-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BV/xR5jPhOmLWsPyWz6OBTR4L0qhelTNYk8rF7WzkTWEdFFL3sJOJi5Z1y73AV3R ZYll4XAydYsFXP6+si3law== 0001157523-06-005207.txt : 20060515 0001157523-06-005207.hdr.sgml : 20060515 20060515170325 ACCESSION NUMBER: 0001157523-06-005207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060402 FILED AS OF DATE: 20060515 DATE AS OF CHANGE: 20060515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALPEY FISHER CORP CENTRAL INDEX KEY: 0000085608 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES & ROLLING & FINISHING MILLS [3310] IRS NUMBER: 060737363 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04184 FILM NUMBER: 06842504 BUSINESS ADDRESS: STREET 1: 75 SOUTH ST CITY: HOPKINTON STATE: MA ZIP: 01748 BUSINESS PHONE: 5084359039 MAIL ADDRESS: STREET 1: 75 SOUTH STREET CITY: HOPKINTON STATE: MA ZIP: 01748 FORMER COMPANY: FORMER CONFORMED NAME: MATEC CORP/DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: RSC INDUSTRIES INC DATE OF NAME CHANGE: 19840515 FORMER COMPANY: FORMER CONFORMED NAME: REEVES INDUSTRIES INC DATE OF NAME CHANGE: 19710520 10-Q 1 a5147276.txt VALPEY-FISHER 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 2, 2006 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) (508) 435-6831 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act): (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of May 12, 2006, the number of shares outstanding of Registrant's Common Stock, par value $.05 was 4,246,503. -1- Valpey-Fisher Corporation INDEX PAGE ----- ---- PART I. FINANCIAL INFORMATION ITEM 1. - Financial Statements - Consolidated Condensed Balance Sheets - April 2, 2006 (Unaudited) and December 31, 2005 (Audited) 3 Consolidated Statements of Operations - (Unaudited) Three Months Ended April 2, 2006 and April 3, 2005 4 Consolidated Statements of Cash Flows - (Unaudited) Three Months Ended April 2, 2006 and April 3, 2005 5 Notes to Consolidated Condensed Financial Statements 6-9 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 ITEM 3. - Quantitative and Qualitative Disclosures About Market Risk 13 ITEM 4. - Controls and Procedures 13-14 PART II. OTHER INFORMATION ITEM 1A. - Risk Factors 14 ITEM 5. - Other Information 14 ITEM 6. - Exhibits 14 SIGNATURES 15 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Valpey-Fisher Corporation and Subsidiaries Consolidated Condensed Balance Sheets (In thousands, except share data)
4/2/06 12/31/05 ------------ ---------- (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 7,574 $ 7,920 Accounts receivable, net of allowances of $115 in 2006 and 2005 1,529 1,495 Inventories, net 916 1,028 Deferred income taxes and other current assets 645 653 - --------------------------------------------------------------------------------------------------------------- Total current assets 10,664 11,096 Property, plant and equipment, at cost 10,978 10,927 Less accumulated depreciation 8,729 8,559 - --------------------------------------------------------------------------------------------------------------- 2,249 2,368 Other assets 161 153 - --------------------------------------------------------------------------------------------------------------- Total assets $ 13,074 $ 13,617 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 516 $ 497 Accrued liabilities 1,090 1,708 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 1,606 2,205 Deferred income taxes 420 448 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: 4,246,503 and 4,246,503 shares 212 212 Capital surplus 5,141 5,105 Retained earnings 5,780 5,747 Less unearned compensation (85) (100) - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 11,048 10,964 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 13,074 $ 13,617 ===============================================================================================================
See notes to consolidated condensed financial statements. -3- Valpey-Fisher Corporation and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)
Three Months Ended 4/2/06 4/3/05 -------------- ------------ Net sales $ 2,872 $ 3,022 Cost of sales 1,861 2,057 - --------------------------------------------------------------------------------------------------------------- Gross profit 1,011 965 Operating expenses: Selling and advertising 405 371 General and administrative 463 461 Research and development 127 87 - --------------------------------------------------------------------------------------------------------------- Total operating expenses 995 919 Operating profit 16 46 Interest income 61 23 - --------------------------------------------------------------------------------------------------------------- Earnings before income taxes 77 69 Income tax (expense) (44) (24) - --------------------------------------------------------------------------------------------------------------- Net earnings $ 33 $ 45 =============================================================================================================== - --------------------------------------------------------------------------------------------------------------- Basic and diluted earnings per share $ .01 $ .01 =============================================================================================================== Basic weighted average shares 4,247 4,223 Diluted weighted average shares 4,247 4,312
