-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PUHX1a0/9fTvsLV3jK5cN+MgRLI5Pj/3lI5bz8vm+0513G1mvdf0vne8RJ4M8Pmf hONUn8HoW3Xsbjw3QmTqeQ== 0000910647-02-000114.txt : 20020514 0000910647-02-000114.hdr.sgml : 20020514 ACCESSION NUMBER: 0000910647-02-000114 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARLEX CORP CENTRAL INDEX KEY: 0000724988 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 042464749 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12942 FILM NUMBER: 02646911 BUSINESS ADDRESS: STREET 1: ONE PARLEX PLACE CITY: METHUEN STATE: MA ZIP: 01844 BUSINESS PHONE: 5086854341 10-Q 1 parl-q3.txt FORM 10-Q FOR MARCH 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 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 [ ] The number of shares outstanding of the registrant's common stock as of May 12, 2002 was 6,303,216 shares. 1 PARLEX CORPORATION ------------------ INDEX ----- Part I - Financial Information Page Item 1. Condensed Unaudited Consolidated Financial Statements: Consolidated Balance Sheets - March 31, 2002 and June 30, 2001 3 Consolidated Statements of Operations - For the Three Months and Nine Months Ended March 31, 2002 and April 1, 2001 4 Consolidated Statements of Cash Flows - For the Nine Months Ended March 31, 2002 and April 1, 2001 5 Notes to Unaudited Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information 18 Signatures 19 Exhibit Index 20 2 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -----------------------------------
ASSETS March 31, 2002 June 30, 2001 CURRENT ASSETS: Cash and cash equivalents $ 1,438,717 $ 3,203,990 Short-term investments - 5,533,703 Accounts receivable - net 16,578,194 17,434,115 Inventories - net 20,335,264 19,318,522 Refundable income taxes 1,176,544 2,921,145 Deferred income taxes 5,601,732 2,901,201 Other current assets 1,395,040 2,634,085 ------------------------------- Total current assets $ 46,525,491 $ 53,946,761 ------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 1,018,822 1,018,822 Buildings 22,177,980 22,109,721 Machinery and equipment 58,543,640 56,174,718 Leasehold improvements and other 7,226,065 6,806,493 Construction in progress 4,511,035 3,843,792 ------------------------------- Total 93,477,542 89,953,546 Less accumulated depreciation and amortization (38,048,667) (34,379,848) ------------------------------- Property, plant and equipment - net 55,428,875 55,573,698 ------------------------------- GOODWILL - net 1,156,935 906,708 OTHER ASSETS 1,612,600 436,785 ------------------------------- TOTAL $104,723,901 $110,863,952 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 3,703,052 $ 10,710,299 Accounts payable 11,772,207 8,330,461 Joint venture partner payable obligations 1,356,964 - Accrued liabilities 3,664,441 3,889,540 ------------------------------- Total current liabilities 20,496,664 22,930,300 ------------------------------- LONG-TERM DEBT 8,000,000 118,762 ------------------------------- OTHER NONCURRENT LIABILITIES 1,035,226 2,442,274 ------------------------------- MINORITY INTEREST IN PARLEX SHANGHAI 438,567 4,021,485 ------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 651,321 651,321 Additional paid-in capital 60,897,275 60,897,275 Retained earnings 14,789,148 21,467,585 Accumulated other comprehensive loss (546,675) (627,425) Less treasury stock, at cost (1,037,625) (1,037,625) ------------------------------- Total stockholders' equity 74,753,444 81,351,131 ------------------------------- TOTAL $104,723,901 $110,863,952 ===============================
See notes to unaudited consolidated financial statements. 3 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
Three Months Ended Nine Months Ended March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001 ------------------------------------------------------------------ REVENUES: Product sales $ 21,266,238 $ 24,873,679 $ 63,563,170 $ 81,396,554 License fees and royalty income 12,048 15,283 35,086 182,051 ------------------------------------------------------------------ Total revenues 21,278,286 24,888,962 63,598,256 81,578,605 ------------------------------------------------------------------ COSTS AND EXPENSES: Cost of products sold 21,285,005 24,904,023 63,175,513 74,423,899 Selling, general and administrative expenses 3,252,309 4,168,874 10,170,700 12,596,214 ------------------------------------------------------------------ Total costs and expenses 24,537,314 29,072,897 73,346,213 87,020,113 ------------------------------------------------------------------ OPERATING LOSS (3,259,028) (4,183,935) (9,747,957) (5,441,508) OTHER INCOME, Net 8,879 218,178 231,368 479,313 INTEREST EXPENSE (145,755) (180,275) (455,417) (299,887) ------------------------------------------------------------------ LOSS FROM OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (3,395,904) (4,146,032) (9,972,006) (5,262,082) BENEFIT FROM INCOME TAXES 1,715,852 517,550 3,988,802 707,550 ------------------------------------------------------------------ LOSS BEFORE MINORITY INTEREST (1,680,052) (3,628,482) (5,983,204) (4,554,532) MINORITY INTEREST 12,604 78,337 472,728 (397,019) ------------------------------------------------------------------ NET LOSS $ (1,667,448) $ (3,550,145) $ (5,510,476) $ (4,951,551) ================================================================== BASIC LOSS PER SHARE ($0.26) ($0.56) ($0.87) ($0.79) ================================================================== DILUTED LOSS PER SHARE ($0.26) ($0.56) ($0.87) ($0.79) ================================================================= Weighted average shares - basic 6,303,216 6,294,818 6,303,216 6,284,503 ================================================================== Weighted average shares - diluted 6,303,216 6,294,818 6,303,216 6,284,503 ==================================================================
See notes to unaudited consolidated financial statements 4 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
