2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to__________ Commission file Number 1-4415 PARK ELECTROCHEMICAL CORP. (Exact Name of Registrant as Specified in Its Charter) New York 11-1734643 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5 Dakota Drive, Lake Success, N.Y. 11042 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (516) 354-4100 Not Applicable ------------------------------------------------------ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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[X] No[ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 19,890,669 as of July 6, 2004. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION: Number Item 1. Financial Statements Condensed Consolidated Balance Sheets May 30, 2004 (Unaudited) and February 29, 2004..................................... 3 Consolidated Statements of Operations 13 weeks ended May 30, 2004 and June 1, 2003 (Unaudited)............................... 4 Condensed Consolidated Statements of Cash Flows 13 weeks ended May 30, 2004 and June 1, 2003 (Unaudited).................. 5 Notes to Condensed Consolidated Financial Statements (Unaudited).................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 13 Factors That May Affect Future Results.... 20 Item 3. Quantitive and Qualitative Disclosures About Market Risk .............................. 20 Item 4. Controls and Procedures................... 21 PART II. OTHER INFORMATION: Item 1. Legal Proceedings......................... 22 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities..... 23 Item 3. Defaults Upon Senior Securities........... 23 Item 4. Submission of Matters to a Vote of Security Holders................................... 23 Item 5. Other Information......................... 23 Item 6. Exhibits and Reports on Form 8-K.......... 23 SIGNATURES............................................ 25 EXHIBIT INDEX......................................... 26 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) <TABLE> <CAPTION> May 30, 2004 February 29, (Unaudited) 2004* ----------- ------------ <s> <c> <c> ASSETS Current assets: Cash and cash equivalents $154,951 $129,989 Marketable securities 46,334 59,197 Accounts receivable, net 33,902 36,149 Inventories (Note 2) 13,752 11,707 Prepaid expenses and other current assets 1,441 3,040 Total current assets 250,380 240,082 Property, plant and equipment, net 68,346 70,569 Other assets 606 419 Total assets $319,332 $311,070 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,788 $ 14,913 Accrued liabilities 23,617 24,468 Income taxes payable 7,107 3,248 Total current liabilities 47,512 42,629 Deferred income taxes 5,099 5,107 Liabilities from discontinued operations (Note 4) 17,373 19,438 Total liabilities 69,984 67,174 Stockholders' equity: Common stock 2,037 2,037 Additional paid-in capital 133,708 133,335 Retained earnings 113,749 108,915 Treasury stock, at cost (3,693) (4,125) Accumulated other non-owner changes 3,547 3,734 Total stockholders' equity 249,348 243,896 Total liabilities and stockholders' equity $319,332 $311,070 <FN> *The balance sheet at February 29, 2004 has been derived from the audited financial statements at that date. </TABLE> See accompanying Notes to the Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) <TABLE> <CAPTION> 13 weeks ended (Unaudited) May 30, June 1, 2004 2003 <s> <c> <c> Net sales $ 58,518 $44,323 Cost of sales 44,806 39,700 Gross profit 13,712 4,623 Selling, general and administrative expenses 8,341 6,204 Realignment and severance charges (Note 5) - 1,934 Operating income (loss) from continuing operations 5,371 (3,515) Interest and other income 651 744 Earnings (loss) from continuing operations before income taxes 6,022 (2,771) Income tax provision (benefit) from continuing operations 1 (1,127) Net earnings (loss) from continuing operations 6,021 (1,644) Loss from discontinued operations, net of taxes (Note 4 ) - (6,807) Net earnings (loss) $ 6,021 $ (8,451) Basic earnings (loss) per share (Note 6): Earnings (loss) from continuing operations $ 0.30 $ (0.08) Loss from discontinued operations - (0.35) Basic earnings (loss) per share $ 0.30 $ (0.43) Diluted earnings (loss) per share (Note 6): Earnings (loss) from continuing operatons $ 0.30 $ (0.08) Loss from discontinued operations - (0.35) Diluted earnings (loss) per share $ 0.30 $ (0.43) Weighted average number of common and common equivalent shares outstanding: Basic shares 19,810 19,709 Diluted shares 20,068 19,709 Dividends per share $ 0.06 $ 0.06 </TABLE> See accompanying Notes to the Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) <TABLE> <CAPTION> 13 Weeks Ended (Unaudited) May 30, June 1, 2004 2003 <s> <c> <c> Cash flows from operating activities: Net earnings (loss) $ 6,021 $ (8,451) Depreciation and amortization 2,549 2,910 Change in operating assets and liabilities 4,659 8,028 Net cash provided by operating activities 13,229 2,487 Cash flows from investing activities: Purchases of property, plant and equipment, net (356) (1,200) Purchases of marketable securities (4,508) (28,987) Proceeds from sales and maturities of marketable securities 16,650 16,598 Net cash provided by (used in) investing activities 11,786 (13,589) Cash flows from financing activities: Dividends paid (1,187) (1,181) Proceeds from exercise of stock options 807 132 Net cash used in financing activities (380) (1,049) Change in cash and cash equivalents before exchange rate changes 24,635 (12,151) Effect of exchange rate changes on cash and cash equivalents 327 248 Change in cash and cash equivalents 24,962 (11,903) Cash and cash equivalents, beginning of period 129,989 111,036 Cash and cash equivalents, end of period $154,951 $ 99,133 Supplemental cash flow information: Cash (received) paid during the period for income taxes $ (3,710) $ 323 </TABLE> See accompanying Notes to the Consolidated Financial Statements. PARK ELECTROCHEMICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except per share amounts) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of May 30, 2004, the consolidated statements of operations for the 13 weeks ended May 30, 2004 and June 1, 2003, and the condensed consolidated statements of cash flows for the 13 weeks then ended have been prepared by the Company, without audit. