-----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, Q6ABoYgivwi1xnokJfqpkXUWf2BsHefNGURa5lUEDm9t0j+cyXQmc26qqayyjT3Z Ata6TG7EVoT/vSNAu8gjlA== 0000910647-02-000230.txt : 20021113 0000910647-02-000230.hdr.sgml : 20021113 20021113165215 ACCESSION NUMBER: 0000910647-02-000230 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021113 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: 02820620 BUSINESS ADDRESS: STREET 1: ONE PARLEX PLACE CITY: METHUEN STATE: MA ZIP: 01844 BUSINESS PHONE: 5086854341 10-Q 1 parl-q1.txt BODY OF FORM 10-Q =========================================================================== 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 September 29, 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 November 6, 2002 was 6,303,216 shares. =========================================================================== 1 PARLEX CORPORATION ------------------ INDEX ----- Part I - Financial Information Page Item 1. Unaudited Condensed Consolidated Financial Statements: Consolidated Balance Sheets - September 29, 2002 and June 30, 2002 3 Consolidated Statements of Operations - For the Three Months Ended September 29, 2002 and September 30, 2001 4 Consolidated Statements of Cash Flows - For the Three Months Ended September 29, 2002 and September 30, 2001 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 Part II - Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 Certifications 26 Exhibit Index 28 2 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -----------------------------------
ASSETS September 29, 2002 June 30, 2002 CURRENT ASSETS: Cash and cash equivalents $ 1,558,708 $ 1,785,025 Accounts receivable - net 18,090,790 17,665,808 Inventories - net 17,576,660 17,588,589 Refundable income taxes 1,810,351 1,810,102 Deferred income taxes 3,595,659 3,595,659 Other current assets 1,688,511 2,030,210 ------------------------------- Total current assets 44,320,679 44,475,393 ------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 1,018,822 1,018,822 Buildings 22,221,208 22,209,273 Machinery and equipment 58,409,818 58,267,902 Leasehold improvements and other 7,506,969 7,499,054 Construction in progress 7,645,566 6,467,541 ------------------------------- Total 96,802,383 95,462,592 Less accumulated depreciation and amortization (40,943,790) (39,480,757) ------------------------------- Property, plant and equipment - net 55,858,593 55,981,835 ------------------------------- INTANGIBLE ASSETS - NET 1,148,226 1,155,827 GOODWILL - NET 1,157,358 1,157,510 DEFERRED INCOME TAXES 3,578,169 2,850,876 OTHER ASSETS 421,446 432,488 ------------------------------- TOTAL $106,484,471 $106,053,929 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 2,251,139 $ 3,560,855 Accounts payable 13,223,824 13,729,201 Accrued liabilities 5,340,505 4,865,058 ------------------------------- Total current liabilities 20,815,468 22,155,114 ------------------------------- LONG-TERM DEBT 15,100,974 12,000,000 ------------------------------- OTHER NONCURRENT LIABILITIES 1,302,939 1,327,490 ------------------------------- MINORITY INTEREST IN PARLEX SHANGHAI 411,495 430,204 ------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 651,321 651,321 Additional paid-in capital 60,897,275 60,897,275 Retained earnings 8,520,679 9,911,794 Accumulated other comprehensive loss (178,055) (281,644) Less treasury stock, at cost (1,037,625) (1,037,625) ------------------------------- Total stockholders' equity 68,853,595 70,141,121 ------------------------------- TOTAL $106,484,471 $106,053,929 ===============================
See notes to unaudited consolidated financial statements. 3 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------
Three Months Ended September 29, 2002 September 30, 2001 ---------------------------------------- REVENUES: $ 21,692,288 $ 21,635,500 COSTS AND EXPENSES: Cost of products sold 20,684,405 21,066,131 Selling, general and administrative expenses 2,919,516 3,502,335 ---------------------------------- Total costs and expenses 23,603,921 24,568,466 ---------------------------------- OPERATING LOSS (1,911,633) (2,932,966) OTHER (EXPENSE) INCOME, Net (20,182) 102,137 INTEREST EXPENSE (204,282) (194,287) ---------------------------------- LOSS FROM OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (2,136,097) (3,025,116) BENEFIT FROM INCOME TAXES 726,273 1,467,207 ---------------------------------- LOSS BEFORE MINORITY INTEREST (1,409,824) (1,557,909) MINORITY INTEREST 18,709 396,821 ---------------------------------- NET LOSS $ (1,391,115) $ (1,161,088) ================================== BASIC AND DILUTED LOSS PER SHARE $ (0.22) $ (0.18) ================================== WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 6,303,216 6,303,216 ==================================
See notes to unaudited consolidated financial statements. 4 PARLEX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
Three Months Ended September 29, 2002 September 30, 2001 ---------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(1,391,115) $(1,161,088) --------------------------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of property, plant and equipment and other assets 1,604,453 1,592,594 Minority interest (18,709) (396,821) Changes in current assets and liabilities: Accounts receivable - net (422,977) (383,974) Inventories 47,250 132,234 Refundable taxes - (1,459,996) Other assets and deferred taxes (372,064) 246,634 Accounts payable and accrued liabilities (1,131,889) 1,374,508 --------------------------------- Net cash used in operating activities (1,685,051) (55,909) --------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Poly-Flex subsidiary - 525,000 Maturities (purchases) of investments available for sale, net - 2,174,519 Additions to property, plant and equipment and other assets (345,283) (1,321,323) --------------------------------- Net cash (used in) provided by investing activities (345,283) 1,378,196 --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank loans 5,467,865 7,965,000 Payment of bank loans (3,676,448) (8,968,515) --------------------------------- Net cash provided by (used in) financing activities 1,791,417 (1,003,515) --------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,600 64,912 --------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (226,317) 383,684 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,785,025 3,203,990 --------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,558,708 $ 3,587,674 ================================= SUPPLEMENTARY DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Property, plant, equipment and other asset purchases financed under capital lease, long-term debt and accounts payable $ 1,041,388 $ 169,958 =================================
