10-K 1 a4590583.txt VALPEY FISHER 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 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 1-4184 ------ Valpey-Fisher Corporation (Exact name of registrant as specified in its charter) Maryland 06-0737363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 75 South St., Hopkinton, Massachusetts 01748 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 435-6831 Securities registered pursuant to Section 12 (b) of the Act: Title of each class: Name of each exchange on which registered: -------------------- ------------------------------------------ Common Stock $.05 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, an will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X] Aggregate market value of voting stock held by non-affiliates: $5,780,242 (computed by reference to the last sales price of such common stock on June 30, 2003 as reported in the American Stock Exchange consolidated trading index). Number of shares of common stock outstanding at March 11, 2004: 4,214,315 Documents incorporated by reference: Annual Report to Stockholders for the year ended December 31, 2003: Parts I, II and IV Proxy Statement for the 2003 annual meeting of stockholders: Part III PART I Item 1. Business ---------------- General Valpey-Fisher Corporation ("Valpey" or "Registrant") is incorporated under the laws of Maryland. As used herein the term "Company" refers to Valpey-Fisher and its subsidiaries. On May 28, 2003, pursuant to an Asset Purchase Agreement dated April 30, 2003, the Company purchased certain assets consisting primarily of inventories, machinery and equipment and the customer order backlog from MF Electronics Corp. ("MF"), a privately held company located in New Rochelle, NY. In addition, the Company acquired accounts receivable and assumed certain trade payables. MF designs and manufactures a wide range of frequency control products. The results of MF's operations have been included in the consolidated financial statements since the date of acquisition. During the week of June 30, 2003, the purchased assets and operations of MF were moved to the Company's facility located in Hopkinton, Massachusetts. Financial Information about Industry Segments The Company operates in one business segment. Information about export sales is set forth in Note 14 of the Notes to Consolidated Financial Statements in Item 8 of this Report, which Note is incorporated by reference. Narrative Description of Business Products -------- Valpey is involved in the design, production, import, and sale of frequency control devices and ultrasonic transducer devices. The frequency control devices include quartz crystals and oscillators incorporating these crystals and are used as integral components in electronic circuitry to assure precise timing and frequency reference. Except for more costly atomic standards, quartz crystals and oscillators continue to be one of the most stable references for accurately controlling electronic frequencies and time. Valpey provides a wide-frequency range of frequency control devices including standard and custom-designed product. Capabilities include: -- high-reliability, precision crystals and oscillators used in sophisticated industrial, military and aerospace applications. -- ultra-high frequency crystals used in crystal filters and oscillators for original equipment manufacturers ("OEMs") telecommunications and microwave applications. -- high-volume, low cost crystals and oscillators for consumer and commercial applications. Valpey's frequency control products are used by the telecommunications, computer and computer peripheral equipment, scientific, instrumentation, industrial, and aerospace markets. The majority of the Company's revenue is generated by the telecommunications markets including the wireless, networking and optical networking segments. The Company's frequency control products are used in telecommunications infrastructure equipment such as bandwidth multipliers, networking switches and routers, cellular base stations, transceivers and multiplexers. The ultrasonic transducer devices are sold to the NDT (nondestructive testing), industrial, research and bio-medical markets. Applications include weld testing, flaw detection, thickness gauging, and corrosion inspection. Raw Materials ------------- Quartz crystal bases, ceramic packages and integrated circuits ("ICs") are the principal raw materials and are available from a number of domestic and foreign suppliers. Valpey imports sub-assemblies and completed products from various Far East (including China, Japan, South Korea, Philippines, and Taiwan) suppliers for use in its domestically manufactured product and for resale to its customers. In order to eliminate the effects of currency fluctuations, Valpey currently purchases the product from its foreign suppliers in U.S. dollars. As exchange rates fluctuate, Valpey's cost for these materials may become more expensive than its competitors that have taken measures to protect against exchange rate fluctuations. In addition, Valpey is subject to the inherent risks involved in international trade such as political instability and restrictive trade policies. Marketing and Customers ----------------------- Valpey's direct sales personnel, independent manufacturers' representatives and distributors sell the frequency control products. Valpey's ultrasonic transducer devices are sold primarily by its direct sales personnel. Valpey sells its frequency control products primarily to OEMs, electronic manufacturing services (EMS) companies, and distributors. Valpey's distributors also sell to both the OEMs and EMS companies. Ultrasonic transducer devices are sold primarily to OEMs, colleges and universities and research facilities. In recent years, OEMs have outsourced a significant amount of their manufacturing capability to EMS companies. As a result, this has tended to increase the concentration of sales to the EMS companies. Sales to Solectron Corporation, an EMS company, accounted for approximately 14%, 22%, and 15% of Valpey's net sales in 2003, 2002, and 2001, respectively. Sales to Valpey's five largest customers accounted for approximately 35% of its sales in 2003, compared to 46% in 2002 and 45% in 2001. Sales to EMS companies accounted for approximately 39% of Valpey's sales in 2003, compared to 43% in 2002, and 38% in 2001. Export sales amounted to approximately 34% of Valpey's sales in 2003, 27% in 2002 and 23% in 2001. Information about export sales is set forth in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference. Valpey's international sales are transacted in U. S. dollars. Backlog ------- Valpey's backlog of firm orders was $1,816,000 at December 31, 2003 and $1,054,000 at December 31, 2002. Approximately 55% of the increase in backlog is due to of the acquisition of MF and the remaining increase is from the increase in demand for the Company's other products sold primarily to the information technology (IT) market. Valpey expects to ship the entire December 31, 2003 backlog during 2004. Competition ----------- There are many domestic and foreign suppliers of quartz crystals and oscillators. A number of the competitors are larger and have greater resources than the Company. In addition, foreign competitors, particularly from the Far East, continue to dominate the U.S. markets. However, Valpey believes it can maintain a competitive position in its business based on its quality, strong design and application engineering, responsive customer service and a willingness to provide specialty small quantity orders. Manufacturing ------------- Valpey's manufacturing facility is located in Hopkinton, Massachusetts. Valpey has been by ISO-9001 certified for the design and manufacture of crystals and crystal oscillators since 1997. During 2001, Valpey installed a semi-automatic production line in order to increase its internal manufacturing capacity for frequency control products and to improve on customer delivery demands. Valpey imports certain raw material and finished product from a supplier in Omsk, Russia. At December 31, 2003, Valpey had approximately $290,000 of its equipment being used by this supplier located in Russia. Valpey imports completed products from various Far East (including China, Japan, South Korea, Philippines, and Taiwan) suppliers for resale to its customers. Environmental Regulations ------------------------- To the knowledge of the Company compliance with Federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, has not had, nor will have a material effect upon capital expenditures, earnings from continuing operations or competitive position. As a result of the sale of its Bergen Cable subsidiary in 1998, the Company is performing environmental clean up at that site. See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference. Employees --------- At December 31, 2003, the Company employed 65 full-time employees. No employees of the Company are represented by a collective bargaining unit. The Company considers its relations with its employees to be satisfactory. Available Information --------------------- Valpey files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file at the SEC's public reference room at Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website (www.sec.gov) that contains annual, quarterly and current reports, proxy statements and other information that issuers (including Valpey) file electronically with the SEC. Our Internet website address is www.valpeyfisher.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15 (d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on the Company's website is not incorporated by reference into this report. Foreign and Domestic Operations and Export Sales Financial information about export sales is set forth in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference. Item 2. Properties ------------------- Valpey owns its 32,000 square foot facility located in Hopkinton, Massachusetts that contains office and manufacturing space and serves as the Company's corporate headquarters. The Company believes its facility is suitable for its current use and is in good repair. The Company believes that its facility is adequate to satisfy its current production capacity needs. Item 3. Legal Proceedings -------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ No matters were submitted to a vote of the Registrant's security holders during the last quarter of the fiscal year covered by this report. Executive Officers of the Registrant ------------------------------------ The names, ages and offices of the executive officers of the Company are as follows:
Name Age Office Ted Valpey, Jr. 71 Chairman Michael J. Ferrantino 61 President and Chief Executive Officer Michael J. Kroll 55 Vice President, Treasurer and Chief Financial Officer
The term of office for each officer of the Registrant is until the first meeting of the Board of Directors following the Annual Meeting of Stockholders and until a successor is chosen and qualified. Mr. Valpey has been Chairman of the Company since 1982 and was President and Chief Executive Officer of the Registrant from April 28, 1997 until September 29, 2002. Mr. Ferrantino was named President and Chief Executive Officer of the Company on September 30, 2002 and was elected to the Board of Directors of the Company on October 23, 2002. From January 2002 to September 2002, he was President of Micro Networks Division (manufacturer of high frequency and filter components and subsystems) of Integrated Circuit Systems, Inc. Mr. Ferrantino was President and Chief Executive Officer of Micro Networks Corporation (MNC) from December 1998 until January 2002 and was Chairman of the Board of MNC from April 2000 to January 2002. Mr. Kroll has been Vice President and Treasurer of the Registrant since 1982 and was named Chief Financial Officer in May 2002. PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters ------------------------------------------------------------------------------- and Issuer Purchases of Equity Securities ---------------------------------------- Valpey-Fisher common stock is listed and traded on the American Stock Exchange under the symbol VPF. The range of high and low prices each quarter for the past two years is shown below:
For the years ended December 31, 2003 2002 ==================================================================================================================================== High Low High Low ==================================================================================================================================== 4th quarter $3.27 $2.83 $3.10 $2.40 ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------- 3rd quarter 3.59 2.15 3.65 2.90 ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------- 2nd quarter 3.75 2.30 7.19 3.20 ------------------------------------------------------------------------------- ----------- -------------- ------------- ----------- 1st quarter 2.75 2.40 6.09 3.10 ====================================================================================================================================
No dividend was paid in 2003 or 2002. The number of stockholders of record on February 27, 2004 was 789. This number does not include stockholders for whom shares are held in a "nominee" or "street" name. Equity Compensation Plan Information The following table presents information as of December 31, 2003 regarding the number of shares of the Registrant's common stock that may be issued under the Registrant's equity compensation plans.