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at May 30, 2004 and the results of operations and cash flows for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2004. <TABLE> 2. INVENTORIES Inventories consisted of the following: <CAPTION> May 30, February 29, 2004 2004 <s> <c> <c> Raw materials $ 5,003 $ 4,088 Work-in-process 3,328 2,424 Finished goods 5,006 4,835 Manufacturing supplies 415 360 $13,752 $11,707 </TABLE> 3. STOCK OPTIONS As of May 30, 2004, the Company had two fixed stock option plans. All options under the plans had an exercise price equal to the market value of the underlying common stock of the Company on the date of grant. The Company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations for the plans. If compensation costs of the grants had been determined based upon the fair market value at the grant dates consistent with the FASB No. 123 "Accounting for Stock-Based Compensation", the Company's net earnings and earnings per share would have approximated the amounts shown below. <TABLE> <CAPTION> 13 weeks ended May 30, June 1, 2004 2003 <s> <c> <c> Net earnings $6,021 $(8,451) Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of tax effects 459 478 ------ -------- Pro forma net income (loss) $5,562 $(8,929) ====== ======== EPS-basic as reported $ 0.30 $ (0.43) ====== ======== EPS-basic pro forma $ 0.28 $ (0.45) ====== ======== EPS-diluted as reported $ 0.30 $ (0.43) ====== ======== EPS-diluted pro forma $ 0.28 $ (0.45) ====== ======== </table> 4. DISCONTINUED OPERATIONS On February 4, 2004, the Company announced that it was discontinuing its financial support of its Dielektra GmbH ("Dielektra") subsidiary located in Cologne, Germany, due to the continued erosion of the European market for the Company's high technology products. Without Park's financial support, Dielektra filed an insolvency petition, which may result in the reorganization, sale or liquidation of Dielektra. In accordance with SFAS No. 144, "Accounting for the Impairment of Disposal of Long- Lived Assets", Dielektra is treated as a discontinued operation. As a result of the discontinuation of financial support for Dielektra, the Company recognized an impairment charge of $22,023 for the write-off of Dielektra assets and other costs during the fourth quarter of the 2004 fiscal year. The liabilities from discontinued operations are reported separately on the consolidated balance sheet. These liabilities from discontinued operations included $12,094 for Dielektra's deferred pension liability. The Company expects to recognize a gain of approximately $17 million related to the reversal of these liabilities when the Dielektra insolvency process is completed, although it is unclear when the process will be completed. The $6,807 loss from discontinued operations for the quarter ended June 1, 2003, includes losses from operations of $665 and $6,142 for termination and other costs related to Dielektra, recorded in the first quarter of the 2004 fiscal year. At the time of the discontinuation of support for Dielektra, $5,539 of the $6,142 of termination and other costs had been paid and the remaining $603 was included in liabilities from discontinued operations in the Condensed Consolidated Balance Sheets as of February 29, 2004 and May 30, 2004. Dielektra's net sales and operating results for the 13 weeks ended May 30, 2004 and June 1, 2003, and the assets and liabilities of discontinued operations at May 30, 2004 and February 29, 2004 were as follows: <TABLE> <CAPTION> 13 weeks ended May 30, June 1, 2004 2003 <s> <c> <c> Net sales $ - $ 5,647 Operating loss $ - $ (665) Restructuring and impairment charges - (6,142) Net loss $ - $(6,807) May 30, February 29, 2004 2004 Current and other liabilities $ 5,279 $ 7,344 Pension liabilities 12,094 12,094 Total liabilities $17,373 $19,438 </TABLE> 5. REALIGNMENT AND SEVERANCE CHARGES The Company recorded pre-tax charges of $1,934 and $6,504 during the first and second quarters of fiscal year 2004, respectfully, related to the realignment of its North America FR-4 business operations in Newburgh, New York and Fullerton, California. During the fourth quarter of fiscal year 2004, the Company recorded pretax charges of $112 related to workforce reductions in Europe. The components of these charges and the related liability balances and activity from the quarter ended June 1, 2003 through the quarter ended May 30, 2004 are set forth below. <TABLE> <CAPTION> Charges 5/30/04 Realignment Incurred or Remaining Charges Paid Reversals Liabilities <s> <c> <c> <c> <c> New York and California and other realignment charges: Lease payments, taxes, utilities and other $7,292 $ 857 - $6,435 Severance payments 1,258 1,258 - - $8,550 $2,115 $ - $6,435 </TABLE> The severance payments were for the termination of hourly and salaried, administrative, manufacturing and support employees. Such employees were terminated during the 2004 fiscal year first, second and third quarters. The severance payments were paid to such employees in installments during fiscal year 2004. The lease charges cover one lease obligation payable through December 2004 and a portion of another lease obligation payable through September 2013. 6. EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potential common stock equivalents outstanding during the period. Stock options are the only common stock equivalents and are computed using the treasury stock method. The following table sets forth the basic and diluted weighted average number of shares of common stock and potential common stock equivalents outstanding during the periods specified: <TABLE> <CAPTION> 13 weeks ended May 30, June 1, 2004 2003 <s> <c> <c> Weighted average shares outstanding for basic EPS 19,810 19,709 Weighted average shares outstanding for diluted EPS 20,068 19,709 </TABLE> Common stock equivalents, which were not included in the computation of diluted earnings per share because either the effect would have been antidilutive or the options' exercise prices were greater than the average market price of the common stock, were 57 and 1,133 for the thirteen weeks ended May 30, 2004 and June 1, 2003, respectively. 7. BUSINESS SEGMENTS The Company considers itself to operate in one business segment. The Company's electronic materials products are marketed primarily to leading independent printed circuit board fabricators, electronic manufacturing service companies, electronic contract manufacturers and major electronic original equipment manufacturers ("OEMs") located throughout North America, Europe and Asia. The Company's advanced composite materials customers, substantially all of which are located in the United States, include OEMs, independent firms and distributors in the electronics, radio frequency, aerospace, rocket motor, automotive, graphic arts and specialty industrial industries. Sales are attributed to geographic region based upon the region from which the materials were shipped to the customer. Sales between geographic regions were not significant. Financial information concerning the Company's continuing operations by geographic area follows: <TABLE> <CAPTION> 13 Weeks Ended May 30, June 1, 2004 2003 <s> <c> <c> Sales: North America $32,264 $25,147 Europe 9,117 7,725 Asia 17,137 11,451 Total sales $58,518 $44,323 </TABLE> <TABLE> <CAPTION> May 30, February 29, 2004 2004 <s> <c> <c> Long-lived assets: United States $36,945 $38,549 Europe 10,544 10,969 Asia 21,463 21,470 Total long-lived assets $68,952 $70,988 </TABLE> 8. COMPREHENSIVE INCOME Total comprehensive income (loss) for the 13 weeks ended May 30, 2004 and June 1, 2003 was $5,834 and ($7,351), respectively. Comprehensive income consisted primarily of net income and foreign currency translation adjustments and unrealized gains and losses on marketable securities. 9. SALE OF NELCO TECHNOLOGY, INC. During the Company's 1998 fiscal year and for several years prior thereto, more than 10% of the Company's total worldwide sales were to Delco Electronics Corporation, a subsidiary of General Motors Corp., and the Company's wholly owned subsidiary, Nelco Technology, Inc. ("NTI") located in Tempe, Arizona, had been Delco's principal supplier of semi-finished multilayer printed circuit board materials, commonly known as mass lamination, which were used by Delco to produce finished multilayer printed circuit boards. However, in March 1998, the Company was informed by Delco that Delco planned to close its printed circuit board fabrication plant and exit the printed circuit board manufacturing business. As a result, the Company's sales to Delco declined during the three-month period ended May 31, 1998, were negligible during the remainder of the 1999 fiscal year and have been nil in subsequent years. After March 1998, the business of NTI languished and its performance was unsatisfactory due primarily to the absence of the unique, high-volume, high-quality business that had been provided by Delco Electronics and the absence of any other customer in the North American electronic materials industry with a similar demand for the large volumes of semi-finished multilayer printed circuit board materials that Delco purchased from NTI. Although NTI's business experienced a resurgence in the 2001 fiscal year as the North American market for printed circuit materials became extremely strong and demand exceeded supply for the electronic materials manufactured by NTI, the Company's internal expectations and projections for the NTI business were for continuing volatility in the business' performance over the foreseeable future. Consequently, in April 2001, the Company sold the assets and business of NTI and closed a related support facility, also located in Tempe, Arizona. As a result of this sale, the Company exited the mass lamination business in North America. In connection with the sale of NTI and the closure of the related support facility, the Company recorded pre-tax charges of $15,707 in its fiscal year 2002 first quarter ended May 27, 2001. The components of these charges and the related liability balances and activity from the May 27, 2001 balance sheet date to the May 30, 2004 balance sheet date are set forth below: <TABLE> <CAPTION> Charges 5/30/04 Closure Incurred or Remaining Charges Paid Reversals Liabilities <s> <c> <c> <c> <c> NTI charges: Loss on sale of assets and business $10,580 $10,580 $ - $ - Severance payments 387 387 - - Medical and other costs 95 95 - - Support facility charges: Impairment of long lived assets 2,058 2,058 - - Write down of accounts receivable 350 319 31 - Write down of inventory 590 590 - - Severance payments 688 688 - - Medical and other costs 133 133 - - Lease payments, taxes, utilities, maintenance 781 542 - 239 Other 45 45 - - ------- ------- --- ---- $15,707 $15,437 $31 $239 ======= ======= ==== ==== </TABLE> The severance payments and medical and other costs incurred in connection with the sale of NTI and the closure of the related support facility were for the termination of hourly and salaried, administrative, manufacturing and support employees, all of whom were terminated during the first and second fiscal quarters ended May 27, 2001 and August 26, 2001, respectively, and substantially all of the severance payments and related costs for such terminated employees (totaling $1,303) were paid during such quarters. The lease obligations will be paid through August 2004 