-----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, QiNixJ3YtwLMkWVuuBV3ekRHVkv2N7+SaPSSJtmQjI32aBKxTbBURmXeXNnGLn/8 PYifzHrePwbLeLdPwIH1xw== 0000910647-04-000384.txt : 20041112 0000910647-04-000384.hdr.sgml : 20041111 20041112134120 ACCESSION NUMBER: 0000910647-04-000384 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041112 DATE AS OF CHANGE: 20041112 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: 041137905 BUSINESS ADDRESS: STREET 1: ONE PARLEX PLACE CITY: METHUEN STATE: MA ZIP: 01844 BUSINESS PHONE: 5086854341 10-Q 1 parl-q1.txt FORM 10-Q FOR SEPTEMBER 30, 2004 =========================================================================== 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 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____ _______________________________________ Commission File No. 0-12942 PARLEX CORPORATION (Exact Name of Registrant as Specified in Its Charter) Massachusetts 04-2464749 - --------------------------------------------------------------------------- (State of incorporation) (I.R.S. ID) One Parlex Place, Methuen, Massachusetts 01844 (Address of Principal Executive Offices) (Zip Code) 978-685-4341 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the registrant's common stock as of November 8, 2004 was 6,449,056 shares. =========================================================================== PARLEX CORPORATION ------------------ FORM 10 - Q ----------- INDEX ----- Part I - Financial Information Page ---- Item 1. Unaudited Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets - September 30, 2004 and June 30, 2004 3 Condensed Consolidated Statements of Operations - For the Three Months Ended September 30, 2004 and September 28, 2003 4 Condensed Consolidated Statements of Cash Flows - For the Three Months Ended September 30, 2004 and September 28, 2003 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 Item 4. Controls and Procedures 36 Part II - Other Information Item 6. Exhibits 38 Signatures 39 Exhibit Index 40 2 PARLEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------
ASSETS September 30, 2004 June 30, 2004 (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,476,287 $ 1,626,275 Accounts receivable - net 25,860,262 21,999,646 Inventories - net 22,570,748 20,326,134 Refundable income taxes 291,823 380,615 Deferred income taxes 42,958 42,958 Other current assets 2,234,581 2,381,471 ------------ ------------ Total current assets 53,476,659 46,757,099 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT - NET 44,364,560 44,979,740 INTANGIBLE ASSETS - NET 32,014 32,746 GOODWILL - NET 1,157,510 1,157,510 DEFERRED INCOME TAXES 40,000 40,000 OTHER ASSETS - NET 2,114,313 2,283,136 TOTAL $101,185,056 $ 95,250,231 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 15,404,125 $ 12,861,077 Accounts payable 20,557,461 16,479,547 Dividends payable 67,582 39,317 Accrued liabilities 4,299,883 4,277,587 ------------ ------------ Total current liabilities 40,329,051 33,657,528 ------------ ------------ LONG-TERM DEBT 10,594,598 10,534,679 ------------ ------------ OTHER NONCURRENT LIABILITIES 909,421 1,025,091 ------------ ------------ MINORITY INTEREST IN PARLEX SHANGHAI 611,114 570,963 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock 40,625 40,625 Common stock 643,593 663,281 Accrued interest payable in common stock 68,502 87,924 Additional paid-in capital 65,981,801 66,979,397 Accumulated deficit (18,570,034) (17,771,307) Accumulated other comprehensive income 576,385 499,675 Less treasury stock, at cost - (1,037,625) ------------ ------------ Total stockholders' equity 48,740,872 49,461,970 ------------ ------------ TOTAL $101,185,056 $ 95,250,231 ============ ============
See notes to unaudited condensed consolidated financial statements. 3 PARLEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) - ---------------------------------------------------------------------------
Three Months Ended September 30, 2004 September 28, 2003 REVENUES: $31,487,405 $19,704,431 ----------- ----------- COSTS AND EXPENSES: Cost of products sold 26,800,499 17,472,246 Selling, general and administrative expenses 4,608,647 3,740,366 ----------- ----------- Total costs and expenses 31,409,146 21,212,612 ----------- ----------- OPERATING INCOME (LOSS) 78,259 (1,508,181) INTEREST AND NON OPERATING INCOME (EXPENSE) Interest income 6,361 4,595 Interest expense (764,351) (532,651) Non operating income - 11,742 Non operating expense (25,989) (218) ----------- ----------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (705,720) (2,024,713) PROVISION FOR INCOME TAXES (52,856) - ----------- ----------- LOSS BEFORE MINORITY INTEREST (758,576) (2,024,713) MINORITY INTEREST (40,151) (62,318) ----------- ----------- NET LOSS (798,727) (2,087,031) PREFERRED STOCK DIVIDENDS (67,582) - ----------- ----------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (866,309) $(2,087,031) ----------- ----------- BASIC AND DILUTED LOSS PER SHARE $ (0.13) $ (0.33) ----------- ----------- WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 6,435,933 6,312,216 =========== ===========
See notes to unaudited condensed consolidated financial statements. 4 PARLEX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - ---------------------------------------------------------------------------
Three Months Ended September 30, 2004 September 28, 2003 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (798,727) $ (2,087,031) ------------ ------------ Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Non-cash operating items: Depreciation of property, plant and equipment 1,392,793 1,658,636 Amortization of deferred loss on sale-leaseback, deferred financing costs and intangible assets 292,611 143,221 Interest payable in common stock 68,502 73,195 Minority interest 40,151 62,318 Changes in current assets and liabilities: Accounts receivable - net (3,862,804) (2,623,007) Inventories (2,251,206) (2,006,270) Refundable taxes 88,792 144,776 Other assets 153,533 (108,796) Accounts payable and accrued liabilities 3,889,109 (1,271,071) ------------ ------------ Net cash used for operating activities (987,246) (6,014,029) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Deposit received for sale of China land use rights - 974,964 Additions to property, plant and equipment and other assets (594,026) (280,611) ------------ ------------ Net cash (used for) provided by investing activities (594,026) 694,353 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank loans 24,960,000 7,502,960 Payment of bank loans (22,431,426) (7,846,834) Payment of capital lease (26,240) - Payment of Methuen sale-leaseback financing obligation (60,993) (74,974) Cash received for interest on sale-leaseback note receivable 32,250 - Dividend paid to series A preferred stock investors (39,317) - Proceeds from convertible note, net of costs - 5,509,984 ------------ ------------ Net cash provided by financing activities 2,434,274 5,091,136 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,990) 8,324 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 850,012 (220,216) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,626,275 1,513,523 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,476,287 $ 1,293,307 ============ ============ 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 $ 187,120 $ 242,874 ============ ============ Issuance of warrants in connection with issuance of convertible debt $ - $ 1,139,252 ============ ============ Beneficial conversion feature associated with convertible debt $ - $ 1,035,016 ============ ============ Interest receivable associated with Methuen sale-leaseback financing obligation $ - $ 33,125 ============ ============ Interest payable in common stock $ 87,924 $ - ============ ============ Accrual of preferred stock dividends $ 67,582 $ - ============ ============
See notes to unaudited condensed consolidated financial statements. 5 PARLEX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- 1. Basis of Presentation --------------------- The condensed 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"). The financial statements as reported in Form 10-Q reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position as of September 30, 2004 and the results of operations and cash flows for the three months ended September 30, 2004 and September 28, 2003. All adjustments made to the interim financial statements included all those of a normal and recurring nature. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. This filing should be read in conjunction with the Company's annual report on Form 10-K for the year ended June 30, 2004. As shown in the consolidated financial statements, the Company incurred net losses of $798,727 and $2,087,031 and used $987,246 and $6,014,029 of cash in operations for the three months ended September 30, 2004 and September 28, 2003, respectively. In addition, the Company had an accumulated deficit of $18,570,034 at September 30, 2004. As of September 30, 2004, the Company had a cash balance of $2,476,287. In response to the worldwide downturn in the electronics industry, management has taken a series of actions to reduce operating expenses and to restructure operations, consisting primarily of reductions in workforce and consolidation of manufacturing operations. During 2004, the Company transferred its high volume automated surface mount assembly line from its Cranston, Rhode Island facility to China. In August 2004, the Company announced a new strategic relationship with Delphi Corporation to supply all multilayer flex and rigid flex circuits that were previously manufactured by Delphi Corporation in its Irvine, California facility. 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; 2) continuing to transfer certain manufacturing processes from the Company's domestic operations to lower cost international manufacturing locations, primarily those in the People's Republic of China; 3) expanding the Company's products in the home appliance, laptop computer, medical, military and aerospace, and electronic identification markets; 4) continuing to monitor general and administrative expenses; and 5) continuing to evaluate opportunities to improve capacity utilization by either acquiring multilayer flexible circuit businesses or entering into strategic relationships for their production. In fiscal years 2003 and 2004, management entered into a series of alternative financing arrangements to partially replace or supplement those currently in place in order to provide the Company with financing to support its current working capital needs. Working capital requirements, particularly those to support the growth in the Company's China operations, consumed $10.4 million of a total $11.4 million of cash used in operations during 2004. In September 2004, the Company secured a new $5 million asset based working capital agreement with the Bank of China which provides standalone financing for its China operations. In addition, in May and June of 2004 the Company received net proceeds of approximately $2.95 million from the sale of its Series A convertible preferred stock. Management continues to evaluate alternative financing opportunities to further improve its liquidity and to fund working capital needs. Management believes that the Company's cash on hand and the cash expected to be generated from operations will be sufficient to enable the Company to meet its operating obligations at least through September 2005. If the Company 6 requires additional or new external financing to repay or refinance its existing financing obligations or fund its working capital requirements, the Company believes that it will be able to obtain such financing. Failure to obtain such financing may have a material adverse impact on the Company's operations. At September 30, 2004, the Company was in compliance, and expects to remain in compliance, with all of its financial covenants associated with its financing arrangements. 2. 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. Raw material, work in process and finished goods inventory associated with programs cancelled by customers are fully reserved for as obsolete. Reductions in obsolescence reserves are recognized when the underlying products are disposed of or sold. Inventories consisted of:
September 30, June 30, 2004 2004 Raw materials $10,255,636 $ 8,729,132 Work in process 10,211,249 9,444,722 Finished goods 5,121,746 5,049,796 ----------- ----------- Total cost 25,588,631 23,223,650 Reserve for obsolescence (3,017,883) (2,897,516) ----------- ----------- Inventory, net $22,570,748 $20,326,134 =========== ===========
3. Property, Plant and Equipment ----------------------------- Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Property, plant and equipment consisted of:
September 30, June 30, 2004 2004 Land and land improvements $ 589,872 $ 589,872 Buildings 18,543,295 18,543,295 Machinery and equipment 63,828,002 64,348,226 Leasehold improvements and other 6,605,973 6,695,173 Construction in progress 3,856,584 2,902,141 ------------ ------------ Total cost 93,423,726 93,078,707 Less: accumulated depreciation (49,059,166) (48,098,967) ------------ ------------ Property, plant and equipment, net $ 44,364,560 $ 44,979,740 ============ ============
7 4. Intangible Assets ----------------- Intangible assets consisted of:
September 30, June 30, 2004 2004 Patents $ 58,560 $ 58,560 Accumulated amortization (26,546) (25,814) -------- -------- Intangible assets, net $ 32,014 $ 32,746 ======== ========
The Company has reassessed the remaining useful lives of the intangible assets at September 30, 2004 and determined the useful lives are appropriate in determining amortization expense. Amortization expense for the three months ended September 30, 2004 and September 28, 2003 was $732 and $2,449, respectively. 5. Other Assets ------------ Other assets consisted of:
September 30, June 30, 2004 2004 Deferred loss on sale-leaseback of Poly-Flex Facility, net $1,018,915 $1,087,606 Deferred financing costs on sale-leaseback of Methuen facility (see Note 7) 361,700 361,700 Deferred financing costs on the Loan and Security Agreement (see Note 7) 292,722 267,722 Deferred financing costs on Convertible Subortinated Note (see Note 7) 673,930 673,930 Other 130,060 160,650 ---------- ---------- Total cost 2,477,327 2,551,608 Less: accumulated amortization (363,014) (268,472) ---------- ---------- Total Other Assets, net $2,114,313 $2,283,136 ========== ==========
In June 2003, Poly-Flex sold its operating facility in Cranston, Rhode Island for a total purchase price of $3,000,000 in cash. Under the terms of the Purchase and Sale Agreement, Poly-Flex entered into a five-year lease of the Poly-Flex Facility with the buyer. The Company did not record an immediate loss on the transaction since the fair value of the Poly-Flex Facility exceeded the net book value of the facility at the time of sale. However, approximately $1,374,000 of excess net book value over the sales price was recorded as a deferred loss and included in Other Assets - Net on the condensed consolidated balance sheets. The deferred loss is being amortized to lease expense over the five-year lease term. Amortization of the deferred loss, reported as a component of rent expense, was $69,000 for the three months ended September 30, 2004 and September 28, 2003. Amortization of deferred financing costs was $95,000 and $57,000 for the three months ended September 30, 2004 and September 28, 2003, respectively. 8 6. Accrued Liabilities - Facility Exit Costs ----------------------------------------- The following is a summary of the facility exit costs activity during the three months ended September 30, 2004:
Facility FY2005 Facility Exit Costs Activity Exit Costs Accrued Cash Accrued June 30, 2004 Payments September 30, 2004 ------------- -------- ------------------ Total Facility refurbishment costs $136,952 $(3,500) $133,452
The remaining accrued facility exit costs at September 30, 2004 represent the estimated costs to refurbish the facility. The Company expects the balance of accrued facility exit costs at September 30, 2004 to be paid within the next three months. 7. Long-term Debt -------------- Long-term debt consisted of:
September 30, June 30, 2004 2004 Loan and Security Agreement $ 7,354,890 $ 3,618,091 Parlex Shanghai term notes 7,662,567 8,870,792 Finance obligation on sale-leaseback of Methuen Facility 5,880,501 5,909,245 Convertible Subordinated Note 4,533,728 4,404,351 Other 567,037 593,277 ----------- ----------- Total long-term debt 25,998,723 23,395,756 Less: current portion of long-term debt 15,404,125 12,861,077 ----------- ----------- Long-term debt $10,594,598 $10,534,679 =========== ===========
A summary of the current portion of our long term debt described above is as follows:
September 30, June 30, 2004 2004 Loan and Security Agreement $ 7,354,890 $ 3,618,091 Parlex Shanghai term notes 7,662,567 8,870,792 Finance obligation on sale-leaseback of Methuen Facility 276,027 263,849 Other 110,641 108,345 ----------- ----------- Total current portion of long-term debt $15,404,125 $12,861,077 =========== ===========
Loan and Security Agreement ("the Loan Agreement") - The Company executed the Loan Agreement with Silicon Valley Bank on June 11, 2003. The Loan Agreement provided Silicon Valley Bank with a secured interest in substantially all of the Company's assets. The Company may borrow up to $10,000,000, based on a borrowing base of eligible accounts receivable. Borrowings may be used for working capital purposes only. The Loan Agreement allows the Company to issue letters of credit, enter into foreign 9 exchange forward contracts and incur obligations using the bank's cash management services up to an aggregate limit of $1,000,000, which reduces the Company's availability for borrowings under the Loan Agreement. As of September 30, 2004, the Company had a $1,000,000 letter of credit outstanding. The Loan Agreement contains certain restrictive covenants, including but not limited to, limitations on debt incurred by its foreign subsidiaries, acquisitions, sales and transfers of assets, and prohibitions against cash dividends, mergers and repurchases of stock without prior bank approval. The Loan Agreement also has financial covenants, which among other things require the Company to maintain $750,000 in minimum cash balances or excess availability under the Loan Agreement. On September 23, 2003, the Company executed a Modification Agreement (the "Modification Agreement") with Silicon Valley Bank. The Modification Agreement increased the interest rate on borrowings to the bank's prime rate plus 1.5% and amended the financial covenants. On February 18, 2004, the Company executed a Second Modification Agreement (the "Second Modification Agreement") with Silicon Valley Bank. The Second Modification Agreement removed the fixed charge coverage ratio from the Loan Agreement and required the Company to report earnings before income taxes, depreciation and amortization ("EBITDA") of at least $50,000 on a three month trailing basis, beginning January 31, 2004. The minimum EBITDA requirement was increased to $250,000 at June 30, 2004. The Second Modification Agreement increased the interest rate on borrowings to the bank's prime rate plus 2.0% (decreasing to prime plus 1.25% after two consecutive quarters of positive operating income and to prime plus 0.75% after two consecutive quarters of positive net income, respectively) and amended the financial covenants. On March 28, 2004, the Company entered into a Third Loan Modification Agreement with Silicon Valley Bank, which permitted certain of the Company's subsidiaries to increase the amount of indebtedness they could incur from $8 million to $13 million, so long as such indebtedness was without recourse to Parlex and its principal subsidiaries. On May 10, 2004, the Company executed a Fourth Loan Modification Agreement (the "Fourth Modification Agreement") with Silicon Valley Bank. The Fourth Modification Agreement changed the EBITDA requirement to $1.00 as of April 30, 2004 and May 31, 2004 and $250,000 on a three month trailing basis beginning June 30, 2004. On June 25, 2004, the Company executed a Fifth Loan Modification Agreement (the "Fifth Modification Agreement") with Silicon Valley Bank. The Fifth Modification Agreement permitted certain of the Company's subsidiaries to borrow up to $5,000,000 in the aggregate from the Bank of China. The Fifth Modification Agreement increased the interest rate on borrowings to the bank's prime rate (4.75% at September 30, 2004) plus 2.25% (decreasing to prime plus 1.25% after two consecutive quarters of positive operating income and to prime plus 0.75% after two consecutive quarters of positive net income, respectively). On September 24, 2004, the Company executed a Sixth Loan Modification Agreement with Silicon Valley Bank to extend the maturity date of the Loan Agreement from June 10, 2005 to July 11, 2005. All other terms and conditions of the Loan Agreement remain the same. As of September 30, 2004, the Company was in compliance with its financial covenants. At September 30, 2004, the Company had available borrowing capacity under the Loan Agreement of approximately $1.6 million. As the available borrowing capacity exceeded $750,000 at September 30, 2004, none of the Company's cash balance was subject to restriction at September 30, 2004. The Loan Agreement includes both a subjective acceleration clause and a lockbox arrangement that requires all lockbox receipts to be used to pay down the revolving credit borrowings. Accordingly, borrowings under the Loan Agreement are classified as current liabilities in the accompanying consolidated balance sheets as of September 30, 2004 and June 30, 2004 as required by Emerging Issues Task Force Issue No. 95-22, " Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lockbox Arrangement". However, such borrowings will be excluded from current liabilities in future periods and considered long-term obligations if: 1) such borrowings are refinanced on a long-term basis, 2) the subjective acceleration terms of the Loan Agreement are modified, or 3) such borrowings will not require the use of working capital within one year. 10 Parlex Shanghai Term Notes - On August 20, 2003, Parlex Shanghai entered into a short-term bank note for 1.2 million, due August 20, 2004, bearing interest at 5.841% and guaranteed by Parlex Interconnect. The note was retired in August 2004. On December 15, 2003, Parlex Shanghai entered into a short-term bank note, due December 15, 2004, bearing interest at 5.31% and guaranteed by Parlex Interconnect. Amounts outstanding under this short-term note total $605,000 as of September 30, 2004. On January 14, 2004, Parlex Shanghai entered into two short-term bank notes, due October 12, 2004 for $725,000 and November 10, 2004 for $1.0 million bearing interest at 5.31% and guaranteed by Parlex Interconnect. On October 11, 2004 Parlex Shanghai renewed the bank note due October 12, 2004 for an additional six months. The Company intends on renewing the bank note due November 10, 2004 at similar terms and conditions. On February 13, 2004 and March 2, 2004, Parlex Shanghai entered into two short-term bank notes, due January 12, 2005 and March 1, 2005, bearing interest at 5.31% and guaranteed by Parlex Interconnect. Amounts outstanding under these short-term notes as of September 30, 2004 totaled $3.8 million. On March 5, 2004, Parlex Shanghai entered into a short-term bank note, due January 5, 2005, bearing interest at LIBOR plus 2.5% and guaranteed by the Company's subsidiary Parlex Asia Pacific Ltd, ("Parlex Asia"). Amounts outstanding under this short-term note as of September 30, 2004 total $1.5 million. The Company believes that it will be able to obtain the necessary refinancing of its Parlex Shanghai short term debt because of the