Number of securities remaining available for future issuance under equity Number of securities to be Weighted-average exercise compensation plans (excluding issued upon exercise of price of outstanding options, securities reflected in the outstanding options, warrants warrants and rights first column) Plan Category and rights ---------------------------------- -------------------------------- -------------------------------- ------------------------------- ---------------------------------- -------------------------------- -------------------------------- ------------------------------- Equity compensation plans approved by security holders (1) 578,438 $3.41 293,166 Equity compensation plans not approved by security holders (2) -0- -0- -0-
(1) Includes the 2003, 2001, 1999 and 1992 Stock Option Plans. (2) Does not include 100,000 shares of Restricted Stock awarded pursuant to the Restricted Stock Agreement dated December 19, 2002 between Mr. Ferrantino and the Company. Material Feature of Restricted Stock Agreement between the Company and Mr. Ferrantino Not Approved by Shareholders As an inducement to becoming an employee of the Company, pursuant to a Restricted Stock Agreement dated December 19, 2002 between the Company and Michael J. Ferrantino, a director and President and Chief Executive Officer of the Company, on December 24, 2002, the Company issued Mr. Ferrantino 100,000 shares of Common Stock for a purchase price of $.05 per share or an aggregate purchase price of $5,000. Pursuant to the Agreement, the Stock may not be sold or transferred, encumbered or otherwise disposed of for a period of five years from October 23, 2002 except that said restrictions will terminate as to 20% of the Restricted Stock upon each of October 23, 2003, 2004, 2005, 2006 and 2007. In addition, the Restriction shall terminate as to an additional 20% of the Restricted Stock upon the death of the employee after October 23, 2003 or entirely upon a change in control of ownership of 70% or more of the outstanding Common Stock of the Company by anyone other than Ted Valpey, Jr. or certain mergers or reorganization of the Company. The Restricted Stock Agreement was not submitted to shareholders for approval. Sale of Unregistered Securities ------------------------------- The 100,000 shares of Common Stock issued to Mr. Ferrantino pursuant to the Restricted Stock Agreement described above in this Item 5 have not been registered under the Securities Act of 1933 (the "Act"). Transfer of the shares is subject to the restrictions and limitations under the Act. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Act as a transaction not involving any public offering. The Company made no repurchases of its common stock in the fourth quarter of 2003. Item 6. Selected Financial Data --------------------------------
------------------------------------------------------------------------------------------------ Years Ended December 31, 2003 2002 2001 2000 1999 ================================================================================================ (in thousands, except per share data) ================================================================================================ Continuing operations: ----------------------------------------------------------------------------------------------- Net sales $8,496 $7,294 $16,897 $26,408 $14,026 ----------------------------------------------------------------------------------------------- Gross profit (loss) 883 (1,346) 2,287 7,861 3,332 ----------------------------------------------------------------------------------------------- Earnings (loss) before income taxes (2,423) (3,988) 4,294 5,019 226 ----------------------------------------------------------------------------------------------- Income (taxes) benefit 1,023 1,198 (1,543) (1,950) ( 68) ----------------------------------------------------------------------------------------------- Earnings (loss) (1,400) (2,790) 2,751 3,069 158 ----------------------------------------------------------------------------------------------- Discontinued operations- net of income ----------------------------------------------------------------------------------------------- tax expense (benefit) - (99) - (90) 809 =============================================================================================== Net earnings (loss) $(1,400) $(2,889) $2,751 $2,979 $967 =============================================================================================== Basic earnings (loss) per share: (1) ----------------------------------------------------------------------------------------------- Continuing operations $(.33) $(.67) $.66 $.75 $.04 ----------------------------------------------------------------------------------------------- Discontinued operations - (.02) - (.02) .20 =============================================================================================== $(.33) $(.69) $.66 $.73 $.24 =============================================================================================== Diluted earnings (loss) per share: (1) ----------------------------------------------------------------------------------------------- Continuing operations $(.33) $(.67) $.64 $.70 $.04 ----------------------------------------------------------------------------------------------- Discontinued operations - (.02) - (.02) .20 =============================================================================================== $(.33) $(.69) $.64 $.68 $.24 =============================================================================================== Cash dividends per share (1) $- $- $- $.13 $- =============================================================================================== Total assets, end of year $12,744 $15,151 $18,841 $19,654 $16,352 =============================================================================================== Long-term debt, end of year $- $- $1,277 $- $- =============================================================================================== (1) Amounts reflect the 3 for 2 stock split distributed on November 27, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and ------------------------------------------------------------------------ Results of Operations --------------------- Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes that judgments and estimates related to the following critical accounting policies could materially affect its consolidated financial statements. Accounts receivable - The Company performs on-going credit evaluations of its customers and assesses the collectability of its accounts receivable based on a number of factors including the customer's financial condition and collection history, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Inventory - The Company estimates the carrying value of its inventory based upon historic usage and management's assumptions relating to projected customer purchases, product design changes and product obsolescence. The changing technology markets that we supply also affect these estimates. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Income Taxes - The Company has recorded deferred tax assets and liabilities resulting from differing treatment of items for tax and financial statement reporting purposes. The Company must estimate its income tax valuation allowance by assessing which deferred tax assets are more likely than not to be recovered in the future. Based on our assessment of the realization of these assets, the Company has recorded a valuation allowance of $704,000 at December 31, 2003. In reaching our conclusion, we evaluated the existence of deferred tax liabilities that can be used to absorb deferred tax assets, realizability of refundable income taxes, the deductibility of the disposal of scrap and worthless inventory, taxable income in prior carryback years and taxable income by jurisdiction in which we operate and the period over which the deferred tax assets would be recoverable. In the event that actual results differ from these estimates in future periods, the Company may need to establish an additional valuation allowance or reduce the valuation allowance, which could materially impact our financial position and results of operations. Financial Condition and Liquidity Cash and cash equivalents amounted to $4,209,000 at December 31, 2003, a decrease of $1,549,000 from the December 31, 2002 level. During 2003, the Company's continuing operations provided cash of $642,000, investing activities used cash of $854,000 and financing activities used cash of $1,337,000. Cash provided from operations of $642,000 resulted mainly from the net loss of $1,400,000 adjusted for the non-cash effect of depreciation and deferred income taxes of $1,120,000 and an $886,000 reduction in working capital, excluding the effects of the acquisition of MF Electronics Corp.(MF). This net reduction in working capital, excluding the effects of the acquisition of MF, was mainly due to a $582,000 decrease in inventory, a $136,000 increase in accounts payable and an $88,000 decrease in refundable income taxes. The 29% reduction in inventory was mainly due to orders being filled from existing inventory and a continuing control of inventory levels. The increase in accounts payable is mainly due to the increased business level. During 2003, the Company acquired certain assets and assumed certain trade payables of MF for $799,000 in cash. Capital expenditures amounted to $154,000 in 2003. The Company `s budget for 2004 capital expenditures is approximately $250,000. The Company used $1,277,000 of cash in 2003 to pay-off the remaining balance on its term note with a bank. During 2003, the Company used $59,000 of cash to purchase and retire 22,300 shares of its common stock. While the Company is projecting a loss in 2004 based on the current conditions in the telecom market, management believes that based on its current working capital and the expected cash flows from operations, the Company's resources are sufficient to meet its financial needs and to fund the capital expenditures for the projected levels of business in 2004. Results of Operations - 2003 versus 2002 Net sales from continuing operations increased $1,202,000 or 16% over 2002. The sales increase is mainly due to the sales from the MF product line acquired at the end of May 2003. The 2002 net sales amount includes sales cancellation charges of approximately $723,000 from two customers. Excluding the effect on net sales from these sales cancellation charges and the 2003 sales generated from the MF product line, sales increased 10% over 2002. The book-to-bill ratio for 2003 was 1.05 versus .95 in 2002. The Company's backlog amounted to $1.8 million at December 31, 2003 compared to $1.1 million at December 31, 2002. Capital spending in the telecom market, the largest market for our products, continued to decline until the fourth quarter of 2003 when we saw a slight increase in order activity. During 2003, the Company saw increased order activity in the IT markets (servers, switches and storage) and military avionics. At this time, we are not sure of the potential impact on the Company's future operations from the current continuing telecom market uncertainties and our industry's over capacity issues. The Company reported an $883,000 gross profit in 2003 compared to a $1,346,000 gross loss in 2002. The main reasons for the improvement in the 2003 gross profit were a reduction in the provision for excess and obsolete inventory of $868,000, a $348,000 decrease in overhead expenses mainly due to reductions in personnel expense and operating supplies compared to 2002 and the $557,000 of gross profit generated by the MF sales in 2003. Raw material costs, as a percentage of sales, decreased about 6% from 2002 mainly as a result of product mix changes and 2003 direct labor remained fairly consistent as a percentage of sales with 2002. Selling and advertising expenses decreased $50,000 (3%) from 2002. Reductions in advertising and promotional expenses ($118,000) and bad debt expense ($37,000) partially offset by higher sales commission expense of $62,000 to the Company's outside manufacturers' representatives were the main reasons for the expense decrease. General and administrative expenses increased $537,000 (38%) over 2002. Increased personnel expenses mainly due to the hiring of a new president in the fourth quarter of 2002 and approximately $160,000 of personnel expenses associated with the acquisition