-----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, A3f/OA5ppJ9nMj2302TTUG05rhgC/gcy80pF8ddFHv00zJetcy52VKyILeuOiUgO E/uXq5x+55xdvp3hqBFdfQ== 0001157523-07-003151.txt : 20070330 0001157523-07-003151.hdr.sgml : 20070330 20070330150438 ACCESSION NUMBER: 0001157523-07-003151 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070330 DATE AS OF CHANGE: 20070330 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04184 FILM NUMBER: 07732174 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-K 1 a5365619.htm VALPEY-FISHER CORPORATION Valpey-Fisher Corporation
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, 2006
   
OR

o
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 is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x      
 
-1-

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 o
   
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, and 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. o

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 o
 Accelerated filer o 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 o No x

The aggregate market value of voting stock held by non-affiliates: $8,884,801 (computed by reference to the last sales price of such common stock on June 30, 2006, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported in the American Stock Exchange consolidated trading index).

Number of shares of common stock outstanding at March 29, 2007: 4,256,503

Documents incorporated by reference:
 
Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

-2-

PART I

Item 1. Business

General

Valpey-Fisher Corporation is incorporated under the laws of Maryland.

Financial Information about Industry Segments

We operate in one business segment. Information about our export sales is set forth in Note 11 of the Notes to Consolidated Financial Statements in Item 8 of this Report, which Note is incorporated by reference.

Description of Business

Products

We are involved in the design, production, import, and sale of frequency control devices and ultrasonic transducer devices.

Our 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.

We provide a wide-frequency range of frequency control devices including standard and custom-designed product. Our 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.
-  
highly-customized timing modules including jitter attenuators and frequency translators for microwave and wireless markets.
-  
high-volume, low cost crystals and oscillators for consumer and commercial applications.
 
Our frequency control products are used by the telecommunications, computer and computer peripheral equipment, scientific, instrumentation, industrial, and aerospace markets. The majority of our revenue is generated by the telecommunications markets including the wireless, networking and optical networking segments. Our frequency control products are used in telecommunications infrastructure equipment such as bandwidth multipliers, networking switches and routers, cellular base stations, transceivers and multiplexers.
 
-3-

Our 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.

We import sub-assemblies and completed products from various Far East (including China, Japan, South Korea, Philippines, and Taiwan) and Russian suppliers for use in our domestically manufactured products and for resale to its customers.

In order to eliminate the effects of currency fluctuations, we currently and historically have purchased products from our foreign suppliers in U.S. dollars. As exchange rates fluctuate, our cost for these materials may become more expensive than our competitors that have taken measures to protect against exchange rate fluctuations. In addition, we are subject to the inherent risks involved in international trade such as political instability and restrictive trade policies.

Marketing and Customers

Our direct sales personnel, independent manufacturers’ representatives and distributors sell the frequency control products. Our ultrasonic transducer devices are sold primarily by our direct sales personnel.

We sell our frequency control products primarily to OEMs, contract manufacturing (CM) companies, and distributors. Our distributors also sell to both the OEMs and CM 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 CM companies. As a result, this has tended to increase the concentration of sales to the CM companies. Sales to Solectron Corporation, a CM company, accounted for approximately 11%, 12%, and 11% of our net sales in 2006, 2005, and 2004, respectively. Sales to Celestica Corporation, a CM company, accounted for approximately 10% of our sales in 2004.

Sales to our five largest customers accounted for approximately 31% of our sales in 2006, compared to 33% in 2005 and 33% in 2004. Sales to CM companies accounted for approximately 33% of our sales in 2006, compared to 36% in 2005, and 37% in 2004.

Export sales amounted to approximately 26% of our sales in 2006, 34% in 2005 and 33% in 2004. Information about export sales is set forth in Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference. Our international sales are transacted in U. S. dollars.
 