See notes to consolidated condensed financial statements. -4- Valpey-Fisher Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended --------------------------- 4/2/06 4/3/05 ----------- ------------ Cash flows from operating activities: Net earnings from operations $ 33 $ 45 Adjustments to reconcile net earnings to net cash (used) in operating activities: Depreciation and amortization 170 190 Deferred income taxes (31) (33) Stock-based compensation 42 - Non-cash restricted stock compensation, net of taxes 9 9 Changes in operating assets and liabilities: Accounts receivable, net (34) (389) Inventories, net 112 265 Other current assets 11 (36) Accounts payable and accrued expenses (562) (63) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) in operating activities of continuing operations (250) (12) Cash flows from operating activities: - Discontinued Operations: (Revised) Change in accrued expenses (37) (3) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) in operating activities of discontinued operations (37) (3) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) in operating activities (287) (15) - ------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (51) (46) Other, net (8) (10) - ------------------------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (59) (56) - ------------------------------------------------------------------------------------------------------------------- Net (decrease) in cash and cash equivalents (346) (71) Cash and cash equivalents: Beginning of period 7,920 6,455 --------------------------- End of period $7,574 $6,384 =========================== Note: The Company has revised its reporting of discontinued operations to note that all cash flows represent operating activities. Supplemental Cash Flow Information Cash paid during the period for: Income taxes $ 240 $ -
See notes to consolidated condensed financial statements. -5- Valpey-Fisher Corporation and Subsidiaries Notes to Consolidated Condensed Financial Statements 1. Financial Presentation: The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company's 2005 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain revisions have been made to the 2005 Consolidated Statement of Cash Flows related to reporting of discontinued operations to note that all cash flows represent operating activities. 2. Stock Compensation Plans: Effective January 1, 2006, the Company began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment". Prior to January 1, 2006, the Company applied 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. Accordingly, the Company did not recognize compensation expense for options granted with exercise prices equal to or greater than the market value on the date of grant. The Company has adopted the modified prospective method as permitted under SFAS No. 123R. Under this transition provision, compensation expense associated with stock options recognized in the first quarter of 2006 includes: (a) expense related to the remaining unvested portion of all stock option awards granted prior to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) expense related to all stock option awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective method of adoption, the Company's results of operations and financial position for prior periods have not been restated. As a result of the adoption of SFAS No. 123R, the Company recorded the following stock-based compensation expense in the Consolidated Statement of Operations for the quarter ended April 2, 2006 (in thousands): Cost of sales $ 8 Selling and advertising 7 General and administrative 25 Research and development 2 ---------- Pre-tax stock-based compensation expense 42 Income tax (benefit) (1) ---------- Net stock-based compensation expense $ 41 ========== -6- The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based compensation for the quarter ended April 3, 2005 (in thousands, except per share data): (unaudited) --------------- Net earnings, as reported $ 45 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (37) --------------- Pro forma net earnings $ 8 =============== Basic and diluted earnings per share, as reported $ .01 Basic and diluted earnings per share, pro forma $ .00 -7- At April 2, 2006, 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. At April 2, 2006, options for 170,166 shares remain available for future grants under the Plans. The option price and terms are recommended by the Company's Compensation Committee to the Company's Board of Directors for approval. The maximum contractual term of an option is ten years. The options granted may qualify as incentive stock options ("ISO's"). Options granted prior to December 31, 2005 