See notes to unaudited consolidated financial statements. 5 PARLEX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------- 1. Basis of Presentation --------------------- The consolidated financial statements include the accounts of Parlex Corporation, its wholly owned subsidiaries ("Parlex" or the "Company") and its 90.1% investment in Parlex(Shanghai) Circuit Co., Ltd. ("Parlex Shanghai") (see Note 9). 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 September 29, 2002 and the results of operations and cash flows for the three months ended September 29, 2002 and September 30, 2001. All adjustments made to the interim financial statements included all those of a normal and recurring nature. The Company followed the same accounting policies in the preparation of these interim financial statements as described in its annual filing on Form 10-K for the year ended June 30, 2002. This filing should be read in conjunction with the Company's annual report on Form 10-K for the year ended June 30, 2002. For the period ended September 29, 2002, as shown in the consolidated financial statements, the Company incurred net losses of $1,391,000 and used $1,685,000 of cash in operations and was out of compliance with its minimum EBITDA financial covenant of its principal external financing agreement. The Company has received a waiver of the minimum EBITDA covenant violation at September 29, 2002 and is in compliance with all other financial covenants. The Company expects to be in compliance with the terms of its principal external financing agreement for the foreseeable future (see Note 7). 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. Comprehensive Loss ------------------ Comprehensive loss for the three months ended September 29, 2002 and September 30, 2001 is as follows: 6
` Three Months Ended September 29, 2002 September 30, 2001 ------------------ ------------------ Net loss $(1,391,115) $(1,161,088) Other comprehensive (loss) income: Unrealized gain (loss) on short term investments - (28,916) Foreign currency translation adjustments 103,589 208,037 --------------------------------- Total comprehensive loss $(1,287,526) $ (981,967) =================================
At September 29, 2002, the Company's accumulated other comprehensive loss pertains entirely to foreign currency translation adjustments. 3. Intangible Assets ----------------- Intangible assets, as of September 29, 2002, are composed of the following:
Land Use Rights Patents Total -------- ------- ----- Gross cost $1,145,784 $ 58,560 $1,204,344 Accumulated amortization (35,428) (20,690) (56,118) ------------------------------------- Intangible assets, net $1,110,356 $ 37,870 $1,148,226 =====================================
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 September 29, 2002 was $7,601. 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 ==========
4. Recent Adoption of Accounting Pronouncements -------------------------------------------- On July 1, 2002 the Company adopted 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 7 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. On July 1, 2002 the Company adopted 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 adoption of SFAS Nos. 144 and 145 did not have a material effect on the Company's financial statements. 5. Future Adoption of Accounting Pronouncements -------------------------------------------- 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 No. 146 on the Company's consolidated financial position and results of operations, but does not expect a material impact. 6. Reclassifications ----------------- Certain prior period amounts have been reclassified to conform to the current period presentation. 7. Long-Term Debt -------------- Long-term debt consists of the following:
September 29, 2002 June 30, 2002 ------------------ ------------- Revolving credit agreement $12,110,000 $12,160,000 Parlex Shanghai term note 2,102,109 2,102,211 Parlex Interconnect term note 3,100,974 1,208,167 Capital lease obligations 39,030 90,477 ------------------------------ Total long-term debt 17,352,113 15,560,855 Less current portion 2,251,139 3,560,855 ------------------------------ Long-term debt - net $15,100,974 $12,000,000 ==============================
8 Revolving Credit Agreement - On September 27, 2002 (updated as of October 31, 2002), the Company executed the Third Amendment to the Credit Agreement (the "Third Amendment"). The Third Amendment increased 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 Company has classified as current those borrowings under the Credit Agreement that exceed $12,000,000. At September 29, 2002, approximately $110,000 is classified as current. 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 amended 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 not in compliance with the minimum EBITDA covenant at September 29, 2002, but has subsequently received a waiver of its covenant violation and is in compliance with all other financial covenants as of September 29, 2002. The Company anticipates being in compliance with the terms of the Third Amendment for the foreseeable future. Parlex Shanghai Term Note - On February 26, 2002, Parlex Shanghai entered into a short-term bank note bearing interest at 5.841%. Shanghai Jinling Co., Ltd ("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 period ended September 29, 2002. The Company provides a cross guarantee to Jinling for 100% of the term note. Parlex Interconnect Term Note - In June 2002, the Company's subsidiary, Parlex (Shanghai) Interconnect Products Co., Ltd ("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 repay Parlex Interconnect's two local short-term bank notes. 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 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 Parlex Interconnect's obligation under the Loan Agreement in the event of the Company's default on other financing arrangements. The Company was not in violation of the cross default provision as of September 29, 2002. Amounts borrowed under the Loan Agreement are payable in four installments of $500,000, $500,000, $1,000,000 and $3,000,000 beginning in February 2004 with the final payment due February 2005. As of September 29, 2002, total borrowings were $3.1 million. These borrowings were used to repay local short-term bank notes of $1.2 million and fund equipment and working capital requirements. 8. Income Taxes ------------ Income taxes are recorded for this interim period based upon an estimated annual effective tax rate. The Company's effective tax rate is impacted by the proportion of its estimated annual income being earned in domestic versus foreign tax jurisdictions, the generation of tax credits and the recording of a valuation allowance. The Company performs an ongoing evaluation of the realizability of its net deferred tax assets. The Company has concluded that it is more likely than not that the Company will realize the benefits of its net deferred tax assets. 9. 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 9 statements with minority interest recorded to reflect its partners' 49.9% interest. On October 22, 2001, the Company purchased Jinling's 40% joint venture interest in Parlex Shanghai, bringing the Company's interest to 90.1%. 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. 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 fully reserved for as obsolete. Reductions in obsolescence reserves are recognized when realized. Inventories, net of reserves, consisted of:
September 29, 2002 June 30, 2002 ------------------ ------------- Raw materials $ 7,754,032 $ 7,240,945 Work in process 7,412,673 7,382,378 Finished goods 2,409,955 2,965,266 ------------------------------ Total $17,576,660 $17,588,589 ==============================