Company's history of successfully refinancing its short term Chinese borrowings and its rapidly improving Chinese operating results. Parlex Interconnect Term Notes - On October 28, 2004, Parlex Interconnect entered into a $605,000 short-term bank note, due October 27, 2005, bearing interest at 5.31% and guaranteed by Parlex Shanghai. Parlex Asia Banking Facility - On September 15, 2004, Parlex Asia entered into an agreement with the Bank of China for a $5 million banking facility guaranteed by Parlex. Under the terms of the banking facility, Parlex Asia may borrow up to $5 million based on a borrowing base of eligible account receivables. The banking facility bears interest at LIBOR plus 2%. The Company anticipates utilizing borrowings from this financing for the refinancing of certain Parlex Shanghai term notes or for working capital needs. Finance Obligation on Sale Leaseback of Methuen Facility - In June 2003, Parlex entered into a sale-leaseback transaction pursuant to which it sold its corporate headquarters and manufacturing facility located in Methuen, Massachusetts (the "Methuen Facility") for a purchase price of $9,000,000. The purchase price consisted of $5,350,000 in cash at the closing, a promissory note in the amount of $2,650,000 (the "Note") and up to $1,000,000 in additional cash under the terms of an Earn Out Clause. In June 2004, Parlex received $750,000 reducing the principal balance of the promissory note to $1,900,000. In connection with the transaction, Parlex simultaneously entered into a lease agreement relating to the Methuen Facility with a minimum lease term of 15 years. As the repurchase option contained in the lease and the receipt of the Note from the buyer provide Parlex with a continuing involvement in the Methuen Facility, Parlex has accounted for the sale-leaseback of the Methuen Facility as a financing transaction. Accordingly, the Company continues to report the Methuen Facility as an asset and continues to record depreciation expense. The Company records all cash received under the transaction as a finance obligation. The Note and related interest thereon, and the $1,000,000 in additional cash under the terms of an Earn Out Clause, will be recorded as an increase to the finance obligation as cash payments are received. The Company records the principal portion of the monthly lease payments as a reduction to the finance obligation and the interest portion of the monthly lease payments is recorded as interest expense. The closing costs for the transaction have been capitalized and are being amortized as interest expense over the initial 15-year lease term. Upon expiration of the repurchase option (June 30, 2015), the Company will reevaluate its accounting to determine whether a gain or loss should be recorded on this sale-leaseback transaction. Convertible Subordinated Notes - On July 28, 2003, Parlex sold an aggregate $6,000,000 of its 7% convertible subordinated notes (the "Notes") with attached warrants to several institutional investors. The 11 Company received net proceeds of approximately $5.5 million from the transaction, after deducting approximately $500,000 in finders' fees and other transaction expenses. Net proceeds were used to pay down amounts borrowed under the Company's Loan Agreement and utilized for working capital needs. No principal payments are due until maturity on July 28, 2007. The Notes are unsecured. The Notes bear interest at a fixed rate of 7%, payable quarterly in shares of Parlex common stock. The number of shares of common stock to be issued is calculated by dividing the accrued quarterly interest by a conversion price, which was initially established at $8.00 per share. The conversion price is subject to adjustment in the event of stock splits, dividends and certain combinations. Interest expense is recorded quarterly based on the fair value of the common shares issued. Accordingly, interest expense may fluctuate from quarter to quarter. The Company has concluded that the interest feature does not constitute an embedded derivative as it does not currently meet the criteria for classification as a derivative. The Company recorded accrued interest payable on the Notes of $68,502 within stockholders' equity at September 30, 2004, as the interest is required to be paid quarterly in the form of common stock. Based on the conversion price of $8.00 per common share, the Company issued a total of 48,717 shares of common stock in October 2003, January, April and July 2004 in satisfaction of previously recorded interest and issued 13,123 shares of common stock in October 2004 as payment for the interest accrued at September 30, 2004. The Notes contain a beneficial conversion feature reflecting an effective initial conversion price that was less than the fair market value of the underlying common stock on July 28, 2003. The fair value of the beneficial conversion feature was approximately $1,035,000, which has been recorded as an increase to additional paid-in capital and as an original issue discount on the Notes that is being amortized to interest expense over the four year life of the Notes. After two years from the date of issuance, the Company has the right to redeem all, but not less than all, of the Notes at 100% of the remaining principal of Notes then outstanding, plus all accrued and unpaid interest, under certain conditions. After three years from the date of issuance, the holder of any of the Notes may require the Company to redeem the Notes in whole, but not in part. Such redemption shall be at 100% of the remaining principal of such Notes, plus all accrued and unpaid interest. In the event of a Change in Control (as defined therein), the holder has the option to require that the Notes be redeemed in whole (but not in part), at 120% of the outstanding unpaid principal amount, plus all unpaid accrued interest. 8. Stockholders' Equity -------------------- Series A Convertible Preferred Stock - On May 7, 2004 and June 8, 2004, the Company completed a private placement of 40,625 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") and warrants entitling holders to purchase 203,125 shares of common stock at $80.00 per unit for proceeds of approximately $2,950,000, net of issuance costs of approximately $300,000. In connection with the private placement, investors received rights to purchase additional shares of the Series A Preferred Stock (the "Over-Allotment Right"). The warrants are exercisable immediately at an exercise price of $8.00 per share (subject to adjustment for certain dilutive events) and expire on May 7, 2007 and June 8, 2007. The Over-Allotment Right allows each investor to purchase additional shares of Series A Preferred Stock in an amount up to 20% of the original purchase and on the same terms as the original purchase. The Over-Allotment right expires on November 7, 2004 and December 8, 2004. The Series A Preferred Stock is redeemable at the option of the Company on the third anniversary of the closing, upon 30 days notice to the holders, in whole but not in part, at $80.00 per share (subject to adjustment for certain dilutive events) together with all accrued but unpaid dividends to the redemption 12 date. The Series A Preferred Stockholders have no voting rights, except with respect to certain limited matters that directly impact the Series A Preferred Stock. Each share of Series A Preferred Stock is only convertible into 10 shares of common stock at the option of the holder at any time, until 20 days following the date on which the Company first mails its notice of redemption, if any. The initial conversion price of $8.00 is adjusted for certain dilutive events. The Series A Preferred Stock is subject to mandatory conversion if the Company's common stock price closes above $12.00 per share for twenty (20) consecutive trading days. The Series A Preferred Stock is entitled to receive cumulative dividends at an annual rate of 8.25% ($6.60 per share), payable quarterly in cash or shares of common stock or a combination of cash and stock at the election of the Company. In the event the Company does not exercise its right to redeem the Series A Preferred Stock on the third anniversary, the dividend rate shall increase to 14% ($11.20 per share) per annum payable quarterly exclusively in cash. The Preferred Stock also entitles the holders thereof to a preferential payment in the event of the Company's voluntary or involuntary liquidation, dissolution or winding up. Specifically, in any such case, the holders of Preferred Stock shall be entitled to be paid, out of the Company's assets that are available for distribution to our shareholders, the sum of $80.00 per share of Preferred Stock held or $3,250,000, plus all accrued and unpaid dividends thereon, prior to any payments being made to holders of our common stock. The $80.00 per share liquidation preference payment amount is subject to equitable adjustment for stock splits, stock dividends, combinations, reorganizations and similar events effecting the shares of Preferred Stock. As the original price of $80.00 included a share of Series A Preferred Stock, a warrant to purchase five shares of common stock and the Over- Allotment Right, the Company used the relative fair value method to record the transaction. Accordingly, $2,668,000, $486,000 and $96,000 of the gross proceeds were attributed to the 40,625 shares of Series A Preferred Stock, the 203,125 common stock warrants and the Over-Allotment Right, respectively. Since 38,750 shares of Series A Preferred Stock were issued for an effective purchase price of $6.56 per share, which was lower than the fair market value of the common stock at the date of closing, the investors realized a beneficial conversion feature of approximately $131,750. Accordingly, the beneficial conversion feature and the relative fair value of the warrants and Over-Allotment Right have been recorded as an increase to additional paid-in capital. The beneficial conversion feature was immediately accreted. Common Stock Warrants - The Company has issued common stock warrants in connection with certain financings. All warrants are currently exercisable and the following table summarizes information about common stock warrants outstanding to lenders and investors at September 30, 2004:
Fiscal Year Number Weighted-Average Expiration Granted Outstanding Exercise Price Date - ----------- ----------- ---------------- ---------- 2003 25,000 $6.89 June 10, 2008 2004 225,000 8.00 July 28, 2007 2004 31,500 8.00 July 28, 2008 2004 193,750 8.00 May 7, 2007 2004 9,375 8.00 June 8, 2007 ------- ----- Total 484,625 $7.94 ======= =====
Upon execution of the Loan Agreement on June 10, 2003, the Company issued warrants for the purchase of 25,000 shares of its common stock to Silicon Valley Bank at an initial exercise price of $6.89 per share. The exercise price is subject to future adjustment under certain conditions, including but not limited to, 13 stock splits and stock dividends. The fair value of the warrants on June 10, 2003 was approximately $100,600, which was recorded as a deferred financing cost and is being amortized to interest expense over the life of the Loan Agreement. Amortization expense for the three months ended September 30, 2004 and September 28, 2003 was $12,600. In connection with the sale of the Convertible Subordinated Notes, the investors and the investment adviser received warrants to purchase 331,500 shares of common stock, at an initial exercise price of $8.00 per share. The exercise price of the warrants is subject to adjustment in the event of stock splits, dividends and certain combinations. The relative fair value of the warrants issued to the investors and to the investment adviser on July 28, 2003 was approximately $1,035,000 and $146,000, respectively. The relative fair value of the warrants was recorded as an increase in additional paid-in capital and as an original issuance discount recorded against the carrying value of the Notes. In December 2003, one of the investors exercised their warrants to purchase 75,000 shares of Parlex common stock and the Company received proceeds of $600,000. The original issue discount is being amortized to interest expense over the four year life of the Note and totaled $72,300 for the three months ended September 30, 2004. In connection with the sale of the Series A Convertible Preferred Stock, the investors received common stock purchase warrants for an aggregate of 203,125 shares of common stock at an initial exercise price of $8.00 per share. The conversion price of the Preferred Stock and the exercise price of the Warrants are subject to adjustment in the event of stock splits, dividends and certain combinations. Treasury Stock - Effective July 1, 2004, companies incorporated in Massachusetts became subject to the Massachusetts Business Corporation Act, Chapter 156D. The new Act eliminates the concept of "treasury stock" and instead Section 6.31 of Chapter 156D provides that shares that are reacquired by a company become authorized but unissued shares. Accordingly, shares previously reported as treasury stock by the Company have been redesignated, at an aggregate cost of $1,037,625, as authorized but unissued shares. This aggregate cost has been allocated to the common stock's par value and additional paid in capital. 9. Revenue Recognition ------------------- Revenue on product sales is recognized when persuasive evidence of an agreement exists, the price is fixed or determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains written purchase authorizations from its customers for a specified amount of product, at a specified price and considers delivery to have occurred at the time title to the product passes to the customer. Title passes to the customer according to the shipping terms negotiated between the Company and the customer. License fees and royalty income are recognized when earned. 10. Stock-Based Compensation ------------------------ The Company accounts for stock-based compensation to employees and nonemployee directors in accordance with Accounting Principles Board ("APB") Opinion No. 25 using the intrinsic-value method as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". Under the intrinsic value method, compensation associated with stock awards to employees and directors is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price the employee or director must pay to exercise the award. The measurement date for employee awards is generally the date of grant. 14 Had the Company used the fair-value method to measure compensation, the Company's net loss and basic and diluted net loss per share would have been as follows:
Three Months Ended September 30, 2004 September 28, 2003 Net loss attributable to common stockholders $ (866,309) $(2,087,031) Add stock-based compensation expense included in reported net loss - - Deduct stock-based compensation expense determined under the fair-value method (82,000) (191,000) ---------- ----------- Net loss - attributable to common stockholders - pro forma $ (948,309) $(2,278,031) ========== =========== Basic and diluted net loss per share - as reported $ (0.13) $ (0.33) Basic and diluted net loss per share - pro forma $ (0.15) $ (0.36)
The fair values of the options at the date of grant were estimated using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended Three Months Ended September 30, 2004 September 28, 2003 Average risk-free interest rate 2.9% 2.4% Expected life of option grants 3.5 years 3.5 years Expected volatility of underlying stock 70% 77% Expected dividend rate None None
The following is a summary of activity for all of the Company's stock option plans:
Three Months Ended September 30, 2004 Weighted- Shares Average Under Exercise Option Price Outstanding options at beginning of period 567,775 $12.54 Granted 116,500 6.01 Cancelled 17,500 12.06 Exercised - - ------- ------ Outstanding options at end of period 666,775 $11.41 ======= ====== Exercisable options at end of period 389,878 $13.52 ======= ====== Weighted average fair value of options granted during the period $ 2.99 ======
15 The following table presents weighted average price and life information about significant option groups outstanding and exercisable at September 30, 2004:
Options Outstanding Options Exercisable ---------------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Exercise Number Contractual Exercise Exercise Prices Outstanding Life (Years) Price Number Price $ 5.67 - $ 6.67 128,500 9.0 $ 6.01 12,000 $ 6.05 8.39 - 10.48 135,000 8.4 9.04 46,250 9.43 11.37 - 13.25 271,525 6.5 12.17 199,878 12.28 15.50 - 16.25 66,250 4.8 16.18 66,250 16.18 18.75 - 19.13 63,500 3.0 18.78 63,500 18.78 22.00 - 22.00 2,000 5.6 22.00 2,000 22.00 ------- --- ------ ------- ------ $ 5.67 - $22.00 666,775 6.9 $11.41 389,878 $13.52 ======= === ====== ======= ======
11. Income Taxes ------------ Income taxes are recorded for interim periods 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. As a result of its operating losses, uncertain future operating results, and past non-compliance with certain of its debt covenant requirements, the Company determined during fiscal 2003 that it is more likely than not that certain historic and current year income tax benefits will not be realized. Consequently, the Company established a valuation allowance against all of its U.S. net deferred tax assets and has not given recognition to these net tax assets in the accompanying financial statements at September 30, 2004. Upon a favorable change in the operations and financial condition of the Company that results in a determination that it is more likely than not that all or a portion of the net deferred tax assets will be utilized, all or a portion of the valuation allowance previously provided for will be eliminated. 12. Net Loss Per Share ------------------ Basic net loss per share is calculated on the weighted-average number of common shares outstanding during the period. Diluted net loss per share is calculated on the weighted-average number of common shares and common share equivalents resulting from outstanding options and warrants except where such items would be antidilutive. The net loss attributable to common stockholders for each period is as follows:
Three Months Ended September 30, 2004 September 28, 2003 Net loss $(798,727) $(2,087,031) Dividends accrued on Series A preferred stock (67,582) - --------- ----------- Net loss attributable to common stockholders $(866,309) $(2,087,031)
16 Antidilutive shares were not included in the per-share calculations for the three months ended September 30, 2004 and September 28, 2003 due to the reported net losses for those periods. Antidilutive shares totaled approximately 1,085,900 and 937,000 for the three months ended September 30, 2004 and September 28, 2003, respectively. All antidilutive shares relate to outstanding stock options except for 475,625 and 347,500 antidilutive shares for the three months ended September 30, 2004 and September 28, 2003, respectively relating to warrants issued in connection with certain debt and equity financings (see Note 8). 13. Comprehensive Loss ------------------ Comprehensive loss for the three months ended September 30, 2004 and September 28, 2003 is as follows:
Three Months Ended September 30, 2004 September 28, 2003 Net loss $(798,727) $(2,087,031) Other comprehensive income (loss): Foreign currency translation adjustments 76,710 (57,575) --------- ----------- Total comprehensive loss $(722,017) $(2,144,606) ========= ===========
At September 30, 2004 and June 30, 2004, the Company's accumulated other comprehensive loss pertains entirely to foreign currency translation adjustments. Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations --------------------- This 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 27. The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe-harbor created by such Act. Forward-looking statements express our expectations or predictions of future events or results. They are not guarantees and are subject to many risks and uncertainties. There are a number of factors - many beyond our control - that could cause actual events or results to be significantly different from those described in the forward-looking statement. Any or all of our forward-looking statements in this report or in any other public statements we make may turn out to be wrong. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or words of similar meaning. They may also use words such as "will," "would," "should," "could" or "may". 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, 2004. 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 judgment by our management which subjects them to an inherent degree of uncertainty. In applying our accounting policies, our management uses its best judgment to determine the appropriate assumptions to be used in the determination of certain estimates. 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 judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts. Overview We believe we are a leading supplier of flexible interconnects principally for sale to the automotive, telecommunications and networking, diversified electronics, military, home appliance, electronic identification, medical and computer markets. We believe that our development of innovative materials and processes provides us with a competitive advantage in the markets in which we compete. During the past three fiscal years, we have invested approximately $12.4 million in property and equipment and approximately $17.7 million in research and development to develop materials and enhance our manufacturing processes. We believe that these expenditures will help us to meet customer demand for our products, and enable us to continue to be a technological leader in the flexible interconnect industry. Our research and development expenses are included in our cost of products sold. Over the past three years, we were adversely affected by the economic downturn and its impact on our key customers and markets. In 2004, we experienced sales growth in several strategic markets, particularly in the second half of the fiscal year. Growth in the medical, home appliance and military markets has helped to reduce domestic losses. Significant investment over the past three years has positioned us to capitalize on a rapidly expanding China electronic manufacturing industry. In 2004, our China operations revenues increased by over 65% with significant improvement in profitability. During fiscal years 2002, 2003 and 2004 we incurred operating losses of $35.3 million and used cash to fund operations and working capital of $13.7 million. We have taken certain steps to improve operating margins, including the closure of facilities, downsizing of our North American employee base, and transfer of our manufacturing operations to lower cost locations, such as the People's Republic of China. In addition, we have 18 worked closely with our lenders to manage through this difficult time and have obtained additional capital in 2003 and 2004 through sale-leasebacks of selected corporate assets, the issuance of convertible debt and preferred stock and the execution of new working capital borrowing agreements. As a result of the difficult economic environment, we have had difficulty maintaining compliance with the terms and conditions of certain of our financing facilities in prior years and throughout 2004. At September 30, 2004, however, we were in compliance with all financial covenants. Based upon our recent improvement in financial performance, we are currently, and expect to remain, in compliance with all of our financial covenants. We have $7.7 million in existing short-term debt, associated with our Chinese operations, that will be refinanced or repaid in 2005. We believe that we will be able to obtain the necessary refinancing of this debt because of our history of successfully refinancing our short-term Chinese borrowings and our rapidly improving Chinese operating results. In fiscal 2004, revenues from our Chinese operations grew 65%. In the quarter ended September 30, 2004 revenues from our Chinese operations grew 89% compared to the quarter ended September 28, 2003. We expect continued revenue growth and improved profitability in China during fiscal 2005. Failure to obtain the necessary refinancing of our short-term Chinese debt may have a material adverse impact on our operations. Critical Accounting Policies The U.S. Securities and Exchange Commission defines critical accounting policies as those that are, in management's view, most important to the portrayal of the company's financial condition and results of operations and most demanding of their judgment. We believe the following policies to be critical to an understanding of our consolidated financial statements and the uncertainties associated with the complex judgments made by us that could impact our results of operations, financial position and cash flows. Our significant accounting policies are more fully described in our Annual Report on Form 10-K for the year ended June 30, 2004. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, property, plant and equipment, goodwill and other intangible assets, valuation of stock options and warrants, income taxes and other accrued expenses, including self-insured health insurance claims. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In applying our accounting policies, our management uses its best judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results would differ from these estimates. Revenue recognition and accounts receivable. We recognize revenue on product sales when persuasive evidence of an agreement exists, the price is fixed and determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. We generally obtain written purchase authorizations from our customers for a specified amount of product, at a specified price and consider delivery to have occurred at the time title to the product passes to the customer. Title passes to the customer according to the shipping terms negotiated between the customer and us. License fees and royalty income are recognized when earned. We have demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with SFAS No. 48 and of allowances for doubtful accounts based on significant historical experience. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 19 Inventories. We value our raw material inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. Work in process and finished goods are valued as a percentage of completed cost, not in excess of net realizable value. We regularly review our inventory and record a provision for excess or obsolete inventory based primarily on our estimate of expected and future product demand. Our estimates of future product demand will differ from actual demand and, as such, our estimate of the provision required for excess and obsolete inventory will change, which we will record in the period such determination was made. Raw material, work in process and finished goods inventory associated with programs cancelled by customers are fully reserved for as obsolete. Reductions in obsolescence reserves are recognized when realized through disposal of reserved items, either through sale or scrapping. Goodwill. We recorded goodwill in connection with our acquisition of a 40% interest in Parlex Shanghai and our 1999 acquisition of Parlex Dynaflex Corporation ("Dynaflex"). We account for goodwill under the provisions of SFAS No.142, "Goodwill and Other Intangible Assets". Under the provisions of SFAS No. 142, if an intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is not amortized but is tested for impairment, for each reporting unit, on an annual basis and between annual tests in certain circumstances. In accordance with the guidelines in SFAS No. 142, we determined we have one reporting unit. We evaluate goodwill for impairment by comparing our market capitalization, as adjusted for a control premium, to our recorded net asset value. If our market capitalization, as adjusted for a control premium, is less than our recorded net asset value, we will further evaluate the implied fair value of our goodwill with the carrying amount of the goodwill, as required by SFAS No. 142, and we will record an impairment charge against the goodwill, if required, in our results of operations in the period such determination was made. Since our market capitalization, as adjusted, exceeded our recorded net asset value upon adoption of SFAS No. 142 and at the subsequent annual impairment analysis dates, we have concluded that no impairment adjustments were required at the time of adoption or at the annual impairment analysis date. The carrying value of the goodwill was $1,157,510 at September 30, 2004 and June 30, 2004. Based on the current recorded net asset value, we may be required to record a charge for the impairment of our goodwill in the future should our stock price consistently remain at a price of less than approximately $5.00 per share. Income Taxes. We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our valuation allowance and by adjusting the amount of such allowance, as necessary. In the determination of the valuation allowance, we have considered future taxable income and the feasibility of tax planning initiatives. Should we determine that it is more likely than not that we will realize certain of our net deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that we have adequately considered such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the results of our operations. Off-Balance Sheet Arrangements. We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources, except as may be set forth below under "Liquidity and Capital Resources." Our obligations under operating leases are disclosed in the Notes to our financial statements. 20 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 Condensed Consolidated Financial Statements and the Notes thereto.
Three Months Ended September 30, 2004 September 28, 2003 Total revenues 100.0 % 100.0 % Cost of products sold 85.1 % 88.7 % ----- ----- Gross profit 14.9 % 11.3 % Selling, general and administrative expenses 14.6 % 19.0 % ----- ----- Operating income (loss) 0.3 % (7.7)% Loss from operations before income taxes and minority interest (2.2)% (10.3)% ----- ----- Net loss (2.5)% (10.6)% ----- -----
Three Months Ended September 30, 2004 Compared to Three Months Ended - -------------------------------------------------------------------- September 28, 2003 - ------------------ Total Revenues. Total revenues for the three months ended September 30, 2004 were $31.5 million versus $19.7 million for the three months ended September 28, 2003. This represents an increase of $11.8 million or 60%. Solid revenue growth was recorded in each of our lines of business. Revenues from our China operations increased to $14.7 million from $7.8 million in the prior year representing an 89% increase for the same period year over year. Strong growth occurred in the computer and peripheral market leveraging automated surface mount assembly capabilities installed late in the prior quarter. Adding surface mount assembly to base flex circuit manufacturing significantly increased the revenue per circuit during the period. Increasing value-add capabilities such as automated surface mount assembly, remains core to our growth strategy. Growth in China also occurred in several other markets including automotive and electronic identification. Polymer thick film revenues totaled $9.5 million increasing 46% versus the same period of the prior year. Revenues increases continue to be driven by accelerated growth in the medical market, particularly in disposable medical devices. Strong performance occurred in both our United Kingdom and United States manufacturing operations. Revenues in our Methuen, Massachusetts multilayer manufacturing operations increased 37% versus the same period of the prior year. Steady growth in military /aerospace programs has contributed to an improved backlog of base business. In July 2004, we began transitioning multilayer flex manufacturing from Delphi Corporation's Irvine, California facility to our Methuen operation under a strategic sourcing relationship. We expect to increase shipments from this opportunity over the next several quarters. Cost of Products Sold. Cost of products sold was $26.8 million, or 85% of total revenues, for the three months ended September 30, 2004, versus $17.5 million, or 89% of total revenues, for the three months ended September 28, 2003. Reduction in the cost of products sold as a percentage of total revenues, or correspondingly an improvement in our gross margin, was in large part driven by manufacturing volume increases. Revenues increased 60%, for the same period year over year, resulting in improved factory utilization and better absorption of fixed overhead costs. Fixed and variable manufacturing overhead 21 decreased from 41% of revenues in the first quarter of fiscal 2003 to 31% of revenues for the current quarter. In addition to improved utilization, overhead as a percentage of revenue was favorably impacted by a continued shift of manufacturing to our low cost China operations. Reductions in manufacturing overhead were in part offset by increases in material cost. Raw material costs and in particular copper prices escalated more than 25% during the past year. Similarly, base flexible materials such as polyimide rose substantially during the year with worldwide supply constraints. In many cases this has forced increased pricing to our customers. Long term supply commitments however, do not always permit price increases, at least in the short term. Rising material costs continues to place adverse pressure on gross margins. The Methuen multilayer operation continues to experience low capacity utilization and, correspondingly, significant unfavorable manufacturing variances. Revenue in the multilayer operation was severely impacted by the rapid decline of the telecommunications network infrastructure market. In fiscal 2001 this market represented over 75% of multilayer revenues. In the first quarter of fiscal 2005, revenues in this market were immaterial. Over the past two years we have sought to replace this revenue by targeting markets demanding complex North American design and manufacturing solutions. We believe the military aerospace and medical markets represent two growing markets demanding such services. In addition to a focused corporate sales effort targeting new business development, we have continued to evaluate opportunities to acquire business, particularly in the highly fragmented military aerospace market. In June 2004, we entered into a strategic sourcing agreement with Delphi Corporation. Under the arrangement Delphi Corporation will transfer production of its multilayer flexible circuit manufacturing to our Methuen operation. In the first quarter of fiscal 2005 we began manufacturing for Delphi Corporation although initial shipments only totaled approximately $190,000. We expect manufacturing to increase significantly over the remainder of the 2005 fiscal year improving facility utilization and further reducing multilayer operating losses. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.6 million for the three months ended September 30, 2004 versus $3.7 million for the comparable period in the prior year. Increases can be primarily attributed to higher commissions ($300,000) on sharp increases in revenues, higher public company costs ($200,000) including legal, audit and insurance, continued escalation of fringe costs ($100,000) in particular medical expenses, and infrastructure investment in China ($200,000). Interest Income. Interest income was $6,000 for the three months ended September 30, 2004 compared to $5,000 for the three months ended September 28, 2003, and primarily consists of interest income on our cash balances. Interest Expense. Interest expense was $764,000 for the three months ended September 30, 2004 compared to $533,000 for the three months ended September 28, 2003. Interest expense for the period ended September 30, 2004 included $425,000 for amortized deferred financing costs and $69,000 for interest payable in common stock related to issuance of convertible notes in July 2003. The deferred financing costs are associated with the sale-leaseback of our Methuen, Massachusetts facility, the Loan Security Agreement and sale of convertible subordinated note. The balance of the interest expense represents interest incurred on our short and long term bank borrowings and deferred compensation. Non operating income. Non operating income was $0 for the three months ended September 30, 2004 versus $12,000 for the three months ended September 28, 2003. Non operating income primarily represents currency exchange rate gains. 22 Non operating expense. Non operating expense was $26,000 for the three months ended September 30, 2004 compared to $200 for the three months ended September 28, 2003. Non operating expense primarily represents currency exchange rate losses. Our loss before income taxes and the minority interest in our Chinese joint venture, Parlex Shanghai, was $706,000 in the three months ended September 30, 2004 compared to $2.0 million in the three months ended September 28, 2003. We own 90.1% of the equity interest in Parlex Shanghai and, accordingly, include Parlex Shanghai's results of operations, cash flows and financial position in our consolidated financial statements. Income Taxes. Our effective tax rate was approximately 7% for the three months ended September 30, 2004 versus 0% for the three months ended September 28, 2003. Our effective tax rate is impacted by the proportion of our estimated annual income being earned in domestic versus foreign tax jurisdictions, the generation of tax credits and the recording of any valuation allowance. As a result of our history of operating losses, uncertain future operating results, and the past non-compliance with certain of our debt covenants requirements, which have subsequently been waived, we determined that it is more likely than not that certain historic and current year income tax benefits will not be realized. Consequently, we recorded no income tax benefits on our U.S. operating losses during the three months ended September 30, 2004. In fiscal 2003, we established a valuation allowance against all of our remaining net U.S. deferred tax assets. Liquidity and Capital Resources - ------------------------------- As of September 30, 2004, we had approximately $2.5 million in cash and cash equivalents. Net cash used by operations during the three months ended September 30, 2004 was $987,000. Net operating losses of $799,000 after adjustment for minority interest, interest payable in common stock, depreciation and amortization, provided $995,000 of operating cash. Working capital consumed $2.0 million of cash. Cash used for working capital included $3.9 million for accounts receivable, $2.3 million for inventory, $3.9 million from accounts payable, and $242,000 from other working capital sources. Increases in accounts receivable were primarily driven by revenue growth. In addition, a pricing dispute with a major customer, which was resolved in October 2004, contributed $1 million to the increases in accounts receivable at September 30, 2004. Inventory increases occurred in raw material, which includes connectors and assembly components ($1.5 million) and work in process ($600,000). The growth in inventory is in part a function of our expanded value-add strategy. Net cash provided by investing activities was $594,000 for the three months ended September 30, 2004, and was used to purchase capital equipment and other assets. As of September 30, 2004, we have an additional $187,000 of capital equipment financed under our accounts payable. We have implemented plans to control our capital expenditures in order to enhance cash flows. Cash provided by financing activities was $2.4 million for the three months ended September 30, 2004 including $2.5 million that represents the net repayments and borrowings on our bank debt. Payments include $1.2 million to retire one of Parlex Shanghai's local short-term bank notes. Improved financial performance in the first quarter of 2005 significantly reduced operating losses and cash used in operations. Increased sales in the first quarter of 2005, however, have placed additional cash demands on working capital with growth in account receivables and inventory. The strong credit ratings of our large OEM and EMS customer base have allowed us to successfully finance this growth through our asset based working capital lines of credit. We recently completed stand alone financing for our China operations through a new line of credit with Bank of China which will allow us to continue financing our growth plans. See "Factors That May Affect Future Results". 23 Series A Convertible Preferred Stock - On June 8, 2004, we completed a private placement of 40,625 shares of Series A Convertible Preferred Stock and warrants entitling holders to purchase an aggregate of 203,125 shares of common stock at $80.00 per unit for proceeds of approximately $2,950,000, net of issuance costs of approximately $300,000. In connection with the private placement, the investors received rights to purchase additional shares of the Series A Preferred Stock. For additional information relating to the Series A Convertible Preferred Stock, please see Note 8 to the Notes to Unaudited Condensed Consolidated Financial Statements. Loan and Security Agreement (the "Loan Agreement") - We executed the Loan Agreement with Silicon Valley Bank on June 11, 2003. The Loan Agreement provided Silicon Valley Bank with a secured interest in substantially all of our assets. We may borrow up to $10,000,000, based on a borrowing base of eligible accounts receivable. Borrowings may be used for working capital purposes only. The Loan Agreement allows us to issue letters of credit, enter into foreign exchange forward contracts and incur obligations using the bank's cash management services up to an aggregate limit of $1,000,000, which reduces our availability for borrowings under the Loan Agreement. The Loan Agreement contains certain restrictive covenants, including but not limited to, limitations on debt incurred by our foreign subsidiaries, acquisitions, sales and transfers of assets, and prohibitions against cash dividends, mergers and repurchases of stock without prior bank approval. The Loan Agreement also has financial covenants, which among other things require us to maintain $750,000 in minimum cash balances or excess availability under the Loan Agreement. On September 23, 2003, we executed a Modification Agreement (the "Modification Agreement") with Silicon Valley Bank. The Modification Agreement increased the interest rate on borrowings to the bank's prime rate plus 1.5% and amended the financial covenants. On February 18, 2004, we executed a Second Modification Agreement (the "Second Modification Agreement") with Silicon Valley Bank. The Second Modification Agreement removed the fixed charge coverage ratio from the Loan Agreement and required us to report EBITDA of at least $50,000 on a three month trailing basis, beginning January 31, 2004. The minimum EBITDA requirement was increased to $250,000 at June 30, 2004. The Second Modification Agreement increased the interest rate on borrowings to the bank's prime rate plus 2.0% (decreasing to prime plus 1.25% after two consecutive quarters of positive operating income and to prime plus 0.75% after two consecutive quarters of positive net income, respectively) and amended the financial covenants. On March 28, 2004, we entered into a Third Loan Modification Agreement with Silicon Valley Bank, which permitted certain of our subsidiaries to increase the amount of indebtedness they could incur from $8 million to $13 million, so long as such indebtedness was without recourse to Parlex and our principal subsidiaries. On May 10, 2004, we executed a Fourth Loan Modification Agreement (the "Fourth Modification Agreement") with Silicon Valley Bank. The Fourth Modification Agreement changed the EBITDA requirement to $1.00 as of April 30, 2004 and May 31, 2004 and $250,000 on a three month trailing basis beginning June 30, 2004. On June 25, 2004, we executed a Fifth Loan Modification Agreement (the "Fifth Modification Agreement") with Silicon Valley Bank. The Fifth Modification Agreement permitted certain of our subsidiaries to borrow up to $5,000,000 in the aggregate from the Bank of China. The Fifth Modification Agreement increased the interest rate on borrowings to the bank's prime rate (4.75% at September 30, 2004) plus 2.25% (decreasing to prime plus 1.25% after two consecutive quarters of positive operating income and to prime plus 0.75% after two consecutive quarters of positive net income, respectively). On September 24, 2004, we executed a Sixth Loan Modification Agreement with Silicon Valley Bank to extend the maturity date of the Loan Agreement from June 10, 2005 to July 11, 2005. All other terms and conditions of the Loan Agreement remain the same. As of September 30, 2004, we were in compliance with our financial covenants. At September 30, 2004, we had available borrowing capacity under the Loan Agreement of approximately $1.6 million. Since the available borrowing capacity exceeded $750,000 at September 30, 2004, none of our cash balance was subject to restriction at September 30, 2004. The Loan Agreement includes both a subjective acceleration clause and a lockbox arrangement that requires all lockbox receipts to be used to pay down the revolving credit borrowings. Accordingly, borrowings under the Loan Agreement have been classified as current liabilities in the accompanying consolidated 24 balance sheets as of September 30, 2004 and June 30, 2004 as required by Emerging Issues Task Force Issue No. 95-22, " Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lockbox Arrangement". However, such borrowings will be excluded from current liabilities in future periods and considered long-term obligations if : 1) such borrowings are refinanced on a long-term basis, 2) the subjective acceleration terms of the Loan Agreement are modified, or 3) such borrowings will not require the use of working capital within one year. Parlex Shanghai Term Notes - On August 20, 2003, Parlex Shanghai entered into a short-term bank note, due August 20, 2004, bearing interest at 5.841% and guaranteed by Parlex Interconnect. The note was retired in August 2004. On December 15, 2003, Parlex Shanghai entered into a short- term bank note, due December 15, 2004, bearing interest at 5.31% and guaranteed by Parlex Interconnect. Amounts outstanding under this short- term note totaled $605,000 as of September 30, 2004. On January 14, 2004, Parlex Shanghai entered into two short-term bank notes, due October 12, 2004 for $725,000 and November 10, 2004 for $1.0 million, bearing interest at 5.31% and guaranteed by Parlex Interconnect. On October 11, 2004, Parlex Shanghai renewed the bank note due October 12, 2004 for an additional six months. We intend on renewing the bank note due November 10, 2004 at similar terms and conditions. On February 13, 2004 and March 2, 2004, Parlex Shanghai entered into two short-term bank notes, due January 12, 2005 and March 1, 2005 respectively, bearing interest at 5.31% and guaranteed by Parlex Interconnect. Amounts outstanding under these short-term notes as of September 30, 2004 totaled $3.8 million. On March 5, 2004, Parlex Shanghai entered into a short-term bank note, due January 5, 2005, bearing interest at LIBOR plus 2.5% and guaranteed by Parlex Asia. Amounts outstanding