pursuant to the related lease agreements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General: Park is a leading global designer and producer of electronic materials used to fabricate complex multilayer printed circuit boards and electronic interconnection systems. Park specializes in advanced materials for high layer count circuit boards and high-speed digital and RF/Microwave electronic systems and also designs and manufactures advanced composite materials for the aerospace, military and industrial markets. The Company's customers include leading independent printed circuit board fabricators, electronic manufacturing service companies, electronic contract manufacturers and electronic original equipment manufacturers in the computer, telecommunications, transportation, aerospace and instrumentation industries. The Company's sales and earnings increased significantly in the three-month period ended May 30, 2004 compared with last year's comparable period as a result of increases in sales by all the Company's operations, although the improvements were attributable principally to increases in sales of the Company's advanced technology products, sales by the Company's operations in Asia and North America and sales by the Company's FiberCote advanced composite materials business. The electronics industry began to improve slightly at the end of the 2004 fiscal year second quarter and continued to improve in the 2004 fiscal year third and fourth quarters and in the 2005 fiscal year first quarter, and there were some indications that the improvement would continue. However, it is not completely clear whether and to what degree the improvement is sustainable. The global markets for the Company's electronic materials products continued to be mixed during the 2005 fiscal year first quarter, and it appeared that the electronic materials industry may have begun to slow down to some extent in the 2005 fiscal year second quarter. During the first and second quarters of the 2004 fiscal year, the Company realigned its North American FR-4 business operations located in New York and California. As part of the realignment, the New York operation was scaled down to a smaller, focused operation and the California operation was scaled up to a larger volume operation, and there were significant workforce reductions at the Company's New York facility and significant workforce increases at the Company's California facility, with the end result being a net reduction in the Company's workforce in North America. A large portion of the New York facility was mothballed. The Company has the flexibility in the future to scale back up the Newburgh, New York facility if the opportunity to do so presents itself. The realignment was designed to help the Company achieve improved operating and cost efficiencies in its North American FR-4 business and to help the Company best service all of its North American customers. As a result of the Company's realignment of its North American FR-4 business operations and related workforce reductions, the Company recorded pre-tax charges totaling $1.9 million in the Company's 2004 fiscal year first quarter. See Note 5 of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Report for additional information regarding the realignment. In February 2004, the Company discontinued its financial support of Dielektra GmbH, the Company's wholly owned subsidiary located in Cologne, Germany ("Dielektra"), which supplied electronic materials to European circuit board manufacturers. The Company discontinued its support of Dielektra because the market in Europe had eroded to the point where the Company believed it would not be possible, at any time in the foreseeable future, for the Dielektra business to be viable. Dielektra had required substantial financial support from the Company. The discontinuation of the Company's financial support resulted in the filing of an insolvency petition by Dielektra. The Company believes that the insolvency procedure in Germany will result in the eventual reorganization, sale or liquidation of Dielektra. The Company continues to service the higher technology European digital and RF circuit board markets through its Neltec Europe SAS business located in Mirebeau, France, and its Neltec SA business located in Lannemezan, France. In accordance with generally accepted accounting principles, the Company treated Dielektra as a discontinued operation. Accordingly, the Company reclassified Dielektra's operating losses and charges and recorded a net loss from discontinued operations of $33.8 million in the 2004 fiscal year, comprised of $5.6 million of operating losses incurred by Dielektra, $6.2 million related to the closure of Dielektra's mass lamination operation and related workforce reductions in the 2004 fiscal year first quarter and $22.0 million for the write-off of assets of Dielektra and other costs. Furthermore, the Company's sales from its continuing operations did not include sales by Dielektra of $14.4 million for the 2004 fiscal year. The Company's sales for the 2005 fiscal year first quarter did not include any sales by Dielektra, and Dielektra had no impact on the Company's results of operations during the 2005 fiscal year first quarter. See Note 4 of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Report for additional information regarding the discontinued operations. The Company is not engaged in any related party transactions involving relationships or transactions with persons or entities that derive benefits from their non- independent relationship with the Company or the Company's related parties, or in any transactions with parties with whom the Company or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may or would not be available from other, more clearly independent parties on an arm's-length basis, or in any trading activities involving non-exchange