $1.1 million. The rights have been reported within intangible assets on the consolidated balance sheets and are being amortized over their 50-year life. F-12 6. CASH AND SHORT-TERM INVESTMENTS A summary of the Company's investments available for sale by major security type at June 30, 2001 was as follows:
Gross Gross Amortized Unrealized Unrealized Fair Security Type Cost Gains Losses Value Cash management fund $ 204,596 $ - $ - $ 204,596 Corporate debt securities 5,294,355 34,752 - 5,329,107 ---------- ------- --- ---------- Total $5,498,951 $34,752 $ - $5,533,703 ========== ======= === ==========
All corporate debt securities at June 30, 2001 had contractual maturities of less than one year. The Company had no short-term investments at June 30, 2002. 7. ACCRUED LIABILITIES Accrued liabilities at June 30 consisted of:
2002 2001 Payroll and related expenses $1,650,825 $1,369,057 Accrued health insurance 375,819 350,008 Commissions 400,411 983,181 Facility exit costs 1,480,000 - Other 958,003 1,187,294 ---------- ---------- Total $4,865,058 $3,889,540 ========== ==========
In June 2002, management committed to a plan to consolidate and relocate certain of its manufacturing operations. The Company accrued $755,000 for lease costs, $625,000 for the abandonment of leasehold improvements, and $100,000 for a lease termination penalty, all of which are reported (as cost of sales) in the consolidated statements of operations. No amounts have been paid as of June 30, 2002. The Company's lease agreement, for which certain costs have accrued under this plan, expires in 2004. F-13 8. INDEBTEDNESS Long-term debt at June 30 consisted of:
2002 2001 Term notes $ 3,310,378 $ 1,495,717 Capital lease obligations 90,477 358,344 Revolving credit agreement 12,160,000 8,975,000 ----------- ----------- Total long-term debt 15,560,855 10,829,061 Less current portion 3,560,855 10,710,299 ----------- ----------- Long-term debt - net $12,000,000 $ 118,762 =========== ===========
The scheduled maturities for long-term debt, excluding capital lease obligations (see Note 13), at June 30, 2002 are $3,560,855 in fiscal year 2003 and $12,000,000 in fiscal 2004. Interest paid during the years ended June 30, 2002, 2001 and 2000 was approximately $625,000, $454,000 and $887,000, respectively. Approximately $1,114,500 of equipment is recorded under capital leases at June 30, 2002 and 2001. Accumulated amortization on the capital lease equipment approximated $1,024,000 and $749,000 at June 30, 2002 and 2001, respectively. Revolving Credit Agreement - On April 16, 2002, the Company executed the Second Amendment to its Loan Agreement (the "Credit Agreement") (originally dated March 1, 2000). The Credit Agreement provided the Company's bank with a secured interest in all of its assets with the exception of its real estate. The Company may borrow up to a total of $15,000,000, based on a borrowing base of eligible accounts receivable and marketable securities. No further advances of principal will be made under this Credit Agreement after December 30, 2003. At the Company's discretion, borrowings under the Credit Agreement accrue interest at either a variable rate equal to the bank's prime rate (4.75% at June 30, 2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to 2.25%. As of June 30, 2002 the Company has, as provided for under its Credit Agreement, converted $9 million of its Credit Agreement borrowings into 4 LIBOR contracts with maturities of three months. The LIBOR plus margin for these contracts varies between 4.12% and 4.17875%. Interest on the LIBOR contracts is payable at the end of each LIBOR term. The Credit Agreement carries an annual commitment fee of 0.25% to 0.5% on the average daily-unused portion of the bank's commitment. Interest is payable monthly. The Credit Agreement allows the Company to issue letters of credit, which reduces its availability for borrowings under the Credit Agreement, and which a $100,000 letter of credit is outstanding at June 30, 2002. The Credit Agreement permits the Company to pay cash dividends to the extent that such payment would not cause the Company to violate the