under this short-term note as of September 30, 2004 totaled $1.5 million. We believe that we will be able to obtain the necessary refinancing of our Parlex Shanghai short-term debt because of our history of successfully refinancing our Chinese debt and our improving operating results. Parlex Interconnect Term Notes - On October 28, 2004, Parlex Interconnect entered into a $605,000 short-term bank note, due October 27, 2005, bearing interest at 5.31% and guaranteed by Parlex Shanghai. Parlex Asia Banking Facility - On September 15, 2004, Parlex Asia entered into an agreement with the Bank of China for a $5 million banking facility guaranteed by Parlex. Under the terms of the banking facility, Parlex Asia may borrow up to $5 million based on a borrowing base of eligible account receivables. The banking facility bears interest at LIBOR plus 2%. We anticipate utilizing borrowings from this financing for the refinancing of certain Parlex Shanghai term notes or for working capital needs. Finance Obligation on Sale Leaseback of Methuen Facility - In June 2003, we entered into a sale-leaseback transaction pursuant to which we sold our corporate headquarters and manufacturing facility located in Methuen, Massachusetts (the "Methuen Facility") for a purchase price of $9,000,000. The purchase price consisted of $5,350,000 in cash at the closing, a promissory note in the amount of $2,650,000 (the "Note") and up to $1,000,000 in additional cash under the terms of an Earn Out Clause. In June 2004, we received $750,000 reducing the principal balance of the promissory note to $1,900,000. Under the terms of the Purchase and Sale Agreement, we simultaneously entered into a lease agreement relating to the Methuen Facility with a minimum lease term of 15 years. As the repurchase option contained in the lease and the receipt of the Note from the buyer provide us with a continuing involvement in the Methuen Facility, we have accounted for the sale-leaseback of the Methuen Facility as a financing transaction. Accordingly, we continue to report the Methuen Facility as an asset and continue to record depreciation expense. We record all cash received under the transaction as a finance obligation. The Note and related interest thereon, and the $1,000,000 in additional cash under the terms of an Earn Out Clause, will be recorded as an increase to the finance obligation as cash payments are received. We record the principal portion of the monthly lease payments as a reduction to the finance obligation and the interest portion of the monthly lease payments is recorded as interest expense. The closing costs for the transaction have been capitalized and are being amortized as interest expense over the initial 15-year lease 25 term. Upon expiration of the repurchase option (June 30, 2015), we will reevaluate our accounting to determine whether a gain or loss should be recorded on this sale-leaseback transaction. Convertible Subordinated Notes - On July 28, 2003, we sold an aggregate $6,000,000 of our 7% convertible subordinated notes (the "Notes") with attached warrants to several institutional investors. We received net proceeds of approximately $5.5 million from the transaction, after deducting approximately $500,000 in finders' fees and other transaction expenses. Net proceeds were used to pay down amounts borrowed under our Loan Agreement and utilized for working capital needs. No principal payments are due until maturity on July 28, 2007. The Notes are unsecured. The Notes bear interest at a fixed rate of 7%, payable quarterly in shares of our common stock. The number of shares of common stock to be issued is calculated by dividing the accrued quarterly interest by a conversion price, which was initially established at $8.00 per share. The conversion price is subject to adjustment in the event of stock splits, dividends and certain combinations. Interest expense is recorded quarterly based on the fair value of the common shares issued. Accordingly, interest expense may fluctuate from quarter to quarter. We have concluded that the interest feature does not constitute an embedded derivative as it does not currently meet the criteria for classification as a derivative. We recorded accrued interest payable on the Notes of $68,502 within stockholders' equity at September 30, 2004, as the interest is required to be paid quarterly in the form of common stock. Based on the conversion price of $8.00 per common share, we issued a total of 48,717 shares of common stock in October 2003, and in January, April and July 2004 in satisfaction of the previously recorded interest. We also issued 13,123 shares of common stock in October 2004 as payment for the interest accrued as of September 30, 2004. The Notes contained a beneficial conversion feature reflecting an effective initial conversion price that was less than the fair market value of the underlying common stock on July 28, 2003. The fair value of the beneficial conversion feature was approximately $1,035,000, which has been recorded as an increase to additional paid-in capital and as an original issue discount on the Notes which is being amortized to interest expense over the four year life of the Notes. After two years from the date of issuance, we have the right to redeem all, but not less than all, of the Notes at 100% of the remaining principal of Notes then outstanding, plus all accrued and unpaid interest, under certain conditions. After three years from the date of issuance, the holder of any of the Notes may require us to redeem the Notes in whole, but not in part. Such redemption shall be at 100% of the remaining principal of such Notes, plus all accrued and unpaid interest. In the event of a Change in Control (as defined therein), the holder has the option to require that the Notes be redeemed in whole (but not in part), at 120% of the outstanding unpaid principal amount, plus all unpaid accrued interest. In response to the worldwide downturn in the electronics industry, we have taken a series of actions to reduce operating expenses and to restructure operations, consisting primarily of reductions in workforce and consolidation of manufacturing operations. During 2004, we transferred our high volume automated surface mount assembly line from our Cranston, Rhode Island facility to China. In August 2004, we announced a new strategic relationship with Delphi Corporation to supply all multilayer flex and rigid flex circuits which were previously manufactured by Delphi Corporation in its Irvine, California facility. We continue 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 us to profitability. Our plans include the following actions: 1) continuing to consolidate manufacturing facilities; 2) continuing to transfer certain manufacturing processes from our domestic operations to lower cost international manufacturing locations, primarily those in the People's Republic of China; 3) expanding our products in the home appliance, laptop computer, medical, military and aerospace, and electronic identification markets; 4) continuing to monitor general and administrative expenses; and 5) continuing to evaluate opportunities to 26 improve capacity utilization by either acquiring multilayer flexible circuit businesses or entering into strategic relationships for their production. In fiscal years 2003 and 2004, we entered into a series of alternative financing arrangements to partially replace or supplement those currently in place in order to provide us with financing to support our current working capital needs. Working capital requirements, particularly those to support the growth in our China operations, consumed $10.4 million of a total of $11.4 million of cash used in operations during 2004. In September 2004, we secured a new $5 million asset based working capital agreement with the Bank of China which provides stand alone financing for our China operations. In addition, in May 2004 we received net proceeds of approximately $2.95 million from the sale of our Series A convertible preferred stock. We continue to evaluate alternative financing opportunities to further improve our liquidity and to fund working capital needs. We believe that our cash on hand and the cash expected to be generated from operations will be sufficient to enable us to meet our operating obligations through September 2005. If we require additional or new 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 such financing. Failure to obtain such financing may have a material adverse impact on our operations. At September 30, 2004, we were in compliance, and we expect to remain in compliance, with all of our financial covenants associated with our financing arrangements. Factors That May Affect Future Results - -------------------------------------- Our prospects are subject to certain uncertainties and risks. 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, 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. If we cannot obtain additional financing when needed, we may experience a material adverse impact on our operations. We may need to raise additional funds either through borrowings or further equity financing. We may not be able to raise additional capital on reasonable terms, or at all. The cash expected to be generated will not be sufficient to enable us to meet our financing and operating obligations over the next twelve months based on current growth plans. If we cannot raise the required funds when needed, we may experience a material adverse impact on our operations. Our business has been, and 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 on both a domestic and worldwide basis. Though we have experienced some general market spending improvement during the past quarter, should market conditions not continue to improve, our business, results of operations or financial condition could continue to be materially adversely affected. We have at times relied upon waivers from our lenders and amendments or modifications to our financing agreements to avoid any acceleration of our debt payments. In the event that we are not in compliance with our financial covenants in the future, we cannot be certain our lenders will grant us waivers or execute amendments on terms, which are satisfactory to us. If such waivers are not received, our debt is immediately callable. 27 Since entering into our current loan arrangement with our primary lender, Silicon Valley Bank, in June of 2003, we have requested and received several waivers relating to our failure to comply with certain financial covenants under our loan arrangement. In conjunction with the waivers, we have also executed several modifications of our loan arrangement, which have primarily resulted in easing our covenant compliance requirements, but have also increased our costs of borrowing. Although we do not believe Silicon Valley Bank will exercise any right it may have to immediately call our debt if we fail to comply with our financial covenants, we cannot guarantee that they will not do so. We are currently in compliance with all of our financial covenants, as amended. The issuance of our shares upon conversion of outstanding convertible notes, conversion of preferred stock and upon exercise of outstanding warrants may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock. On July 28, 2003, we completed a private placement of our 7% convertible subordinated notes (and accompanying warrants) in an aggregate subscription amount of $6 million. The conversion price of the convertible notes and the exercise price of the warrants is $8.00 per share. In addition, on June 8, 2004, we completed a private placement of 40,625 shares of our Series A Convertible Preferred Stock (the "Preferred Stock") (and accompanying warrants), for $80.00 per share, or $3.25 million in the aggregate. Each share of Preferred Stock may be converted at any time at the option of the holder of the Preferred Stock for 10 shares of common stock, and the exercise price of the warrants is $8.00 per share. For additional information relating to the sale of the convertible subordinated notes and related warrants, please see "Market for Registrant's Common Equity and Related Stockholder Matters - Recent Sales of Unregistered Securities - 7% Convertible Subordinated Notes and Warrants" in our Form 10-K filing for the period ended June 30, 2004. For additional information relating to the sale of Preferred Stock and related warrants, please see "Market for Registrant's Common Equity and Related Stockholder Matters - Recent Sales of Unregistered Securities - Series A Preferred Stock and Warrants" in our Form 10-K filing for the period ended June 30, 2004. The issuance of our shares upon conversion of the convertible subordinated notes and/or Preferred Stock, and exercise of the warrants, and their resale by the holders thereof will increase our publicly traded shares. These re-sales could also depress the market price of our common stock. We will not control whether or when the holders of these securities elect to convert or exercise their securities for common stock. In addition, the perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock. Substantial leverage and debt service obligations may adversely affect us. We have a substantial amount of indebtedness. As of September 30, 2004, we had approximately $26.0 million of consolidated debt of which $15.4 million is due within one year. Our substantial level of indebtedness increases the possibility that we may be unable to generate sufficient cash to pay when due the principal of, interest on, or other amounts due with respect to our indebtedness. Approximately 34% of our outstanding indebtedness bears interest at floating rates. As a result, our interest payment obligations on such indebtedness will increase if interest rates increase. Our substantial leverage could have significant negative consequences on our financial condition, results of operations, and cash flows, including: * Impairing our ability to meet one or more of the financial ratios contained in our debt agreements or to generate cash sufficient to pay interest or principal, including periodic principal amortization payments, 28 which events could result in an acceleration of some or all of our outstanding debt as a result of cross-default provisions; * Increasing our vulnerability to general adverse economic and industry conditions; * Limiting our ability to obtain additional debt or equity financing; * Requiring the dedication of a substantial portion of our cash flow from operations to service our debt, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures; * Requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations; * Limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and * Placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources. Our credit agreement contains restrictive covenants that could adversely affect our business by limiting our flexibility. Our credit agreement imposes restrictions that affect, among other things, our ability to incur additional 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 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 credit agreement. Upon the occurrence of a breach, the lender under our 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 credit agreement and/or cease to provide additional revolving loans or letters of credit, which would have a material adverse effect on us. We have incurred losses in each of the last three years, and we may continue to incur losses. We incurred net losses in each of the last three fiscal years. We had net losses of $8.2 million in fiscal year 2004, $19.5 million in fiscal year 2003 and $10.4 million in fiscal year 2002. Our operations may not be profitable in the future. 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 financing. 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. 29 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 adversely impact 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 adversely impact 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 52% of total revenues in fiscal year 2004, 50% of total revenues in fiscal year 2003, and 44% in fiscal year 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. If we fail to keep pace with technological change, our products may become less competitive or obsolete and we may lose customers and revenues. Competing technologies may reduce demand for our products. 30 Flexible circuit and laminated cable interconnects provide electrical connections between components in electrical systems and are used as a platform to support the attachment of electronic devices. While flexible circuits and laminated cables offer several advantages over competing printed circuit board and ceramic hybrid circuit technologies, our customers may consider changing their designs to use these alternative technologies in future applications. If our customers switch to alternative technologies, our business, financial condition and results of operations could be materially adversely affected. It is also possible that the flexible interconnect industry could encounter competition from new technologies in the future that render existing flexible interconnect technology less competitive or obsolete. We are heavily dependent upon certain target markets for domestic manufacturing. A slowdown in these markets could have a material impact on domestic capacity utilization resulting in lower sales and gross margins. We manufacture our products in seven facilities worldwide, including lower cost offshore locations in China. However, a significant portion of our manufacturing is still performed domestically. Domestic manufacturing may be at a competitive disadvantage with respect to price when compared to lower cost facilities in Asia and other locations. While historically our competitors in these locations have produced less technologically advanced products, they continue to expand their capabilities. Further, we have targeted markets that have historically sought domestic manufacturing, including the military and aerospace markets. Should we be unsuccessful in maintaining our competitive advantage or should certain target markets also move production to lower cost offshore locations, our domestic sales will decline resulting in significant excess capacity and reduced gross margins. A significant downturn in any of the sectors in which we sell products could result in a revenue shortfall. We sell our flexible interconnect products principally to the automotive, telecommunications and networking, diversified electronics, military, home appliance, electronic identification and computer markets. The worldwide electronics industry has seen a substantial downturn since 2001 impacting a number of our target markets. Although we serve a variety of markets to avoid a dependency on any one sector, a significant further 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 year 2004, we purchased approximately 21% of our materials from Tongxing, a Chinese gold plater, 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 Tongxing 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. 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 investment 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 31 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; foreign labor issues; wars and acts of terrorism; and potentially adverse tax consequences. Although these issues have not materially impacted our revenues or operations to date, we cannot guarantee that they will not impact our revenues or operations in the future. International expansion may require significant management attention, which could negatively affect our business. We may also incur significant costs to expand our existing international operations or enter new international markets, which could increase operating costs and reduce our profitability. We face significant competition, which could make it difficult for us to acquire and retain customers. We face competition worldwide in the flexible interconnect market from a number of foreign and domestic providers, as well as from alternative technologies such as rigid printed circuits. Many of our competitors are larger than we are and have greater financial resources. New competitors could also enter our markets. Our competitors may be able to duplicate our strategies, or they may develop enhancements to, or future generations of, products that could offer price or performance features that are superior to our products. Competitive pressures could also necessitate price reductions, which could adversely affect our operating results. In addition, some of our competitors are based in foreign countries and have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause our dollar-priced products to be less competitive than our competitors' products priced in other currencies. We will need to make a continued high level of investment in product research and development, 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. We face risks from fluctuations in the value of foreign currency versus the U.S. dollar and the cost of currency exchange. While we transact business predominantly in U.S. dollars, a large portion of our sales and expenses are denominated in foreign currencies, primarily the Chinese Renminbi ("RMB"), the basic unit of currency issued by the People's Bank of China. Currently, our exposure to risk from foreign exchange is limited due to the fact that the People's Republic of China has fixed the exchange rate of the Renminbi to the U.S. dollar. The value of the Renminbi is subject to changes in the PRC government's policies and depends to an extent on its domestic and international economic and political developments, as well as supply and demand in the local market. We cannot give any assurance that the Renminbi will continue to remain stable against the U.S. dollar and other foreign currencies. Any devaluation of the Renminbi may adversely affect our results of operations. In addition, a small portion of our sales and expenses are denominated in Euros and the British Pound. Changes in the relation of foreign currencies to the U.S. dollar will affect our cost of sales and operating margins and could result in exchange losses. We do not enter into foreign exchange contracts to reduce our exposure to these risks. 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. 32 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 Peter J. Murphy. If we lose the services of Mr. 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 20 patents issued and have 8 patent applications pending in the United States and have several corresponding foreign patent applications pending. Our existing patents may not effectively protect our intellectual property and could be challenged by third parties, and our future patent applications, if any, may not be approved. In addition, other parties may independently develop similar or competing technologies. Competitors may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. If we fail to adequately protect our proprietary rights, our competitors could offer similar products using materials, processes or technologies developed by us, potentially harming our competitive position and our revenues. If we become involved in a protracted intellectual property dispute, or one with a significant damages award or which requires us to cease selling some of our products, we could be subject to significant liability and the time and attention of our management could be diverted. Although no claims have been asserted against us for infringement of the proprietary rights of others, we may be subject to a claim of infringement in the future. An intellectual property lawsuit against us, if successful, could subject us to significant liability for damages and could invalidate our proprietary rights. A successful lawsuit against us could also force us to cease selling, or redesign, products that incorporate the infringed intellectual property. We could also be required to obtain a license from the holder of the intellectual property to use the infringed technology. We might not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our revenues could decline and our expenses could increase. We may, in the future, be required to initiate claims or litigation against third parties for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. Litigation with respect to patents and other intellectual property matters could result in substantial costs and divert our management's attention from other aspects of our business. Market prices of technology companies have been highly volatile, and our stock price may be volatile as well. From time to time the U.S. stock market has experienced significant price and trading volume fluctuations, and the market prices for the common stock of technology companies in particular have been extremely volatile. In the past, broad market fluctuations that have affected the stock price of technology companies have at times been unrelated or disproportionate to the operating performance of these companies. Any significant fluctuations in the future might result in a material decline in the market price of our common stock. 