-4-

Seasonal Fluctuations

During the last few years, we have noticed that some of our customers, most notably the CM companies and the larger OEMs, have closed their manufacturing facilities during the last two or three weeks in December. These facility closures reduce the number of available days to ship these customers in the 4th quarter.

Research and Development

Research and development expenses amounted to $482,000 in 2006, $352,000 in 2005 and $218,000 in 2004. During 2007, we intend to increase our efforts to develop new products that provide additional functions such as frequency translators and jitter attenuation which would leverage off our expertise in the timing area.
 
Backlog

Our backlog of firm orders was approximately $2,028,000 at December 31, 2006 compared to $1,602,000 at December 31, 2005. We expect to ship the entire December 31, 2006 backlog during 2007.

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 us, for instance Vectron International (a division of Dover Corporation) and CTS Corporation. In addition, foreign competitors, particularly from the Far East, continue to dominate the U.S. markets. However, we believe we can maintain a competitive position in our business based on our quality, strong design and application engineering, responsive customer service and a willingness to provide specialty small quantity orders.

Manufacturing

Our manufacturing facility is located in Hopkinton, Massachusetts. We have been ISO-9001 certified for the design and manufacture of crystals and crystal oscillators since 1997.

Environmental Regulations

To the our knowledge 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.
 
-5-

As a result of the sale of our Bergen Cable subsidiary in 1998, we are performing environmental clean up at that site. See Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference.
 
Employees

At December 31, 2006, we employed 53 full-time employees. None of our employees are represented by a collective bargaining unit. We consider our relations with our employees to be satisfactory.

Available Information

We file 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 us) 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 our website is not incorporated by reference into this report.

Foreign and Domestic Operations and Export Sales
 
Financial information about our export sales is set forth in Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference.
 
-6-

Item 1A. Risk Factors

Our business, financial condition and results of operations can be affected by a number of factors, including but not limited to those set forth below and elsewhere in this Annual Report on Form 10-K, any one of which could cause our actual results to vary materially from past results or from our anticipated future results.
 
While we reported an operating profit of $491,300 in 2006 and $350,500 in 2005, we had incurred operating losses in the four years preceding 2005 and our results are likely to fluctuate in the future.

While we reported an operating profit of $491,300 in 2006 and $350,500 in 2005, we had incurred operating losses in the four years preceding 2005 and our results are likely to fluctuate in the future. A wide variety of factors affect our operating results. Factors that could affect our future operating results include:
·  
changes in sales volume and mix,
·  
price compression,
·  
declines in gross margin,
·  
increased research and development expenses associated with new product development, and
·  
costs to comply with changing laws and regulations and standards, including the Sarbanes-Oxley Act of 2002, new SEC regulations and American Stock Exchange rules.

If we are unable to introduce new products, including more-value added products, our future operating results may decrease.

Our future operating results are dependent on the timely development, production, introduction and marketing of new products, including more-value added products. We have continuing sales of older/mature products that tend to decline in average selling prices over the product life cycle. By developing these new products, we can replace and/or offset the impact of the lower average selling prices of the older/mature products.

The future demand for our products depends in a large part to growth of the markets that incorporate our frequency control products. These markets are cyclical and have experienced a decline in product demand in recent years.

The future demand for our products depends in a large part to growth of the markets that incorporate our frequency control products. These markets include telecommunications equipment, computers and computer peripheral and scientific instrumentation. These markets are cyclical and have experienced a decline in product demand in recent years. The decline in the demand for products in these markets could negatively affect our operating results and financial condition.
 
-7-

A significant portion of our revenues is derived from sales to a few customers. The loss of one or more of our significant customers could have an adverse impact on our operating results and financial condition.

In 2006, sales to our top five customers accounted for approximately 31% of our sales. The loss of one or more of our significant customers or a reduction in sales to any one of them could have an adverse impact on our operating results and financial condition.

A significant portion of our revenues are to Contract Manufacturers (CMs). If we fail to successfully obtain orders from the CMs, our operating results and financial condition could be negatively affected.