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. 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. 12. Accrued Liabilities - Facility Exit Costs ----------------------------------------- In June 2002, the Company 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 were reported (as cost of sales) in its consolidated statement of operations. No amounts have been paid as of September 29, 2002. The lease agreement, for which certain costs have accrued under this plan, expires in 2004. 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 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2002, 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 judgements 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 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 increase, which we would record in the period such determination was made. Reductions in inventory reserves are recognized when realized. 11 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 and additional charges to reserves for deferred tax assets would be necessary. 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. On October 22, 2001, we purchased the 40% share of Parlex Shanghai held by one of our joint venture partners, 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. 12 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 September 29, 2002 September 30, 2001 ------------------ ------------------ Total revenues 100.0 % 100.0 % Cost of products sold 95.3 % 97.4 % ---------------------------- Gross profit 4.7 % 2.6 % Selling, general and administrative expenses 13.5 % 16.2 % ---------------------------- Operating loss (8.8)% (13.6)% Loss from operations before benefit from income taxes and minority interest (9.8)% (14.0)% ---------------------------- Net loss (6.4)% (5.4)% ===========================
Three Months Ended September 29, 2002 Compared to Three Months Ended - -------------------------------------------------------------------- September 30, 2001 - ------------------ Total Revenues. Our total revenues were $21.7 million for the three months ended September 29, 2002 compared to $21.6 million for the three months ended September 30, 2001. Revenues were flat when compared to the same period last year. However, revenues from foreign operations were 35% of total revenues for the three months ending September 29, 2002 compared to 23% of total revenues for the comparable period of the prior year. The growth in our foreign sourced revenue is a result of our efforts to transfer manufacturing processes from our domestic operations to our lower cost international manufacturing locations. Revenues remained strong in the appliance market with growth in both the laundry and dishwasher segments. Growth also occurred in our broad based computer business with significant revenues recorded from sales of flexible interconnects for desktops and printers. However, continued price erosion in the automotive market and further declines in telecommunications revenues offset increases. Cost of Products Sold. Cost of products sold were $20.7 million, or 95% of total revenues, for the three months ended September 29, 2002, compared to $21.1 million, or 97% of total revenues for the comparable period in the prior year. Margins for the three months ended September 29, 2002 were adversely impacted by approximately $225,000 in severance costs associated with work force reductions. Our Methuen, Massachusetts operation continued to experience low capacity utilization and correspondingly, significant unfavorable manufacturing variances. To improve utilization in fiscal 2003, we decided in fiscal 2002 to relocate our Salem, New Hampshire laminated cable operations to Methuen. We expect this move to be complete by January 1, 2003. The costs associated with the closing of our Salem, New Hampshire facility were recorded in fiscal 2002. 13 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. Even though the transfer of manufacturing operations is costly, this investment is core to our long-term strategy for cost effective manufacturing. Although these cost reduction measures are expected to improve gross margins, a return to profitability is predicated upon operational performance, a more favorable product mix, and increased sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2.9 million, or 14% of total revenues, for the three months ended September 29, 2002, and $3.5 million or 16% of total revenues for the same period in the prior year representing a decrease of $583,000, or 17%. Continued cost controls are primarily responsible for the reduction in costs. Headcount decreases through work force reductions and attrition have resulted in reduced spending at the corporate level. Tight cash flow management has resulted in the elimination of all non-core consulting expenses and non-essential outside services. All discretionary expenses continue to be held to a minimum. Other (Expense) Income, Interest Expense, and Benefit from Income Taxes. Other income was ($20,000) for the three months ended September 29, 2002, compared to $102,000 for the three months ended September 30, 2001. Other income for the period ended September 29, 2002 consisted primarily of currency exchange losses for our foreign operations compared to $117,000 of interest earned on our short-term investments during the period ending September 30, 2001 when we had marketable securities of $3.3 million. Interest expense was $204,000 for the three months ended September 29, 2002, compared to $194,000 for the comparable period in the prior year. Higher borrowings offset by lower interest rates for the three months ending September 29, 2002 compared to the three months ended September 30, 2001 resulted in an increase in interest expense. The outstanding balances on our long-term debt, including current maturities, were $17.4 million and $9.8 million at the quarter ended September 29, 2002 and September 30, 2001, respectively. Interest rates varied from 4.03% to 5.841% and 5.16% to 7.6875% for the three months ended September 29, 2002 and September 30, 2001, respectively. Our loss before benefit from income taxes and for the minority interest in our Chinese joint venture, Parlex Shanghai, was $2.1 million for the three months ended September 29, 2002, compared to a loss of $3.0 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 (34%) in the three months ended September 29, 2002 and (49%) 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, the generation of tax credits and changes in our valuation allowance. Accordingly, changes to our estimated annual effective tax rate are recorded in the period of that change. We perform an ongoing evaluation of the realizability of our net deferred tax assets. We have concluded that it is more likely than not that we will realize the benefits of our net deferred tax assets. Liquidity and Capital Resources - ------------------------------- As of September 29, 2002, we had approximately $1.6 million in cash and cash equivalents. Net cash used by operations during the three months ended September 29, 2002 was $1.7 million. Operating losses of $1.4 million after adjustment for minority interest, depreciation and amortization, generated $195,000 of operating cash. This was offset by $1.9 million used for our working capital requirements including payment of $1.1 million of accounts payables and accrued liabilities. In October 2002 we received income tax refunds of $1.5 million. 