generally vested 20% per on each of the first, second, third, fourth, and fifth anniversaries of the date of grant with a contractual life of ten years. The options granted in 2006, vest 33% on each of the first, second and third anniversaries of the date of grant and have a contractual life of five years. Compensation expense related to stock options granted is recognized ratably over the vesting period of the option. The Company issues new shares upon the exercise of stock options. Stock options for 10,000 shares were granted in the quarter ended April 2, 2006. There were no stock option grants in the quarter ended April 3, 2005. The estimated fair value of each option grant is determined on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for stock option grants during the quarter ended April 3, 2006: Stock options granted 10,000 Weighted-average exercise price $ 3.25 Weighted-average grant date fair value $ 1.06 Assumptions: Risk-free interest rate 4.6% Expected volatility 36% Expected term in years 3.5 Expected dividend yield 0% The risk-free interest rate is based on the yield on zero-coupon U.S. treasury securities at the time of grant for a period commensurate with the expected term. The expected volatility is calculated using the Black-Scholes model based on the historic monthly closing prices for a period commensurate with the expected term, which is the same method used both prior and subsequent to the adoption of SFAS 123R. The expected term of the option is determined by using the "shortcut approach" as provided for in Staff Accounting Bulletin No. 107. A summary of the activity under all the Company's stock option plans as of April 2, 2006 and the changes during the three month period then ended are as follows:
Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Price Life Intrinsic Shares Per Share In Years Value -------------- ------------------- ----------------- ----------------- Outstanding at December 31, 2005 488,750 $ 3.38 Options granted 10,000 3.25 -------------- Outstanding at April 2, 2006 498,750 $ 3.37 7.3 $ 230,595 ============== ================= ================= Exercisable at April 2, 2006 205,658 $ 3.88 6.5 $ 76,302 ============== ================= =================
-8- A summary of the status of the Company's nonvested stock options as of April 2, 2006 and the changes during the three month period then ended is as follows: Weighted-Average Grant-Date Shares Fair Value ------------- ----------------- Nonvested at December 31, 2005 285,092 $ 1.80 Granted 10,000 1.06 Vested (2,000) 1.68 ------------- ----------------- Nonvested at April 2, 2006 293,092 $ 1.78 ============= ================= At April 2, 2006, there was approximately $429,000 of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total grant-date fair value of stock options that vested during the three months ended April 2, 2006 was approximately $3,400. 3. Inventories, net: Inventories, net of reserves, consist of the following: (in thousands) 4/2/06 12/31/05 -------------------------------------------------------------------------- (unaudited) Raw materials $ 455 $ 637 Work in process 182 194 Finished goods 279 197 ----------------- $ 916 $ 1,028 ================= 4. Earnings Per Share: Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the net incremental shares that would be issued if dilutive outstanding stock options were exercised using the treasury stock method. The computation of diluted earnings per share excludes stock options with an exercise price in excess of the average market price as they are antidilutive. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. During the three months ended April 2, 2006, the computation of dilutive earnings per share included 307 of net incremental shares from dilutive stock options and excluded 33,750 of stock options, as the exercise prices were greater than the average market price. In addition, options to purchase 455,000 shares were excluded from the calculation under the treasury stock method as they were anti-dilutive. These options were not included because the assumed proceeds from the amount of the exercise prices combined with the average unrecognized compensation costs, adjusted for the amount of excess tax benefits, if any, that would be credited to additional paid-in capital upon exercise of the options were greater than the average market price of our stock. During the three months ended April 3, 2005, the computation of dilutive earnings per share included 89,790 of net incremental shares from dilutive stock options and excluded 28,750 of stock options, as the exercise prices were greater than the average market price. -9- Item 2. 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. 