aforementioned covenants. The Credit Agreement has certain restrictive covenants related to current ratio, tangible net worth, total liabilities to tangible net worth, interest coverage ratio, debt service coverage ratio and income and capital expenditure targets. As of June 30, 2002, the Company was not in compliance with the restrictive covenants related to income targets and tangible net worth coverage and its outstanding advances under the Credit Agreement exceeded its borrowing base. The Company received a waiver of certain restrictive covenants at June 30, 2002 and renegotiated the terms of its existing external financing arrangement. F-14 8. INDEBTEDNESS (CONTINUED) On September 27, 2002, the Company executed the Third Amendment to the Credit Agreement (the "Third Amendment"). The Third Amendment increases the bank's security interest in the Company's assets to include a first mortgage on the Company's Methuen, Massachusetts facility. In addition, the total availability for borrowings under the Credit Agreement was reduced to $14,000,000 at September 30, 2002 and will be reduced to $12,000,000 by March 31, 2003. The borrowing base was amended so as to be calculated as 80% of eligible accounts receivable plus 70% of the appraised value of the Methuen, Massachusetts facility, less amounts outstanding through letters of credit. The Third Amendment also amends the restrictive covenants for periods subsequent to June 30, 2002 to remove the interest coverage ratio, amend the definition of minimum tangible net worth, and amend the future income targets. The Company was in compliance with the restrictive covenants at June 30, 2002, as amended. The Company has classified as a current liability on the consolidated balance sheets, $160,000 of the amounts owed under the Credit Agreement due to the reduction in the total availability for borrowings as amended by the Third Amendment. Parlex Shanghai Term Note - On February 26, 2002, Parlex Shanghai entered into a short-term bank note bearing interest at 5.841%. Jinling, a former minority interest partner in Parlex Shanghai, guarantees the short-term note. Amounts outstanding under this short-term note total $2.1 million and are included within the current portion of long-term debt on the consolidated balance sheet for the year ended June 30, 2002. The Company provides a cross guarantee to Jinling for 100% of the term note. Parlex Interconnect Term Notes - In December 2001 and May 2002, Parlex Interconnect entered into two short-term bank notes bearing interest at 7.02%. Parlex Shanghai guarantees the short-term notes. Amounts outstanding under these two short-term notes total $1.2 million and is included within the current portion of long-term debt on the consolidated balance sheet for the year ended June 30, 2002. In June 2002, the Company's subsidiary, Parlex Interconnect, executed a $5,000,000 Loan Agreement (the "Loan Agreement") with CITIC Ka Wah Bank Limited, a Hong Kong bank. Proceeds received under the Loan Agreement are to be used exclusively for financing land, building, plant and machinery and other working capital requirements and to prepay Parlex Interconnect's two current short-term bank notes with combined outstanding balances of $1.2 million as of June 30, 2002. As of June 30, 2002, no amounts were outstanding under the Loan Agreement. Borrowings under the Loan Agreement accrue interest at a fixed rate equal to LIBOR plus a margin of 2.2%. Interest is payable at the end of each interest period which varies from one to six months. As a condition of the approval of this Loan Agreement, the Company's subsidiary, Parlex Asia Pacific Ltd., and the Company has provided a guarantee of the payment of this loan. The Loan Agreement contains a cross default provision that would permit the lender to accelerate the repayment of Parlex Interconnect's obligation under the Loan Agreement in the event of the Company's default on other financing arrangements. As of August 31, 2002, total borrowings were $3.1 million. These borrowings were used to repay local short-term bank notes of $1.2 million and fund future equipment and working capital requirements. 9. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities at June 30 consisted of:
2002 2001 Deferred income taxes (Note 10) $ 350,919 $1,390,390 Deferred compensation 976,571 1,051,884 ---------- ---------- $1,327,490 $2,442,274 ========== ==========
Deferred compensation of $182,000 is to be paid within one year and is included within accrued liabilities in the consolidated balance sheet at June 30, 2002. F-15 10. INCOME TAXES Income (loss) before income taxes consisted of:
2002 2001 2000 Domestic $(16,345,891) $(13,537,847) $ 9,327,873 Foreign (1,378,155) 2,020,962 1,145,387 ------------ ------------ ----------- Total $(17,724,046) $(11,516,885) $10,473,260 ============ ============ ===========
The benefit (provision) for income taxes consisted of:
2002 2001 2000 Current: State $ - $ - $ (201,720) Federal 2,288,093 2,821,486 (2,102,868) Foreign (17,771) (194,971) (396,953) ---------- ---------- ----------- 2,270,322 2,626,515 (2,701,541) Deferred Tax: State 83,844 7,442 (28,452) Federal 475,116 129,358 (445,741) Foreign (41,919) - - ---------- ---------- ----------- 517,041 136,800 (474,193) Tax Credits: State 451,712 141,841 235,560 Federal 1,408,981 616,303 166,690 ---------- ---------- ----------- 1,860,693 758,144 402,250 Effect on Tax Benefit (Expense) from Exercise of Stock Options: State - 7,555 (13,972) Federal - 64,218 (118,763) ---------- ---------- ----------- - 71,773 (132,735) Tax Benefit from Operating Losses Carryforwards: State 327,262 733,865 - Federal 2,066,700 1,326,148 - Foreign 313,109 - - Valuation Allowance (500,000) (200,000) - ---------- ---------- ----------- 2,207,071 1,860,013 - ---------- ---------- ----------- Total $6,855,127 $5,453,245 $(2,906,219) ========== ========== ===========
F-16 10. INCOME TAXES (CONTINUED) A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
2002 2001 2000 Statutory federal income tax rate (34)% (34)% 34 % State income taxes, net of federal tax benefit (3) (4) 2 Foreign income - not subject to taxation 2 - (7) Foreign sales corporation - (1) (2) Tax credits (5) (7) (4) Valuation allowance on net operating loss carryforwards 3 2 - Other (2) (3) 5 --- --- -- Effective income tax rate (39)% (47)% 28 % === === ==
The Company's China joint venture, Parlex Shanghai, was exempt from income taxes for the two years ended December 31, 1998. For the next three years, the China joint venture was eligible for a 50% reduction in the statutory income tax rate of 15%. Accordingly, income tax of 7.5% was recorded for the two years ended June 30, 2001 and 15% for the year ended June 30, 2002. No provision for U.S. income taxes has been recorded on undistributed earnings of Poly-Flex Circuits Limited (approximately $98,000 at June 30, 2002) because such amounts are considered permanently invested. F-17 10. INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities at June 30 are attributable to the following:
2002 2001 Deferred tax assets: Inventories $ 1,488,945 $ 1,284,907 Allowance for doubtful accounts 431,496 689,688 Goodwill 29,099 59,470 Accruals 1,316,151 475,777 Self-insurance 146,384 69,020 Deferred compensation 451,271 512,574 Net operating loss carryforwards 4,767,084 2,060,013 Valuation allowance (700,000) (200,000) Tax credit carryforwards 3,021,087 1,160,394 ----------- ----------- 10,951,517 6,111,843 ----------- ----------- Deferred tax liabilities: Depreciation 4,761,141 4,121,057 Accruals - 272,325 Prepaid expenses 94,760 207,650 ----------- ----------- 4,855,901 4,601,032 ----------- ----------- Net deferred tax asset $ 6,095,616 $ 1,510,811 =========== ===========