traded commodity or other contracts that are accounted for at fair value or otherwise or in any energy trading or risk management activities, other than certain limited foreign currency contracts intended to hedge the Company's contractual commitments to pay certain obligations or to realize certain receipts in foreign currencies and certain limited energy purchase contracts intended to protect the Company from increased utilities costs. The Company believes that an evaluation of its ongoing operations would be difficult if the disclosure of its financial results were limited to generally accepted accounting principles ("GAAP") financial measures. Accordingly, in addition to disclosing its financial results determined in accordance with GAAP, the Company discloses non-GAAP operating results that exclude certain items in order to assist its shareholders and other readers in assessing the Company's operating performance. Such non-GAAP financial measures are provided to supplement the results provided in accordance with GAAP. Three Months Ended May 30, 2004 Compared with Three Months Ended June 1, 2003: The Company's operations generated profits during the three-month period ended May 30, 2004 as the improved conditions that developed in the markets for sophisticated printed circuit materials in the second half of the 2004 fiscal year continued during the 2005 fiscal year first quarter. The Company's gross profit in the 2005 fiscal year first quarter was significantly higher than the gross profit in the prior year's first quarter primarily as a result of the improvement in the Company's utilization of its manufacturing plants resulting from higher sales and concomitant production volumes, higher percentages of sales of higher technology, higher margin products and the Company's reduction of its operating costs, partially offset by continuing operating inefficiencies resulting from operating certain facilities at levels below their designed manufacturing capacities. Operating results of the Company's advanced composite materials business also improved during the 2005 fiscal year first quarter primarily as a result of higher sales volumes related to strength in the aircraft manufacturing industry. Results of Operations Net sales for the three-month period ended May 30, 2004 increased 32% to $58.5 million from $44.3 million for last fiscal year's comparable period. The increase in net sales was principally the result of higher unit volumes of materials shipped by the Company's operations in Asia, North America and Europe. The Company's foreign operations accounted for $26.3 million of net sales, or 45% of the Company's total net sales worldwide, during the three-month period ended May 30, 2004 compared with $19.2 million of sales, or 43% of total net sales worldwide, during last fiscal year's comparable period. Net sales by the Company's foreign operations during the 2005 fiscal year first quarter increased by 37% from the 2004 fiscal year comparable period, principally as the result of increased sales in Asia. The overall gross profit as a percentage of net sales for the Company's worldwide operations improved to 23.4% during the three-month period ended May 30, 2004 compared with 10.4% for last fiscal year's comparable period. The significant improvement in the gross profit margin was attributable to increased sales volume, higher percentages of sales of higher margin, advanced technology products, as high performance materials accounted for 92% of worldwide sales from continuing operations for the first quarter of the 2005 fiscal year compared with 88% for the first quarter of the prior fiscal year, and reductions in the Company's operating costs from the 2004 fiscal year, which were only partially offset by inefficiencies caused by operating certain facilities at levels below their designed manufacturing capacities. The Company's cost of sales increased moderately by 12.9% in support of higher production volumes. Selling, general and administrative expenses increased by $2.1 million, or by 34%, during the three months ended May 30, 2004 compared with last fiscal year's comparable period, but these expenses, measured as a percentage of sales, were 14.3% during the three-months ended May 30, 2004 compared with almost the same percentage, 14.0%, during last fiscal year's comparable period. The increase in selling, general and administrative expenses in the 2005 fiscal year first quarter was a result of increased shipping costs incurred by the Company to meet its customers' customized manufacturing and quick-turn-around requirements and an increase in the provision for employee performance based incentive compensation. The Company incurred pre-tax charges of $1.9 million, and after-tax charges of $1.1 million, during the 2004 fiscal year first quarter in connection with the realignment of its North American FR-4 business operations in New York and California and related workforce reductions. For the reasons set forth above, the Company's operating income from continuing operations was $5.4 million for the three months ended May 30, 2004 compared to an operating loss from continuing operations of $3.5 million for the three months ended June 1, 2003, including the pre-tax charges described above related to the realignment of its North American FR-4 business operations and related workforce reductions. Interest and other income, net, principally investment income, was $0.7 million for the three-month period ended May 30, 2004 compared with the same amount for last fiscal year's comparable period. The Company's investments were primarily short-term taxable instruments. The Company's effective income tax rate for the three- month period ended May 30, 2004 was 0.0%, compared to a tax benefit of 30.0% on the operating loss before the realignment and workforce reduction charges for last fiscal year's comparable period. The