of the MF product line, were the primary reasons for this higher expense. The decrease in interest income of $59,000 from 2002 was mainly due to lower average cash balances and lower interest rates during the current year. The $70,000 decrease in interest expense from the 2002 amount is mainly due to the Company paying-off the balance of its outstanding term-debt in the first quarter of 2003. During 2002, the Company received $187,000 in cash as the final proceeds from the sales of a former subsidiary in 2000 and the related real estate in 2001 and recorded a total pre-tax gain of $187,000 on these sales. The combined federal and state effective income tax rate for 2003 is 42% compared to 30% in 2002. The difference in the rates is mainly due to the recording of an income tax valuation allowance for certain deferred tax assets in 2002. During both years, a valuation allowance has been recorded for the full amount of the state income tax benefit due to the uncertainty of realization. Based on the increases in sales and gross profit over 2002, offset in part by the higher operating expenses in 2003, the Company reported an operating loss of $2,460,000 in 2003 compared to an operating loss of $4,201,000 in 2002. Nonoperating income amounted to $37,000 during 2003 versus $213,000 in 2002. As a result, the Company reported a pre-tax loss from continuing operations of $2,423,000 during 2003 compared to a pre-tax loss of $3,988,000 in 2002. The loss from continuing operations amounted to $1,400,000 in 2003 versus $2,790,000 in 2002. Discontinued operations, net of the income tax benefit, reported a loss of $99,000 in 2002. In total, the Company reported a consolidated net loss of $1,400,000 in 2003 versus a consolidated net loss of $2,889,000 in 2002. Results of Operations - 2002 versus 2001 ---------------------------------------- Net sales from continuing operations decreased $9,603,000 or 57% from 2001, primarily due to the continued sharp drop in the demand for the Company's products from the telecom market. The Company has experienced a drop-off in market demand for its products beginning in the first quarter of 2001 and continuing to date as customers have reported slower growth rates and excess inventory levels. In addition, some customers requested order cancellations. As a result of the continued decline in market demand, the Company began 2002 with a backlog of $1.4 million versus a backlog of $16.4 million at the beginning of 2001. We believe that market conditions for our products, in particular the telecom market, have not "bottomed out", and near-term visibility continues to be poor. The telecom industry continues to operate at low levels of production with customers not willing to commit to forecasts and long-term contracts. Orders for the most part continue to be small with near-term delivery dates. The Company's backlog at December 31, 2002 was $1.1 million. During 2002, the Company reported a $1,346,000 gross loss on sales compared to a gross profit of $2,287,000 in 2001. The main reasons causing the negative gross profit on sales in 2002 were the adverse impact of allocating the fixed overhead expenses over the lower sales volume and the $1.1 million provision for excess inventory. During the current year, direct labor and raw material costs, as percentages of sales, remained fairly equal to those in 2001. Selling and advertising expenses decreased $910,000 (38%) from 2001 mainly due to the lower sales commission expense to the Company's outside manufacturers' representatives as a result of the decrease in sales and a reduction in advertising and promotional expenses. General and administrative expenses remained relatively level with 2001. During 2002, the Company received $187,000 in cash as the final proceeds from the sales of a former subsidiary in 2000 and the related real estate in 2001and recorded a total pre-tax gain of $187,000 on these sales. Interest income increased $40,000 over 2001 mainly due to the higher average cash balances in the current year. Interest expense decreased $13,000 from 2001 mainly due to the lower interest rate on the outstanding term-debt. During 2001, the Company sold its investment in marketable equity securities and its ownership share of real estate located in New Jersey and recorded a total pre-tax gain of $5,671,000 on these sales. The combined federal and state effective income tax rate for 2002 was 30% compared to 36% in 2001. The combined tax benefit rate of 30% in 2002 was less than the combined statutory rate of approximately 40%, mainly due to the Company providing a valuation allowance for its deferred tax assets. The combined federal and state tax rate of 36% in 2001 is lower than the statutory rate mainly due to a lower effective state tax rate in 2001. Based on the significant decreases in sales and gross profit in 2002, the Company reported an operating loss of $4,201,000 in 2002 compared to an operating loss of $1,458,000 in 2001. Nonoperating income amounted to $213,000 in 2002 versus $5,753,000 in 2001. As a result, the Company reported a pre-tax loss from continuing operations of $3,988,000 in 2002 compared to pre-tax earnings of $4,294,000 in 2001. The loss from continuing operations amounted to $2,790,000 in 2002 versus earnings of $2,751,000 in 2001. Discontinued operations net of income tax benefit reported a loss of $99,000 in 2002. In total, the Company reported a net loss of $2,889,000 in 2002 compared to net earnings of $2,751,000 in 2001. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet financing arrangements. Contractual Obligations During the normal course of business, we incur certain commitments to make future payments for the purchase of inventory and production supplies based on our projected requirements. At December 31, 2003, the Company has outstanding purchase commitments totaling approximately $565,000, all of which are expected to be fulfilled in 2004. At December 31, 2003, the Company did not have any contractual obligations for capital leases, operating leases or long-term debt. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Words such as "expects", "believes", "estimates", "plans" or similar expressions are intended to identify such forward-looking statements. The forward-looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, but not limited to: the Company's ability to achieve profitability, the current production over-capacity within the suppliers of frequency control devices, the ability to develop, market and manufacture new innovative products competitively, the fluctuations in product demand of the telecommunications industry, the ability of the Company and its suppliers to produce and deliver materials and products competitively, and the ability to limit the amount of the negative effect on operating results caused by pricing pressure. Recent accounting pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations", effective for years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted this SFAS effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, is effective for exit activities initiated after December 31, 2002, and requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Previous accounting guidance recognized a liability for an exit cost at the date of a commitment to an exit plan. The Company adopted this SFAS effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In November 2002, the FASB issued interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The interpretation expands on the accounting guidance of SFAS Nos. 5, 57, and 107 and incorporates without change the provisions of FASB FIN 34, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, such as standby letter of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The Company adopted this FIN effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities". Many variable interest entities have commonly been referred to as special-purpose entities or off-balance sheet structures. Under the interpretation, certain entities known as "Variable Interest Entities" (VIE) must be consolidated by the primary beneficiary of an entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE's in which a significant (but not majority) variable interest is held, certain disclosures are required. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004 may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. The adoption of this FIN in January 2003 had no material effect on the Company's financial position, results of operations and cash flows and the Company does not expect the adoption of the Revised Interpretations to have a material effect on the Company's financial position, results of operations and cash flows. In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on the Company's financial position, results of operations and cash flows. Item 7A. Quantitative and Qualitative Disclosures about Market Risk -------------------------------------------------------------------- The Company's cash balances in excess of operating requirements are currently invested in money market accounts. These money market accounts are subject to interest rate risk and interest income will fluctuate in relation to general money market rates. Based on the cash and cash equivalent balance at December 31, 2003, and assuming the balance was totally invested in money market instruments for the full year, a hypothetical 1% point decline in interest rates would result in an approximate $42,100 decrease in interest income. The Company purchases certain inventory from and sells product in foreign countries. As these activities are currently transacted in U.S. dollars, they are not subject to foreign currency exchange risk. However, significant fluctuation in the currencies where the Company purchases inventory or sells product could make the U.S. dollar equivalent of such transactions more or less favorable to the Company and the other involved parties. Item 8. Financial Statements and Supplementary Data ----------------------------------------------------
Valpey-Fisher Corporation Consolidated Balance Sheets December 31, 2003 2002 =========================================================================================================== Assets Current assets: ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents $4,209,355 $5,758,055 ----------------------------------------------------------------------------------------------------------- Receivables, net 2,466,715 2,175,369 ----------------------------------------------------------------------------------------------------------- Inventories 1,570,973 2,027,886 ----------------------------------------------------------------------------------------------------------- Deferred income taxes and other current assets 674,932 1,109,408 =========================================================================================================== Total current assets 8,921,975 11,070,718 =========================================================================================================== Property, plant and equipment, at cost: ----------------------------------------------------------------------------------------------------------- Land and improvements 226,505 255,205 ----------------------------------------------------------------------------------------------------------- Buildings and improvements 2,030,558 1,996,354 ----------------------------------------------------------------------------------------------------------- Machinery and equipment 8,495,386 7,913,557 =========================================================================================================== 10,752,449 10,165,116 ----------------------------------------------------------------------------------------------------------- Less accumulated depreciation 7,064,497 6,231,296 ----------------------------------------------------------------------------------------------------------- 3,687,952 3,933,820 =========================================================================================================== Other assets 134,565 146,029 =========================================================================================================== $12,744,492 $15,150,567 =========================================================================================================== Liabilities and Stockholders' Equity Current liabilities: ----------------------------------------------------------------------------------------------------------- Current