14 Net cash used by investing activities was $345,000 for the three months ended September 29, 2002. These funds were used to purchase capital equipment and other assets. As of September 29, 2002, we have an additional $1.0 million of capital equipment financed under our accounts payable. We have implemented plans to control our capital expenditures in order to increase revenue opportunities, enhance cash flows and maintain compliance with restrictive covenants under our Credit Agreement. Cash provided by financing activities was $1.8 million for the three months ended September 29, 2002 which represents the net borrowings and repayments on our bank debt. The bank borrowings include $3.1 million from Parlex Interconnect's $5.0 million Hong Kong bank loan and payments of $1.2 million to retire their two local short-term bank notes. 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 repay Parlex Interconnect's two local short-term bank notes. 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, we and our subsidiary, Parlex Asia Pacific Ltd., 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 Parlex Interconnect's obligation under the Loan Agreement in the event of our default on other financing arrangements. We were not in violation of the cross default provision as of September 29, 2002. Amounts borrowed under the Loan Agreement are payable in four installments of $500,000, $500,000, $1,000,000 and $3,000,000 beginning in February 2004 with the final payment due February 2005. As of September 29, 2002, total borrowings were $3.1 million. These borrowings were used to repay local short-term bank notes of $1.2 million and fund equipment and working capital requirements. On September 27, 2002 (updated as of October 31, 2002), we executed the Third 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 including a first mortgage on our Methuen, Massachusetts facility. 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. We have classified as current those borrowings under the Credit Agreement that exceed $12,000,000. At September 29, 2002, approximately $110,000 is classified as current. 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. 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 September 29, 2002) or a fixed rate equal to LIBOR plus a margin that varies from 1.5% to 2.25%. As of September 29, 2002 we have, as provided for under our Credit Agreement, converted $11.0 million of our Credit Agreement borrowings into four LIBOR contracts with maturities of three months. The LIBOR plus margin for these contracts varies between 4.03% and 4.0775%. 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 a $100,000 letter of credit is outstanding at September 29, 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, debt service coverage to EBITDA, and income, EBITDA and capital expenditure targets. As of September 29, 2002, we were not in compliance with the restrictive covenants related to minimum EBITDA. We have subsequently received a waiver of our covenant violation and are in compliance with all other financial covenants. 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 15 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. 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 external financing. Recent Adoption of Accounting Pronouncements - -------------------------------------------- On July 1, 2002 we adopted 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. On July 1, 2002 the Company adopted 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 adoption of SFAS Nos. 144 and 145 did not have a material effect on our financial statements. Future Adoption of Accounting Pronouncements - -------------------------------------------- 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. We are currently evaluating the impact resulting from the adoption of SFAS No. 146 on our consolidated financial position and results of operations, but do not expect a material impact. 16 Factors That May Affect Future Results - -------------------------------------- Our prospects are subject to certain uncertainties and risks. This Quarterly Report on Form 10-Q contains certain "forward-looking statements" as defined under 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. Our debt instrument contains restrictive covenants that could adversely affect our business by limiting our flexibility. Our amended and restated credit agreement imposes restrictions that affects, among other things, our ability to incur debt, pay dividends, sell assets, create liens, make capital expenditures and investments, merge or consolidate, enter into transactions with affiliates, and otherwise enter into certain transactions outside the ordinary course of business. Our amended and restated credit agreement also requires us to maintain specified financial ratios and meet certain financial tests. Our ability to continue to comply with these covenants and restrictions may be affected by events beyond our control. A breach of any of these covenants or restrictions would result in an event of default under our amended and restated credit agreement. Upon the occurrence of a breach, the lender under our amended and restated credit agreement could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable, foreclose on the assets securing our amended and restated credit agreement and/or cease to provide additional revolving loans or letters of credit, which could have a material adverse effect on us. If we cannot maintain compliance with certain financial covenants of our existing credit agreements, our outstanding debt may be callable. Our ability to maintain compliance with the financial covenants of our existing credit agreements is dependent upon our ability to achieve certain operating results. Failure to achieve those operating results may constitute an event of default under the terms of our credit agreements which may allow the lenders to accelerate repayment of all or portions of our outstanding debt. 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. 17 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. 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. 18 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; 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. 19 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 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 20 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 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. 