33 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, products 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. Undetected problems in our products could directly impair our financial results. If flaws in design, production, assembly or testing of our products were to occur by us or our suppliers, we could experience a rate of failure in our products that would result in substantial repair or replacement costs and potential damage to our reputation. Continued improvement in manufacturing capabilities, control of material and manufacturing quality, and costs and product testing, are critical factors in our future growth. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to permit us to avoid a rate of failure in our products that results in substantial delays in shipment, significant repair or replacement costs, or potential damage to our reputation, any of which could have a material adverse effect on our business, results of operations or financial condition. Our stock is thinly traded. Our stock is thinly traded and you may have difficulty in reselling your shares quickly. The low trading volume of our common stock is outside of our control, and we cannot guarantee that trading volume will increase in the near future. We do not expect to pay dividends in the foreseeable future. We have never paid cash dividends on our common stock and we do not expect to pay cash dividends on our common stock any time in the foreseeable future. In addition, our current financing agreements prohibit the payment of dividends. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. For the foreseeable future, we will use earnings from operations, if any, to finance our growth, and we will not pay dividends to our common stockholders. You should not rely on an investment in our common stock if 34 you require dividend income. The only return on your investment in our common stock, if any, would most likely come from any appreciation of our common stock. 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 significant additional taxes, there could be a material adverse affect on our results of operations or financial condition. We could use preferred stock to resist takeovers, and the issuance of preferred stock may cause additional dilution. Our Articles of Organization authorizes the issuance of up to 1,000,000 shares of preferred stock, of which 40,625 shares are issued and outstanding as a result of our preferred stock offering completed in June 2004. Our Articles of Organization gives our board of directors the authority to issue preferred stock without approval of our stockholders. We may issue additional shares of preferred stock to raise money to finance our operations. We may authorize the issuance of the preferred stock in one or more series. In addition, we may set the terms of preferred stock, including: * dividend and liquidation preferences; * voting rights; * conversion privileges; * redemption terms; and * other privileges and rights of the shares of each authorized series. The issuance of large blocks of preferred stock could possibly have a dilutive effect to our existing stockholders. It can also negatively impact our existing stockholders' liquidation preferences. In addition, while we include preferred stock in our capitalization to improve our financial flexibility, we could possibly issue our preferred stock to friendly third parties to preserve control by present management. This could occur if we become subject to a hostile takeover that could ultimately benefit Parlex and Parlex's stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The following discussion about our market risk disclosures involves forward- looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in U.S. and foreign interest rates and fluctuations in exchange rates. We do not use derivative financial instruments. 35 Interest Rate Risk Our primary bank facility bears interest at our lender's prime rate plus 2.25%. We also have a subsidiary bank note for $1,500,000 at LIBOR plus 2.5%. The prime rate is affected by changes in market interest rates. These variable rate lending facilities create exposure for us relating to interest rate risk; however, we do not believe our interest rate risk to be material. As of September 30, 2004, we had an outstanding balance under our primary bank facility of $7,355,000 and an outstanding balance of $1,500,000 under our subsidiary note. A hypothetical 10% change in interest rates would impact interest expense by approximately $63,000 over the next fiscal year, and such amount would not have a material effect on our financial position, results of operations and cash flows. The remainder of our long-term debt bears interest at fixed rates and is therefore not subject to interest rate risk. Currency Risk Sales of Parlex Shanghai, Parlex Interconnect, Poly-Flex Circuits Limited and Parlex Europe are typically denominated in the local currency, which is also each company's functional currency. This creates exposure to changes in exchange rates. The changes in the Chinese/U.S. and U.K./U.S. exchange rates may positively or negatively impact our sales, gross margins and retained earnings. Based upon the current volume of transactions in China and the United Kingdom and the stable nature of the exchange rate between China and the U.S., 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 30, 2004 of approximately $20.6 million. Poly-Flex Circuits Limited and Parlex Europe had combined net assets as of September 30, 2004 of approximately $5.9 million. We believe that a 10% change in exchange rates would not have a significant impact upon our financial position, results of operation or outstanding debt. As of September 30, 2004, Parlex Shanghai had outstanding debt of approximately $7.7 million. As of September 30, 2004, Poly-Flex Circuits Limited had no outstanding debt. Item 4. Controls and Procedures - -------------------------------- Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we are required to file under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Management believes that there are reasonable assurances that our controls and procedures will achieve management's control objectives. We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of September 30, 2004. Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Parlex (and its consolidated subsidiaries) required to be included in our Exchange Act reports. 36 Changes in Internal Controls Over Financial Reporting There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 37 PART II - OTHER INFORMATION --------------------------- Item 6. EXHIBITS Exhibits - See Exhibit Index to this report. 38 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, 2004 ----------------- Date 39 EXHIBIT INDEX EXHIBIT DESCRIPTION OF EXHIBIT 10.1 Change of Control Agreement, dated July 21, 2004 by and between Parlex Corporation and Thibaud LeSeguillon (filed herewith). 10.2 Change of Control Agreement, dated July 21, 2004 by and between Parlex Corporation and Eric Zanin (filed herewith). 10.3 Form of Stock Option Grant Agreement under Parlex Corporation's 1989 Employees' Stock Option Plan (file herewith). 10.4 Form of Stock Option Grant Agreement under Parlex Corporation's 1996 Outside Directors' Stock Option Plan (file herewith). 10.5 Form of Stock Option Grant Agreement under Parlex Corporation's 2001 Employees' Stock Option Plan (file herewith). 31.1 Certification of Registrant's Chief Executive Officer required by Rule 13a-14(a) (filed herewith) 31.2 Certification of Registrant's Chief Financial Officer required by Rule 13a-14(a) (filed herewith) 32.1 Certification of Registrant's Chief Executive Officer pursuant To 18 U.S.C. 1350 (furnished herewith) 32.2 Certification of Registrant's Chief Financial Officer pursuant To 18 U.S.C. 1350 (furnished herewith) 40 EX-10 2 paq1-101.txt EXHIBIT 10.1 Exhibit 10.1 CHANGE OF CONTROL AGREEMENT --------------------------- This Change of Control Agreement (this "Agreement") is made as of this 21st day of July, 2004 by and between Thibaud LeSeguillon (the "Executive") and Parlex Corporation (the "Company"). WHEREAS, the Executive is an employee of the Company and provides personal services to the Company, and Company provides Executive with certain compensation and benefits in return for such services; WHEREAS, Executive and the Company have heretofore entered into the Parlex Corporation Employee Agreement - Confidential Information and Trade Secrets (the "Employee Agreement") providing for certain agreements between the Executive and the Company regarding the Executive's employment with the Company; WHEREAS, the Company's Board of Directors (the "Board") has determined that it is in the best interests of the Company and its shareholders for the Company to agree to provide the Executive with benefits under the circumstances described below; and WHEREAS, the Company wishes to ensure the continued dedication of the Executive to Company duties in the event of an actual or threatened Change of Control (as defined below) of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. a. If beginning six (6) months and ending seven (7) months after the Effective Date (as defined below) of the Change of Control, the Executive shall elect to terminate his employment with the Company for Good Reason (as defined below), the Executive shall give the Company at least two weeks notice of such termination (such date, the "Termination Date"). Following such termination, the Executive shall continue to receive from the Company the greater of his monthly base compensation (less standard federal and state payroll tax deductions and employment benefit deductions) at (i) the Effective Date or (ii) the Termination Date, for a period of six (6) months from the Termination Date. Such amounts shall be payable to the Executive in semi-monthly installments, in accordance with the regular payroll practices of the Company. Additionally, all stock options granted to the Executive shall be immediately and automatically accelerated and become fully vested and all unexercised stock options shall be exercisable by the Executive during the period ending ninety (90) days following the Termination Date, but in no event later than the expiration date of any stock option. For purposes of this Agreement, "Good Reason" shall mean (i) failure of the Company to continue the Executive in the position of VP Multilayer & Cable Business or a comparable position that he held immediately prior to the Change of Control; or (ii) material and substantial diminution in the nature or scope of the Executive's responsibilities, duties or authority that he had immediately prior to the Change of Control; however, any diminution of the business of the Company, including without limitation the sale or transfer of any or all of the assets of the Company, shall not constitute "Good Reason"; or (iii) material reduction in the Executive's base salary or benefits from that he had immediately prior to the Change of Control; or (iv) the relocation of the Executive's principal office, without his prior consent, to a location more than thirty (30) miles from its location on the day prior to the Change of Control. b. If, within seven (7) months following the Effective Date (as defined below) of a Change of Control or within sixty (60) days prior to the Effective Date, the Company terminates the Executive's employment without Cause (as defined below), the Company shall pay to the Executive the greater of his monthly base compensation (less standard federal and state payroll tax deductions and employment benefit deductions) at (i) the Effective Date or (ii) the Termination Date, for a period of twelve (12) months from the Termination Date; provided, however, in the event that the Executive is terminated within sixty (60) days prior to the Effective Date and prior to the Effective Date the Executive has received any compensation in connection with his termination, any amounts previously paid to the Executive in connection with his termination will be credited against any amounts owed pursuant to this clause (b). All amounts owed pursuant to this clause (b) shall be payable to the Executive in semi-monthly installments, in accordance with the regular payroll practices of the Company, and such payments shall begin after the Effective Date. Additionally, all stock options granted to the Executive shall be immediately and automatically accelerated and become fully vested and all unexercised stock options shall be exercisable by the Executive 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. c. Executive, together with his dependents, shall be entitled to participate in Company's then existing medical insurance plan (or whatever medical insurance plan the Company provides for its full time employees) that he is enrolled in on the Termination Date for the Executive and his family (with Executive still obligated to make the required employee contribution) for the duration of the payment period specified in Section 1(a) or 1(b), as the case may be. The Company shall pay the portion of the monthly insurance premium for said health insurance benefits that it pays for its full time employees. Executive acknowledges that the type of medical insurance coverage provided by the Company and the amount of the employee contribution obligation of its full-time employees may change during the term of this Agreement and therefore, Executive shall be obligated to pay at the same rate and shall receive the same medical insurance as that being offered Company's full-time employees. Upon expiration of the payment period specified in Section 1(a) or 1(b), as the case may be, Executive shall be entitled to participate in Company's then existing medical insurance plan on a COBRA basis but the Company shall not be obligated to 2 make any employer contribution towards the Executive's medical insurance premiums. Executive shall make the required employee contribution to Company ten (10) days prior to the end of each calendar month. d. For purposes of this Agreement, a termination for "Cause" shall mean that the Executive 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. e. For purposes of this Agreement, the "Effective Date" shall mean the date upon which a Change of Control (as defined below) occurs. f. The term of this Agreement shall begin on July 21, 2004 ("Start Date") and shall terminate on the first anniversary of the Start Date if there has not been a Change of Control prior to such time, unless such term is extended by the Company in its sole and absolute discretion. If there has been a Change of Control prior to the first anniversary of the Start Date, the termination rights under clauses (a) and (b) of this Section 1 shall terminate seven (7) months after the Effective Date and this Agreement shall terminate when no further payments are required hereunder in accordance with the terms hereof, unless such term is extended by the Company in its sole and absolute discretion. 2. For purposes of this Agreement, a Change of Control will occur if: a. the Company shall reorganize, merge or consolidate with any corporation and the Company shall not be the "surviving corporation" (as defined below); or b. 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 c. 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 "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 d. 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 3 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 not 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 immediately prior to the transaction beneficially own less than fifty percent (50%) of the aggregate voting power represented by all outstanding securities of the Company or other entity resulting from such reorganization, merger or consolidation immediately after such transaction. 3. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets. The Company must require that any entity with which it merges or consolidates or to which it agrees to transfer a substantial portion of its assets expressly assume the obligations of the Company under this Agreement and that any successor or successors of such an entity, whether by merger, consolidation or transfer of assets, also expressly assume such obligations. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to participate or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. 4. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. 5. There shall be no requirement on the part of the Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment. 6. Prior to Executive gaining the right to receive, and in exchange for, the severance compensation, benefits and option acceleration provided in hereunder, to which Executive would not otherwise be entitled, Executive shall abide by the terms of its Employee Agreement with the Company and shall first enter into and execute a release substantially in the form attached hereto 4 as Exhibit A (the "Release") upon Executive's termination of employment. Unless the terms of the Employee Agreement are complied with and the Release is executed by Executive and delivered to the Company within twenty-one (21) days after the termination of Executive's employment with the Company, Executive shall not receive (or continue to receive, in the case of a breach after the Effective Date) any severance benefits provided under this Agreement, acceleration, if any, of Executive's options as provided in this Agreement shall not apply and Executive's options in such event may be exercised following the date of Executive's termination only to the extent provided under their original terms in accordance with the applicable stock option plan and option agreements. 7. Nothing contained in this Agreement shall be construed as a contract of employment between the Company and the Executive, or as a right of the Executive to continue in the employ of the Company, or as a limitation of the right of the Company to discharge the Executive with or without Cause. 8. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. Payments made by the Company pursuant to this Agreement shall be in lieu of payments and other benefits, if any, to which Executive may be entitled under any other severance agreement or severance plan of the Company. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. 9. The validity, interpretation and effect of this Agreement shall be governed by the internal laws of The Commonwealth of Massachusetts. 10. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement. 11. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. No right or interest to or in any payments or benefits hereunder shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiary to receive any amount that may be payable after his death and shall not preclude the legal representatives of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representatives of the Executive's estate. 13. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in respect of any claim, debt, or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the 5 immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be duly executed and delivered as of the date set forth above. PARLEX CORPORATION /s/ Peter J. Murphy ------------------------------ Peter J. Murphy President EXECUTIVE /s/ Thibaud LeSeguillon ------------------------------ Name: Thibaud LeSeguillon 6 Exhibit A --------- RELEASE AGREEMENT ----------------- I understand that my position with Parlex Corporation (the "Company") terminated effective _______________ (the "Separation Date"). The Company has agreed that if I choose to sign this Release, the Company will, within fifteen (15) days after the Effective Date of this Release, pay me certain severance benefits (minus the standard withholdings and deductions) pursuant to the terms of the Change of Control Agreement (the "Agreement") entered into as of July 21, 2004, between myself and the Company, and any agreements incorporated therein by reference. I understand that I am not entitled to such severance benefits unless I sign this Release. I further understand that, regardless of whether I sign this Release, the Company will pay me all of my accrued salary and paid time off through the Separation Date, to which I am entitled by law. 1. In consideration for the severance benefits I am receiving under the Agreement, I hereby fully, forever, irrevocably and unconditionally, release, remise and discharge the Company, and its officers, employees, attorneys, agents and representatives, and each of them (both individually and in their official capacities), from any and all manner of claims, litigation, complaints, demands, actions, causes of action, suits, rights, debts, dues, sums of money, costs, losses, accounts, reckonings, covenants, contracts, controversies, agreements, promises, leases, doings, omissions, damages, executions, obligations, medical expenses, liabilities and expenses (including attorneys' fees and costs), of every kind and nature whatsoever, known or unknown, either at law or in equity, from the beginning of the world to this date arising under any provisions of law of the United States, The Commonwealth of Massachusetts, or any other state, including without limitation any claims under laws prohibiting discrimination on account of disability, sex, age, race, color, religious creed, natural origin, or sexual orientation, Massachusetts health benefits continuation laws, including but not limited to M.G.L. c.175, 176A, 176B, 176G, federal benefits continuation laws, including but not limited to the Consolidated Omnibus Budget Reconciliation Act, and any claims at common law including contract or tort law, which I ever had, now has, or can, shall or may have, by reason of, on account of, or arising out of or due to my employment with the Company. This provision is intended by the parties hereto to be all encompassing and to act as a full and total release of any claims, whether specifically enumerated herein or not, that I have, may have or has had against the Company up to the date of this Release, specifically including, without limitation, any and all claims arising out of her employment with the Company. Notwithstanding the release in the preceding sentence, I am not releasing any right of indemnification, or Company Director and Officer insurance protection, I may have for any liabilities and costs of defense (including without limitation reasonable attorneys' fees) arising from my actions within the course and scope of my employment with the Company. In releasing