Nine Months Ended March 31, 2002 April 1, 2001 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (5,510,476) $ (4,951,551) ------------------------------ Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization of property, plant and equipment and other assets 4,779,170 4,971,724 Minority interest (472,863) 397,019 Changes in current assets and liabilities: Accounts receivable - net 871,753 (807,209) Inventories (998,429) (1,293,662) Refundable taxes 1,753,601 (2,065,277) Other assets and deferred taxes (3,045,651) 532,524 Accounts payable and accrued liabilities 1,471,391 (532,446) ------------------------------ Net cash used for operating activities (1,151,504) (3,748,878) ------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Poly-Flex subsidiary 525,000 - Acquisition of minority interest in Parlex Shanghai (3,173,283) - Maturities (purchases) of investments available for sale, net 5,498,950 (5,373,994) Additions to property, plant and equipment and other assets (4,367,584) (6,825,149) ------------------------------ Net cash used for investing activities (1,516,917) (12,199,143) ------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank loans 21,121,583 18,840,000 Payment of bank loans (20,247,411) (11,088,444) Exercise of stock options - 150,226 ------------------------------ Net cash provided by financing activities 874,172 7,901,782 ------------------------------ Effect of exchange rate changes on cash 28,976 (87,423) ------------------------------ Net decrease in cash and cash equivalents (1,765,273) (8,133,662) Cash and cash equivalents, beginning of year 3,203,990 11,949,858 ------------------------------ Cash and cash equivalents, end of period $ 1,438,717 $ 3,816,196 ============================== SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS: Effect of tax election on Poly-Flex acquisition $ - $ 3,197,000 ============================== Acquisition of minority interest in Parlex Shanghai $ 1,356,964 $ - ============================== Property, plant, equipment and other asset purchases financed under capital lease, long-term debt and accounts payable $ 495,320 $ 210,431 ==============================
See notes to unaudited consolidated financial statements. 5 PARLEX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------- 1. Management Statement -------------------- The financial statements as reported in Form 10-Q reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position as of March 31, 2002 and the results of operations and cash flows for the three months and nine months ended March 31, 2002 and April 1, 2001. All adjustments made to the interim financial statements included all those of a normal and recurring nature. We followed the same accounting policies in the preparation of these interim financial statements as described in our annual filing on Form 10-K for the year ended June 30, 2001. This filing should be read in conjunction with our annual report on Form 10-K for the year ended June 30, 2001. 2. Comprehensive Loss ------------------ Comprehensive loss for the three months and nine months ended March 31, 2002 and April 1, 2001 is as follows:
Three Months Ended Nine Months Ended March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001 -------------- ------------- -------------- ------------- Net loss $(1,667,448) $(3,550,145) $(5,510,476) $(4,951,551) Other comprehensive (loss) income: Unrealized gain (loss) on short term investments - 26,728 (34,751) 48,724 Foreign currency translation adjustments (46,815) (127,873) 115,501 (136,148) ----------------------------------------------------------------- Total comprehensive loss $(1,714,263) $(3,651,290) $(5,429,726) $(5,038,975) =================================================================
The accumulated other comprehensive (loss) income balance is as follows:
Unrealized gains Foreign (losses) on Currency Trans- Short Term Investments lation Adjustments Total ---------------------- ------------------ ----- Beginning balance, July 1, 2001 $ 34,751 $ (662,176) $ (627,425) Current period change (34,751) 115,501 80,750 ----------------------------------------------------- Ending balance, March 31, 2002 $ - $ (546,675) $ (546,675) =====================================================
6 3. Recent Accounting Pronouncements -------------------------------- Effective July 1, 2001, Parlex Corporation and subsidiaries (the "Company") 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, 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. Other intangible assets, which is a component of other assets on the condensed consolidated balance sheets, as of March 31, 2002, are as follows:
Other Intangible Assets ---------- Land use rights $1,144,835 Other intangible assets 109,787 Less: Accumulated amortization (66,788) ---------- Other intangible assets, net $1,187,834
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 quarter ended March 31, 2002 was $7,867. The estimated amortization expense for each of the fiscal years subsequent to June 30, 2001 is as follows:
Amortization Expense -------------------- For year ended June 30, 2002 $ 20,267 For year ended June 30, 2003 29,510 For year ended June 30, 2004 25,821 For year ended June 30, 2005 25,821 For year ended June 30, 2006 25,821 Thereafter 1,060,594 ---------- $1,187,834 ==========
The effect of adoption of SFAS 142 on net income and earnings per share is as follows: 7
Three Months Ended Nine Months Ended March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001 -------------- ------------- -------------- ------------- Reported net loss $(1,667,448) $(3,550,145) $(5,510,476) $(4,951,551) Goodwill amortization (net of tax) - 37,876 - 236,596 ----------------------------------------------------------------- Adjusted net loss (1,667,448) (3,512,269) (5,510,476) (4,714,955) Adjusted basic loss per share $ (0.26) $ (0.56) $ (0.87) $ (0.75) ================================================================= Adjusted diluted loss per share $ (0.26) $ (0.56) $ (0.87) $ (0.75) =================================================================