21 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 3. Quantitative and Qualitative Disclosures of 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. Our $14 million Credit Agreement 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 rate and LIBOR are affected by changes in market interest rates. As of September 29, 2002, we have an outstanding balance under our Credit Agreement of approximately $12.1 million. We have the option to repay borrowings at anytime without penalty, other than breakage fees in the case of prepayment of LIBOR 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) Limited 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 September 29, 2002, of approximately $12.1 million. Poly-Flex Circuits Limited and Parlex (Europe) Limited had combined net assets as of September 29, 2002 of approximately $5.2 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 September 29, 2002, Parlex Shanghai and Parlex Interconnect had combined outstanding debt of $5.2 million. As of September 29, 2002, Poly-Flex Circuits Limited had no outstanding debt. 22 Item 4. Controls and Procedures - ------------------------------- Our Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report (Evaluation Date), that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 23 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 September 29, 2002. 24 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/ Jonathan R. Kosheff -------------------------- Jonathan R. Kosheff Treasurer & CFO (Principal Accounting and Financial Officer) November 12, 2002 ----------------- Date 25 CERTIFICATION I, Peter J. Murphy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Parlex Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: November 13, 2002 * /s/ Peter J. Murphy - --------------------- Peter J. Murphy, Chief Executive Officer (Principal Executive Officer) 26 CERTIFICATION I, Jonathan R. Kosheff, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Parlex Corporation; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and c) presented in this quarterly 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 quarterly 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: November 13, 2002 * /s/ Jonathan R. Kosheff - ------------------------- Jonathan R. Kosheff, Chief Financial Officer (Principal Financial Officer) 27 EXHIBIT INDEX EXHIBIT DESCRIPTION OF EXHIBIT ---------------------- 10-Y Employment Agreement between Parlex Corporation and Peter J. Murphy dated September, 2002; (filed herewith) 10-Z Third Amendment dated as of October 31, 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. Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002 28 EX-10 3 parl-10y.txt EXHIBIT 10Y Exhibit 10-Y EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT (the "Agreement") made as of the 1st day of September, 2002, by and between Parlex Corporation, a Massachusetts corporation (the "Company"), and Peter J. Murphy of Atkinson, New Hampshire (the "Employee"). In consideration of the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. Employment ---------- The Company hereby employs the Employee, and the Employee hereby accepts employment by the Company to render such services in connection with the business of the Company as the Company may from time to time request. The term of the Employee's employment hereunder shall begin on September 1, 2002, and shall end on August 31, 2005. 2. Compensation ------------ 2.1 In consideration of all services to be rendered by the Employee during the term of this Agreement, the Company shall pay to the Employee during the term of his employment hereunder compensation at the rate of eleven thousand four hundred and sixty dollars ($11,460.00) twice a month, payable in accordance with Company's current policy for senior management. 2.2 The amount of compensation provided in subsection 2.1 above may be reviewed from time to time by the Compensation Committee of the Board of Directors of the Company in its sole discretion. 2.3 If, during the term of the Agreement, a Change of Control (as defined below) shall occur, then Employee shall have the option, beginning six (6) months after the effective date of the Change of Control, exercisable by him at any time during the remainder of the term of the Agreement, upon giving written notice to the Company, to terminate this Agreement. In the event the Employee elects to terminate the Agreement as provided for herein, then Company shall pay to Employee, beginning 15 days after receipt of written notice from Employee exercising his rights under this provision, an amount, payable on a monthly basis, for a period of twelve months from the date of termination, equal to one hundred percent (100%) of the rate of compensation payable per month to Employee, at the time of Employee's termination, pursuant to subsection 2.1 above, plus an amount equal to the monthly COBRA payment for the health insurance plan the Employee participates in, at the time of Employee's termination but shall not be required to pay to Employee the compensation described in Section 7.3 below. Upon Employee's termination of this Agreement, he shall also be entitled to exercise, to the extent they are then exercisable, any stock options within a period of ninety (90) days following such date of termination, but in no event later than the expiration date of any stock option. 2.4 If, in the event of a Change of Control, the Company terminates the Employee's employment hereunder, and said decision was made without Cause, the Company shall pay to the Employee in a lump sum, an amount equal to 24 months of the rate of compensation payable per month to Employee, at the time of Employee's termination, pursuant to subsection 2.1 above plus an amount equal to 24 months of the monthly COBRA payment for the health insurance plan the Employee participates in, at the time of Employee's termination. The Employee shall also receive, at the expense of the Company, professional outplacement services, provided that the Company shall only be required to bear up to Fifty Thousand Dollars ($50,000) for said services. Additionally, all stock options granted to the Employee shall be immediately and automatically accelerated and become fully vested and all unexercised stock options shall be exercisable by the Employee during the period ending ninety (90) days after the date of termination by the Company, but in no event later than the expiration date of any stock option. 2.5 As used in this Agreement, the term "Change of Control" means the happening of any of the following: (i) the Company shall reorganize, merge or consolidate with any corporation and the Company shall not be the "surviving corporation" (as defined below); or (ii) the Company shall sell or exchange all or substantially all of its assets to a corporation which is not a wholly owned subsidiary of the Company; or (iii) any "person", as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Act") (other than the Company or a subsidiary or any employee benefit plan (including its trustee) of either the Company or a subsidiary) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly of securities of the Company representing 30 percent or more of the combined voting power of the Company's then outstanding securities and the effect of which (as determined by the Board of Directors) is to take over control or participate in the affairs of the Company. For purposes of this Section, the term 2 "person" shall exclude all persons who are then officers or directors of the Company, or spouses, or spouses, blood relatives or stepchildren of such officers or directors, and trusts for the benefit of any such persons, and the estates of any such persons; or (iv) during any period of two consecutive years, the individuals who, at the beginning of such period, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of a least a majority of the directors then still in office who were directors at the beginning of the period. As used herein, the Company shall be deemed to be the "surviving corporation" following a reorganization, merger or consolidation if, following such transaction, the persons who were the beneficial owners of the Company's voting securities prior to the transaction beneficially own securities having a majority of the aggregate voting power represented by all outstanding securities of the Company or other entity resulting from such reorganization, merger or consolidation. 