zero tax provision for the 2005 fiscal year first quarter was the result of higher sales and taxable income in jurisdictions with lower income tax rates and the elimination of foreign tax provisions that were no longer required. The Company's net earnings for the three months ended May 30, 2004 were $6.0 million compared to a net loss of $8.5 million for the three months ended June 1, 2003, including the charges described above related to the realignment of the Company's North American FR-4 business operations and related workforce reductions, which consisted of a net loss from continuing operations of $1.6 million and a net loss from discontinued operations of $6.8 million. Basic and diluted earnings per share for the three-month period ended May 30, 2004 were $0.30, compared to basic and diluted losses per share of $0.43 for the three-month period ended June 1, 2003, including the charges described above, which were $0.05 per share, and compared to basic and diluted losses from continuing operations of $0.03 per share, before the charges described above, and basic and diluted losses from discontinued operations of $0.35 per share for the three-month period ended June 1, 2003. Liquidity and Capital Resources: At May 30, 2004, the Company's cash and temporary investments were $201.3 million compared with $189.2 million at February 29, 2004, the end of the Company's 2004 fiscal year. The increase in the Company's cash and investment position at May 30, 2004 was attributable to cash generated by operating activities, partially offset by purchases of property, plant and equipment and the payment of dividends. The Company's working capital (which includes cash and temporary investments) was $202.9 million at May 30, 2004 compared with $197.5 million at February 29, 2004. The increase in working capital at May 30, 2004 compared with February 29, 2004 was due principally to the increase in cash and temporary investments and an increase in inventories partially offset by decreases in accounts receivable and other current assets and increases in accounts payable and income taxes payable. The Company's current ratio (the ratio of current assets to current liabilities) was 5.3 to 1 at May 30, 2004 compared to 5.6 to 1 at February 29, 2004. During the three months ended May 30, 2004, net earnings from the Company's operations, before depreciation and amortization, of $8.6 million and a net increase in working capital items, resulting in $13.2 million of cash provided by operating activities. During the same three-month period, the Company expended only $0.4 million for the purchase of property, plant and equipment compared with $1.2 million for the three-month period ended June 1, 2003 and paid $1.2 million in dividends on its common stock in each of such three-month periods. Net expenditures for property, plant and equipment were $2.4 million in the 2004 fiscal year, $6.4 million in the 2003 fiscal year and $22.8 million in the 2002 fiscal year. At May 30, 2004, the Company had no long-term debt. The Company believes its financial resources will be sufficient, for the foreseeable future, to provide for continued investment in working capital and property, plant and equipment and for general corporate purposes. Such resources would also be available for purchases of the Company's common stock, appropriate acquisitions and other expansions of the Company's business. The Company is not aware of any circumstances or events that are reasonably likely to occur that could materially affect its liquidity. The Company's contractual obligations and other commercial commitments to make future payments under contracts, such as lease agreements, consist only of operating lease commitments. The Company has no long-term debt, capital lease obligations, unconditional purchase obligations or other long- term obligations, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments or contingent commitments, other than two standby letters of credit in the total amount of $2.7 million to secure the Company's obligations under its workers' compensation insurance program and certain limited energy purchase contracts intended to protect the Company from increased utilities costs. As of May 30, 2004, there were no material changes outside the ordinary course of the Company's business in the Company's contractual obligations disclosed in Item 7 of Part II of its Form 10-K Annual Report for the fiscal year ended February 29, 2004. Off-Balance Sheet Arrangements: The Company's liquidity is not dependent on the use of, and the Company is not engaged in, any off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities. Environmental Matters: In the three-month periods ended May 30, 2004 and June 1, 2003, the Company charged less than $0.1 million against pretax income for environmental remedial response and voluntary cleanup costs (including legal fees). While annual expenditures have generally been constant from year to year and may increase over time, the Company expects it will be able to fund such expenditures from available cash. The timing of expenditures depends on a number of factors, including regulatory approval of cleanup projects, remedial techniques to be utilized and agreements with other parties. At May 30, 2004 and February 29, 2004, the recorded liability in liabilities from discontinued operations for environmental matters related to Dielektra was $2.1 million and the recorded liability in accrued liabilities for environmental matters was $2.4 million. Management does not expect that environmental matters will have a material adverse effect on the liquidity, capital resources, business, consolidated results of operations or consolidated financial position of the Company. Critical Accounting Policies and Estimates: In response to financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", issued by the Securities and Exchange