claims unknown to me at present, I am waiving all rights and benefits under any law or legal principle in any jurisdiction that a general release may not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7 If I am forty (40) years of age or older as of the Separation Date, I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"). I also acknowledge that the consideration given for the waiver in the above paragraph is in addition to anything of value to which I was already entitled. I have been advised by this writing, as required by the ADEA that: (a) my waiver and release do not apply to any claims that may arise after my signing of this Release; (b) I should consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days within which to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this release to revoke the Release; and (e) this Release will not be effective until the eighth day after this Release has been signed both by me and by the Company ("Effective Date"). Agreed: ____________ ___________________________________ Date Employee 8 EX-10 3 paq1-102.txt EXHIBIT 10.2 Exhibit 10.2 CHANGE OF CONTROL AGREEMENT --------------------------- This Change of Control Agreement (this "Agreement") is made as of this 21st day of July, 2004 by and between Eric Zanin (the "Executive") and Parlex Corporation (the "Company"). WHEREAS, the Executive is an employee of the Company and provides personal services to the Company, and Company provides Executive with certain compensation and benefits in return for such services; WHEREAS, Executive and the Company have heretofore entered into the Parlex Corporation Employee Agreement - Confidential Information and Trade Secrets (the "Employee Agreement") providing for certain agreements between the Executive and the Company regarding the Executive's employment with the Company; WHEREAS, the Company's Board of Directors (the "Board") has determined that it is in the best interests of the Company and its shareholders for the Company to agree to provide the Executive with benefits under the circumstances described below; and WHEREAS, the Company wishes to ensure the continued dedication of the Executive to Company duties in the event of an actual or threatened Change of Control (as defined below) of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. a. If beginning six (6) months and ending seven (7) months after the Effective Date (as defined below) of the Change of Control, the Executive shall elect to terminate his employment with the Company for Good Reason (as defined below), the Executive shall give the Company at least two weeks notice of such termination (such date, the "Termination Date"). Following such termination, the Executive shall continue to receive from the Company the greater of his monthly base compensation (less standard federal and state payroll tax deductions and employment benefit deductions) at (i) the Effective Date or (ii) the Termination Date, for a period of six (6) months from the Termination Date. Such amounts shall be payable to the Executive in semi-monthly installments, in accordance with the regular payroll practices of the Company. Additionally, all stock options granted to the Executive shall be immediately and automatically accelerated and become fully vested and all unexercised stock options shall be exercisable by the Executive during the period ending ninety (90) days following the Termination Date, but in no event later than the expiration date of any stock option. For purposes of this Agreement, "Good Reason" shall mean (i) failure of the Company to continue the Executive in the position of VP Sales & Marketing or a comparable position that he held immediately prior to the Change of Control; or (ii) material and substantial diminution in the nature or scope of the Executive's responsibilities, duties or authority that he had immediately prior to the Change of Control; however, any diminution of the business of the Company, including without limitation the sale or transfer of any or all of the assets of the Company, shall not constitute "Good Reason"; or (iii) material reduction in the Executive's base salary or benefits from that he had immediately prior to the Change of Control; or (iv) the relocation of the Executive's principal office, without his prior consent, to a location more than thirty (30) miles from its location on the day prior to the Change of Control. b. If, within seven (7) months following the Effective Date (as defined below) of a Change of Control or within sixty (60) days prior to the Effective Date, the Company terminates the Executive's employment without Cause (as defined below), the Company shall pay to the Executive the greater of his monthly base compensation (less standard federal and state payroll tax deductions and employment benefit deductions) at (i) the Effective Date or (ii) the Termination Date, for a period of twelve (12) months from the Termination Date; provided, however, in the event that the Executive is terminated within sixty (60) days prior to the Effective Date and prior to the Effective Date the Executive has received any compensation in connection with his termination, any amounts previously paid to the Executive in connection with his termination will be credited against any amounts owed pursuant to this clause (b). All amounts owed pursuant to this clause (b) shall be payable to the Executive in semi-monthly installments, in accordance with the regular payroll practices of the Company, and such payments shall begin after the Effective Date. Additionally, all stock options granted to the Executive shall be immediately and automatically accelerated and become fully vested and all unexercised stock options shall be exercisable by the Executive 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. c. Executive, together with his dependents, shall be entitled to participate in Company's then existing medical insurance plan (or whatever medical insurance plan the Company provides for its full time employees) that he is enrolled in on the Termination Date for the Executive and his family (with Executive still obligated to make the required employee contribution) for the duration of the payment period specified in Section 1(a) or 1(b), as the case may be. The Company shall pay the portion of the monthly insurance premium for said health insurance benefits that it pays for its full time employees. Executive acknowledges that the type of medical insurance coverage provided by the Company and the amount of the employee contribution obligation of its full-time employees may change during the term of this Agreement and therefore, Executive shall be obligated to pay at the same rate and shall receive the same medical insurance as that being offered Company's full-time employees. Upon expiration of the payment period specified in Section 1(a) or 1(b), as the case may be, Executive shall be entitled to participate in Company's then existing medical insurance plan on a COBRA basis but the Company shall not be obligated to 2 make any employer contribution towards the Executive's medical insurance premiums. Executive shall make the required employee contribution to Company ten (10) days prior to the end of each calendar month. d. For purposes of this Agreement, a termination for "Cause" shall mean that the Executive 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. e. For purposes of this Agreement, the "Effective Date" shall mean the date upon which a Change of Control (as defined below) occurs. f. The term of this Agreement shall begin on July 21, 2004 ("Start Date") and shall terminate on the first anniversary of the Start Date if there has not been a Change of Control prior to such time, unless such term is extended by the Company in its sole and absolute discretion. If there has been a Change of Control prior to the first anniversary of the Start Date, the termination rights under clauses (a) and (b) of this Section 1 shall terminate seven (7) months after the Effective Date and this Agreement shall terminate when no further payments are required hereunder in accordance with the terms hereof, unless such term is extended by the Company in its sole and absolute discretion. 2. For purposes of this Agreement, a Change of Control will occur if: a. the Company shall reorganize, merge or consolidate with any corporation and the Company shall not be the "surviving corporation" (as defined below); or b. 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 c. 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 "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 d. 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 3 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 not 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 immediately prior to the transaction beneficially own less than fifty percent (50%) of the aggregate voting power represented by all outstanding securities of the Company or other entity resulting from such reorganization, merger or consolidation immediately after such transaction. 3. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets. The Company must require that any entity with which it merges or consolidates or to which it agrees to transfer a substantial portion of its assets expressly assume the obligations of the Company under this Agreement and that any successor or successors of such an entity, whether by merger, consolidation or transfer of assets, also expressly assume such obligations. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to participate or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquirer of such assets of the Company. 4. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. 5. There shall be no requirement on the part of the Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment. 6. Prior to Executive gaining the right to receive, and in exchange for, the severance compensation, benefits and option acceleration provided in hereunder, to which Executive would not otherwise be entitled, Executive shall abide by the terms of its Employee Agreement with the Company and shall first enter into and execute a release substantially in the form attached hereto 4 as Exhibit A (the "Release") upon Executive's termination of employment. Unless the terms of the Employee Agreement are complied with and the Release is executed by Executive and delivered to the Company within twenty-one (21) days after the termination of Executive's employment with the Company, Executive shall not receive (or continue to receive, in the case of a breach after the Effective Date) any severance benefits provided under this Agreement, acceleration, if any, of Executive's options as provided in this Agreement shall not apply and Executive's options in such event may be exercised following the date of Executive's termination only to the extent provided under their original terms in accordance with the applicable stock option plan and option agreements. 7. Nothing contained in this Agreement shall be construed as a contract of employment between the Company and the Executive, or as a right of the Executive to continue in the employ of the Company, or as a limitation of the right of the Company to discharge the Executive with or without Cause. 8. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. Payments made by the Company pursuant to this Agreement shall be in lieu of payments and other benefits, if any, to which Executive may be entitled under any other severance agreement or severance plan of the Company. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. 9. The validity, interpretation and effect of this Agreement shall be governed by the internal laws of The Commonwealth of Massachusetts. 10. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries or estate provided for in this Agreement. 11. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. No right or interest to or in any payments or benefits hereunder shall be assignable by the Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiary to receive any amount that may be payable after his death and shall not preclude the legal representatives of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representatives of the Executive's estate. 13. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in respect of any claim, debt, or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the 5 immediately preceding sentence shall, to the full extent permitted by law, be null, void and of no effect. IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be duly executed and delivered as of the date set forth above. PARLEX CORPORATION /s/ Peter J. Murphy ------------------------------ Peter J. Murphy President EXECUTIVE /s/ Eric Zanin ------------------------------ Name: Eric Zanin 6 Exhibit A --------- RELEASE AGREEMENT ----------------- I understand that my position with Parlex Corporation (the "Company") terminated effective _______________ (the "Separation Date"). The Company has agreed that if I choose to sign this Release, the Company will, within fifteen (15) days after the Effective Date of this Release, pay me certain severance benefits (minus the standard withholdings and deductions) pursuant to the terms of the Change of Control Agreement (the "Agreement") entered into as of July 21, 2004, between myself and the Company, and any agreements incorporated therein by reference. I understand that I am not entitled to such severance benefits unless I sign this Release. I further understand that, regardless of whether I sign this Release, the Company will pay me all of my accrued salary and paid time off through the Separation Date, to which I am entitled by law. 1. In consideration for the severance benefits I am receiving under the Agreement, I hereby fully, forever, irrevocably and unconditionally, release, remise and discharge the Company, and its officers, employees, attorneys, agents and representatives, and each of them (both individually and in their official capacities), from any and all manner of claims, litigation, complaints, demands, actions, causes of action, suits, rights, debts, dues, sums of money, costs, losses, accounts, reckonings, covenants, contracts, controversies, agreements, promises, leases, doings, omissions, damages, executions, obligations, medical expenses, liabilities and expenses (including attorneys' fees and costs), of every kind and nature whatsoever, known or unknown, either at law or in equity, from the beginning of the world to this date arising under any provisions of law of the United States, The Commonwealth of Massachusetts, or any other state, including without limitation any claims under laws prohibiting discrimination on account of disability, sex, age, race, color, religious creed, natural origin, or sexual orientation, Massachusetts health benefits continuation laws, including but not limited to M.G.L. c.175, 176A, 176B, 176G, federal benefits continuation laws, including but not limited to the Consolidated Omnibus Budget Reconciliation Act, and any claims at common law including contract or tort law, which I ever had, now has, or can, shall or may have, by reason of, on account of, or arising out of or due to my employment with the Company. This provision is intended by the parties hereto to be all encompassing and to act as a full and total release of any claims, whether specifically enumerated herein or not, that I have, may have or has had against the Company up to the date of this Release, specifically including, without limitation, any and all claims arising out of her employment with the Company. Notwithstanding the release in the preceding sentence, I am not releasing any right of indemnification, or Company Director and Officer insurance protection, I may have for any liabilities and costs of defense (including without limitation reasonable attorneys' fees) arising from my actions within the course and scope of my employment with the Company. In releasing claims unknown to me at present, I am waiving all rights and benefits under any law or legal principle in any jurisdiction that a general release may not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7 If I am forty (40) years of age or older as of the Separation Date, I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"). I also acknowledge that the consideration given for the waiver in the above paragraph is in addition to anything of value to which I was already entitled. I have been advised by this writing, as required by the ADEA that: (a) my waiver and release do not apply to any claims that may arise after my signing of this Release; (b) I should consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days within which to consider this Release (although I may choose to voluntarily execute this Release earlier); (d) I have seven (7) days following the execution of this release to revoke the Release; and (e) this Release will not be effective until the eighth day after this Release has been signed both by me and by the Company ("Effective Date"). Agreed: ____________ ___________________________________ Date Employee 8 EX-10 4 paq1-103.txt EXHIBIT 10.3 Exhibit 10.3 PARLEX CORPORATION 1989 EMPLOYEES' STOCK OPTION PLAN For: Granted on __________, _____ incorporated under the laws of the Commonwealth of Massachusetts (hereinafter called the "Company") THE OPTION IS EXERCISABLE ONLY WITHIN CERTAIN PERIODS AND ONLY UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN THIS MEMORANDUM WITNESSETH THAT: This option is granted under the Employees' Stock Option Plan (hereinafter called the "Plan") of the Company and is subject to the provisions thereof which are made a part hereof by this reference. The Company hereby grants to the individual whose name is hereinabove set forth and who is sometimes hereinafter called "the said individual" the following option: ARTICLE FIRST. ------------- Subject to the terms and conditions set forth herein, the said individual is hereby given the right and option to purchase from the Company at ____________ ($________) per share an aggregate of _________________ (_______) shares of the Common Stock of the Company during certain periods hereinafter stated and in the manner hereinafter set forth. Notwithstanding any provision of this memorandum or of the Plan, the option to purchase hereunder is not exercisable after the expiration of ten years from the date this option is granted. The last day of said ten-year period is herein called the "specified termination date." The option to purchase hereunder (unless sooner terminated) may be exercised, in whole or in part, within an only within certain periods in the amounts stated as to each period. The said periods are herein called "Exercise Periods" and commence one year from the date of the grant. All said periods shall end on the specified termination date. In the event the said individual ceased to be employed by the Company before the time when the Exercise Period as to certain shares commences, the option as to such shares shall terminate and become void upon the date of such cessation of employment and shall not thereafter be exercisable. Notwithstanding any provision contained herein, the Board of Directors of the Company (the "Board"), in its sole discretion, may after an option is granted change the period during which the option or any portion thereof may not be exercised. ARTICLE SECOND. -------------- (a) This option is not transferable by the said individual otherwise than by will or the laws of descent and distribution, and is exercisable, during the said individual's lifetime, only by him, and by him only while he is an employee of the Company; provided, however, that if the said individual dies while he is an employee of the Company, then with respect only as to any shares as to which at the time of his decease this option by its terms could then have been exercised, his estate shall have the right to exercise this option for a period commencing with his decease and ending with the date six months thereafter or the specified termination date or a date of termination fixed under Section (f) of ARTICLE SECOND of Section (c) of ARTICLE FOURTH, whichever of said four dates shall first occur. (b) The term "Estate" as used in this Section or elsewhere means the executors or administrators of the estate of the said individual after his decease or other persons succeeding, to the extent permitted by the provisions of this option, to the rights of the said individual after his decease by his will or the laws of descent and distribution, as the case may be. (c) Re-employment of a person by the Company shall not be deemed to constitute such person an employee of the Company for purposes of any rights held by such person upon the date his prior employment ceased. Except as specifically permitted by express provision in the case of the decease of the said individual, this option may not under any provision hereof be exercised at any time unless at all times during the period beginning with the date of the granting of this option and ending on the date of such time of exercise the said individual was an employee of the Company. (d) For purposes of this memorandum only, employment of a person by a subsidiary of the Company shall be considered as if such person were employed by the Company, and termination of employment of a person by either the Company or a subsidiary thereof shall not constitute cessation of 2 employment by the Company if at substantially the same time such person is or became employed by the Company or a subsidiary of the Company. The term "subsidiary" as used in this Section and all subsequent provisions of the Option Agreement shall mean any present or future corporation which would be a subsidiary corporation of the Company as that term is defined in Section 4259(f) of the Internal Revenue Code of 1986, as amended (the "Code"). (e) The term "Holder", as used in this Section and all subsequent provision of this option, shall mean the said individual and, if the said individual shall have deceased, his Estate as herein before defined. The Holder shall not, by virtue of this option, be deemed to be a holder of any shares purchasable hereunder or to be entitled to the rights or privileges of a holder of such shares unless and until they shall have been in fact issued to him after exercise of the option with respect to such shares. (f) This option is subject to all laws and regulations of any governmental authority which may be applicable thereto and, notwithstanding any of the provisions hereof, the Holder agrees that the option granted hereby will not be exercised nor will the Company be obligated to issue any shares of stock hereunder if the exercise thereof or the issuance of such shares, as the case may be, would constitute a violation by the Holder or the Company of any such law or regulation or of any provision thereof. (g) Except in the manner and to the extent allowed for incentive stock options by the Secretary of the Treasury or his delegate, this option is not exercisable while there is outstanding any incentive stock option within the meaning of Section 422(A) of the Code which was granted before the granting of this option, to said individual, to purchase stock in the Company or in a corporation which at the time of the granting of such option is a subsidiary or a parent corporation (as defined in Section 425(e) of the Code) of the Company, or in a predecessor corporation of any such corporations. For purposes of this Section (g), an option shall be treated as outstanding until it has been exercised in full or has expired by the reason of lapse of time. ARTICLE THIRD. ------------- (a) This option may be exercised only by delivery of written notice of exercise to the Company as hereinafter provided, and delivery of such notice shall 3 constitute exercise thereof. Such notice shall state the number of shares with respect