4. Reclassifications ----------------- Certain prior period amounts have been reclassified to conform to the current period presentation. 5. Stock Options ------------- 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 changes) in the aggregate may be issued under the 2001 Plan. 6. Long-Term Debt -------------- We executed the Second Amendment to our Loan Agreement (the "Credit Agreement") (originally dated March 1, 2000) on April 16, 2002. The agreement provides our bank with a secured interest in all of our assets with exception to our real estate. We may borrow up to a total of $15,000,000 which is currently 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 March 31, 2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to 2.25%. The Credit Agreement carries an annual commitment fee that varies from 1/4% to 1/2% on the average daily unused portion of the bank's commitment. Interest is payable monthly. As of March 31, 2002, the unused commitment amounted to $6.9 million. 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 March 31, 2002, we were in compliance with the provisions of the Credit Agreement. The Credit Agreement permits us to pay cash dividends to the extent such payment would not cause us to violate the aforementioned covenants. As of March 31, 2002 we have, as provided for under our Credit Agreement, converted $8 million of our Credit Agreement borrowings into six LIBOR contracts with maturities between two and five months. The LIBOR plus margin for these contracts varies between 4.12% and 4.36%. 7. Income Taxes ------------ Income taxes are recorded for this interim period based upon an estimated annual effective tax rate. Our effective tax rate is impacted by the proportion of our estimated annual income being earned in domestic versus foreign tax jurisdictions and the generation of tax credits. 8 8. Acquisition ----------- In 1995, we formed a joint venture, Parlex (Shanghai) Circuit Co. Ltd. ("Parlex Shanghai"). At its formation, we had a 50.1% controlling interest and as such have been consolidating Parlex Shanghai's financial results within our financial statements with minority interest recorded to reflect our partners' 49.9% interest. On October 22, 2001, we entered into an agreement (the "Agreement") to purchase Shanghai Jinling Co., Ltd.'s ("Jinling") 40% joint venture interest in Parlex Shanghai, bringing our controlling interest to 90.1%. The Agreement requires us to pay Jinling the sum of $2.2 million. As of March 31, 2002, the outstanding balance owed to Jinling is $1,140,000. The acquisition of Jinling's 40% interest in Parlex Shanghai will be accounted for as a business combination under the purchase method of accounting. Prior to the acquisition, a distribution of retained earnings was declared based upon the joint venture partners' proportional share of Parlex Shanghai's registered capital as of December 30, 2000. Jinling's distribution approximated $2.3 million and is payable in cash. As of March 31, 2002, the outstanding balance is approximately $217,000. A preliminary allocation of purchase price has been made to the assets acquired based on their estimated fair market value at the date of acquisition resulting in goodwill of approximately $250,000. Such amount is subject to change based upon the final allocation of purchase price. We signed a memorandum of understanding with Gul Technologies Singapore Ltd. ("Gul") to enter into a joint venture with us relative to our Asian operations and are currently finalizing the terms of the definitive joint venture agreement. Further, we have an agreement, subject to approval by our Board of Directors, to purchase the remaining 9.9% in Parlex Shanghai. 9. Other Intangible Assets -Land Use Rights ---------------------------------------- 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 us to expand our operations within China. The purchase price of the land use rights was approximately $1.1 million of which $347,000 has been paid as of March 31, 2002. The rights have been capitalized as intangible assets and will be amortized over their 50 year life. 9 10. 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. Work in process and finished goods inventory associated with programs cancelled by customers are reserved as obsolete. Inventories consisted of:
March 31, 2002 June 30, 2001 -------------- ------------- Raw materials $ 7,399,370 $ 6,766,359 Work in process 8,936,641 8,861,718 Finished goods 3,999,253 3,690,445 ---------------------------- Total $20,335,264 $19,318,522 ============================
11. Revenue Recognition Policy -------------------------- Revenue on product sales is recognized 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. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial information included in this Quarterly Report on Form 10-Q and with "Factors That May Affect Future Results" set forth on page 17. 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 Quarterly Report on Form 10-Q. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements in our Annual Report of Form 10-K for the year ended June 30, 2001. 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 its 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 - ---------------------------- 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. 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 future product demand. Our estimates of future product demand may differ from actual demand and, as such our estimate of the provision required for excess and obsolete inventory may change, which we would 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 11 is the possibility that the ultimate resolution of such issues could have an adverse effect on the results of our operations. 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 $31.9 million in property and equipment and approximately $14.9 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, 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. We signed a memorandum of understanding with Gul to enter into a joint venture with us relative to our Asian operations and are currently finalizing the terms of the definitive joint venture agreement. Further, we have an agreement, subject to approval by our Board of Directors, to purchase the remaining 9.9% interest in Parlex Shanghai. Results of Operations - --------------------- The following table sets forth, for the periods indicated, selected items in our statements of operations as a percentage of total revenue. You should read the table and the discussion below in conjunction with our Consolidated Financial Statements and the Notes thereto.