Commission in December 2001, the following information is provided regarding critical accounting policies that are important to the Consolidated Financial Statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment. General The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to sales allowances, bad debts, inventories, valuation of long- lived assets, income taxes, restructuring, pensions and other employee benefit programs, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Sales Allowances The Company provides for the estimated costs of sales allowances at the time such costs can be reasonably estimated. The Company is focused on manufacturing the highest quality electronic materials and other products possible and employs stringent manufacturing process controls and works with raw material suppliers who have dedicated themselves to complying with the Company's specifications and technical requirements. However, if the quality of the Company's products declined, the Company may incur higher sales allowances. Bad Debt The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company writes down its inventory for estimated obsolescence or unmarketability based upon the age of the inventory and assumptions about future demand for the Company's products and market conditions. Valuation of Long-lived Assets The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Important factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends and significant changes in the use of the Company's assets or strategy of the overall business. Income Taxes Carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly. Restructuring During the fiscal years ended February 29, 2004 and March 2, 2003, the Company recorded significant charges in connection with the realignment of its North American FR-4 business operations and the closure of the Company's manufacturing facility in England and employee severance costs; and during the fiscal year ended March 3, 2002, the Company recorded significant charges in connection with the restructuring related to the sale of Nelco Technology, Inc. and the closure of a related support facility. Prior to the Company's treating Dielektra GmbH as a discontinued operation, the Company recorded significant charges in connection with the closure of the mass lamination operation of Dielektra and the realignment of Dielektra during the fiscal years ended February 29, 2004, March 2, 2003 and March 3, 2002. These charges include estimates pertaining to employee separation costs and the settlements of contractual obligations resulting from the Company's actions. Although the Company does not anticipate significant changes, the actual costs incurred by the Company may differ from these estimates. Contingencies and Litigation The Company is subject to a small number of proceedings, lawsuits and other claims related to environmental, employment, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes in these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. Pension and Other Employee Benefit Programs Dielektra GmbH has significant pension costs that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates and wage inflation rates. The Company is required to consider current market conditions, including changes in interest rates and wage costs, in selecting these assumptions. The pension liability of Dielektra has been included in liabilities from discontinued operations on the Company's balance sheet. The Company's obligations for workers' compensation claims are self-insured, and its obligations for a recently terminated employee health care benefits program were self-insured. The Company uses an insurance company administrator to process all such claims and benefits. The Company accrues its workers' compensation liability based upon the claim reserves established by the third-party administrator and historical experience. The Company's employee health insurance benefit liability is based on its historical claims experience. The Company and certain of its subsidiaries have a non- contributory profit sharing retirement plan covering their regular full-time employees. In addition, the Company's subsidiaries have various bonus and incentive compensation programs, most of which are determined at management's discretion. The Company's reserves associated with these self-insured liabilities and benefit programs are reviewed by management for adequacy at the end of each reporting period. Factors that May Affect Future Results. Certain portions of this Report which do not relate to historical financial information may be deemed to constitute forward-looking statements that are subject to various factors which could cause actual results to differ materially from Park's expectations or from results which might be projected, forecast, estimated or budgeted by the Company in forward- looking statements. Such factors include, but are not limited to, general conditions in the electronics industry, the Company's competitive position, the status of the Company's relationships with its customers, economic conditions in international markets, the cost and availability of utilities, and the various factors set forth under the caption "Factors That May Affect Future Results" after Item 7 of Park's Annual Report on Form 10-K for the fiscal year ended February 29, 2004. Item 3. Quantitative and Qualitative Disclosure About Market Risk. The Company's market risk exposure at May 30, 2004 is consistent with, and not greater than, the types of market risk and amount of exposures presented in the Annual Report on Form 10-K for the fiscal year ended February 29, 2004. Item 4. Controls and Procedures. (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of May 30, 2004, the end of the period covered by this quarterly report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. (b) Internal Control Over Financial Reporting. There