Approximately 33% of the Company’s sales in 2006 were to Contract Manufacturers (CMs). There is a continuing trend among original equipment manufacturers (OEMs) to outsource the manufacture of their product to CMs. We first work with and receive design wins from OEMs. We then have to negotiate pricing, quantities and delivery with the CMs. If we fail to successfully obtain orders from the CMs, our operating results and financial condition could be negatively affected.

There is a limited market and limited trading activity for our common shares. The purchase or sale of a relatively small number of shares could result in significant share price fluctuations.
 
There is a limited public market and limited trading activity for our common shares. Directors and executive officers currently on a fully diluted basis beneficially own 48% of the outstanding shares. Institutional and other 5% holders own approximately 12% of the outstanding shares. During 2006, the average trading volume of our common stock was 1,400 shares per day. As a result of the low trading volume and the limited outstanding float, the purchase or sale of a relatively small number of shares could result in significant share price fluctuations.

 We may make an acquisition that is not successful.
 
As part of our business strategy, we continue to evaluate acquisition opportunities that could complement, enhance or expand our current business or provide additional product offerings or technologies. We may have difficulty finding these opportunities or, if we do find an opportunity, we may not be able to complete the transaction for reasons including a failure to secure financing, if necessary. Any transaction we are able to complete may involve a number of risks including, but not limited to:
·  
the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired business,
·  
the possible adverse effects on the Company’s operating results during the integration period,
·  
the loss of key employees, customers and vendors as a result of the change in management, and
·  
our possible inability to achieve the intended objectives of the transaction.
 
-8-

In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of debt.

Our success depends on our ability to retain our existing management and technical team and to recruit and retain qualified technical, sales and marketing and management personnel.

Our future growth and success will depend in a large part on our ability to retain our existing management and technical team and to recruit and retain qualified technical, sales and marketing and management personnel. Competition for qualified employees in our industry is at times intense. The loss of any of these key personnel or our inability to attract and retain these key employees to operate and expand our business could adversely affect our operations.

We face global business, political and economic risks which may adversely affect us.

We sell our products to customers and purchase inventory from vendors located outside of the United States. As a result, we face global business, political and economic risks which may adversely affect us. These risks include, but are not limited to:
·  
political and economic instability in countries where our products are sold or manufactured,
·  
expropriation or the imposition of government controls,
·  
export license requirements,
·  
trade restrictions,
·  
high levels of inflation or deflation,
·  
greater difficulty in collecting our accounts receivable and longer payment terms,
·  
less favorable intellectual property laws, and
·  
increases in duties.

In addition, these same factors may also place us at a competitive disadvantage to some of our foreign competitors.

To date, very few of our international transactions have been denominated in foreign
currency. As a result, a change in the value of the US dollar relative to the foreign currencies could make our products more expensive, and thus less competitive. We may find it necessary in the future from a competitive position to complete transactions denominated in foreign currency. This will subject us with the risks associated with fluctuations in these foreign currencies.

Our markets are highly competitive, and we may lose business to larger and better financed competitors.
 
Our markets are highly competitive worldwide with few import barriers. Foreign competitors, particularly from the Far East, continue to dominate the U.S. and world markets. We compete primarily on our quality, strong design and application engineering, responsive customer service and a willingness to provide specialty small quantity orders. Our major competitors, most of which are larger than we are, have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities than we have.

-9-
 
Certain Directors and Members of Management Beneficially Own a Substantial Portion
of Our Common Stock and May Be in a Position to Determine the Outcome of Our
Corporate Elections

Members of the Board of Directors and Management, on a fully diluted basis beneficially own 48% of the currently outstanding shares of Common Stock. By virtue of such ownership, such members of the Board and Management including Ted Valpey, Jr. may have the practical ability to determine the election of all directors and control the outcome of substantially all matters submitted to our stockholders. Such concentration of ownership could have the effect of making it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of us.