Three Months Ended Nine Months Ended March 31, 2002 April 1, 2001 March 31, 2002 April 1, 2001 -------------- ------------- -------------- ------------ Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of products sold 100.0 % 100.1 % 99.3 % 91.2 % ---------------------------------------------------------- Gross Profit 0.0 % (0.1)% 0.7 % 8.8 % Selling, general and administrative expenses 15.3 % 16.7 % 16.0 % 15.4 % ---------------------------------------------------------- Operating loss (15.3)% (16.8)% (15.3)% (6.6)% Loss from operations before benefit from income taxes and minority interest (16.0)% (16.7)% (15.7)% (6.5)% --------------------------------------------------------- Net loss (7.8)% (14.3)% (8.7)% (6.1)% ==========================================================
12 Three Months Ended March 31, 2002 Compared to - --------------------------------------------- Three Months Ended April 1, 2001 - -------------------------------- Total Revenues. Our total revenues were $21.3 million for the three months ended March 31, 2002 compared to $24.9 million for the three months ended April 1, 2001, representing a decrease of $3.6 million, or 14%. 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. 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. Cost of Products Sold. Cost of products sold were $21.3 million, or 100% of total revenues, for the three months ended March 31, 2002, compared to $24.9 million, or 100% of total revenues for the comparable period in the prior year. We experienced unfavorable manufacturing variances of $5 million or 23% of total revenues for the three months ended March 31, 2002. This was due to excess manufacturing capacity associated with a 14% decrease in revenues for this period compared to the three months ended April 1, 2001. In addition, for the quarter ending March 31, 2002 cost of products sold includes a $41,000 charge for severance costs associated with a reduction in workforce. To counteract the excess manufacturing capacity, we have implemented a plan to further reduce manufacturing expenses and consolidate or relocate lower margin products to our lower cost operations in China and Mexico. 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.3 million, or 15% of total revenues, for the three months ended March 31, 2002, and $4.2 million or 17% of total revenues for the same period in the prior year representing a decrease of $900,000, or 21%. The decrease in selling, general and administrative expenses is attributable to lower costs arising from a reduction in personnel and lower commission expense. The three months ended March 31, 2002 includes a $32,000 charge for severance costs associated with a reduction in work force and the three months ended April 1, 2001 included a $400,000 charge for bad debt allowance and employee severance costs resulting from the slowdown in our technology markets. Other Income, Interest Expense, and Benefit from Income Taxes. Other income was $9,000 for the three months ended March 31, 2002, compared to $218,000 for the three months ended April 1, 2001. Other income for the period ended March 31, 2002 consisted primarily of gains on the sale of equipment compared to $110,000 received for the three months ended April 1, 2001 for the settlement of legal claims associated with our Methuen building addition and interest income earned on our short-term investments. Interest expense was $146,000 for the three months ended March 31, 2002, compared to $180,000 for the comparable period in the prior year. The decrease in interest expense is due primarily to the change in the average interest rate for the period ending March 31, 2002 compared to the period ended April 1, 2001. The average interest rates were 4.36% and 8.63% for the quarter ending March 31, 2002 and April 1, 2001, respectively. The outstanding balances on our revolving credit line were $8 million and $7.7 million at the quarter ending March 31, 2002 and April 1, 2001, respectively. Our loss before benefit from income taxes and for the minority interest in our Chinese joint venture, Parlex Shanghai, was $3.4 million for the three months ended March 31, 2002, compared to a loss of $4.1 million for the comparable period in the prior year. We include Parlex Shanghai's results of operations, cash flows and financial position in our consolidated financial statements. 13 Our effective tax rate was approximately 51% in the three months ended March 31, 2002 and 12% for the comparable period in the prior year. Income taxes are recorded for this interim period based upon an estimated annual effective tax rate. Our effective tax rate is impacted by the proportion of our estimated annual income being earned in domestic versus foreign tax jurisdictions and the generation of tax credits. Accordingly, changes to our estimated annual effective tax rate are recorded in the period of that change. Nine Months Ended March 31, 2002 Compared to - -------------------------------------------- Nine Months Ended April 1, 2001 - ------------------------------- Total Revenues. Our total revenues were $63.6 million for the nine months ended March 31, 2002 compared to $81.6 million for the nine months ended April 1, 2001, representing a decrease of $18 million, or 22%. 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. 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. Licensing and royalty fees. Licensing and royalty fees were $35,000 for the nine months ended March 31, 2002 compared to $182,000 for the same period in 2001. The nine month period ending April 1, 2001, included the receipt of the final installment payment under the terms of our patent assignment agreement with Polyclad Laminates, Inc. 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 future. Cost of Products Sold. Cost of products sold were $63.2 million, or 99% of total revenues, for the nine months ended March 31, 2002, compared to $74.4 million, or 91% of total revenues for the comparable period in the prior year. We experienced unfavorable manufacturing variances of $14 million or 22% of total revenues for the nine months ended March 31, 2002. This was due to excess manufacturing capacity associated with a 22% decrease in revenues for this period compared to the nine months ended April 1, 2001. In addition, the nine months ended March 31, 2002 includes a $180,000 charge for severance costs associated with a reduction in workforce. To counteract the excess manufacturing capacity, we have implemented a plan to further reduce manufacturing expenses and consolidate or relocate lower margin products to our lower cost operations in China and Mexico. 