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 Company's critical accounting policies could materially affect its consolidated financial statements. The Company's most critical accounting policies, which were discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, pertain to accounts receivable, inventories and income taxes. Except for the manner in which we account for share based compensation, as discussed below, those policies continue to be the Company's most critical accounting policies for the period covered by this report and there were no significant changes in the application of those policies during this reporting period. Stock-Based Compensation. During the first quarter of 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" using the modified prospective method of transition. Under SFAS No. 123R, the estimated fair value of stock options granted under our Stock Option Plans is recognized as expense. The estimated fair value of stock options is expensed on a straight-line basis over the expected term of the option. Prior to January 1, 2006, the Company applied 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. Accordingly, the Company did not recognize compensation expense for options granted with exercise prices equal to or greater than the market value on the date of grant. We adopted the modified prospective method as permitted under SFAS No. 123R. Under this transition provision, compensation expense associated with stock options recognized in the first quarter of 2006 includes: (a) expense related to the remaining unvested portion of all stock option awards granted prior to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) expense related to all stock option awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective method of adoption, the Company's results of operations and financial position for prior periods have not been restated. As a result, the results for the quarter ended April 2, 2006 are not directly comparable to the same period in 2005. The estimated fair value of each option grant is determined on the date of grant using the Black-Scholes option pricing model. The Black-Scholes model is dependent upon key inputs estimated by management, including the expected term of an option and the expected volatility of the Company's common stock price over the expected term. The risk-free interest rate is based on the yield on zero-coupon U.S. treasury securities at the time of grant for a period commensurate with the expected term. The expected volatility is calculated using the Black-Scholes model based on the historic monthly closing prices for a period commensurate with the expected term, which is the same method used both prior and subsequent to the adoption of SFAS 123R. The expected term of the option is determined by using the "shortcut approach" as provided for in Staff Accounting Bulletin No. 107. Changes in the subjective assumptions could materially affect the estimated fair value of an option and consequently the amount of stock option expense recognized in the Company's results of operations. -10- See Note 2 of the Notes to Consolidated Condensed Financial Statements in Part 1, Item 1 of this Form 10-Q for a more detailed discussion of and the effects of SFAS No. 123R on our results of operations and financial condition. -11- Liquidity and Capital Resources Cash and cash equivalents amounted to $7,574,000 at April 2, 2006, a decrease of $346,000 from the December 31, 2005 balance. During this period, our operations used cash of $287,000 and investing activities used cash of $59,000. Cash used in operations of $287,000 resulted mainly from the net earnings of $33,000 adjusted for the net effect of non-cash items, mainly depreciation and amortization, of $190,000 offset by a $472,000 increase in working capital. Discontinued operations used cash of $37,000. The main items accounting for the net increase in working capital were a $617,000 decrease in accrued liabilities, partially offset by an $112,000 reduction in inventory. The decrease in accrued liabilities is mainly due to payments of $325,000 for incentive compensation to employees, $240,000 in income tax payments, and $75,000 for the Company's 2005 401k match. The reduction in inventory is mainly due to the Company's continuing control of inventory levels. Capital expenditures during the quarter ended April 2, 2006 amounted to $51,000. Management believes that based on its current working capital and the expected cash flow 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 2006. 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, equipment, and production supplies based on projected requirements. At April 2, 2006, our outstanding purchase commitments totaling approximately $788,000, all of which are expected to be fulfilled in 2006. -12- Results of Operations During the quarter ended April 2, 2006, net sales decreased $150,000 or 5% from the comparable quarter in 2005 mainly as a result of the lower backlog at the beginning of the quarter. The Company's backlog amounted to $1.6 million at December 31, 2005 compared to $1.8 million at December 31, 2004. Bookings during both the 2006 and 2005 quarters amounted to $3.1 million. The backlog at April 2, 2006 amounted to $1.9 million comparable to that at April 3, 2005. While the