Item 1B. Unresolved Staff Comments

Not applicable.
 
-10-

Item 2. Properties

We own our 32,000 square foot facility located in Hopkinton, Massachusetts that contains office and manufacturing space and serves as our corporate headquarters.

We believe ours facility is suitable for our current use and is adequate to satisfy our 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.
 
-11-

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our 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,
  
2006
  
2005
  
   
High
    
Low
    
High
    
Low
  
4th quarter
  
$
3.60
  
$
3.29
  
$
4.10
  
$
2.96
  
3rd quarter
    
3.84
    
3.41
    
4.21
    
3.59
  
2nd quarter
    
4.00
    
3.30
    
4.01
    
2.79
  
1st quarter
    
3.59
    
3.00
    
4.19
    
3.00
  
 
No dividend was paid in 2006 or 2005.

The number of stockholders of record on March 19, 2007 was 723. 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, 2006 regarding the number of shares of our common stock that may be issued under our equity compensation plans.
 
 
 
 
 
 
 
Plan Category
  
 
 
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
  
 
 
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
  
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column)
  
               
Equity compensation plans approved by security holders (1)
    
486,250
  
$
3.39
    
172,666
  
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 us.

-12-
 
Material Feature of Restricted Stock Agreement between Us and Mr. Ferrantino Not Approved by Shareholders

As an inducement to becoming our employee, pursuant to a Restricted Stock Agreement dated December 19, 2002 between us and Michael J. Ferrantino, our director and President and Chief, on December 24, 2002, we 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 our outstanding Common Stock by anyone other than Ted Valpey, Jr. or certain mergers or reorganization of us. 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.

Stock Repurchases

At December 31, 2006, under prior authorizations from the Board of Directors, we are authorized to purchase up to 227,500 shares of common stock through the open market or negotiated transactions.

We made no repurchases of its common stock in the fourth quarter of 2006.

-13-

PERFORMANCE GRAPH

The graph below compares the cumulative total shareholder return on the Company’s Common Stock with the cumulative total return of the American Stock Exchange Index, and a peer index (“Peer Group”) made up of 33 companies in the electronic components manufacturing business, for the five years beginning December 31, 2001 and ending December 31, 2006 (assuming the investment of $100 on December 31, 2001, and the reinvestment of all dividends).
 
GRAPH
 
   
Base
      
Years Ending
  
   
Period
                      
Company Name / Index
  
12/31/01
  
12/31/02
  
12/31/03
  
12/31/04
  
12/31/05
  
12/31/06
  
Valpey-Fisher Corporation
  
$
100.00
  
$
67.65
  
$
76.30
  
$
91.36
  
$
77.04
  
$
86.91
  
American Stock Exchange Index
  
$
100.00
  
$
97.26
  
$
138.45
  
$
169.22
  
$
207.53
  
$
242.62
  
Peer Group
  
$
100.00
  
$
58.41
  
$
126.85
  
$
134.65
  
$
171.47
  
$
159.74
  

The Peer Group Index consists of the following companies: Advanced Energy Industries, Inc., Cambridge Display Technology, Inc., Cherokee International Corporation, Conolog Corporation, Corning, Incorporated, Digital Power Corporation, eMagin Corporation, Espey Mfg. & Electronics Corp., Giga-Tronics Incorporated, Hoku Scientific, Inc., Hutchinson Technology Incorporated, InPlay Technologies, Inc., The JPM Company, LG. Philips LCD Co., Ltd (ADR), The LGL Group, Inc., Lumenon Innovative Lightwave Technology, Inc., Micronetics, Inc., Microwave Filter Company, Inc., MSGI Security Solutions, Inc., Nortech Systems Incorporated, Photonic Products Group, Inc., Planar Systems, Inc., Power-One, Inc., Simclar, Inc., Smartvideo Technologies, Inc., Sparton Corporation, Spectrum Control, Inc., Stoneridge, Inc., Synaptics Incorporated, TDK Corporation (ADS), Technitrol, Inc., Veritec, Inc., and Vicor Corporation.