3. Death Benefit ------------- If the Employee dies during the term of employment hereunder, this Agreement shall terminate and all obligations of Company to Employee shall terminate except that Company agrees to pay to the Designated Beneficiary (as hereinafter defined) on a monthly basis for a period of twenty-four (24) months beginning with the first month after Employee's death, an amount equal to seventy-five percent (75%) of the rate of compensation payable per month to Employee, at the time of Employee's death, pursuant to subsection 2.1 above. For purposes of this Agreement, the term "Designated Beneficiary" shall be the person or persons designated in a writing filed by the Employee with the Company or, upon the death of the Employee without having made such a designation, the Employee's estate. 4. Fringe Benefits --------------- In addition to the compensation provided for in section 2 above, while this Agreement is in effect Employee shall be entitled to receive all fringe benefits and perquisites customarily extended to officers and key employees of the Company, including but not limited to, profit sharing, bonus, stock option, health and life insurance. 5. Further Covenants ----------------- 3 5.1 The Employee agrees that all knowledge and information of a secret or confidential nature with respect to the business of the Company possessed or acquired by him will be held in confidence and will not, either during or after his employment by the Company, be disclosed, published, or made use of except when in the ordinary course of business the disclosure is in the best interest of the Company or unless and until such knowledge and information shall have ceased to be secret or confidential as evidenced by general public knowledge. 5.2 The Employee agrees that all inventions, developments, patents, and patent applications relating to the business of the Company made, conceived, or obtained by him either alone or in conjunction with others during the term of his employment by the Company shall be the sole property of the Company. The Employee agrees to promptly disclose and assign to the Company all such inventions, developments, patents, and patent applications, and, at the request of the Company to promptly execute and deliver any documents and take any other action which the Company deems necessary or advisable in order to vest in it all rights to such inventions, developments, patents, and patent applications. 5.3 The Employee agrees that at the termination of his employment by the Company he will promptly deliver to the Company all technical data, drawings, memoranda, customer lists, and other documents in his possession or control which relate to the business of the Company. 5.4 The Employee agrees that so long as he is employed by the Company hereunder, and for a period of twelve (12) months after he ceases for any reason to be employed by the Company, he will not, directly or indirectly, own, operate, manage or participate in the ownership, operation, or management of, or be connected or employed in any way (whether as owner, employee, officer, director, partner, shareholder, consultant, joint venturer, investor, lender or in any other capacity) with, or engage, enter into or participate in any business in competition with the business of the Company, including, but not limited to, the business of the design, manufacture, and sale of flexible circuits, laminated cable and related products, operating units of flexible circuit competitors, laminated cable competitors, material or service suppliers to competitors or customer owned printed circuit facilities, anywhere in the United States; provided, however, the Employee shall not be deemed to be in violation of this subsection 5.4 solely by reason of his ownership of not more than two percent (2%) of the equity of any corporation whose stock is regularly traded on a national securities exchange or in the over-the-counter market. 5.5 The Employee agrees that so long as he is employed by the Company hereunder, and for a period of twelve (12) months after he ceases for 4 any reason to be employed by the Company, he will not, directly or indirectly, through one or more persons, offer employment to any employee of the Company, assist in the hiring of any employee of the Company by any other person, or encourage any employee of the Company to terminate his or her employment with the Company. 5.6 The Employee agrees that so long as he is employed by the Company hereunder, and for a period of twelve (12) months after he ceases for any reason to be employed by Company, Employee shall not, directly or indirectly, solicit, divert or take away, or attempt to divert or take away, the business of any client, account or customer, or prospective client, customer or account of Company or with whom Employee has had any contact as a result of his employment by Company hereunder nor shall he divulge, disclose or communicate the list of customers (present or potential) of the Company's business to any person, firm, corporation, association or other entity. 5.7 In consideration of and as an inducement to both parties to enter into this Agreement, Employee and Company represent and agree that the provisions of this covenant not to compete are proper and customary for Employee's level of responsibility and there is mutual advantage to both parties for execution of this Agreement. The Employee represents and agrees that he has received fair and reasonable compensation for his employment and further represents and warrants that although a disadvantage, his education, training and experience are such that the provisions of this Covenant will not prevent him from earning a living. The Company acknowledges that the employment restriction could significantly damage the Employee's ability to quickly retain suitable employment but will not prevent him from earning a living. Employee agrees and acknowledges that Company will suffer irreparable injury and damage and cannot be reasonably or adequately compensated in monetary damages for the loss by the Company of its benefits or rights under this Agreement as a result of a breach, default or violation by the Employee of his obligations hereunder. Accordingly, the Company shall be entitled, in addition to all other remedies which may be available to it (including monetary damage), to injunctive and other available equitable relief in any court of competent jurisdiction to prevent or otherwise restrain or terminate any actual or threatened breach, default or violation by the Employee of any provision hereunder or to enforce any such provision. Any legal action or other proceeding for any purpose with respect to this Section 5 shall be brought exclusively in any court of competent jurisdiction sitting in the Commonwealth of Massachusetts, and the parties hereto agree to submit to the jurisdiction of such court and to comply with all requirements necessary to give such court exclusive jurisdiction thereof. The losing party to any such proceeding shall pay all costs (including reasonable attorney's fees) of all parties with respect to the proceeding. 