portion of long-term debt $ - $1,277,402 ----------------------------------------------------------------------------------------------------------- Accounts payable 539,936 269,375 ----------------------------------------------------------------------------------------------------------- Accrued liabilities 900,275 817,931 =========================================================================================================== Total current liabilities 1,440,211 2,364,708 =========================================================================================================== Deferred income taxes 646,231 704,145 ----------------------------------------------------------------------------------------------------------- Commitments and contingencies - - ----------------------------------------------------------------------------------------------------------- Stockholders' equity: ----------------------------------------------------------------------------------------------------------- Preferred stock, $1.00 par value-Authorized 1,000,000 shares; issued, none - - ----------------------------------------------------------------------------------------------------------- Common stock, $.05 par value-Authorized 10,000,000 shares; issued and outstanding: 4,184,815 and 4,207,115 shares 209,241 210,356 ----------------------------------------------------------------------------------------------------------- Capital surplus 4,998,453 5,079,416 ----------------------------------------------------------------------------------------------------------- Retained earnings 5,667,356 7,067,442 ----------------------------------------------------------------------------------------------------------- Less unearned compensation (217,000) (275,500) =========================================================================================================== Total stockholders' equity 10,658,050 12,081,714 =========================================================================================================== $12,744,492 $15,150,567 =========================================================================================================== See notes to consolidated financial statements. Valpey-Fisher Corporation Consolidated Statements of Operations For the Years Ended December 31, 2003 2002 2001 =========================================================================================================== Net sales $8,495,770 $7,294,214 $16,897,138 ---------------------------------------------------------------------------------------------------------- Cost of sales 7,613,197 8,640,336 14,609,911 ========================================================================================================== Gross profit (loss) 882,573 (1,346,122) 2,287,227 ========================================================================================================== Selling and advertising expenses 1,406,007 1,456,295 2,365,802 ---------------------------------------------------------------------------------------------------------- General and administrative expenses 1,936,248 1,398,775 1,379,880 ========================================================================================================== 3,342,255 2,855,070 3,745,682 ========================================================================================================== Operating (loss) (2,459,682) (4,201,192) (1,458,455) ---------------------------------------------------------------------------------------------------------- Other income (expense): ---------------------------------------------------------------------------------------------------------- Interest income 48,537 107,571 67,760 ---------------------------------------------------------------------------------------------------------- Interest expense (11,941) (81,522) (94,511) ---------------------------------------------------------------------------------------------------------- Gains on sales of marketable equity securities and assets - 187,406 5,670,873 ---------------------------------------------------------------------------------------------------------- Dividend income - - 108,681 ========================================================================================================== 36,596 213,455 5,752,803 ========================================================================================================== Earnings (loss) from continuing operations before income taxes (2,423,086) (3,987,737) 4,294,348 ---------------------------------------------------------------------------------------------------------- Income tax benefit (expense) 1,023,000 1,198,000 (1,543,000) ========================================================================================================== Earnings (loss) from continuing operations (1,400,086) (2,789,737) 2,751,348 ---------------------------------------------------------------------------------------------------------- (Loss) from discontinued operations - (99,000) - ========================================================================================================== Net earnings (loss) $(1,400,086) $(2,888,737) $2,751,348 ========================================================================================================== Basic earnings (loss) per share: ---------------------------------------------------------------------------------------------------------- Continuing operations $(.33) $(.67) $.66 ---------------------------------------------------------------------------------------------------------- Discontinued operations .00 (.02) .00 ========================================================================================================== $(.33) $(.69) $.66 ========================================================================================================== Diluted earnings (loss) per share: ---------------------------------------------------------------------------------------------------------- Continuing operations $(.33) $(.67) $.64 ---------------------------------------------------------------------------------------------------------- Discontinued operations .00 (.02) .00 ========================================================================================================== $(.33) $(.69) $.64 ========================================================================================================== See notes to consolidated financial statements.
Valpey-Fisher Corporation Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003 2002 2001 ==================================================================================================== Cash Flows from Operating Activities: Earnings (loss) from continuing operations $(1,400,086) $(2,789,737) $2,751,348 Adjustments to reconcile earnings (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization 833,201 848,342 700,915 Changes in deferred income taxes 287,000 254,516 (491,000) Gains on sales of marketable equity securities and assets - (187,406) (5,670,873) Non-cash restricted stock compensation, net of taxes 35,500 125,400 - Changes in assets and liabilities, excluding the effects of the purchase of MF Electronics: Receivables, net (41,373) 1,054,145 2,340,924 Inventories 581,913 2,441,429 1,943,958 Other current assets 36,460 54,622 (71,313) Accounts payable and accrued liabilities 179,842 (340,755) (2,942,710) Income taxes, net 129,385 (1,096,976) (137,065) ==================================================================================================== Net cash provided (used) by operating activities 641,842 363,580 (1,575,816) ==================================================================================================== Cash Flows from Investing Activities: Capital expenditures (153,863) (254,987) (2,176,310) Purchase of MF Electronics (798,762) - - Collection of notes receivable 24,178 141,729 228,498 Proceeds from sales of assets 82,450 187,406 6,134,257 Other, net (8,065) (8,065) (8,065) ==================================================================================================== Net cash provided (used) by investing activities (854,062) 66,083 4,178,380 ==================================================================================================== Cash Flows from Financing Activities: Payments on long-term debt (1,277,402) (403,389) (319,209) Purchases of common stock (59,078) (133,974) (31,602) Proceeds from long-term debt - - 2,000,000 Stock options exercised and other - 5,000 81,376 ==================================================================================================== Net cash provided (used) by financing activities (1,336,480) (532,363) 1,730,565 ==================================================================================================== Cash (Used) by Discontinued Operations - (99,000) - ==================================================================================================== Net Increase (Decrease) in Cash and Cash Equivalents (1,548,700) (201,700) 4,333,129 Cash and Cash Equivalents at beginning of year 5,758,055 5,959,755 1,626,626 ==================================================================================================== Cash and Cash Equivalents at end of year $4,209,355 $5,758,055 $5,959,755 ==================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid during the year by continuing operations for: Interest $11,941 $81,522 $94,511 Income taxes $- $- $2,281,262
Noncash Investing and Financing Activities: In 2002, the Company granted 100,000 shares of restricted stock to the President and Chief Executive Officer for $5,000. The shares issued under a Restricted Stock Agreement vest over a period of five years. Unearned compensation was recorded at the date of the grant based on the market value of $295,000. Unearned compensation, which is shown as a separate component of stockholders' equity, is being amortized over the five-year vesting period. See notes to consolidated financial statements. Valpey-Fisher Corporation Consolidated Statements of Stockholders' Equity
Accumulated Other Common Stock Capital Retained Unearned Comprehensive Shares Amount Surplus Earnings CompensationIncome (Loss) ======================================================================================================================== Balance, January 1, 2001 4,131,015 $206,550 $4,761,522 $7,204,831 $- $1,686,396 ------------------------------------------------------------------------------------------------------------------------ Net earnings - - - 2,751,348 - - ------------------------------------------------------------------------------------------------------------------------ Exercise of stock options 31,500 1,576 79,800 - - - ------------------------------------------------------------------------------------------------------------------------ Purchases and retirement of common stock (10,000) (500) (31,102) - - - ------------------------------------------------------------------------------------------------------------------------ Reclassification adjustment for realized gain included in net earnings - - - - - (1,686,396) ======================================================================================================================== Balance, December 31, 2001 4,152,515 207,626 4,810,220 9,956,179 - - ------------------------------------------------------------------------------------------------------------------------ Net (loss) - - - (2,888,737) - ------------------------------------------------------------------------------------------------------------------------ Issuance of restricted stock 100,000 5,000 290,000 - (290,000) - ------------------------------------------------------------------------------------------------------------------------ Purchases and retirement of common stock (45,400) (2,270) (131,704) - - - ------------------------------------------------------------------------------------------------------------------------ Amortization of restricted stock grant - - - - 14,500 - ------------------------------------------------------------------------------------------------------------------------ Tax benefit of restricted stock grant - - 110,900 - - - ------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2002 4,207,115 210,356 5,079,416 7,067,442 (275,500) - ------------------------------------------------------------------------------------------------------------------------ Net (loss) - - - (1,400,086) - - ------------------------------------------------------------------------------------------------------------------------ Purchases and retirement of common stock (22,300) (1,115) (57,963) - - - ------------------------------------------------------------------------------------------------------------------------ Amortization of restricted stock grant - - - - 58,500 - ------------------------------------------------------------------------------------------------------------------------ Tax effect of restricted stock grant - - (23,000) - - - ======================================================================================================================== Balance, December 31, 2003 4,184,815 $209,241 $4,998,453 $5,667,356 $(217,000) $- ======================================================================================================================== See notes to consolidated financial statements. Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2003 2002 2001 ---------------------------------------------------------------------------- ----------------- --------------- ---------------- Net earnings (loss) $(1,400,086) $(2,888,737) $ 2,751,348 ---------------------------------------------------------------------------- ---------------- ---------------- --------------- Other comprehensive income (loss), before tax: ---------------------------------------------------------------------------- ---------------- ---------------- --------------- Less reclassification adjustment for realized gain included in net earnings, net of income tax expense of $575,000 - - (1,686,396) ---------------------------------------------------------------------------- ---------------- ---------------- --------------- ---------------------------------------------------------------------------- ---------------- ---------------- --------------- Other comprehensive (loss), net of tax - - (1,686,396) ---------------------------------------------------------------------------- ---------------- ---------------- --------------- Comprehensive income (loss) $(1,400,086) $(2,888,737) $ 1,064,952 ---------------------------------------------------------------------------- ---------------- ---------------- ---------------
See notes to consolidated financial statements. Valpey-Fisher Corporation Notes to Consolidated Financial Statements (1) Description of Business - Valpey-Fisher Corporation (the Company), a Maryland corporation, is involved in the design, production, import, and sale of quartz crystals and oscillators marketed primarily to customers operating in the telecommunications industry and the design, production and sale of ultrasonic transducer devices. (2) Summary of Significant Accounting Policies: Principles of consolidation - The accompanying consolidated financial statements include the accounts of Valpey-Fisher Corporation and its wholly owned subsidiaries. Significant intercompany balances and transactions have been eliminated in consolidation. Use of estimates - The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates. Estimates include reserves for accounts receivable and inventory, useful lives of property, plant and equipment, accrued liabilities, and deferred income taxes. Actual results could differ from those estimates. Fair value of financial instruments - The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short-term nature. Cash equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value. The Company reduces its exposure to credit risk by maintaining such deposits with high quality financial institutions. At December 31, 2003, the majority of the Company's cash and cash equivalents balance were in excess of the applicable insurance limits. Inventories - Inventories are stated at the lower of cost or market and are determined by the first-in, first out method (FIFO). Property, plant and equipment - The Company uses the straight-line method of providing for depreciation and amortization of property, plant and equipment for financial reporting purposes and accelerated methods for tax purposes. The estimated lives used to compute depreciation and amortization are as follows: land improvements - 10 years, building and improvements - 15 to 40 years and machinery and equipment - 3 to 10 years. Revenue recognition - Revenue is recognized when an agreement of sale exists, product delivery has occurred and title passes, pricing is fixed or determinable, and collection is reasonably assured. Income taxes - The Company computes deferred income taxes based on the differences between the financial statement and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The tax effect of the differences between compensation expense for financial statement and income tax purposes is charged or credited to capital surplus. Earnings (loss) per share - Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the diluted weighted average shares outstanding. Diluted weighted average shares includes the weighted average number of common shares outstanding and the weighted average number of common shares that would have been outstanding if potentially dilutive common shares relating to stock options had been issued using the treasury stock method. Stock compensation plans - The Company applies the intrinsic value method, Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. The Company provides the disclosure requirements of Statement of Financial Accounting Standards (SFAS) Nos. 123 and 148, "Accounting for Stock-Based Compensation," and related interpretations and amendments. Valpey-Fisher Corporation Notes Continued The Company adopted the disclosure-only option under SFAS No.123 "Accounting for Stock-Based Compensation." The following table illustrates the effect on net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based compensation. For the Year Ended December 31,
2003 2002 2001 --------------------------------------------- Net earnings (loss), as reported $(1,400,086) $(2,888,737) $2,751,348 ----------------------------------------------------------------------------------- Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (111,809) (123,442) (72,518) ----------------------------------------------------------------------------------- Pro forma net earnings (loss) $(1,511,895) $(3,012,179) $2,678,830 ----------------------------------------------------------------------------------- Basic net earnings (loss) per share, as reported $(.33) $(.69) $.66 ----------------------------------------------------------------------------------- Basic net earnings (loss) per share, pro forma $(.36) $(.72) $.65 ----------------------------------------------------------------------------------- Diluted net earnings (loss) per share, as reported $(.33) $(.69) $.64 ----------------------------------------------------------------------------------- Diluted net earnings (loss) per share, pro forma $(.36) $(.72) $.63 -----------------------------------------------------------------------------------
For purposes of the above pro forma disclosures, the estimated fair value of the options is amortized to expense over the five-year vesting period of the options. The fair value of these options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-assumptions:
For the Year Ended December 31, ================================= 2003 2002 2001 ================================= Expected dividend yield 0% 0% 0% -------------------------------------------------------------------------------------- Risk-free interest rate 3.3% 3.4% 5.1% -------------------------------------------------------------------------------------- Expected life options in years 7 7 7 -------------------------------------------------------------------------------------- Assumed volatility 59% 61% 55% -------------------------------------------------------------------------------------- Estimated fair value per share at date of grant $1.60 $1.79 $2.60 --------------------------------------------------------------------------------------
Comprehensive income (loss) - Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the years ended December 31, 2003 and 2002, the Company had no items of other comprehensive income (loss). For the year ended December 31, 2001, the only component of other comprehensive income (loss) for the Company was unrealized holding gains (losses) on available for sale marketable equity securities. Reclassifications - Certain reclassifications have been made to prior year financial statements to conform to current year presentation. Recent accounting pronouncements - In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations", effective for years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted this SFAS effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, is effective for exit activities initiated after December 31, 2002, and requires that the liability for Valpey-Fisher Corporation Notes Continued costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Previous accounting guidance recognized a liability for an exit cost at the date of a commitment to an exit plan. The Company adopted this SFAS effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In November 2002, the FASB issued interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The interpretation expands on the accounting guidance of SFAS Nos. 5, 57, and 107 and incorporates without change the provisions of FASB FIN 34, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, such as standby letter of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor's fiscal year-end. The Company adopted this FIN effective January 1, 2003. The adoption of this statement had no material effect on the Company's financial position, results of operations and cash flows. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities". Many variable interest entities have commonly been referred to as special-purpose entities or off-balance sheet structures. Under the interpretation, certain entities known as "Variable Interest Entities" (VIE) must be consolidated by the primary beneficiary of an entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE's in which a significant (but not majority) variable interest is held, certain disclosures are required. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004 may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. The adoption of this FIN in January 2003 had no material effect on the Company's financial position, results of operations and cash flows and the Company does not expect the adoption of the Revised Interpretations to have a material effect on the Company's financial position, results of operations and cash flows. In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which codifies, revises and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on the Company's financial position, results of operations and cash flows. Acquisition: On May 28, 2003, pursuant to an Asset Purchase Agreement dated April 30, 2003, the Company purchased certain assets consisting primarily of inventories, machinery and equipment and the customer order backlog from MF Electronics Corp. ("MF"), a privately held company located in New Rochelle, NY. MF designs and manufactures a wide range of frequency control products. In addition, the Company acquired for cash the net of the May 28, 2003 MF's accounts receivable less trade accounts payable. The total purchase price was $798,762 in cash. The results of MF's operations have been included in the consolidated financial statements since the date of acquisition. During the week of June 30, 2003, the purchased assets and operations of MF were moved to the Company's facility located in Hopkinton, Massachusetts. Valpey-Fisher Corporation Notes Continued The following table presents the allocation of the purchase price, including transaction costs of $50,000, to the assets acquired and liabilities assumed, based on their fair values:
(in thousands) Accounts receivable $ 343 Inventory 125 Machinery and equipment 516 Trade accounts payable and accrued expenses (135) ----------- $ 849 ===========
The following unaudited pro forma financial information presents the results of the Company as if the acquisition of MF was completed January 1, 2001. This pro forma financial information is presented for informational purposes and is not necessarily indicative of the Company's operating results if the acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any anticipated cost savings or operating efficiencies that the Company believes are achievable.