-14-

Item 6. Selected Financial Data
 
Years Ended December 31,
  
2006 (1)
  
2005
  
2004
  
2003
 
2002
  
   
(in thousands, except per share data)
  
Continuing operations:
                      
Net sales
 
$
11,782
  
$
11,427
  
$
11,545
  
$
8,496
  
$
7,294
  
Gross profit (loss)
   
4,469
    
3,814
    
3,260
    
989
    
(1,211
)
Earnings (loss) before income taxes
   
778
    
499
    
(55
)
  
(2,423
)
  
(3,988
)
Income tax (expense) benefit
   
71
    
(195
)
  
-
    
1,023
    
1,198
  
Earnings (loss)
   
849
    
304
    
(55
)
  
(1,400
)
  
(2,790
)
Discontinued operations- net of income tax benefit
   
(180
)
  
(60
)
  
(110
)
  
-
    
(99
)
Net earnings (loss)
 
$
669
  
$
244
  
$
(165
)
$
(1,400
)
$
(2,889
)
                                 
Basic and diluted earnings (loss) per share:
                               
Continuing operations
 
$
.20
  
$
.07
  
$
(.01
)
$
(.33
)
$
(.67
)
Discontinued operations
   
(.04
)
  
(.01
)
  
(.03
)
  
-
    
(.02
)
 
  
$
.16
  
$
.06
  
$
(.04
)
$
(.33
)
$
(.69
)
Cash dividends per share
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  
Total assets, end of year
 
$
14529
  
$
13,617
  
$
12,864
  
$
12,744
  
$
15,151
  
Long-term debt, end of year
 
$
-
  
$
-
  
$
-
  
$
-
  
$
-
  

(1) As discussed in Note 2 in the Notes to Consolidated Financial Statements, we changed our method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123R “Share-Based Payment”. 
 
-15-

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 - We perform on-going credit evaluations of our customers and assess the collectibility of our 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 - We estimate the carrying value of our 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 - We have recorded deferred tax assets and liabilities resulting from differing treatment of items for tax and financial statement reporting purposes. We must estimate our 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, we have recorded a valuation allowance of $471,000 at December 31, 2006. In reaching our conclusion, we evaluated the existence of deferred tax liabilities that can be used to absorb deferred tax assets, 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, we may need to establish an additional valuation allowance or reduce the valuation allowance, which could materially impact our financial position and results of operations.

-17

Financial Condition and Liquidity

Cash and cash equivalents amounted to $9,184,060 at December 31, 2006, an increase of $1,264,000 over the December 31, 2005 level. During 2006, our continuing operations provided cash of $1,478,000, investing activities used cash of $185,000, financing activities provided cash of $27,000, and discontinued operations used cash of $56,000.

Cash provided from continuing operations was $1,478,000 for 2006 compared to $1,574,000 in 2005. Operating cash flows during 2006 resulted mainly from net earnings of $849,000, net adjustments of $477,000 for the non-cash effects of depreciation, deferred income taxes and stock compensation expense and the $144,000 net reduction in our components of working capital. The net decrease in working capital was mainly due to a $218,000 reduction in inventory and an increase in current liabilities of $64,000, offset in part by a $119,000 increase in accounts receivable, net. The decrease in inventory was mainly due to orders being filled from existing inventory and the continuing control over inventory purchases and levels. The net increase in current liabilities is mainly due to a $152,000 increase in accounts payable partially offset from an $88,000 reduction in accrued liabilities. The increase in accounts payable is mainly attributable to the timing of inventory and capital equipment purchases. The reduction in accrued liabilities is mainly due to a $201,000 reduction in incomes taxes payable, mainly as a result of payments due on the 2005 tax return, offset in part by an $82,000 increase in employee compensation and benefits and a $23,000 increase in commissions due to outside sales representatives. The increase in accounts receivable was mainly due to the increase in the current year’s fourth quarter sales over 2005.
 