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $10.2 million, or 16% of total revenues, for the nine months ended March 31, 2002, and $12.6 million or 15% of total revenues for the same period in the prior year representing a decrease of $2.4 million, or 19%. The decrease in selling, general and administrative expenses is attributable to lower costs arising from a reduction in personnel and lower commission expense. The nine months ended April 1, 2001 included a $400,000 charge for bad debt allowance and employee severance costs associated with the slowdown in our technology markets. Other Income, Interest Expense, and Benefit from Income Taxes. Other income was $231,000 for the nine months ended March 31, 2002, compared to $479,000 for the nine months ended April 1, 2001. Other income consists primarily of interest income earned on our short-term investments, and the decrease is associated with lower investment balances. 14 Interest expense was $455,000 for the nine months ended March 31, 2002, compared to $300,000 for the comparable period in the prior year. The increase in interest expense is due to the increased amount of average borrowings required to finance working capital and capital expenditure needs. The average daily loan balance on our revolving credit line was $7.7 million and $3.0 million for the nine month period ended March 31, 2002 and April 1, 2001, respectively. Our loss before benefit from income taxes and for the minority interest in our Chinese joint venture, Parlex Shanghai, was $10 million for the nine months ended March 31, 2002, compared to a loss of $5.3 million for the comparable period in the prior year. We include Parlex Shanghai's results of operations, cash flows and financial position in our consolidated financial statements. Our effective tax rate was approximately 40% in the nine months ended March 31, 2002 compared to an effective tax rate of 13% for the comparable period in the prior year. The increase in the effective tax rate resulted from net operating losses in higher tax jurisdictions and an increased amount of available tax credits. Liquidity and Capital Resources - ------------------------------- As of March 31, 2002, we had approximately $1.4 million in cash and cash equivalents. Net cash used by operations during the nine months ended March 31, 2002 was $1.2 million. Operating losses of $5.5 million adjusted for minority interest, depreciation and amortization used $1.2 million of operating cash. This was offset by $53,000 generated from a reduction in our working capital requirements including collection of $1.8 million of refundable taxes. Net cash used by investing activities was $1.5 million for the nine months ended March 31, 2002. These funds were used to purchase $4.4 million of capital equipment and other assets, and acquire our joint venture partner's 40% minority interest in Parlex Shanghai for $3.2 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 final settlement related to our 2000 acquisition of the Poly-Flex business. Cash provided by financing activities was $874,000 for the nine months ended March 31, 2002 which represents the net borrowings and repayments on our bank debt. We executed the Second Amendment to our Loan Agreement (the "Credit Agreement") (originally dated March 1, 2000) on April 16, 2002. The agreement provides our bank with a secured interest in all of our assets with exception to our real estate. We may borrow up to a total of $15,000,000 which is currently 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 March 31, 2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to 2.25%. 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. As of March 31, 2002, the unused commitment amounted to $6.9 million. 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 March 31, 2002, we were in compliance with the provisions of the Credit Agreement. The Credit Agreement permits us to pay cash dividends to the extent such payment would not cause us to violate the aforementioned covenants. As of March 31, 2002 we have, as provided for under our Credit Agreement, converted $8 million of our Credit Agreement borrowings into six LIBOR contracts with maturities between two and five months. The LIBOR plus margin for these contracts varies between 4.12% and 4.36%. 15 As of March 31, 2002, we owed Jinling a balance of $1,140,000 for the purchase of its minority interest in Parlex Shanghai and a balance of $217,000 on its distribution of retained earnings based upon Jinling's proportional share of Parlex Shanghai's registered capital as of December 30, 2000. Interest accrues, on these unpaid balances, as of March 31, 2002 at .03% per day, if these balances are not paid by May 15, 2002. Although we anticipate finalizing the terms of a joint venture agreement with Gul Technologies Singapore Ltd., ("Gul"), the terms of which would require Gul to purchase an interest in certain of our existing subsidiaries for cash, our ability to fund future capital needs and research and development would be adversely affected if the joint venture agreement is not completed. We believe that our cash on hand, our anticipated cash flow from operations, and the amounts to be made available under our domestic and foreign financing agreements should be sufficient to meet our anticipated needs for at least the next 12 months. 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 were no necessary adjustments. 