(in thousands, except for per share For the Year ended December 31, amounts) ------------------------------------------------------------------------------ 2003 2002 2001 ------------------------------------------------------------------------------ Net sales $10,387 $13,767 $26,980 Net earnings (loss) $(1,762) $(3,341) $4,001 Basic earnings (loss) per share $(.42) $(.80) $.97 Diluted earnings (loss) per share $(.42) $(.80) $.94
(4) Gains on Sales of Marketable Equity Securities and Assets: As part of the proceeds from the sale of its Bergen Cable Technologies, Inc. subsidiary, ("BCT") in 1998 (see Note 5), the Company received a 10% stock and membership interest in the acquiring entities, Bergen Cable Technology, Inc. ("BCTI") and Bergen Real Estate L.L.C. ("BRE"). In the second quarter of 2001, the real estate owned by BRE was sold and the Company received $182,700 in cash after estimated expenses for its ownership share in this company and recorded a pre-tax gain of $151,700 on the sale. In the fourth quarter of 2002, the Company received $32,400 in cash as its ownership share of the note receivable related to the sale and recorded a pre-tax gain of $32,400 on the sale. The Company had deferred any gain on its share of the note receivable pending collection of the note. In 2002, the Company received $155,000 in cash representing its share of the net escrow balance from the sale of its common stock investment in BCTI in 2000 and reported this amount as a gain on the sale of assets. In 2001, the Company sold its investment in marketable equity securities which consisted of MetroWest Bank common stock for $5,951,600 in cash. The Company recorded a pre-tax gain of $5,519,200 on the sale. The Company had valued these securities under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and had classified these securities as "available for sale". At December 31, 2000, this investment had a net unrealized gain of $1,686,396 included in "Accumulated Other Comprehensive Income". Valpey-Fisher Corporation Notes Continued (5) Discontinued Operations: In 1998, the Company sold all the assets of BCT (see Note 4). As a result of this sale, the Company was required to perform environmental cleanup at the BCT site. During 2002, the Company expensed $150,000 to increase the environmental expense accrual to reflect the revised estimate to complete the remediation. This after-tax expense of $99,000 is presented in the Consolidated Statements of Operations under the caption "(Loss) from discontinued operations". As of December 31, 2003, a total of $950,000 has been expensed for the cleanup and $74,000 (see Note 10) is accrued for future payments. These costs represent the Company's best estimate, but the ultimate costs will not be known until the remediation is complete. (6) Receivables, net: Receivables, net of allowances, consist of the following:
2003 2002 ----------------------------------------------------------------------------------------------------------- Accounts receivable, less allowance for doubtful accounts of $80,000 and $200,000 $1,160,364 $776,369 ----------------------------------------------------------------------------------------------------------- Refundable income taxes 1,287,000 1,375,000 ----------------------------------------------------------------------------------------------------------- Amount due from the sale of assets 19,351 24,000 =========================================================================================================== $2,466,715 $2,175,369 =========================================================================================================== (7) Inventories, net: Inventories, net of reserves, consist of the following: 2003 2002 ----------------------------------------------------------------------------------------------------------- Raw materials $1,110,035 $1,560,364 ----------------------------------------------------------------------------------------------------------- Work in process 274,583 152,932 ----------------------------------------------------------------------------------------------------------- Finished goods 186,355 314,590 =========================================================================================================== $1,570,973 $2,027,886 ===========================================================================================================
(8) Income Taxes: The components of the provision (benefit) for income taxes are as follows:
2003 2002 2001 ------------------------------------------------------------------------------------------------------------ Current: ------------------------------------------------------------------------------------------------------------ Federal (excluding $(51,000) income tax (benefit) from discontinued operations in 2002) $ (1,287,000) $(1,324,000) $ 1,726,000 ------------------------------------------------------------------------------------------------------------ State - - 308,000 ------------------------------------------------------------------------------------------------------------ (1,287,000) (1,324,000) 2,034,000 ============================================================================================================ Deferred: ------------------------------------------------------------------------------------------------------------ Federal 418,000 (31,000) (388,000) ------------------------------------------------------------------------------------------------------------ State (227,000) (474,000) (103,000) ------------------------------------------------------------------------------------------------------------ 191,000 (505,000) (491,000) ------------------------------------------------------------------------------------------------------------ Valuation allowance 73,000 631,000 - ============================================================================================================ Total $ (1,023,000) $(1,198,000) $1,543,000 ============================================================================================================
The total income tax provision (benefit) differs from that computed by applying the federal income tax rate to income before income taxes. The reasons for the difference are as follows:
2003 2002 2001 --------------------------------------------------------------------------------------------------------- Income taxes at statutory rates $(823,850)$(1,355,800) $1,460,100 --------------------------------------------------------------------------------------------------------- State income tax, net of federal tax benefit (276,600) (241,400) 135,300 --------------------------------------------------------------------------------------------------------- Change in valuation allowance 73,000 631,000 - --------------------------------------------------------------------------------------------------------- Reversal of accruals - (235,000) - --------------------------------------------------------------------------------------------------------- Other, net including dividend exclusion 4,450 3,200 (52,400) --------------------------------------------------------------------------------------------------------- $(1,023,000)$(1,198,000) $1,543,000 =========================================================================================================
Valpey-Fisher Corporation Notes Continued The tax effects of significant items comprising the Company's deferred tax assets and liabilities as of December 31, 2003 and 2002 are as follows:
2003 2002 ----------------------------------------------------------------------------------------------------------- Deferred tax assets: ----------------------------------------------------------------------------------------------------------- Inventory valuation $662,000 $1,305,700 ----------------------------------------------------------------------------------------------------------- Accruals and allowances 69,200 123,300 ----------------------------------------------------------------------------------------------------------- State tax loss carryforward 619,000 246,000 ----------------------------------------------------------------------------------------------------------- Valuation allowance (704,000) (631,000) =========================================================================================================== Net deferred tax assets 646,200 1,044,000 =========================================================================================================== ----------------------------------------------------------------------------------------------------------- Deferred tax liabilities: ----------------------------------------------------------------------------------------------------------- Depreciation 376,600 383,000 ----------------------------------------------------------------------------------------------------------- DISC commissions 269,600 321,100 =========================================================================================================== Total deferred tax liabilities 646,200 704,100 =========================================================================================================== Net deferred tax assets $- $339,900 ===========================================================================================================
At December 31, 2003, the Company has state tax loss benefit carryforwards of $619,000 that begin to expire in 2007. Due to the uncertainty of the realization of this state tax benefit and management's estimate that operating income and the reversal of future taxable temporary differences will more likely than not be sufficient to recognize all of the other deferred tax assets, the Company has established a valuation allowance of $704,000 at December 31, 2003. Other current assets include deferred income taxes of approximately $646,200 in 2003 and $1,044,000 in 2002. (9) Profit Sharing and Savings Plan: The Company has a trusteed profit sharing 401(k) plan that covers all qualified employees. Under the profit sharing section of the plan, the Company may make contributions to the plan at the discretion of the Board of Directors. Profit sharing expenses amounted to $ 0 in 2003, 2002 and 2001. Under the 401(k) section of the plan, the Company matched 50% of employee contributions up to 6% of compensation. Total Company contributions charged to operations were $67,000 in 2003, $58,000 in 2002 and $58,000 in 2001. (10) Accrued Liabilities: Accrued liabilities consist of the following items: 2003 2002 ----------------------------------------------------------------------------------------- --------------- --------------- Employee compensation $ 396,200 $ 215,900 ----------------------------------------------------------------------------------------- --------------- --------------- Income taxes 105,300 117,000 ----------------------------------------------------------------------------------------- --------------- --------------- Professional fees 90,000 84,000 ----------------------------------------------------------------------------------------- --------------- --------------- Environmental costs (see Note 5) 74,000 125,000 ----------------------------------------------------------------------------------------- --------------- --------------- Other 234,775 276,031 ========================================================================================= =============== =============== $ 900,275 $ 817,931 ========================================================================================= =============== ===============
(11) Debt: At December 31, 2003, the Company had no outstanding credit arrangements with banks. On March 18, 2003, the Company paid off its outstanding term-debt balance with a bank and the Company's borrowing arrangements with that bank terminated. As a result, the total outstanding amount of the term debt outstanding at December 31, 2002 was classified as current portion of long-term debt. Valpey-Fisher Corporation Notes Continued (12) Stockholders' Equity: The Company has 4,184,815 and 4,207,115 shares of its $.05 par value Common Stock outstanding at December 31, 2003 and 2002, respectively. During 2003, the Company acquired 22,300 shares of common stock at a cost of $59,000 and retired the shares. During 2002, the Company acquired 45,400 shares of common stock at a cost of $134,000 and retired the shares. Under prior authorizations from the Board of Directors, at December 31, 2003, the Company is authorized to purchase up to an additional 233,500 shares of stock through the open market or negotiated transactions. In the fourth quarter of 2002, the Company granted 100,000 shares of restricted stock to the President and Chief Executive Officer for $5,000. The shares issued under a Restricted Stock Agreement vest over a period of five years. Unearned compensation was recorded at the date of the grant based on the market value of $295,000. Unearned compensation, which is shown as a separate component of stockholders' equity, is being amortized over the five year vesting period. The amount amortized to expense in 2003 and 2002 was $58,500 and $14,500, respectively. The tax effect of the differences between compensation expense for financial statement and income tax purposes is charged or credited to capital surplus. At December 31, 2003, the Company has four Stock Option Plans that allow for the granting of options to officers, key employees, and other individuals to purchase a maximum of 1,000,000 shares of the Company's common stock. The option price and terms are approved by the Company's Board of Directors. The options granted may qualify as incentive stock options ("ISO's"). Through December 31, 2003, all options granted except for 90,000 options were ISO's. At December 31, 2003, the 1992 and 1999 Plans had no options available for future grant and 471,604 common shares reserved for issuance upon exercise of the outstanding stock options. At December 31, 2003, the 2001 Plan has 93,166 options available for future grants and 106,834 common shares reserved for issuance upon exercise of the outstanding stock options. At December 31, 2003, the 2003 Plan has 200,000 options available for future grants. A summary of the status of the Company's fixed stock option plans as of December 31, 2003, 2002, and 2001, and changes during the years ended on those dates is presented below: 2003 2002 2001 -------------------------- ------------------------------- -------------------------------- -------------------------------- Number Weighted-Avg. Number of Weighted-Avg. Number of Weighted-Avg. of shares Exercise Price shares Exercise Price shares Exercise Price -------------------------- ------------ ------------------ ------------- ------------------ ------------- ------------------ Outstanding, January 1 509,938 $3.57 314,438 $3.89 473,188 $3.48 -------------------------- ------------ ------------------ ------------- ------------------ ------------- ------------------ Granted 86,500 2.61 207,500 3.24 10,000 4.23 -------------------------- ------------ ------------------ ------------- ------------------ ------------- ------------------ Exercised - - - - (31,500) 2.59 -------------------------- ------------ ------------------ ------------- ------------------ ------------- ------------------ Forfeited (18,000) 4.18 (12,000) 6.02 (137,250) 2.81 -------------------------- ------------ ------------------ ------------- ------------------ ------------- ------------------ Outstanding, December 31 578,438 $3.41 509,938 $3.57 314,438 $3.89 ========================== ============ ================== ============= ================== ============= ================== Exercisable, December 31 226,038 $3.56 174,157 $3.55 80,941 $3.40 ========================== ============ ================== ============= ================== ============= ==================