overall actual number of units sold increased over the prior year level due to new product sales, the sales decrease resulted mainly from both lower unit sales and average selling prices of its older products. The Company continues to see price compression and management believes it will continue to see this pricing pressure in 2006 and beyond. In addition, our near-term visibility continues to be poor and we continue to see customer orders for small quantities with near-term delivery dates. Management is not sure of the potential impact on its future operations from the current continuing telecom market uncertainties, the industry-wide over capacity issues, and the effects of the continuing pricing compression. The Company reported a $1,011,000 gross profit (35% of net sales) in the current quarter versus a $965,000 gross profit (32% of net sales) in the 2005 quarter. The higher margin was mainly attributable to a decrease in raw material costs due to changes in product mix toward the more value-added, high-rel products. Direct labor and overhead costs as a percentage of sales in 2006 remained fairly consistent with that in the 2005 period. Selling and advertising expenses increased $34,000 or 9% over the comparable quarter in 2005. Increases in personnel expenses ($46,000), travel and entertainment ($13,000), and stock option expense ($7,000) were partially offset by reductions in advertising ($13,000), sales commission expense to outside sales representatives ($10,000) and bad debt expense ($6,000). While the quarter ended April 2, 2006 included stock option expense of $25,000, general and administrative expenses were comparable to last year. Reductions in overall expenses, including $15,000 in recruitment expenses, offset the effect of the stock option expense. Research and development expenses increased $40,000 over the $87,000 reported in the comparable 2005 period primarily as a result of increased personnel expenses. The 46% increase is consistent with the Company's plan to make significant engineering investments in new product development in 2006. The $38,000 increase in interest income in 2006 was due to a combination of higher average cash balances and higher interest rates during the current year. The estimated annual combined federal and state income tax rates for 2006 and 2005 are 58% and 34%, respectively. The increase in the projected rate is a result of the nondeductible stock option expense in 2006 resulting from the adoption of SFAS No. 123R. The majority of the stock option expense results from incentive stock options and under SFAS No. 123R, the expense does not generate a tax deduction and related tax benefit. As the Company has state income tax NOL carryforwards available, there is no estimated state income tax provision for 2006 and 2005. For the quarter ended April 2, 2006, the Company reported an operating profit of $16,000 compared to an operating profit of $46,000 in comparable quarter of 2005. The operating profit in 2006 was reduced by $42,000 for stock option expense resulting from the Company's adoption of SFAS No. 123R. As the Company adopted SFAS No. 123R on a modified prospective method, the 2005 quarter dos not include any stock option expense. Interest income amounted to $61,000 in 2006, compared to $23,000 in 2005. As a result, the Company reported a pre-tax profit of $77,000 during the quarter ended April 2, 2006 compared to a pre-tax -13- profit $69,000 in comparable 2005 period. For the quarter ended April 2, 2006, the Company reported net earnings of $33,000 versus net earnings of $45,000 in 2005. Forward-Looking Statements Certain statements made herein contain 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 continue 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, the ability to limit the amount of the negative effect on operating results caused by pricing pressure and the Company's ability to comply with Section 404 of the Sarbanes-Oxley Act. Item 3. 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 April 2, 2006, and assuming the balance was totally invested in money market instruments for the full year, a hypothetical 1% point increase or decrease in interest rates would result in an approximate $75,700 increase or 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 4. Controls and Procedures Evaluation of disclosure controls and procedures. At the end of the period covered by this report, 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 the Chief Financial Officer concluded, except as noted below, that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic SEC filings and that information required to be disclosed by the Company in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As stated in the Company's 2005 Form 10-K, the Company's independent registered accounting firm advised management and the audit committee, that the following identified internal control deficiency constituted a significant deficiency in the Company's internal control. -14- Reliance on the Chief Financial Officer for period end financial reporting functions, accounting estimates and income taxes. We believe that this deficiency did not affect the accuracy of our financial statements in this report. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties and whether the potential benefits of adding employees to clearly segregate duties or other alternatives justifies the expense associated with the changes. In addition, management will be reviewing this matter with its outside consultants to examine other available alternative solutions. Changes in internal control. During the first quarter of 2006, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1A. Risk Factors Information regarding risk factors are set forth under the caption "Forward-Looking Statements" in Part 1, Item 2 of this Form 10-Q and in Part 1, Item 1A. of the Company's Annual Report on Form 10-K for the Year Ended December 31, 2005. There have been no material changes from the risk factors previously disclosed in the Company's 2005 Annual Report on Form 10-K. Item 5. Other Information On March 1, 2006, the Board of Directors adopted the Key Employee Bonus Plan for 2006. The Plan provides payments to key employees including the President and Chief Executive Officer and the Vice President, Treasurer and Chief Financial Officer based on achieving the 2006 budgeted pre-tax operating result amount before other income/expense, extraordinary income/expense, and the effects of SFAS 123R ("budgeted amount"). A copy of the Plan is filed as Exhibit 10.1. Item 6. Exhibits 10.1 Key Employee Bonus Plan for 2006. Filed herewith. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of 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. -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Valpey-Fisher Corporation Date: May 15, 2006 /s/ Michael J. Ferrantino ------------------------- Michael J. Ferrantino, President and Chief Executive Officer Date: May 15, 2006 /s/ Michael J. Kroll -------------------- Michael J. Kroll Vice President, Treasurer and Chief Financial Officer -16- EX-10.1 2 a5147276ex10_1.txt EXHIBIT 10.1 Exhibit 10.1 Valpey-Fisher Corporation Key Employee Bonus Plan For fiscal year 2006 Purpose of Plan To provide an incentive to those employees who have a major impact on the profitability of the company. Eligibility Must be a fulltime employee and be in continued employment of the Company for the entire fiscal year, unless a waiver of this provision is approved in advance of hiring by the Compensation Committee. Participants The plan participants will include the CEO and the Management Staff. Bonus Pool The 2006 bonus pool is based on achieving the 2006 budgeted pre-tax operating result amount before other income/expense, extraordinary income/expense, and the effects of SFAS 123R ("budgeted amount"). The bonus pool will equal $50,000 upon achieving the budgeted amount. The bonus pool will increase by: 35% of the next $200,000 increase over the budgeted amount, and 40% of the next $600,000 increase over the budgeted amount. For operating performance in excess of $800,000 of the budgeted amount, the Board of Directors will determine the bonus. The Compensation Committee will recommend the bonus payout amount for the CEO to the Board of Directors for their approval. The CEO will decide the payout amount for the remaining participants. The distribution of the bonus and % of individual participation will range from 0% to 100% of salary. Payout will either be in stock or cash and will be at the sole discretion of the CEO and the Board of Directors. -17- EX-31.1 3 a5147276ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael J. Ferrantino, certify that: 1. I have reviewed this report on Form 10-Q of Valpey-Fisher Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (Intentionally omitted) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2006 /s/ Michael J. Ferrantino ------------------------- Michael J. Ferrantino President and Chief Executive Officer -18- EX-31.2 4 a5147276ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael J. Kroll, certify that: 1. I have reviewed this report on Form 10-Q of Valpey-Fisher Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (Intentionally omitted) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2006 /s/ Michael J. Kroll --------------------- Michael J. Kroll Vice President, Treasurer and Chief Financial Officer -19- EX-32.1 5 a5147276ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Valpey-Fisher Corporation (the "Company"), does hereby certify, to such officer's knowledge, that: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended April 2, 2006 ("Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 15, 2006 /s/ Michael J. Ferrantino ------------------------- Michael J. Ferrantino, President and Chief Executive Officer Date: May 15, 2006 /s/ Michael J. Kroll -------------------- Michael J. Kroll Vice President, Treasurer and Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -20- -----END PRIVACY-ENHANCED MESSAGE-----