Tax credit carryforwards consist of research and development, alternative minimum, and investment tax credits available for state and federal purposes. To the extent the credits are not currently utilized on the Company's tax returns, deferred tax assets, subject to the considerations about the need for a valuation allowance, are recognized for the carryforward amounts. Research and development tax credits, if not utilized, will expire in the years 2008 through 2022. The Company's alternative minimum tax and investment credits do not expire and can be carried forward indefinitely. The Company has available at June 30, 2002, federal and state net operating loss carryforwards of approximately $9,979,000 and $24,463,000, respectively, expiring beginning in 2022 and 2006, respectively. A valuation allowance has been established to reduce the deferred tax asset recorded for certain state net operating loss carryforwards that may expire unutilized through 2007. The Company has foreign net operating losses carryforwards of $2,087,000, which do not expire. Income tax payments of approximately $600,000 and $2,469,000 were made in 2001 and 2000, respectively. Income tax refunds of approximately $3,348,000 were received in 2002. 11. STOCKHOLDERS' EQUITY Preferred Stock - 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, 2002, the Board of Directors has not authorized any series of preferred stock. F-18 11. STOCKHOLDERS' EQUITY (CONTINUED) Common Stock - On August 30, 2000, a special meeting of the Company's stockholders approved an amendment to the Company's Restated Articles of Organization increasing the number of authorized shares of common stock, par value $.10 per share, from 10,000,000 shares to 30,000,000 shares. Common Stock Offering - In June 2000, the Company sold 1,452,500 shares of its common stock in an underwritten public offering of which 202,500 shares were sold pursuant to an underwriters' over-allotment provision. Proceeds to the Company approximated $35,865,000, net of expenses associated with the offering. A portion of the proceeds was used by the Company to repay all the outstanding indebtedness under the Company's Revolving Credit Agreement and $15.0 million Term Loan. The Company used the remaining balance of the net proceeds for general corporate purposes, including working capital. Stock Option Plans - The Company has incentive and nonqualified stock option plans covering officers, key employees and non-employee directors. The options are generally exercisable commencing one year from the date of grant and typically expire in either five or ten years, depending on the plan. The option price for the incentive stock options and for the directors' plan is fair market value at the date of grant. Non-employee directors receive an automatic grant of 1,500 options annually. Additionally, grants of up to 2,250 options annually, per director, may also be made at the discretion of the Board of Directors. Nonqualified stock options are granted at fair market value or at a price determined by the Board of Directors, depending on the plan. On December 4, 2001 the stockholders approved the adoption of the 2001 Employees' Stock Option Plan (the "2001 Plan"). A total of 600,000 shares of common stock (subject to adjustment for capital charges) in the aggregate may be issued under the 2001 Plan. On November 28, 2000, the Board of Directors approved a proposal to offer certain employees a choice to cancel approximately 45,000 stock options granted to them in February and March 2000 in exchange for new options to purchase 75% of the original number of shares of stock. The new options were granted six months and one day from the date the old options were cancelled. The exercise price of the new options was the market price on the grant date. The exchange offer was not available to members of the Board of Directors or executive officers. At June 30, 2002, there were 846,443 shares reserved for future grants for all of the above-mentioned plans. F-19 11. STOCKHOLDERS' EQUITY (CONTINUED) Stock Option Plans (Continued) 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, 1999 243,630 $12.38 105,244 Granted 167,000 23.79 Surrendered (5,438) 15.12 Exercised (42,235) 6.18 ------- ------ June 30, 2000 362,957 11.97 118,832 Granted 59,250 11.81 Surrendered (66,875) 29.71 Exercised (27,332) 6.81 ------- ----- June 30, 2001 328,000 15.76 154,562 Granted 160,800 12.30 Surrendered (18,050) 14.53 ------- ------ June 30, 2002 470,750 $14.63 229,370 ======= ====== =======
The following table sets forth information regarding options outstanding at June 30, 2002:
Options Outstanding Options Exercisable ---------------------------------------- ------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Exercise Number Contractual Exercise Exercise Prices Outstanding Life (Years) Price Number Price $5.67 - $6.67 21,000 2.7 $ 5.96 21,000 $ 5.96 10.00 - 10.45 25,500 8.3 10.28 10,000 10.11 12.05 - 13.25 243,500 8.2 12.45 65,620 12.57 15.50 - 16.25 81,250 7.0 16.17 44,250 16.11 18.75 - 19.13 77,500 5.4 18.79 77,500 18.79 22.00 2,000 7.9 22.00 1,000 22.00 32.75 20,000 7.7 32.75 10,000 32.75 ------- --- ------ ------- ------ $5.67 - $32.75 470,750 7.2 $14.63 229,370 $15.56 ======= === ====== ======= ======
As described in Note 2, the Company uses the intrinsic-value method in accordance with APB Opinion 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 (loss) income and diluted income per share would have been ($11,233,000) or ($1.78) per share in 2002, ($7,108,000) or ($1.13) per share in 2001 and $5,439,000 or $1.10 per share in 2000. F-20 11. STOCKHOLDERS' EQUITY (CONTINUED) Stock Option Plans (Continued) The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. Key assumptions used to apply this option-pricing model are as follows:
2002 2001 2000 Average risk-free interest rate 4.1% 5.6% 5.6% Expected life of option grants 3.5 years 2.5 years 2.5 years Expected volatility of underlying stock 74% 88% 74% Expected dividend rate None None None
The weighted-average fair value of options granted in 2002, 2001 and 2000 was $6.72, $6.46, and $11.57, respectively. The option-pricing model was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of 10 years. However, management believes that the assumptions used and the model applied to value the awards yield a reasonable estimate of the fair value of the grants made under the circumstances. Accumulated Other Comprehensive Income (Loss) - The Company reports comprehensive income (loss) in accordance with the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The following components and changes in balances of accumulated other comprehensive income (loss) are as follows:
Foreign Accumulated Currency Unrealized Other Translation Gains (Losses) Comprehensive Adjustments on Investments Income (Loss) Balance, July 1, 1999 $ 12,992 $ 1,886 $ 14,878 Change in balance (136,020) (1,886) (137,906) --------- -------- --------- Balance, June 30, 2000 (123,028) - (123,028) Change in balance (539,149) 34,752 (504,397) --------- -------- --------- Balance, June 30, 2001 (662,177) 34,752 (627,425) Change in balance 380,533 (34,752) 345,781 --------- -------- --------- Balance, June 30, 2002 $(281,644) $ - $(281,644) ========= ======== =========
F-21 11. STOCKHOLDERS' EQUITY (CONTINUED) Accumulated Other Comprehensive Income (Loss) (Continued) A summary of the changes in unrealized gains (loss) in short-term investments is as follows for the years ended June 30:
2002 2001 2000 Unrealized gains on short-term investments: Unrealized holding gains arising during the year $ - $34,752 $ - Less reclassification adjustment for (loss) gains realized in net income (34,752) - (1,886) -------- ------- ------- Net unrealized gains (losses) on short-term investments $(34,752) $34,752 $(1,886) ======== ======= =======
12. BENEFIT PLAN The Company sponsors a 401(k) Savings Plan (the "Plan") covering all domestic employees of the Company who have three consecutive months of service and have attained the age of 21. Matching employer contributions equal 50% of the first 8% of employee contributions and vest 100% after three complete years of service. Effective September 1, 2001, the Company suspended the employer matching contribution. The Company contributed approximately $70,000, $492,000 and $26,000 to the Plan for the years ended June 30, 2002, 2001 and 2000, respectively. 13. COMMITMENTS AND CONTINGENCIES Leases - The Company leases certain property and equipment under agreements generally with initial terms from three to five years with renewal options. Rental expense for each of the years ended June 30, 2002, 2001 and 2000 approximated $1,458,000, $1,378,000 and $798,000, respectively. Future payments under noncancelable capital and operating leases, including payments related to the Salem, NH facility which will be exited in fiscal 2003 are:
Capital Operating Leases Leases 2003 $97,715 $1,458,926 2004 - 1,328,469 2005 - 462,042 2006 - 405,422 2007 - 412,622 Thereafter - 419,822 ------- ---------- Total minimum lease payments 97,715 4,487,303 ========== Less amounts representing interest (7,238) ------- Present value of net minimum lease payments 90,477 Current maturities of capitalized lease obligations 90,477 ------- Portion of capitalized lease obligations due after one year $ - =======
F-22 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) Litigation - From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management is not aware of any current legal matters that would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 14. BUSINESS SEGMENT, MAJOR CUSTOMER AND INTERNATIONAL OPERATIONS The Company operates within a single segment of the electronics industry as a specialist in the interconnection and packaging of electronic equipment with its product lines of flexible printed circuits, laminated cable, and related assemblies. The Company organizes itself as one segment reporting to the chief operating decision maker, the Chief Executive Officer. Revenue consists of product sales, license fees, and royalty income. The Company had two customers which individually accounted for 10% of the Company's revenues in 2000. No other revenues from a single customer exceeded 10% of the Company's revenues in 2002, 2001, or 2000. The Company had two customers which individually accounted for more than 10% of the Company's accounts receivables in 2002. No other customers accounted for more than 10% of accounts receivable in 2002, 2001, or 2000. Summarized information relating to international operations is as follows:
2002 2001 2000 Revenues: United States $56,138,749 $ 62,803,825 $ 59,001,502 Canada 1,972,938 5,888,696 17,262,614 China 3,614,000 6,576,148 5,434,875 Europe 15,871,637 19,585,733 13,186,932 Other 9,458,240 8,765,787 6,952,821 ----------- ------------ ------------ Total revenues $87,055,564 $103,620,189 $101,838,744 =========== ============ ============ The principal product group sales were: Flexible circuits $70,046,402 $ 81,288,991 $ 80,047,383 Laminated cables 16,958,851 22,137,651 19,904,759 ----------- ------------ ------------ Product sales $87,005,253 $103,426,642 $ 99,952,142 =========== ============ ============ Long-lived assets: United States $47,600,687 $ 47,938,826 $ 51,652,326 =========== ============ ============ China $10,738,185 $ 5,623,713 $ 3,427,673 =========== ============ ============ United Kingdom $ 3,275,430 $ 3,354,652 $ 4,134,371 =========== ============ ============
F-23 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data are as follows (in thousands except per share amounts):
First Second Third Fourth (A) 2002 Quarters Revenues $21,636 $20,684 $21,278 $23,458 Gross profit (loss) 569 (140) (7) (3,660) Net (loss) (1,161) (2,682) (1,667) (4,878) Net (loss) per share: Basic (0.18) (0.43) (0.26) (0.77) Diluted (0.18) (0.43) (0.26) (0.77) 2001 Quarters Revenues $29,689 $27,001 $24,889 $22,041 Gross profit (loss) 5,555 1,615 (15) (995) Net income (loss) 872 (2,274) (3,550) (1,247) Net income (loss) per share: Basic .14 (0.36) (0.56) (0.21) Diluted .14 (0.36) (0.56) (0.21)
(A) Fourth quarter 2001 net income includes a pretax charge of $2.2 million related to severance, and increases in reserves for inventory and the allowance for bad debts. In addition, the Company recorded a $4.7 million change in its income tax benefit reflecting net operating loss carryforwards and additional tax credits. Fourth quarter 2002 net loss includes a pretax charge of $4.9 million related to a reserve for relocating the Salem, New Hampshire operations to Methuen, Massachusetts and increases in inventory reserves and inventory write-downs. F-24 Part III Item 9. Changes In and Disagreements With Accountants on Accounting and ----------------------------------------------------------------------- Financial Disclosure -------------------- None Item 10. Directors and Executive Officers of the Registrant ----------------------------------------------------------- The