Valpey-Fisher Corporation Notes Continued
The following table summarizes information about fixed stock options outstanding at December 31, 2003: Options Outstanding Options Exercisable -------------------------------------------------------------- ---------------------------------- Weighted-Average ---------------------------- Range of Number Remaining Number Weighted Exercise Outstanding Contractual Exercise Exercisable Avg. Exercise Prices at 12/31/03 Life Price at 12/31/03 Price -------------------- --------------------- ---------------------- --------------------- --------------------- ------------------ $1.83 - 1.95 26,188 3.6 years $ 1.85 26,188 $ 1.85 -------------------- --------------------- ---------------------- --------------------- --------------------- ------------------ $2.39 - 2.80 98,500 9.0 2.59 9,600 2.39 -------------------- --------------------- ---------------------- --------------------- --------------------- ------------------ $3.24 - 4.28 435,000 7.4 3.36 179,000 3.40 -------------------- --------------------- ---------------------- --------------------- --------------------- ------------------ $11.04 18,750 6.8 11.04 11,250 11.04 ==================== ===================== ====================== ===================== ===================== ================== 578,438 7.4 $ 3.41 226,038 $ 3.56 ==================== ===================== ====================== ===================== ===================== ==================
The Company adopted the disclosure-only option under SFAS No.123 "Accounting for Stock-Based Compensation." The following table illustrates the effect on net earnings (loss), and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based compensation. For the Year Ended December 31, ------------------- ------------------- ------------------- 2003 2002 2001 ------------------- ------------------- ------------------- As Reported Net earnings (loss) $ (1,400,086) $ (2,888,737) $ 2,751,348 -------------------------------------------------------------------------------------------------------- Basic net earnings (loss) per share $ (.33) $ (.69) $ .66 -------------------------------------------------------------------------------------------------------- Diluted net earnings (loss) per share $ (.33) $ (.69) $ .64 -------------------------------------------------------------------------------------------------------- Pro Forma Net earnings (loss) $ (1,511,895) $ (3,012,179) $ 2,678,830 -------------------------------------------------------------------------------------------------------- Basic net earnings (loss) per share $ (.36) $ (.72) $ .65 -------------------------------------------------------------------------------------------------------- Diluted net earnings (loss) per share $ (.36) $ (.72) $ .63 --------------------------------------------------------------------------------------------------------
For purposes of the above pro forma disclosures, the estimated fair value of the options is amortized to expense over the five-year vesting period of the options. The fair value of these options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-assumptions: For the Year Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------------------------------------------ Expected dividend yield 0% 0% 0% ---------------------------------------------------------------------------------------------------------------------- Risk-free interest rate 3.3% 3.4% 5.1% ---------------------------------------------------------------------------------------------------------------------- Expected life of options in years 7 7 7 ---------------------------------------------------------------------------------------------------------------------- Assumed volatility 59% 61% 55% ---------------------------------------------------------------------------------------------------------------------- Estimated fair value per share at date of grant $1.60 $1.79 $2.60 ----------------------------------------------------------------------------------------------------------------------
Valpey-Fisher Corporation Notes Continued (13) Earnings (Loss) Per Share: The computation of basic and diluted earnings (loss) per share from continuing operations is as follows: ------------------------------------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------------------------------------------------------------------------------------------------- Basic: ------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations $ (1,400,086) $ (2,789,737) $ 2,751,348 ------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 4,187,970 4,165,659 4,138,363 ========================================================================================================================= Basic earnings (loss) per share from continuing operations $ (.33) $ (.67) $ .66 ------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- Diluted: ------------------------------------------------------------------------------------------------------------------------- Earnings (loss) from continuing operations $ (1,400,086) $ (2,789,737) $ 2,751,348 ------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 4,187,970 4,165,659 4,138,363 ------------------------------------------------------------------------------------------------------------------------- Dilutive effect of stock options outstanding, using the treasury stock method - - 139,125 ------------------------------------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding 4,187,970 4,165,659 4,277,488 ========================================================================================================================= Diluted earnings (loss) per share from continuing operations $ (.33) $ (.67) $ .64 =========================================================================================================================
The Company had 578,438 and 509,938 options outstanding in 2003 and 2002, respectively, not included in the computation of dilutive shares since the Company had a net loss and the inclusion of such shares would be anti-dilutive. (14) Industry Segment: The Company operates in one segment: the design, production, import, and sale of quartz crystals and oscillators and ultrasonic transducer devices. One customer accounted for approximately 14%, 22% and 15% of net sales in 2003, 2002 and 2001, respectively. Export sales to foreign markets are as follows: ---------------------------------------------------------------------------------------------------------------- 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------- Asia Pacific $ 1,652,200 $ 1,113,900 $ 401,100 ---------------------------------------------------------------------------------------------------------------- Europe and Middle East 670,900 345,600 1,518,500 ---------------------------------------------------------------------------------------------------------------- Canada 560,800 374,200 1,889,800 ---------------------------------------------------------------------------------------------------------------- Other 20,800 94,900 106,600 ---------------------------------------------------------------------------------------------------------------- $ 2,904,700 $ 1,948,600 $ 3,916,000 ================================================================================================================
Valpey-Fisher Corporation Notes Continued
(15) Quarterly Financial Data (unaudited): Selected unaudited quarterly financial data for 2003 and 2002 is set forth below: First Second Third Fourth ----------------------------------------------------------------------------------------------------------------------- 2003 (in thousands, except per share data) ----------------------------------------------------------------------------------------------------------------------- Net sales from continuing operations $ 1,711 $ 2,180 $ 2,190 $ 2,415 ----------------------------------------------------------------------------------------------------------------------- Gross profit (loss) 48 244 257 334 ----------------------------------------------------------------------------------------------------------------------- (Loss) before income taxes (692) (637) (587) (507) ----------------------------------------------------------------------------------------------------------------------- Net (loss) from: Continuing operations (457) (429) (396) (118) ----------------------------------------------------------------------------------------------------------------------- Discontinued operations - - - - ======================================================================================================================= Net (loss) $ (457) $ (429) $ (396) $ (118) ======================================================================================================================= Basic and diluted (loss) per share: Continuing operations $ (.11) $ (.10) $ (.09) $ (.03) ----------------------------------------------------------------------------------------------------------------------- Discontinued operations - - - - ======================================================================================================================= Continuing operations $ (.11) $ (.10) $ (.09) $ (.03) ======================================================================================================================= 2002 ----------------------------------------------------------------------------------------------------------------------- Net sales from continuing operations $ 2,353 $ 1,722 $ 1,617 $ 1,602 ----------------------------------------------------------------------------------------------------------------------- Gross profit (loss) 163 (24) (1,071) (414) ----------------------------------------------------------------------------------------------------------------------- (Loss) before income taxes (339) (694) (1,730) (1,225) ----------------------------------------------------------------------------------------------------------------------- Net (loss) from: Continuing operations (203) (418) (1,092) (1,077) ----------------------------------------------------------------------------------------------------------------------- Discontinued operations (45) - - (54) ======================================================================================================================= Net (loss) $ (248) $ (418) $ (1,092) $ (1,131) ======================================================================================================================= Basic and diluted (loss) per share: Continuing operations $ (.05) $ (.10) $ (.26) $ (.26) ----------------------------------------------------------------------------------------------------------------------- Discontinued operations (.01) - - (.01) ----------------------------------------------------------------------------------------------------------------------- $ (.06) $ (.10) $ (.26) $ (.27) -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period and the sum of the quarters may not necessarily be equal to the full year earnings per share amounts. In the fourth quarter of 2003, net loss from continuing operations includes a tax benefit of $300,000 ($.07 basic and diluted (loss) per share) as a result of a reduction in the deferred tax asset valuation allowance during the quarter. In the fourth quarter of 2002, net loss from continuing operations includes tax expense of $396,000 ($.09 basic and diluted (loss) per share) as a result of a provision for a deferred tax asset valuation allowance net of a tax accrual reversal. The third quarter of 2002 gross profit (loss) includes a $.9 million inventory write-off provision for excess inventory. (16) Commitments and Contingencies: During the normal course of business, the Company incurs certain commitments to make future payments for the purchase of inventory