to which the option is being exercised, shall be accompanied by cash or a certified check for the option price or by such other consideration as the Board has agreed to accept pursuant to the authority granted by Section 6(a) of the Plan; and, unless the Company shall at the time expressly waive this requirement in connection with such exercise of the option, shall contain a statement that the option is being exercised only with a view to investment in, and not with a view to the disposition of, the shares with respect to which the option is then being exercised. (b) As soon as reasonably feasible after the receipt of such notice and payment, the Company will deliver or cause to be delivered to the Holder at the office of the Company, certificates for the number of shares with respect to which the option has been exercised, registered in the name of the Holder. Notwithstanding the foregoing, as a condition precedent to the delivery of any shares hereunder, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements, if and to the extent required by law. The shares may be registered in the name of a person other than a Holder if the Holder is an Estate. Notwithstanding the foregoing, if any law or regulation of the Securities and Exchange Commission or other body having jurisdiction shall require the Company or the Holder to take any action in connection with the shares specified in such notice, then delivery of such shares to the Holder shall be deferred for the period necessary to take such action. The Company may also require as a condition precedent to the delivery of any shares hereunder that the Holder give a written representation to the Company which is satisfactory in form and substance to its counsel and upon which the Company may reasonably rely, that he will report to the Company any disposition of such shares prior to the expiration of the holding periods specified by Section 422A(a)(1) of the Code. If, and to the extent that, the realization of income in such a disposition imposes upon the Company, federal, state, local, or other withholding tax requirements, the Company shall have the right to require that the recipient remit to the Company an amount sufficient to satisfy those requirements, and the Company may require as a condition precedent to the 4 delivery of any shares hereunder that the party exercising this option give a satisfactory written representation promising to make such a remittance. (c) Delivery shall be made as of the date of delivery of notice of exercise of the option with respect thereto, and the Holder shall be entitled to receive all dividends and distributions (payable in cash, stock, or otherwise) or the equivalent thereof payable to stockholders of record subsequent to delivery of notice of exercise of the option with respect to such shares and prior to the date of issuance and delivery of the shares pursuant thereto. Except as above provided with respect to the payment of withholding taxes, the Company will pay all federal original issue taxes on such issue and delivery, and all other fees or expenses necessarily incurred by the Company in connection therewith; provided, however, that all federal and state transfer taxes payable in respect of shares of Common Stock of the Company issued and delivered under this option in a name other than the name of the person to whom this option is granted shall, upon the delivery of such shares, be paid by the recipient thereof. ARTICLE FOURTH. -------------- If any of the following events shall occur prior to the specified termination date or other termination of this option, the aggregate number of shares covered by this option (or the balance of the shares covered thereby, if theretofore the option has been exercised in part) and the purchase price payable therefore, shall in each instance be changed or adjusted as follows: (a) If the Company shall, at any time while this option is outstanding and prior to any termination thereof, declare and pay in Common Stock any dividend upon shares of its Common Stock outstanding, there shall in any such event be added to the number of shares of Common Stock which might, immediately prior to such dividend, be purchased pursuant to this option the number of shares of Common Stock of the Company which the Holder would have received or become entitled to receive by way of such dividend if, at the date for the determination of stockholders entitled to receive such dividend, the Holder had been the holder of record of the number of shares of Common Stock then covered by this option; and the then option price per share shall be correspondingly adjusted so that the option price per share, thereafter and 5 prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such stock dividend by the number of shares which, by virtue of the foregoing provisions of this paragraph, the Holder shall be entitled to purchase at the time of purchase for each share he was entitled to purchase immediately prior to such dividend. The additional shares, which are purchasable by reason of the foregoing provisions of this paragraph, may be purchased only within such period or periods as may be purchased the shares on account of which, by virtue of the foregoing provisions of this paragraph, such additional shares may be purchased. (b) If the Company shall, at any time while this option is outstanding, reclassify the shares of its Common Stock into a greater or lesser number of shares of Common Stock, the number of shares which may, after any such reclassification, be purchased pursuant to this option shall be the number of shares which the Holder would have received or become entitled to receive upon such reclassification if the Holder had, prior to such reclassification, been the holder of record of the number of shares of Common Stock then covered by this option; and the option price per share shall be correspondingly adjusted so that, in the event of a reclassification into a greater number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock into which each share of such stock shall be reclassified, and, in the event of a reclassification into a lesser number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the product resulting from multiplying the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock required to constitute one share of the reclassified number of shares. The number of shares which are purchasable by reason of the foregoing provisions of this paragraph within any specified fixed period or periods shall be increased or decreased in that proportion which the number of shares purchasable after any such reclassification bears 6 to the number of shares purchasable immediately before any such reclassification. (c) If, at any time while this option is outstanding, there shall be a reorganization or recapitalization of the Company or a consolidation or merger of the Company into or with another company or a sale of all or substantially all of the assets of the Company, adequate provision shall be made so that, in lieu of each share of Common Stock then covered by this option, there shall thereafter be substituted hereunder during the period hereof such other share or shares of stock, security or securities, or assets as would have been issuable or payable in respect of or in exchange for such share had the Holder on the record date for the determination thereof been the record holder of such share; provided, however, that in any such event or in anticipation of any such event, the period or periods within which this option may be exercised may be accelerated by the Company by vote of the Board of Directors to a date not less than thirty days after notice of such acceleration shall have been mailed to the Holder. (d) If the Company shall take any action (other than by way of the declaration or payment of a dividend or dividends (exclusive of stock dividends) thereon and other than such action as is described or referred to in clauses (a), (b), or (c) of this ARTICLE FOURTH hereof which, in the opinion of the Board of Directors, would materially dilute the Common Stock or other securities then covered by this option, the Board of Directors shall appoint a firm of independent public accountants (which may be the firm which regularly examines and reports upon the financial statements of the Company) which shall give their opinion as to the adjustment, if any, in the then option price per share required to protect against such dilution, and the option price per share shall thereupon become the price expressed in such opinion. (e) No fraction of or fractional shares shall be purchasable or delivered upon purchase hereunder. Upon any adjustment required as herein above provided of the purchase price or the number of shares purchasable upon the exercise of this option, the Company agrees forthwith to deliver to the Holder a certificate, signed by its 7 President or Treasurer, setting forth the number of shares, and the price per share therefore, thereafter purchasable on the exercise of this option. The Company will, at all times during the term of this option, reserve and keep available out of shares of its Common Stock authorized and unissued such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of this option. This option shall be binding upon any company into which the Company is merged or with which it is consolidated, and, unless clearly inapplicable, references herein to the Company shall be deemed to include any such company. ARTICLE FIFTH. ------------- Any notice to be given to the Company hereunder shall be deemed sufficient if delivered in writing at the office of the Treasurer of the Company or at such other address as the Company may hereafter designate and shall be effective when so delivered. Any notice to be given to the Holder hereunder shall be deemed sufficient if delivered in person to the Holder or at his address furnished to the Company or when deposited in the mail addressed to the Holder at such address and shall be effective when so delivered or when so deposited. ARTICLE SIXTH. ------------- The decision of the Board of Directors of the Company shall be final with respect to all questions arising under the Plan, including all matters relating to the construction thereof and of the options issued thereunder. IN WITNESS WHEREOF, the Company has caused this option to be signed by its duly authorized officer and its corporate seal to be hereunto affixed this __ day of ___________, _____. ATTEST: PARLEX CORPORATION ______________________ By:___________________________ Name: Name: Title: Title: 8 EX-10 5 paq1-104.txt EXHIBIT 10.4 Exhibit 10.4 PARLEX CORPORATION 1996 OUTSIDE DIRECTORS' STOCK OPTION PLAN incorporated under the laws of the Commonwealth of Massachusetts (hereinafter called the "Company") STOCK OPTION NUMBER: GRANTED: FOR SHARES OF COMMON STOCK AT $ PER SHARE TO: THIS OPTION IS EXERCISABLE ONLY WITHIN CERTAIN PERIODS AND ONLY UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN THIS MEMORANDUM WITNESSETH THAT: This option is granted under the 1996 Outside Directors' Stock Option Plan (hereinafter called the "Plan") of the Company and is subject to the provisions thereof which are made a part hereof by this reference. The Company hereby grants to the Outside Director whose name is hereinabove set forth and who is sometimes hereinafter called "the Optionee" the following option: ARTICLE FIRST. ------------- (a) Subject to the terms and conditions set forth herein, the Optionee is hereby given the right and option to purchase from the Company at option price per share an aggregate of number of shares shares of the Common Stock of the Company during certain periods hereinafter stated and in the manner hereinafter set forth. Notwithstanding any provision of this memorandum or of the Plan, the option to purchase hereunder is not exercisable after the expiration of ten years from the date this option is granted. The last day of said ten-year period is herein called the "specified termination date." The option to purchase hereunder (unless sooner terminated) may be exercised, in whole or in part, one year from the date of the grant of the Option. (b) All exercise periods shall end on the specified termination date. In the event the Optionee ceases to be a member of the Board of Directors of the Company for any reason other than death or disability, any then unexercised options granted to such Optionee shall, to the extent not then exercisable, immediately terminate and become void, and any options which are then exercisable but have not been exercised at the time the Optionee so ceases to be a member of the Board of Directors may be exercised, to the extent they are then exercisable, by the Optionee within a period of thirty (30) days following such time the Optionee so ceases to be a member of the Board of Directors, but in no event later than the expiration date of the option. (c) In the event that an Optionee ceases to be a member of the Board of Directors of the Company by reason of his disability or death, any option granted to such Optionee shall be immediately and automatically accelerated and become fully vested and all unexercised options shall be exercisable by the Optionee (or by the Optionee's personal representative, heir or legatee, in the event of death) during the period ending one hundred eighty (180) days after the date the Optionee so ceases to be a member of the Board of Directors, but in no event later than the expiration date of the option. (d) In the event of a Change of Control (as defined herein), all options outstanding (whether or not then exercisable) as of the date of such Change in Control shall automatically become vested and fully exercisable, but in no event shall they be exercised later than the specified expiration date of the option. For purposes of the Plan, the term "Change of Control" means the happening of any of the following: (i) when 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; or (ii) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or its subsidiary through purchase or assets, or by merger, or otherwise; or (iii) if, as a result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Company before such transaction shall cease to constitute a majority of the Board of Directors of the Company or of any successor institution. For purposes of this Section, the term "person" shall exclude all persons who are currently officers or directors of the Company, 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. 2 ARTICLE SECOND. -------------- (a) This option is not transferable by the said Optionee otherwise than by will or the laws of descent and distribution, and is exercisable, during the Optionee's lifetime, only by him, and by him only while he is a member of the Board of Directors of the Company. (b) The term "Estate" as used in this Section or elsewhere means the executors or administrators of the estate of the Optionee after his decease or other persons succeeding, to the extent permitted by the provisions of this option, to the rights of the Optionee after his decease by his will or the laws of descent and distribution, as the case may be. (c) The term "Holder", as used in this Section and all subsequent provisions of this option, shall mean the Optionee and, if the Optionee shall have deceased, his Estate as hereinbefore defined. The Holder shall not, by virtue of this option, be deemed to be a holder of any shares purchasable hereunder or to be entitled to the rights or privileges of a holder of such shares unless and until they shall have been in fact issued to him after exercise of the option with respect to such shares. (d) This option is subject to all laws and regulations of any governmental authority which may be applicable thereto and, notwithstanding any of the provisions hereof, the Holder agrees that the option granted hereby will not be exercised nor will the Company be obligated to issue any shares of stock hereunder if the exercise thereof or the issuance of such shares, as the case may be, would constitute a violation by the Holder or the Company of any such law or regulation or of any provision thereof. ARTICLE THIRD. ------------- (a) This option may be exercised only by delivery of written notice of exercise to the Company as hereinafter provided, and delivery of such notice shall constitute exercise thereof. Such notice shall state the number of shares with respect to which the option is being exercised, shall be accompanied by cash or a certified check for the option price and, unless the Company shall at the time expressly waive this requirement in connection with such exercise of the option, shall contain a statement that the option is being exercised only with a view to investment in, and not with a view to the disposition of, the shares with respect to which the option is then being exercised. Payment may also be in whole or in part in shares of the Common Stock of the Company already owned by the Optionee exercising the option, valued at the Market Price determined in accordance with the provisions of Section (b) of Article Third herein provided, however, that there shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option, if fewer than one hundred (100) shares. 3 (b) For purposes of this Plan, the Market Price shall be the closing sale price of a share of Common Stock as listed on the NASDAQ National Market System on the date of grant (or the last closing sale price of the next business day in the event there were no such trades on the date of grant). (c) As soon as reasonably feasible after the receipt of such notice and payment, the Company will deliver or cause to be delivered to the Holder at the office of the Company, certificates for the number of shares with respect to which the option has been exercised, registered in the name of the Holder. Notwithstanding the foregoing, as a condition precedent to the delivery of any shares hereunder, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements, if and to the extent required by law. The shares may be registered in the name of a person other than a Holder if the Holder is an Estate. Notwithstanding the foregoing, if any law or regulation of the Securities and Exchange Commission or other body having jurisdiction shall require the Company or the Holder to take any action in connection with the shares specified in such notice, then delivery of such shares to the Holder shall be deferred for the period necessary to take such action. (d) Delivery shall be made as of the date of delivery of notice of exercise of the option with respect thereto, and the Holder shall be entitled to receive all dividends and distributions (payable in cash, stock, or otherwise) or the equivalent thereof payable to stockholders of record subsequent to delivery of notice of exercise of the option with respect to such shares and prior to the date of issuance and delivery of the shares pursuant thereto. Except as above provided with respect to the payment of withholding taxes, the Company will pay all federal original issue taxes on such issue and delivery, and all other fees or expenses necessarily incurred by the Company in connection therewith; provided, however, that all federal and state transfer taxes payable in respect of shares of Common Stock of the Company issued and delivered under this option in a name other than the name of the person to whom this option is granted shall, upon the delivery of such shares, be paid by the recipient thereof. ARTICLE FOURTH. -------------- If any of the following events shall occur prior to the specified termination date or other termination of this option, the aggregate number of shares covered by this option (or the balance of the shares covered thereby, if theretofore the option has been exercised in part) and the purchase price payable therefor, shall in each instance be changed or adjusted as follows: (a) If the Company shall, at any time while this option is outstanding and prior to any termination thereof, declare and pay in Common Stock any dividend upon shares of its Common Stock outstanding, there shall in 4 any such event be added to the number of shares of Common Stock which might, immediately prior to such dividend, be purchased pursuant to this option the number of shares of Common Stock of the Company which the Holder would have received or become entitled to receive by way of such dividend if, at the date for the determination of stockholders entitled to receive such dividend, the Holder had been the holder of record of the number of shares of Common Stock then covered by this option; and the then option price per share shall be correspondingly adjusted so that the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such stock dividend by the number of shares which, by virtue of the foregoing provisions of this paragraph, the Holder shall be entitled to purchase at the time of purchase for each share he was entitled to purchase immediately prior to such dividend. The additional shares, which are purchasable by reason of the foregoing provisions of this paragraph, may be purchased only within such period or periods as may be purchased the shares on account of which, by virtue of the foregoing provisions of this paragraph, such additional shares may be purchased. (b) If the Company shall, at any time while this option is outstanding, reclassify the shares of its Common Stock into a greater or lesser number of shares of Common Stock, the number of shares which may, after any such reclassification, be purchased pursuant to this option shall be the number of shares which the Holder would have received or become entitled to receive upon such reclassification if the Holder had, prior to such reclassification, been the holder of record of the number of shares of Common Stock then covered by this option; and the option price per share shall be correspondingly adjusted so that, in the event of a reclassification into a greater number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock into which each share of such stock shall be reclassified, and, in the event of a reclassification into a lesser number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the product resulting from multiplying the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock required to constitute one share of the reclassified number of shares. The number of shares which are purchasable by reason of the foregoing provisions of this paragraph within any specified fixed period or periods shall be increased or decreased in that proportion which the number of shares purchasable after any such reclassification bears to the number of shares purchasable immediately before any such reclassification. (c) If, at any time while this option is outstanding, there shall be a reorganization or recapitalization of the Company or a consolidation or merger 5 of the Company into or with another company or a sale of all or substantially all of the assets of the Company, adequate provision shall be made so that, in lieu of each share of Common Stock then covered by this option, there shall thereafter be substituted hereunder during the period hereof such other share or shares of stock, security or securities, or assets as would have been issuable or payable in respect of or in exchange for such share had the Holder on the record date for the determination thereof been the record holder of such share; provided, however, that in any such event or in anticipation of any such event, the period or periods within which this option may be exercised may be accelerated by the Company by vote of the Board of Directors to a date not less than thirty days after notice of such acceleration shall have been mailed to the Holder. (d) If the Company shall take any action (other than by way of the declaration or payment of a dividend or dividends (exclusive of stock dividends) thereon and other than such action as is described or referred to in clauses (a), (b), or (c) of this ARTICLE FOURTH hereof which, in the opinion of the Board of Directors, would materially dilute the Common Stock or other securities then covered by this option, the Board of Directors shall appoint a firm of independent public accountants (which may be the firm which regularly examines and reports upon the financial statements of the Company) which shall give their opinion as to the adjustment, if any, in the then option price per share required to protect against such dilution, and the option price per share shall thereupon become the price expressed in such opinion. (e) No fraction of or fractional shares shall be purchasable or delivered upon purchase hereunder. Upon any adjustment required as hereinabove provided of the purchase price or the number of shares purchasable upon the exercise of this option, the Company agrees forthwith to deliver to the Holder a certificate, signed by its President or Treasurer, setting forth the number of shares, and the price per share therefor, thereafter purchasable on the exercise of this option. The Company will, at all times during the term of this option, reserve and keep available out of shares of its Common Stock authorized and unissued such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of this option. This option shall be binding upon any company into which the Company is merged or with which it is consolidated, and, unless clearly inapplicable, references herein to the Company shall be deemed to include any such company. ARTICLE FIFTH. ------------- 6 Any notice to be given to the Company hereunder shall be deemed sufficient if delivered in writing at the office of the Treasurer of the Company or at such other address as the Company may hereafter designate and shall be effective when so delivered. Any notice to be given to the Holder hereunder shall be deemed sufficient if delivered in person to the Holder or at his address furnished to the Company or when deposited in the mail addressed to the Holder at such address and shall be effective when so delivered or when so deposited. ARTICLE SIXTH. ------------- The Plan shall be administered by the Board of Directors (the "Board") of the Company. The Board shall have authority, not inconsistent with the express provisions of the Plan (a) to grant Options in accordance with the Plan to such directors as are eligible to receive Options; (b) to prescribe the form or forms of instruments evidencing Options and any other instruments required under the Plan and to change such forms from time to time; (c) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (d) to interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Board shall be conclusive and shall bind all parties. 