has not been any change in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. In May 1998, the Company and its Nelco Technology, Inc. ("NTI") subsidiary in Arizona filed a complaint against Delco Electronics Corporation and the Delphi Automotive Systems unit of General Motors Corp. in the United States District Court for the District of Arizona. The complaint alleged, among other things, that Delco breached its contract to purchase semi- finished multilayer printed circuit boards from NTI and that Delphi interfered with NTI's contract with Delco, that Delco breached the covenant of good faith and fair dealing implied in the contract, that Delco engaged in negligent misrepresentation and that Delco fraudulently induced NTI to enter into the contract. In November 2000, after a trial in Phoenix, Arizona, a jury awarded damages to NTI in the amount of $32.3 million, and in December 2000 the judge in the United States District Court entered judgment for NTI on its claim of breach of the implied covenant of good faith and fair dealing with damages in the amount of $32.3 million. Both parties appealed the decision to the United States Court of Appeals for the Ninth Circuit in San Francisco, and in May 2003, a panel of three judges in the Court of Appeals for the Ninth Circuit rendered a unanimous decision affirming the jury verdict. In June 2003, the United States District Court for the District of Arizona entered final judgment in favor of NTI, and Delco paid NTI on July 1, 2003. NTI received a net amount of $33.1 million. Park announced in March 1998 that it had been informed by Delco Electronics that Delco planned to close its printed circuit board fabrication plant and exit the printed circuit board manufacturing business. After the plant closure, Delco purchased all of its printed circuit boards from outside suppliers and Delco was no longer a customer of the Company's. As a result, the Company's sales to Delco declined significantly during the three-month period ended May 31, 1998, were negligible during the three-month period ended August 30, 1998 and have been nil since that time. During the Company's 1999 fiscal year first quarter and during its 1998 fiscal year and for several years prior thereto, more than 10% of the Company's total worldwide sales were to Delco Electronics Corporation; and the Company had been Delco's principal supplier of semi-finished multilayer printed circuit board materials for more than ten years. These materials were used by Delco to produce finished multilayer printed circuit boards. See "Factors That May Affect Future Results" after Item 2 of Part I of this Report. In the first quarter of the fiscal year ended March 3, 2002, the Company sold the assets and business of NTI and recorded pre-tax charges of approximately $15.7 million in its 2002 fiscal year first quarter ended May 27, 2001 in connection with the sale of NTI and the closure of a related support facility also located in Arizona. See Note 9 of the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Report. Item 2. Changes to Securities, Use of Proceeds and Issuer Purchases of Equity Securities. The following table provides information with respect to shares of the Company's Common Stock acquired by the Company during each month included in the Company's 2005 fiscal year first quarter ended May 30, 2004. <TABLE> <CAPTION> Maximum Number Total Number (or Approximate of Shares (or Dollar Value) Units) of Shares (or Total Average Purchased as Units) that May Number of Price Part of yet Be Shares (or paid per Publicly Purchased Under Period Units) Share (or Announced the Plans or Purchased Unit) Plan or Programs Programs <s> <c> <c> <c> <c> March 1-31 0 - 0 April 1-30 0 - 0 May 1-30 11,687(a) $22.46 0 Total 11,687(a) $22.46 0 2,305,170(b) </TABLE> (a) Acquired by the Company upon surrender of such shares to the Company in payment of the exercise price of stock options issued pursuant to the Company's 1992 Stock Option Plan. (b) Aggregate number of shares available to be purchased by the Company pursuant to previous share purchase authorizations announced on June 24, 1998 and September 9, 1998. Pursuant to such authorizations, the Company is authorized to purchase its shares from time to time on the open market or in privately negotiated transactions. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: (1) Report on Form 8-K, dated April 27, 2004, Commission File No. 1-4415, reporting in Item 12 that the Company issued a news release on April 27, 2004 reporting its results of operations for the fiscal year 2004 fourth quarter and for the full fiscal year ended February 29, 2004 and furnishing the news release to the Securities and Exchange Commission pursuant to Item 12 of Form 8-K as Exhibit 99.1 thereto. (2) Report on Form 8-K, dated May 26, 2004, Commission File No. 1-4415, reporting in Item 4 that on May 26, 2004 the Company was notified by Ernst & Young LLP ("E&Y"), the Company's independent auditor for the fiscal year ended February 29, 2004 and for ten years prior thereto, that E&Y would decline reappointment as the Company's independent auditor for the current fiscal year, although E&Y and the Company agreed that E&Y would review the Company's financial statements for its 2005 fiscal year first quarter ended May 30, 2004. 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. Park Electrochemical Corp. -------------------------- (Registrant) /s/Brian E. Shore Date: July 8, 2004 ---------------------------- Brian E. Shore President and Chief Executive Officer /s/Murray O. Stamer Date: July 8, 2004 ---------------------------- Murray O. Stamer Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit No. Name Page ----------- ---- ---- 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) 27 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) 29 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32