information required by this Item is incorporated by reference from the information under the captions "Election of Directors", "Board of Directors Meetings and Committees of the Board", "Executive Officers" and "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement to be filed with the Commission within 120 days of June 30, 2002. Item 11. Executive Compensation ------------------------------- The information required by this Item is incorporated by reference from the information under the captions "Compensation of Executive Officers" and "Board of Directors Meetings and Committees of the Board" in our definitive proxy statement to be filed with the Commission within 120 days of June 30, 2002. 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 our definitive proxy statement to be filed with the Commission within 120 days of June 30, 2002. Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- We retain as our general counsel the law firm of Kutchin & Rufo, P.C. to perform legal services on our behalf. Payments made by us to Kutchin & Rufo, P.C. in fiscal 2002 were approximately $65,000. Edward D. Kutchin, a shareholder in the professional corporation of Kutchin & Rufo, P.C., was elected to the position of Clerk on August 27, 2002 and is the son-in-law of Herbert W. Pollack, the Chairman of the Board of Directors. Part IV Item 14. Exhibits, Financial Statement Schedule And Reports on Form 8-K ----------------------------------------------------------------------- (a) 1. Consolidated Financial Statements The Consolidated Financial Statements are filed as part of this report. 2. Consolidated Financial Statement Schedules The schedule is filed as part of this report and is set forth below: 28 VALUATION AND QUALIFYING ACCOUNTS For the Years Ended June 30, 2002, 2001 and 2000
Additions Balance at Charges to Charges to Balance at Beginning Cost and Other End of of Year Expenses Accounts Deductions Year Allowance for Bad Debts June 30, 2002 $ 1,896,615 $ 355,490 $ - $(1,036,927) $ 1,215,178 June 30, 2001 404,000 1,877,743 249 (385,377) 1,896,615 June 30, 2000 255,000 649,000 - (500,000) 404,000 ------------------------------------------------------------------------------------------------------------ Accumulated Amortization of Goodwill June 30, 2002 234,477 - - - 234,477 June 30, 2001 220,100 250,284 - (235,907) 234,477 June 30, 2000 16,800 219,162 - (15,862) 220,100 ------------------------------------------------------------------------------------------------------------ Accumulated Depreciation June 30, 2002 34,379,848 6,408,138 - (1,307,229) 39,480,757 June 30, 2001 28,114,968 5,919,839 345,041 - 34,379,848 June 30, 2000 23,915,018 4,491,855 - (291,905) 28,114,968 ------------------------------------------------------------------------------------------------------------ Inventory Obsolescence June 30, 2002 3,494,094 643,942 - (616,335) 3,521,701 June 30, 2001 711,709 2,782,385 - - 3,494,094 June 30, 2000 - 711,709 - - 711,709 ------------------------------------------------------------------------------------------------------------
All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the Consolidated Financial Statements or notes thereto. 3. Exhibits See Index to Exhibits on page 32 of this report. The exhibits listed below are either filed herewith or incorporated by reference in this report. (b) Reports on Form 8-K We did not file any current report on Form 8-K during the quarter ended June 30, 2002. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 27, 2002. Parlex Corporation By * /s/ Peter J. Murphy ------------------------ Peter J. Murphy, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * /s/ Herbert W. Pollack Chairman of the Board September 27, 2002 --------------------------- Herbert W. Pollack * /s/ Peter J. Murphy Director and Chief Executive September 27, 2002 --------------------------- Officer (Principal Executive Peter J. Murphy Officer) * /s/ Jonathan R. Kosheff Treasurer and Chief Financial September 27, 2002 --------------------------- Officer (Principal Financial Jonathan R. Kosheff and Accounting Officer) * /s/ Sheldon A. Buckler Director September 27, 2002 --------------------------- Sheldon A. Buckler * /s/ Richard W. Hale Director September 27, 2002 --------------------------- Richard W. Hale * /s/ M. Joel Kosheff Director September 27, 2002 --------------------------- M. Joel Kosheff * /s/ Lester Pollack Director September 27, 2002 ---------------------------- Lester Pollack * /s/ Benjamin M. Rabinovici Director September 27, 2002 ---------------------------- Benjamin M. Rabinovici * /s/ Edward D. Kutchin Attorney-in-Fact September 27, 2002 ---------------------------- Edward D. Kutchin