5 It is acknowledged further by Employee that the provisions of Section 5 are restrictive and intended to prevent Employee from competing with Company, soliciting its customers or influencing Company's employees in any way to discontinue their employment relationship with Company. If at any time the provisions relating to the agreement of the Employee not to compete with the Company or raid or entice away its employees shall be deemed invalid or unenforceable by the laws of the jurisdiction wherein it is to be enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of activities restricted, or for any other reason, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein and the covenant shall be considered divisible as to such invalid or unenforceable portion, and it shall be construed to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body of such jurisdiction charged with interpreting and/or enforcing this Agreement, and the Company, and Employee agree that the restrictions of such covenant as so construed shall be valid and binding as though the invalid or unenforceable portion had not been included herein. 5.8 For purposes of this Agreement, the words "so long as he is employed by the Company hereunder" as used herein shall refer to the time period when the Company shall have terminated Employee's employment without cause pursuant to Section 6.3 below and Employee continues to be paid compensation in accordance with the provisions of Section 2 above. 6. Employment Termination ---------------------- Section 1 of this Agreement notwithstanding, the employment of the Employee by the Company pursuant to this Agreement shall terminate upon the occurrence of any of the following: 6.1 At the election of the Company, for cause, immediately upon written notice by the Company to the Employee. For the purposes of this Agreement the term "Cause" shall mean that the Employee shall have breached or failed to perform his obligations and job responsibilities in accordance with the terms and conditions of this Agreement or his job description, shall demonstrate negligence, inefficiency, gross misconduct, dishonesty, or insubordination in the execution of his duties as an employee of the Company, or upon conviction of a felony or any crime involving moral turpitude; 6.2 Upon the death or total disability of the Employee. As used in this Agreement, the term "total disability" shall mean the inability of the Employee, due to a physical or mental disability, for a period of 90 consecutive days during any 360-day period, to perform the services contemplated under this Agreement. 6 A determination of total disability shall be made by a physician satisfactory to both the Employee and the Company, provided that if the Employee and the Company do not agree on a physician, the Employee and the Company shall each select a physician and these two together shall select a third physician, whose determination as to disability shall be binding on all parties. Notwithstanding the foregoing, the Company may, in its sole discretion, enlarge the time period definition provided herein; or 6.3 Upon notice of termination given at the election of the Company by action of its board of directors without Cause provided that the Employee shall be entitled to receive the compensation described in Section 7.3 below. 7. Effect of Termination --------------------- 7.1 In the event the Employee's employment is terminated for Cause pursuant to Section 6.1, the Company shall pay to the Employee the compensation and benefits otherwise payable to him under Section 2 through the last day of his actual employment by the Company. 7.2 If the Employee's employment is terminated because of disability pursuant to Section 6.2 above, the Company shall pay to the Employee both the compensation which would otherwise be payable to the Employee up to the end of the month in which the termination of his employment because of disability occurs and an amount, payable on a monthly basis, for a period of six (6) months beginning with the first month after termination of his employment because of disability occurs, equal to one hundred percent (100%) of the rate of compensation payable per month to Employee, at the time of Employee's termination, pursuant to subsection 2.1 above. Notwithstanding the foregoing, Company's obligation to pay compensation to Employee for six months after termination of his employment shall be reduced dollar for dollar by the amount of any long term disability payments received by or payable to Employee for this same time period. 7.3 If the Employee's employment is terminated without Cause pursuant to Section 6.3, the Company shall pay to Employee both (i) the compensation and benefits otherwise payable to him under Section 2 through the last day of his actual employment by the Company and (ii) an amount, payable on a monthly basis, through August 31, 2005 equal to one hundred percent (100%) of the rate of compensation payable per month to Employee, at the time of Employee's termination, pursuant to subsection 2.1 above. Additionally, Company shall pay to Employee a monthly sum equivalent to fifty percent (50%) of the rate of compensation payable per month to Employee, at the time of Employee's termination, pursuant to subsection 2.1 above ("Termination Pay"), for each month or pro rata portion of each month, from September 1, 2005 to the earlier to occur of the following dates: (a) August 31, 7 2006; (b) Employee becomes reemployed in any capacity with either Company or any third party; or (c) Company determining, in its sole discretion, that it will waive compliance by the Employee with the provisions of section 5.4 herein. Notwithstanding the foregoing, Company shall not be obligated to pay Employee in total for a period of more than one year from the date of Employee's termination without Cause pursuant to Section 6.3. 7.4 In the event the Company decides after expiration of this Agreement not to renew Employee's employment with the Company and said decision was made without Cause, the Company shall pay to Employee a monthly sum equivalent to fifty percent (50%) of the rate of compensation payable per month to Employee, at the time of expiration of this Agreement, pursuant to subsection 2.1 above ("Termination Pay"), for each month or pro rata portion of each month, from September 1, 2005 to the earlier to occur of the following dates: (a) August 31, 2006; (b) Employee's reemployment; or (c) Company determining, in its sole discretion, that it will waive compliance by the Employee with the provisions of section 5.4 herein. 