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 interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. We maintain a portion of our cash and cash equivalents in financial instruments with maturities of one month. These financial instruments are subject to interest rate risk and will change in value if interest rates fluctuate. Due to the short duration of these financial instruments, an immediate decrease in interest rates would not have a material adverse effect upon our financial position. As of March 31, 2002, we had no funds invested in these financial instruments. We also have a revolving credit line, at our lender's prime rate or LIBOR plus a margin that varies from 1.5% to 2.25%. Both the prime rate and LIBOR are affected by changes in market interest rates. As of March 31, 2002, we owe approximately $8 million under the terms of the Credit Agreement. We have the option to repay borrowings at anytime without penalty, other than breakage fees in the case of prepayment of LIBOR borrowings. We believe that a 10% change in interest rates would not have a significant impact upon our financial position or results of operations. The remainder of our long-term debt bears interest at fixed rates and is therefore not subject to market risk. A substantial, and growing, portion of our business is conducted in Asia and the United Kingdom. Therefore our future results could be affected by fluctuations in the dollar's value against other currencies, specifically the Chinese Renminbi, in the case of Parlex Shanghai and Parlex Interconnect, and the British Sterling, in the case of Poly-Flex Circuits Limited. The effect of foreign currency fluctuations on long term assets for the period ended 16 March 31, 2002 was an increase of $116,000 and the cumulative historical effect, since 1995, was a decrease of $547,000, as reflected in our Consolidated Balance Sheets as accumulated other comprehensive loss. Although exchange rates between the dollar and the Renminbi have remained stable, exchange rates between the dollar and the British Sterling have fluctuated significantly in recent years. We do not believe that the effect of foreign currency fluctuation is material to our results of operations as the expenses related to our foreign currency revenues are recorded in the same currency. However, the value of assets recorded on our Consolidated Balance Sheets may be materially impacted by foreign currency translation, as well as the translated amounts of revenues and expenses. Nonetheless, we do not plan to modify our business practices. We have relied primarily upon financing activities to fund our United States and Chinese operations. In the event that we are required to fund these operations or cash needs with funds generated in the United Kingdom, currency rate fluctuations in the future could have a significant impact. However, at the present time, we do not anticipate altering our business plans and practices to compensate for future currency fluctuations. Factors That May Affect Future Results - -------------------------------------- This Quarterly Report on Form 10-Q contains certain "forward-looking statements" as defined under the federal securities laws. Our actual results of operations may differ significantly from those contemplated by such forward-looking statements as a result of various risk factors beyond our control, including, but not limited to, economic conditions in the electronics industry, particularly in the principal industry sectors we serve, changes in customer requirements and in the volume of sales to principal customers, competition and technological change, and other one- time events including, but not limited to, recent terrorist attacks and other important factors disclosed previously, including our failure to enter into a definitive joint venture with Gul relative to our Asian operations, and from time to time in other filings we have made with the U.S. Securities and Exchange Commission. 17 PART II - OTHER INFORMATION --------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibit Index to this report. (b) Reports on Form 8-K - We did not file a report on Form 8-K during the quarter ended March 31, 2002. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARLEX CORPORATION By: /s/ Peter J. Murphy ----------------------- Peter J. Murphy President and Chief Executive Officer By: /s/ Robert A. Rieth ----------------------- Robert A. Rieth Senior Vice President& CFO (Principal Accounting and Financial Officer) May 14, 2002 -------------- Date 19 EXHIBIT INDEX EXHIBIT DESCRIPTION OF EXHIBIT ---------------------- 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-S to Form 8-K dated March 15, 2000 and filed with the Securities and Exchange Commission on March 15, 2000. 20 EX-10 3 parl-10w.txt EXHIBIT 10W April 16, 2002 Parlex Corporation One Parlex Place Methuen, MA 01844 Attn: Peter J. Murphy, President Re: Second Amendment of Loan Agreement dated March 1, 2000 Gentlemen: Reference is made to that certain Loan Agreement dated March 1, 2000, as amended (the "Agreement") by and between Parlex Corporation (the "Borrower") and Fleet National Bank (the "Bank"). Notwithstanding any provisions of the Agreement to the contrary, the Agreement is hereby amended, effective immediately, as follows: 1. All capitalized terms used herein, unless otherwise defined, shall have the meanings ascribed to them in the Agreement. 2. Section 1.1 of the Agreement is hereby deleted in its entity and the following new Section 1.1 substituted therefor as follows: "1.1A Subject to the terms and conditions of this Agreement, the Bank hereby establishes a revolving line of credit of up to Fifteen Million ($15,000,000.00) Dollars (the "Revolving Loan") to be advanced as hereinafter provided. The Bank shall, as long as no Event of Default has occurred hereunder, from time to time, make advances in the form of direct loans or letters of credit issued for the account of the Borrower comprising the Revolving Loan (all of which shall be called "Loans" hereunder) to the Borrower upon the Borrower's request; provided, however, that no advance or other financial accommodation will be made if, after giving effect to the Borrower's request for such advance or other financial accommodation, the outstanding principal balance of the Revolving Loan would exceed the lesser of: (a) $15,000,000.00 (the "Credit Limit") or (b) the sum of: 1 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 2 (i) seventy percent (70%) of the face amount of eligible accounts receivable less than ninety (90) days from the invoice date thereof provided, however, that Bank may in its discretion increase the borrowing base percentage for advances as of April 30, 2002, plus (ii) ninety (90%) percent of the fair market value of eligible marketable securities, minus (iii) one hundred (100%) percent of the aggregate amount of all letters of credit or acceptances issued for the account of the account of the Borrower (the sum of (i) plus (ii) minus (iii) is hereinafter called the "Borrowing Base"). Borrower and Bank hereby recognize and agree that Bank has arranged for a Field Exam to be conducted with respect to Borrower's financial records and collateral for the Revolving Loan (the "Field Exam"). The Field Exam is currently scheduled to take occur on or about April 16, 2002. Upon the Bank's receipt of the Field Exam, the Bank will review its collateral position with respect to the Borrower's assets and specifically reserves the right to modify the Borrowing Base, in its reasonable discretion, based upon the results of the Field Exam. 1.1B For purposes of the Borrowing Base calculation set forth above, eligible accounts receivable are those which are owing to the Borrower which met the following specifications at the time it came into existence and continues to meet the same until collected in full: (i) The account arose from the performance of services or an outright sale of goods by Borrower, such goods have been shipped to the account debtor, and Borrower has possession of, or has delivered to Bank, shipping and delivery receipts evidencing such shipment. (ii) The account is not subject to any prior assignment, claim, lien, or security interest, and Borrower will not make any further assignment thereof or create any further security interest therein, nor permit Borrower's rights therein to be reached by attachment, levy, garnishment or other judicial process. (iii) The account is not subject to set?off, credit, allowance or 2 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 3 adjustment by the account debtor, except discount allowed for prompt payment and the account debtor has not complained as to his liability thereon and has not returned any of the goods from the sale of which the account arose. (iv) The account arose in the ordinary course of Borrower's business and did not arise from the performance of services or a sale of goods to a supplier or employee of the Borrower. (v) No notice of bankruptcy or insolvency of the account debtor has been received by or is known to the Borrower. (vi) The account is not owed by an account debtor whose principal place of business is outside the United States of America, unless such account is supported by a letter of credit acceptable to the Bank in all respects (which requirement may be modified or waived in Bank's sole discretion). (vii) The account is not owed by an entity which is a parent, brother/sister, subsidiary or affiliate of Borrower. (viii) The account debtor is not located in the State of New Jersey or Indiana, unless Borrower has filed and shall file all legally required Notice of Business Activities Report(s) with the New Jersey Division of Taxation or the Indiana Department of Revenue, respectively. (ix) The account is not evidenced by a promissory note. (x) The account did not arise out of any sale made on a bill and hold, dating or delayed shipment basis. (xi) The account when aggregated with all of the accounts of that account debtor does not exceed twenty-five percent (25%) of the then aggregate eligible accounts. (xii) The account did not arise out of a contract with the United States government or any department, agency or instrumentality thereof, 3 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 4 unless the Borrower has complied with the Federal Assignment of Claims Act. (xiii) The Bank in its reasonable discretion exercised in its good faith banking judgment, does not deem the account to be unacceptable for any reason. Provided that if any time twenty-five percent (25%) or more of the aggregate amount of the accounts due from any account debtor are unpaid in whole or in part more than ninety (90) days from the respective dates of invoice, from and after such time none of the accounts (then existing or thereafter arising) due from such account debtor shall be deemed to be eligible accounts until such time as all accounts due from such account debtor are (as a result of actual payments received thereon) no more than ninety (90) days from the date of invoice; accounts payable by Borrower to an account debtor shall be netted against accounts due from such account debtor and the difference (if positive) shall constitute eligible accounts from such account debtor for purposes of determining the Borrowing Base (notwithstanding sub-paragraph (iii) above); characterization of any account due from an account debtor as an eligible account shall not be deemed a determination by Bank as to its actual value nor in any way obligate Bank to accept any account subsequently arising from such account debtor to be, or to continue to deem such account to be, an eligible account; it is the Borrower's responsibility to determine the creditworthiness of account debtors and all risks concerning the same and collection of accounts are with Borrower; and all accounts, whether or not eligible accounts, constitute Collateral (as hereinafter defined)." 2. Section 3.4 of Agreement is hereby deleted in its entity and the following new Section 3.4 substituted therefor as follows: "3.4 The Borrower will, at reasonable times, furnish the Bank with such information and statements as the Bank may reasonably request, including without limitation, quarterly (within 45 days of the end of each fiscal quarter) accounts receivable agings and other internally generated financial reports and copies of all financial statements and reports that it shall send or make available its stockholders and monthly (within 10 days of the end of each fiscal month) a borrowing base certificate in the form of Exhibit C attached hereto and made a part hereof." 3. Sections 4.9 thru and including 4.17 of the Agreement are hereby deleted in their entirety and the following new Sections 4.9 thru 4.19 are substituted therefor as follows: 4 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 5 "4.9 (Minimum Current Ratio). The Borrower will not permit the ratio of its current assets to its current liabilities, determined on a consolidated basis, to be less than 2.0 to 1 as at the last day of any fiscal quarter of the Borrower, commencing with the fiscal quarter ending September 30, 2001. 