and production supplies based on its projected requirements. At December 31, 2003, the Company has outstanding purchase commitments totaling approximately $565,000, all of which are expected to be fulfilled in 2004. Report of Independent Certified Public Accountants To the Stockholders and Board of Directors of Valpey-Fisher Corporation: We have audited the accompanying consolidated balance sheets of Valpey-Fisher Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valpey-Fisher Corporation and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP Boston, Massachusetts February 13, 2004 Independent Auditors' Report To the Stockholders and Board of Directors of Valpey-Fisher Corporation (formerly MATEC Corporation): We have audited the accompanying consolidated statement of operations, comprehensive income (loss) and cash flows of Valpey-Fisher Corporation (formerly MATEC Corporation) and subsidiaries (the "Company") for the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Valpey-Fisher Corporation (formerly MATEC Corporation) and subsidiaries for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Boston, Massachusetts February 15, 2002 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------------------------------------------------------------- Effective November 6, 2002, the Registrant dismissed Deloitte & Touche LLP (D&T) as independent accountants and appointed Grant Thornton LLP (GT) as independent accountants for the Registrant. The Registrant's audit committee approved these changes and recommended them to the Board of Directors. The Registrant's Board of Directors approved the changes. During the Company's fiscal years ended December 31, 2002 and 2001 and the subsequent interim period preceding D&T's dismissal, there were no disagreements between D&T and the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of D&T, would have caused D&T to make a reference to the subject matter of the disagreements in their report on financial statements for such year. During such period, there were no reportable events as defined in Item 304 (a) (1) (v) of Regulation S-K. The report of D&T on the Company's consolidated financial statements as of and for the years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's fiscal years ended December 31, 2001 and 2000 and through November 6, 2002, the Company did not consult with GT with respect to the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K. The Company provided D&T with a copy of the foregoing disclosures and requested that D&T furnish it a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements and, if not, stating the respects in which it does not agree. A copy of the letter from D&T to the Commission filed as Exhibit 16.1 to the Form 8-K dated November 6, 2002 is incorporated by reference. Item 9A. Controls and Procedures --------------------------------- Evaluation of disclosure controls and procedures. As of December 31, 2003, the Company carried out an evaluation, under the supervision and with the Company's management, including the Company's President and Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Changes in internal control. Such evaluation did not identify any change in the Company's internal controls over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART III The information called for by Part III is hereby incorporated by reference from the information set forth and under the headings "Common Stock Ownership of Certain Beneficial Owners and Management", "Election of Directors", "Executive Compensation", "Corporate Governance and Board Matters","Principal Accountant Fees and Services" and "Policy on Audit Committee Pre-Approval" in Registrant's definitive proxy statement for the 2004 Annual Meeting of Stockholders, which meeting involves the election of directors, such definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. In addition, information on Registrant's executive officers has been included in Part I above under the caption "Executive Officers of the Registrant". The Company's Board of Directors has adopted a Code of Ethics for Senior Executive and Financial Officers, a copy of which is filed as Exhibit 14 to this Annual Report on Form 10-K. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ------------------------------------------------------------------------- (a) The following are filed as part of this Annual Report on Form 10-K: 1. The following Consolidated Financial Statements are included in Item 8: Consolidated Balance Sheets, December 31, 2003 and 2002 Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statement Report of Independent Certified Public Accountants (Grant Thornton LLP) Independent Auditors' Report (Deloitte & Touche LLP) 2. The following schedule to the Consolidated Financial Statements, the Report of Independent Certified Public Accountant, and the Independent Auditors' Report on Schedule are filed as part of this report. Page Number ----------- Report of Independent Certified Public Accountants on Supplementary Schedule 38 Independent Auditors' Report 39 Schedule II - Valuation Reserves 40 All other schedules are omitted because they are not applicable, not required or because the required information is included in the Consolidated Financial Statements or notes thereto. 3. The exhibits filed in this report or incorporated by reference, listed on the Exhibit Index on pages 41 and 42 are as follows: Exhibit No. Description ----------- ----------- 2. Agreement of Merger and Recapitalization 2.1 Asset Purchase Agreement dated April 30, 2003 between Seller, William Stein, Martin Finkelstein and the Company 3.1 Restated and Amended Articles of Incorporation 3.2 Amendment to Article III, Section 1 of the By-Laws effective May 8, 2003 3.3 By-Laws effective May 8, 2003 7.1 Loan Agreement dated February 27, 2001 7.2 Commercial Term Promissory Note 7.3 Demand Revolving Line of Credit Promissory Note 10.1 * 1992 Stock Option Plan 10.2 * 1999 Stock Option Plan 10.3 * Management Incentive Plan 10.4 * 2001 Stock Option Plan 10.5 * Restricted Stock Agreement 10.6 * 2003 Stock Option Plan 14. Code of Ethics 16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange Commission dated November 6, 2002 21. Subsidiaries of the Registrant 23. Independent Certified Public Accountant Consent 23.1 Independent Auditors' Consent 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management contract or compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 14(c) of this report. (b) Reports on Form 8-K On November 6, 2003, the Registrant filed a report on Form 8-K dated November 6, 2003 reporting under Item 7.(c) Exhibits and Item 12. Results of Operations and Financial Condition. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Valpey-Fisher Corporation Date: March 12, 2004 By:/s/ Michael J. Ferrantino ------------------------- Michael J. Ferrantino President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/Ted Valpey, Jr. Chairman of the Board March 12, 2004 ------------------- and Director Ted Valpey, Jr. /s/Michael J. Ferrantino President, Chief Executive Officer March 12, 2004 ------------------------ and Director (Principal Executive Michael J. Ferrantino Officer) /s/Michael J. Kroll Vice President, Treasurer and March 12, 2004 ------------------- Chief Financial Officer Michael J. Kroll (Principal Financial Officer and Principal Accounting Officer) /s/Richard W. Anderson Director March 12, 2004 ---------------------- Richard W. Anderson /s/Eli Fleisher Director March 12, 2004 ---------------- Eli Fleisher /s/Lawrence Holsborg Director March 12, 2004 -------------------- Lawrence Holsborg /s/John J. McArdle III Director March 12, 2004 ---------------------- John J. McArdle III Director March , 2004 ---------------------- Robert W. Muir, Jr. Report of Independent Certified Public Accountants on Supplementary Schedule To Valpey-Fisher Corporation: We have audited the accompanying consolidated balance sheets of Valpey-Fisher Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years then ended, and have issued our report thereon dated February 13, 2004; such consolidated financial statements and report are included in the Company's 2003 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company as of and for the years ended December 31, 2003 and 2002, listed in Item 15a(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information therein. GRANT THORNTON LLP Boston, Massachusetts February 13, 2004 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Valpey-Fisher Corporation (formerly MATEC Corporation) Hopkinton, Massachusetts We have audited the consolidated statement of operations, comprehensive income (loss) and cash flows of Valpey-Fisher Corporation (formerly MATEC Corporation) and subsidiaries (the "Company") for the year ended December 31, 2001, and have issued our report thereon dated February 15, 2002. Our audit also included the financial statement schedule, for the year ended December 31, 2001, of the Company listed in Item 15(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule for the year ended December 31, 2001 when considered in relation to the basic financial statements for the year ended December 31, 2001, taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts February 15, 2002
Valpey-Fisher Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- Additions ------------------------------ Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period ------------------------------------------------------------------------------------------------------------------------------------ Allowance for Doubtful Accounts: Year Ended: December 31, 2003 $ 200,000 $ 2,300 $ - $ (122,300) $ 80,000 ==================== ==================== =================== ==================== =================== December 31, 2002 $ 395,800 $ 30,000 $ 139,200 $ (365,000) $ 200,000 ==================== ==================== =================== ==================== =================== December 31, 2001 $ 175,000 $ 148,200 $ 88,100 $ (15,500) $ 395,800 ==================== ==================== =================== ==================== =================== Inventory Reserve: Year Ended: December 31, 2003 $ 5,339,000 $ 234,900 $ $ (4,571,900) $ 1,002,000 ==================== ==================== =================== ==================== =================== December 31, 2002 $ 3,854,000 $ 1,601,000 $ 228,000 $ (344,000) $ 5,339,000 ==================== ==================== =================== ==================== =================== December 31, 2001 $ 1,6730,000 $ 2,600,000 $ - $ (419,000) $ 3,854,000 ==================== ==================== =================== ==================== ===================
EXHIBIT INDEX Exhibit No. (inapplicable items are omitted) ---------- 2. Agreement of Merger and Recapitalization between MATEC Corporation a Delaware corporation and MATEC Corporation a Maryland corporation (incorporated by reference to Exhibit A to the Proxy Statement of Registrant for its Special in Lieu of Annual Meeting of Stockholders held on June 18, 1998). 2.1 Asset Purchase Agreement dated April 30, 2003 between Seller, William Stein, Martin Finkelstein and the Company (incorporated by reference to Exhibit 2 on Registrant's Form 8-K dated May 28, 2003). 3.1 Restated and Amended Articles of Incorporation as of June 3, 2002 (incorporated by reference to Exhibit 3.2 on Registrant's Form 10-Q for the period ended June 30, 2002). 3.2 Amendment to Article III, Section 1 of the By-Laws effective May 8, 2003. Filed herewith. 3.3 By-Laws effective May 8, 2003. Filed herewith. 7.1 Loan Agreement dated February 27, 2001 between the Registrant, Valpey Fisher Corporation and First Massachusetts Bank, N.A. (incorporated by reference to Exhibit 7.1 on Registrant's Form 10-Q for the quarter ended April 1, 2001). 7.2 Commercial Term Promissory Note dated February 27, 2001 between the Registrant, Valpey Fisher Corporation and First Massachusetts Bank, N.A. (incorporated by reference to Exhibit 7.1 on Registrant's Form 10-Q for the quarter ended April 1, 2001). 7.3 Demand Revolving Line of Credit Promissory Note dated February 27, 2001 between the Registrant, Valpey Fisher Corporation and First Massachusetts Bank, N.A. (incorporated by reference to Exhibit 7.1 on Registrant's Form 10-Q for the quarter ended April 1, 2001). 10.1 1992 Stock Option Plan (incorporated by reference to Exhibit 10.1 on Registrant's Form 10-K for the year ended December 31, 2002). 10.2 1999 Stock Option Plan (incorporated by reference to Exhibit A to the Proxy Statement of Registrant for its Special In Lieu of Annual Meeting of Stockholders held on May 13, 1999). 10.3 Management Incentive Plan (incorporated by reference to Exhibit 10.3 on Registrant's Form 10-Q for the quarterly period ended July 2, 2000). 10.4 2001 Stock Option Plan (incorporated by reference to Exhibit A to the Proxy Statement of Registrant for its Annual Meeting of Stockholders held on May 10, 2001). 10.5 Restricted Stock Agreement (incorporated by reference to Exhibit 10.5 on Registrant's Form 10-K for the year ended December 31, 2003. EXHIBIT INDEX, continued Exhibit No. (inapplicable items are omitted) ----------- 10.6 2003 Stock Option Plan (incorporated by reference to Exhibit 10.1 on Registrant's Form 10-Q for the quarterly period ended June 29, 2003). 14. Code of Ethics of the Chief Executive Officer and the Chief Financial and Accounting Officer. Filed herewith. 16.1 Letter from Deloitte & Touche LLP to the Securities and Exchange Commission dated November 6, 2002 (incorporated by reference to Exhibit 16.1 on Registrant's Form 8-K dated November 6, 2002). 21. Subsidiaries of the Registrant. Filed herewith. 23. Independent Certified Public Accountants' Consent. Filed herewith. 23.1 Independent Auditors' Consent. Filed herewith. 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.