8. Attachment; assignability ------------------------- The right of the Employee or his Designated Beneficiary to any payment hereunder shall not be subject in any manner to attachment or other legal process for the debts of the Employee or such Designated Beneficiary, and the right to any such payment shall not be subject to anticipation, alienation, sale, transfer, assignment, or encumbrance. 9. Severability ------------ The provisions of this Agreement shall be severable, and the invalidity of any portion of this Agreement shall not affect the validity of any other portion hereof. 10. Successors ---------- This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and the Employee, his executors, administrators, and personal representatives. The parties further agree that this Agreement contains the entire understanding of the parties and is the complete and exclusive statement of the Agreement between them, and that they understand and agree to be bound by its terms and conditions. 8 11. Governing Law ------------- This Agreement shall be construed and interpreted in accordance with the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its behalf by an officer thereof thereunto duly authorized and has caused its seal to be hereunto affixed and duly attested, and the Employee has hereunto set his hand and seal, as of the day and year first above written. ATTEST: PARLEX CORPORATION: _____________ By: _______________________________ Herbert W. Pollack, Chairman of the Board EMPLOYEE: _____________ ___________________________________ Peter J. Murphy 9 EX-10 4 parl-10z.txt EXHIBIT 10Z Exhibit 10-Z As of October 31, 2002 Parlex Corporation One Parlex Place Methuen, MA 01844 Attn: Peter J. Murphy, President Re: Third 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 Fourteen Million ($14,000,000.00) 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) $14,000,000.00 which amount shall automatically reduce to 13,000,000.00 on December 31, 2002 and to $12,000,000.00 on March 31, 2003 the "Credit Limit") or (b) the sum of: (i) eighty percent (80%) of the face amount of eligible accounts receivable less than ninety (90) days from the invoice date thereof, plus (ii) seventy percent (70%) of the "as is" appraised market value of the Premises located at One Parlex Place Methuen MA (the Bank reserves the right to have the Premises appraised from time to time to establish or adjust such value, which is currently Seven Million Two Hundred Thousand ($7,200,000.00) Dollars, which is equal to seventy percent (70%) of the Ten Million Three Hundred Thousand ($10,300,000.00) Dollar "as is" value of the Premises based on the appraisal from MacPherson Appraisal Company dated May 17, 2002), 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"). 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 adjustment by the account debtor, except discount allowed for 2 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, unless the Borrower has complied with the Federal Assignment of Claims Act. 3 (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. 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 4.17 are substituted therefor as follows: "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. 4.10 (Minimum Tangible Net Worth). The Borrower will not permit its tangible net worth, determined on a consolidated basis, to be less than $65,500,000.00 as at the last day of the fiscal quarter ending June 30, 2002 or less than $65,500,000.00 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 4 costs; and (ii) accounts and indebtedness owing from any employee or parent, subsidiary or other affiliate. 4.11 (Maximum Total Liabilities to Tangible Net Worth Ratio). The Borrower will not permit the ratio of its total liabilities (including, without limitation, all deferred taxes and contingent liabilities such as guarantees) to its tangible net worth, determined on a consolidated basis, to be more than 1.0 to 1 as at the last day of each fiscal quarter of the Borrower. 4.12 [Intentionally deleted] 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. Prior to the Expiration Date, outstanding balances under the Revolving Loan shall not be considered current maturities of long term indebtedness. 4.14 (Minimum EBITDA). The Borrower will not permit its EBITDA to be less than $1.00 for the fiscal quarter ending September 30, 2002 or less than $500,000.00 for the fiscal quarter ending December 31, 2002, or for any fiscal quarter thereafter. 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 March 31, 2003. 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 5 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." 3. Section 7.14 of the Agreement is hereby deleted in its entirety and a new subsection 7.14 substituted therefor, 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 16, 2002, as the same may be amended, supplemented or superceded from time to time and by a Mortgage, Security Agreement and Financing Statement with respect to Premises located at One Parlex Place, Methuen, MA." 4. Exhibit B and Exhibit C of the Agreement are hereby deleted in their entirety and Exhibit B and Exhibit C attached hereto are substituted therefor. 5. In addition to the foregoing, the Borrower and Bank hereby agree that until such time as the Borrower delivers a Covenant Compliance Certificate to the Bank as of the end of any fiscal quarter of Borrower which demonstrates the Borrower's full compliance with the financial covenants contained in Section 4 of the Agreement and provided no Event of Default has occurred under the Agreement which has not been otherwise waived or cured, the "Margin" over the applicable LIBOR Interest Rate in the Revolving Note shall be 250 basis points instead of 225 basis points and shall revert to 225 basis points upon delivery of the Covenant Compliance Certificate by the Borrower to the Bank reflecting full compliance with the financial covenants contained in 6 Section 4 of the Agreement. Borrower and Bank acknowledge that the provisions of this Section shall specifically amend the Revolving Note, which shall otherwise remain in full force and effect. 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 7 EX-99 5 par1-991.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter J. Murphy, Chief Executive Officer of Parlex Corporation (the "Company"), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (a) the Quarterly Report on Form 10-Q of the Company for the period ending September 29, 2002, as filed with the Securities and Exchange Commission (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Peter J. Murphy - ----------------------- Peter J. Murphy Chief Executive Officer EX-99 6 par1-992.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jonathan R. Kosheff, Chief Financial Officer of Parlex Corporation (the "Company"), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (c) the Annual Report on Form 10-Q of the Company for the period ending September 29, 2002, as filed with the Securities and Exchange Commission (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (d) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 13, 2002 /s/ Jonathan R. Kosheff - ----------------------- Jonathan R. Kosheff Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----