7 IN WITNESS WHEREOF, the Company has caused this option to be signed by its duly authorized officer and its corporate seal to be hereunto affixed this __th day of _________, _____. ATTEST: PARLEX CORPORATION __________________________________ By:________________________________ Name: Name: Title: Title: I hereby acknowledge receipt of this Option Agreement covering my stock option under the Parlex Corporation 1996 Outside Directors' Stock Option Plan, and the enclosed Plan, and in connection with the grant of the Option hereunder to me, hereby agree that the contents of this Option Agreement and the terms and conditions of the Plan are acceptable to me and that I shall be bound thereby. ___________________________ __________ Optionee Date 8 EX-10 6 paq1-105.txt EXHIBIT 10.5 Exhibit 10.5 PARLEX CORPORATION 2001 EMPLOYEES' STOCK OPTION PLAN incorporated under the laws of the Commonwealth of Massachusetts (hereinafter called the "Company") STOCK OPTION NO. ___________ GRANTED: __________ FOR _____ SHARES OF COMMON STOCK AT _________ PER SHARE TO: __________________ THIS OPTION IS EXERCISABLE ONLY WITHIN CERTAIN PERIODS AND ONLY UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN THIS MEMORANDUM WITNESSETH THAT: This option is granted under the 2001 Employees' Stock Option Plan (hereinafter called the "Plan") of the Company and is subject to the provisions of the Plan which are made a part hereof by this reference. The parties acknowledge and agree that except for the provisions contained in this Memorandum, the Plan constitutes the full and complete understanding and agreement of the parties. In the event of a conflict between the provisions of this Memorandum and the Plan, the Plan shall govern. The Company hereby grants to the individual whose name is hereinabove set forth and who is sometimes hereinafter called "the Optionee" the following option: ARTICLE FIRST. ------------- (a) Subject to the terms and conditions set forth herein, the Optionee is hereby given the right and option to purchase from the Company at ______________________ dollars ($ ) per share an aggregate of _______ _________ (_____) shares of the Common Stock of the Company during certain periods hereinafter stated and in the manner hereinafter set forth. Notwithstanding any provision of this memorandum or of the Plan, the option to purchase hereunder is not exercisable after the expiration of five years from the date this option is granted. The last day of said five-year period is herein called the "specified termination date." The option to purchase hereunder (unless sooner terminated) may be exercised, in whole or in part, within and only within certain periods in the amounts stated as to each period. The said periods are herein called "Exercise Periods" and are as follows: as to _____ shares, the period beginning with the _____ day of ____________, 20 ; as to _____ shares, the period beginning with the _____ day of ____________, 20 ; as to _____ shares, the period beginning with the _____ day of ____________, 20 ; as to _____ shares, the period beginning with the _____ day of ____________, 20 ; and as to _____ shares, the period beginning with the _____ day of ____________, 20 . (b) All said periods shall end on the specified termination date. In the event the Optionee ceases to be employed by the Company for any reason other than death, any then unexercised options granted to such Optionee shall immediately terminate and become void upon the date of termination of employment and shall not thereafter be exercisable. The Company shall have the sole discretion to set the date of termination for purposes of the Plan, without regard to any notice period or other obligation under the labor laws of the jurisdiction where the Optionee is employed. (c) In the event that an Optionee ceases to be an employee of the Company by reason of his death, any option granted to such Optionee, to the extent exercisable on the date of his death, may be exercised by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution at any time or times within one hundred eighty (180) days after the date of the Participant's death. The options shall expire at the end of such one hundred eighty (180) day period. ARTICLE SECOND. -------------- (a) This option is not transferable by the said Optionee otherwise than by will or the laws of descent and distribution, and is exercisable, during the Optionee's lifetime, only by him, and by him only while he is an employee of the Company. (b) The term "Estate" as used in this Section or elsewhere means the executors or administrators of the estate of the Optionee after his decease or other persons succeeding, to the extent permitted by the provisions of this option, to the rights of the Optionee after his decease by his will or the laws of descent and distribution, as the case may be. (c) The term "Holder", as used in this Section and all subsequent provisions of this option, shall mean the Optionee and, if the Optionee shall have deceased, his Estate as hereinbefore defined. The Holder shall not, by virtue of this option, be deemed to be a holder of any shares purchasable hereunder or to be entitled to the rights or privileges of a holder of 2 such shares unless and until they shall have been in fact issued to him after exercise of the option with respect to such shares. (d) This option is subject to all laws and regulations of any governmental authority which may be applicable thereto and, notwithstanding any of the provisions hereof, the Holder agrees that the option granted hereby will not be exercised nor will the Company be obligated to issue any shares of stock hereunder if the exercise thereof or the issuance of such shares, as the case may be, would constitute a violation by the Holder or the Company of any such law or regulation or of any provision thereof. (e) Re-employment of the Optionee by the Company shall not be deemed to constitute the Optionee an employee of the Company for purposes of any rights held by such person upon the date his prior employment ceased. Except as specifically permitted by express provision in the case of the decease of the said Optionee, this option may not under any provision hereof be exercised at any time unless at all times during the period beginning with the date of the granting of this option and ending on the date of such time of exercise the Optionee was an employee of the Company. (f) For purposes of this memorandum only, employment of an Optionee by a subsidiary of the Company shall be considered as if such Optionee were employed by the Company. The term "subsidiary" as used in this Section and all subsequent provisions of the Option Agreement shall mean any present or future corporation in which the Company owns, directly or indirectly, stock possessing 50 percent or more of the total combined voting power of all classes of stock. ARTICLE THIRD. ------------- (a) This option may be exercised only by delivery of written notice of exercise to the Company as hereinafter provided, and delivery of such notice shall constitute exercise thereof. Such notice shall state the number of shares with respect to which the option is being exercised, shall be accompanied by cash or a certified check for the option price and, unless the Company shall at the time expressly waive this requirement in connection with such exercise of the option, shall contain a statement that the option is being exercised only with a view to investment in, and not with a view to the disposition of, the shares with respect to which the option is then being exercised. Payment may also be in whole or in part in shares of the Common Stock of the Company already owned by the Optionee exercising the option, valued at the Market Price determined in accordance with the provisions of Section (b) of Article Third herein provided, however, that there shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option, if fewer than one hundred (100) shares. (b) For purposes of this Plan, the Market Price shall be the closing sale price of a share of Common Stock as listed on the Nasdaq National 3 Market on the date of grant (or the last closing sale price in the event there were no such trades on the date of grant). (c) As soon as reasonably feasible after the receipt of such notice and payment, the Company will deliver or cause to be delivered to the Holder at the office of the Company, certificates for the number of shares with respect to which the option has been exercised, registered in the name of the Holder. Notwithstanding the foregoing, as a condition precedent to the delivery of any shares hereunder, the Company shall have the right to require the Holder to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements, if and to the extent required by law. The shares may be registered in the name of a person other than a Holder if the Holder is an Estate. Notwithstanding the foregoing, if any law or regulation of the Securities and Exchange Commission or other body having jurisdiction shall require the Company or the Holder to take any action in connection with the shares specified in such notice, then delivery of such shares to the Holder shall be deferred for the period necessary to take such action. (d) Delivery shall be made as of the date of delivery of notice of exercise of the option with respect thereto, and the Holder shall be entitled to receive all dividends and distributions (payable in cash, stock, or otherwise) or the equivalent thereof payable to stockholders of record subsequent to delivery of notice of exercise of the option with respect to such shares and prior to the date of issuance and delivery of the shares pursuant thereto. Except as above provided with respect to the payment of withholding taxes, the Company will pay all federal original issue taxes on such issue and delivery, and all other fees or expenses necessarily incurred by the Company in connection therewith; provided, however, that all federal and state transfer taxes payable in respect of shares of Common Stock of the Company issued and delivered under this option in a name other than the name of the person to whom this option is granted shall, upon the delivery of such shares, be paid by the recipient thereof. ARTICLE FOURTH. -------------- If any of the following events shall occur prior to the specified termination date or other termination of this option, the aggregate number of shares covered by this option (or the balance of the shares covered thereby, if theretofore the option has been exercised in part) and the purchase price payable therefore, shall in each instance be changed or adjusted as follows: (a) If the Company shall, at any time while this option is outstanding and prior to any termination thereof, declare and pay in Common Stock any dividend upon shares of its Common Stock outstanding, there shall in any such event be added to the number of shares of Common Stock which might, immediately prior to such dividend, be purchased pursuant to this option the number of shares of Common Stock of the Company which the Holder would have received or become entitled to receive by way of such dividend if, at the date for the determination of stockholders entitled to receive such dividend, the 4 Holder had been the holder of record of the number of shares of Common Stock then covered by this option; and the then option price per share shall be correspondingly adjusted so that the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such stock dividend by the number of shares which, by virtue of the foregoing provisions of this paragraph, the Holder shall be entitled to purchase at the time of purchase for each share he was entitled to purchase immediately prior to such dividend. The additional shares, which are purchasable by reason of the foregoing provisions of this paragraph, may be purchased only within such period or periods as may be purchased the shares on account of which, by virtue of the foregoing provisions of this paragraph, such additional shares may be purchased. (b) If the Company shall, at any time while this option is outstanding, reclassify the shares of its Common Stock into a greater or lesser number of shares of Common Stock, the number of shares which may, after any such reclassification, be purchased pursuant to this option shall be the number of shares which the Holder would have received or become entitled to receive upon such reclassification if the Holder had, prior to such reclassification, been the holder of record of the number of shares of Common Stock then covered by this option; and the option price per share shall be correspondingly adjusted so that, in the event of a reclassification into a greater number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the quotient resulting from dividing the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock into which each share of such stock shall be reclassified, and, in the event of a reclassification into a lesser number of shares, the option price per share, thereafter and prior to any other adjustment therein pursuant to the provisions hereof, shall be the product resulting from multiplying the option price per share of Common Stock in effect immediately prior to such reclassification by the number of shares of Common Stock required to constitute one share of the reclassified number of shares. The number of shares which are purchasable by reason of the foregoing provisions of this paragraph within any specified fixed period or periods shall be increased or decreased in that proportion which the number of shares purchasable after any such reclassification bears to the number of shares purchasable immediately before any such reclassification. (c) If, at any time while this option is outstanding, there shall be a reorganization or recapitalization of the Company or a consolidation or merger of the Company into or with another company or a sale of all or substantially all of the assets of the Company, adequate provision shall be made so that, in lieu of each share of Common Stock then covered by this option, there shall thereafter be substituted hereunder during the period hereof such other share or shares of stock, security or securities, or assets as would have been issuable or payable in respect of or in exchange for such share had the Holder on the record date for the determination thereof been the record holder of such share; 5 provided, however, that in any such event or in anticipation of any such event, the period or periods within which this option may be exercised may be accelerated by the Company by vote of the Board of Directors to a date not less than thirty days after notice of such acceleration shall have been mailed to the Holder. Notwithstanding the foregoing, a dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation or in which a majority of its outstanding shares are so converted or exchanged shall cause every option hereunder to terminate; provided that if any such dissolution, liquidation, merger or consolidation is contemplated, the Company shall either arrange for any corporation succeeding to the business and assets of the Company to issue to the participants replacement options (which, in the case of Incentive Stock Options, satisfy, in the determination of the Committee, the requirements of Section 424 of the Code) on such corporation's stock which will to the extent possible preserve the value of the outstanding options or shall make the outstanding options fully exercisable at least 20 days before the effective date of any such dissolution, liquidation, merger or consolidation. The existence of the Plan shall not prevent any such change or other transaction and no participant hereunder shall have any right except as herein expressly set forth. (d) If the Company shall take any action (other than by way of the declaration or payment of a dividend or dividends (exclusive of stock dividends) thereon and other than such action as is described or referred to in clauses (a), (b), or (c) of this ARTICLE FOURTH hereof which, in the opinion of the Board of Directors, would materially dilute the Common Stock or other securities then covered by this option, the Board of Directors shall appoint a firm of independent public accountants (which may be the firm which regularly examines and reports upon the financial statements of the Company) which shall give their opinion as to the adjustment, if any, in the then option price per share required to protect against such dilution, and the option price per share shall thereupon become the price expressed in such opinion. (e) No fraction of or fractional shares shall be purchasable or delivered upon purchase hereunder. Upon any adjustment required as hereinabove provided of the purchase price or the number of shares purchasable upon the exercise of this option, the Company agrees forthwith to deliver to the Holder a certificate, signed by its President or Treasurer, setting forth the number of shares, and the price per share therefore, thereafter purchasable on the exercise of this option. The Company will, at all times during the term of this option, reserve and keep available out of shares of its Common Stock authorized and unissued such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of this option. This option shall be binding upon any company into which the Company is merged or with which it is consolidated, and, unless clearly inapplicable, 6 references herein to the Company shall be deemed to include any such company. ARTICLE FIFTH. ------------- Any notice to be given to the Company hereunder shall be deemed sufficient if delivered in writing at the office of the President of the Company or at such other address as the Company may hereafter designate and shall be effective when so delivered. Any notice to be given to the Holder hereunder shall be deemed sufficient if delivered in person to the Holder or at his address furnished to the Company or when deposited in the mail addressed to the Holder at such address and shall be effective when so delivered or when so deposited. ARTICLE SIXTH. ------------- The Plan shall be administered by the Committee appointed by the Board of Directors to administer the Plan or the Board of Directors as a whole if no appointment is made (the "Committee"). The decision of the Committee or the Board of Directors shall be final and binding on all persons concerned and with respect to all questions arising under the Plan, including the terms of the Plan and of the options granted under the Plan. IN WITNESS WHEREOF, the Company has caused this option to be signed by its duly authorized officer and its corporate seal to be hereunto affixed this ____ day of _______________, 20__ . ATTEST: PARLEX CORPORATION _____________________________ By:___________________________ Name: Name: Title: Title: I hereby acknowledge receipt of this Option Agreement covering my stock option under the Parlex Corporation 2001 Employees' Stock Option Plan, and the enclosed Plan, and in connection with the grant of the Option hereunder to me, hereby agree that the contents of this Option Agreement and the terms and conditions of the Plan are acceptable to me and that I shall be bound thereby. __________________________ ____________ Optionee Date 7 EX-31 7 paq1-311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF REGISTRANT'S CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13a-14(a) 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 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 the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a 15(e) and 15d 15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2004 /s/ Peter J. Murphy ------------------------------------ Peter J. Murphy President & Chief Executive Officer 41 EX-31 8 paq1-312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF REGISTRANT'S CHIEF FINANCIAL OFFICER REQUIRED BY RULE 13a-14(a) 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 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 the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a 15(e) and 15d 15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 12, 2004 /s/ Jonathan R. Kosheff ------------------------------------ Jonathan R. Kosheff Chief Financial Officer 42 EX-32 9 paq1-321.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF REGISTRANT'S CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 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 30, 2004, 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 12, 2004 /s/ Peter J. Murphy - ---------------------------------- Peter J. Murphy Chief Executive Officer 43 EX-32 10 paq1-322.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION OF REGISTRANT'S CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350 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: (a) the Quarterly Report on Form 10-Q of the Company for the period ending September 30, 2004, 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 12, 2004 /s/ Jonathan R. Kosheff - ---------------------------------- Jonathan R. Kosheff Chief Financial Officer 44 -----END PRIVACY-ENHANCED MESSAGE-----