4.10 (Minimum Tangible Net Worth). The Borrower will not permit its tangible net worth, determined on a consolidated basis, to be less than $74,000,000.00 as at the last day of the fiscal quarter ending September 30, 2001 or less than $74,000,000.00 plus fifty (50%) percent of the prior quarter's net income for each subsequent fiscal quarter thereafter (without reduction for any losses sustained in any fiscal quarter). The term "tangible net worth" shall mean stockholders' equity determined in accordance with generally accepted accounting principles, consistently applied, subtracting therefrom: (i) intangibles (as determined in accordance with such principles so applied), including, without limitation, goodwill, purchased technology and capitalized software development costs; and (ii) accounts and indebtedness owing from any employee or parent, subsidiary or other affiliate. 4.11 (Maximum Total Liabilities to Tangible Net Worth Ratio). The Borrower will not permit the ratio of its total liabilities (including, without limitation, all deferred taxes and contingent liabilities such as guarantees) to its tangible net worth, determined on a consolidated basis, to be more than 1.0 to 1 as at the last day of each fiscal quarter of the Borrower, commencing with the fiscal quarter ending September 30, 2001. 4.12 (Minimum Interest Coverage Ratio). The Borrower will not permit the ratio of its: (a) net operating profit (earnings before interest and taxes) to (b) interest expense to be less than 3.0 to 1 for the fiscal quarters ending September 30, 2002, December 31, 2002, March 31, 2003 or June 30, 2003 or less than 3.0 to 1 for the twelve- month period ending on the last day of any fiscal quarter thereafter. 4.13 (Maximum Senior Funded Indebtedness to EBITDA). The Borrower will not permit the ratio of its senior indebtedness to its EBITDA, determined on a consolidated basis, to be more than 2.0 to 1 for the twelve-month period ending on the last day of any fiscal quarter, commencing with the fiscal quarter ending June 30, 2003. The term "EBITDA" as used herein, shall mean, for the applicable period, income from operations before the payment of interest and taxes, plus depreciation and amortization. 5 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 6 Prior to the Expiration Date, outstanding balances under the Revolving Loan shall not be considered current maturities of long term indebtedness. 4.14 (Maximum Net Loss). The Borrower will not sustain a net loss in excess of $1,700,000.00 for the fiscal quarter ending March 31, 2002 or sustain a net loss in excess of $500,000.00 for the fiscal quarter ending June 30, 2002. 4.15 (Minimum Net Income). The Borrower's net income after taxes will not be less than $1.00 for any fiscal quarter, commencing with the fiscal quarter ending September 30, 2002. 4.16 (Maximum Capital Expenditures). The Borrower will not permit Borrower's Capital Expenditures to exceed $8,000,000.00 for any fiscal year of Borrower, commencing with the fiscal year ending June 30, 2002. The term "Capital Expenditures" as used herein means, for any period, the aggregate amount of all expenditures for the acquisition, construction, replacement or purchase of Capital Assets and Intangible Assets, including, but not limited to, expenditures under Capital Leases. The term "Capital Assets" as used herein means assets that according to generally accepted accounting principles consistently applied are required or permitted to be depreciated or amortized on Borrower's balance sheet. The term "Intangible Assets" as used herein means assets that according to generally accepted accounting principles consistently applied are properly classified as intangible assets, including, but not limited to, goodwill, franchises, licenses, patents, trademarks, trade names and copyrights. The term "Capital Leases" as used herein means capital leases, conditional sales contracts and other title retention agreements related to the purchase or acquisitions of Capital Assets. In calculating Capital Expenditures, Borrower will be assessed the value of Borrower's capital expenditures for Borrower's Chinese Joint Venture (the Joint Venture") times Borrower's percentage interest in such Joint Venture. Furthermore, capital equipment being transferred (or sold) from Borrower's locations to China will be excluded in calculating Borrower's Capital Expenditures for purposes of this covenant. 4.17 All accounting terms not otherwise specifically defined herein shall be construed and interpreted in accordance with generally accepted accounting principles consistently applied." 4. Section 7.11 of the Agreement is hereby deleted in its entity and the following new Section 7.11 substituted therefor as follows: 6 Parlex Corporation Attn: Peter J. Murphy, President April 16, 2002 Page 7 "7.11 The exhibits annexed hereto as Exhibit A, Exhibit B and Exhibit C are the only exhibits to be annexed to this Agreement, and the material contained therein shall be incorporated herein." 5. Section 7 of the Agreement is hereby further amended to add a new subsection 7.14 thereto, at the end thereof, as follows: "7.14 All Liabilities of the Borrower to the Bank, whether now existing or hereafter arising, shall be secured by a security interest in substantially all assets of the Borrower pursuant to a Security Agreement (All Assets) dated April ____, 2002, as the same may be amended, supplemented or superceded from time to time." 6. Exhibit A and Exhibit B of the Agreement are hereby deleted in their entirety and Exhibit A and Exhibit B attached hereto are substituted therefor. Except as specifically amended hereby, the Agreement shall remain in full force and effect, and the Borrower hereby reaffirms all representations and warranties contained therein, as of date hereof. Please acknowledge your acceptance and agreement to the matters contained herein by signing this letter in the space provided and returning it to the undersigned, whereupon it shall take effect as an instrument under seal. Very truly yours, FLEET NATIONAL BANK By:_________________________________ Thomas F. Brennan, Senior Vice President ACCEPTED AND AGREED TO: PARLEX CORPORATION By:_________________________________ Peter J. Murphy, President -----END PRIVACY-ENHANCED MESSAGE-----