30 CERTIFICATION I, Peter J. Murphy, certify that: 1. I have reviewed this annual report on Form 10-K of Parlex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: September 27, 2002 /s/ Peter J. Murphy ------------------- Peter J. Murphy, Chief Executive Officer (Principal Executive Officer) 31 CERTIFICATION I, Jonathan R. Kosheff, certify that: 1. I have reviewed this annual report on Form 10-K of Parlex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: September 27, 2002 /s/ Jonathan R. Kosheff ----------------------- Jonathan R. Kosheff, Chief Financial Officer (Principal Financial Officer) 32 EXHIBIT INDEX The exhibits listed below are filed with or incorporated by reference in the Annual Report on Form 10-K. Exhibit No. Description ------- ----------- 3-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 Bylaws; (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 dated May 29, 1995; (filed as Exhibit 10-AH to Form 10-K for the fiscal year ended June 30, 1995). Confidential treatment has been granted for portions of this exhibit. 10-F Manufacturing and Sales Agreement between Samsung Electro Mechanics Co., Ltd. and Parlex Corporation dated September 29, 1994; (filed as Exhibit 10-AK to Form 10-K for the fiscal year ended June 30, 1995). Confidential treatment has been granted for portions of this exhibit. 10-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. 33 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-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 as Exhibit 10-O to Form 10-K for the fiscal year ended June 30, 1998). 10-P Commercial Loan Agreement dated November 12, 1997; (filed as Exhibit 10-P to Form 10-K for the fiscal year ended June 30, 1998). 10-Q Amendment to Agreement between Parlex Corporation and Allied Signal Laminate Systems, Inc., effective May 5, 1999;(filed as Exhibit 10-Q to Form 10-K for the fiscal year ended June 30, 1999). 10-R Employment Agreement between Parlex Corporation and Peter J. Murphy, dated September 1, 1999;(filed as Exhibit 10-R to Form 10-K for the fiscal year ended June 30, 1999). 10-S Loan Agreement dated as of March 1, 2000 between Parlex Corporation and Fleet National Bank (filed as Exhibit 10-S to Form 8-K dated March 15, 2000 and filed with the Securities and Exchange Commission on March 15, 2000). 10-T Patent Assignment Agreement between Parlex Corporation and Polyclad Laminates, Inc., dated January 20, 2000; (filed as Exhibit 10-T to Form 10-K for the fiscal year ended June 30, 2000). 10-U First Amendment dated September 28, 2001 to Loan Agreement dated as of March 1, 2000 between Parlex Corporation and Fleet National Bank; (filed as Exhibit 10-U to Form 10-Q dated September 30, 2001 and filed with the Securities and Exchange Commission on November 9, 2001). 10-V Parlex Corporation 2001 Employees' Stock Option Plan*; (filed as Exhibit 10-V to Form 10-Q dated December 30, 2001 and filed with the Securities and Exchange Commission on February 12, 2002). 10-W Second Amendment dated April 16, 2002 to Loan Agreement dated as of March 1, 2000 between Parlex Corporation and Fleet National Bank; (filed as Exhibit 10-W to Form 10-Q dated March 31, 2002 and filed with the Securities and Exchange Commission on May 14, 2002). 10-X Employment Agreement between Parlex Corporation and Herbert W. Pollack dated September 1, 2000*; (filed herewith). 21.1 Subsidiaries of the Registrant; filed herewith. 23.1 Consent of Independent Auditors; filed herewith. 34 24.1 Powers of Attorney; filed herewith. * Denotes management contract or compensatory plan or arrangement. 35