Capital expenditures amounted to $299,000 in 2006. Our budget for 2007 capital expenditures is approximately $500,000. During the year, we sold machinery and equipment and received $122,500 in cash proceeds.
  
We believe that based on our current working capital and the expected cash flows from operations, our resources are sufficient to meet our financial needs and to fund our capital expenditures for the projected levels of business in 2007.

Results of Operations - 2006 versus 2005

Net sales increased $355,000 or 3% over 2005. The sales increase is mainly attributable to higher sales in the buy and resell product line resulting from higher bookings in the year. The overall actual number of units sold in this product line increased about 23% over 2005, however, the average selling price decreased about 7%. Sales of our domestic products increased slightly over last year as the number of units sold decreased 27% from the 2005 level while the overall average selling price increased 38%. For 2006, total bookings were $12,316,000 or 9% higher than 2005. The backlog at December 31, 2006 amounted to $2,028,000 versus $1,602,000 million at December 31, 2005. We continue to see price compression in the buy and resell product line and in our older domestic products and we believe this pricing pressure will continue in the future. 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. We are 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.

We reported a $4,469,000 gross profit (38% of net sales) in 2006 versus a $3,814,000 gross profit (33% of net sales) in 2005. The higher margin was mainly attributable to an 11% decrease in raw material costs due to changes in product mix toward the more value-added, high-reliability, and higher margin products and product yield improvements. Direct labor as a percentage of sales decreased 18% from 2005 mainly as a result of changes in product mix. Overhead costs as a percentage of sales in 2006 remained fairly consistent with that in 2005.

-16-
 
Selling and advertising expenses increased $291,000 or 20% over 2005. This overall expense increase was mainly due to higher personnel expenses of $252,000, a $34,000 increase in sales commission expense to outside manufacturers’ representatives, a $33,000 increase in travel and entertainment expense, and the recognition of $28,000 of stock-based compensation expense partially offset by expense reductions of $36,000 in advertising, and $17,000 in telephone expense.
 
General and administrative expenses increased $93,000 or 6% over 2005 mainly as a result of the recognition of $99,000 of stock-based compensation expense.

Research and development expenses increased $131,000 or 37% over 2005 primarily as a result of increased personnel expenses. The expense increases are consistent with our plans to make significant engineering investments in new product development in 2006.

The increase in interest income over 2005 is due mainly to higher interest rates during the current year and to a lesser extent higher average cash balances.

The combined federal and state income tax rate for 2006 was 9% compared to 39% in 2005. The lower rate in 2006 is due to a combination of a reduction in the valuation allowance for deferred taxes and the reversal of accrued income taxes offset by the effect of the nondeductible stock compensation expense 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. We reduced the valuation allowance by $257,500 in 2006 based on our assessment of the realization of certain deferred tax assets. As we have state income tax NOL carryforwards available, there is no estimated state income tax provision for 2006 and 2005.

We reported an operating profit of $491,000 during 2006 compared to an operating profit of $351,000 in 2005. The operating profit in 2006 was reduced by $170,000 for stock option expense resulting from our adoption of SFAS No. 123R. As we adopted SFAS No. 123R on a modified prospective method, 2005 does not include any stock option expense. Interest income amounted to $293,000 in 2006 compared to $148,000 in 2005. We reported a pre-tax profit of $778,000 from continuing operations in 2006 compared to a pre-tax profit of $499,000 in 2005. For 2006, we reported net earnings of $849,000 from continuing operations versus net earnings of $304,000 in 2005. We reported after-tax losses of $180,000 in 2006 and $60,000 in 2005 from discontinued operations. In total, we reported net earnings of $669,000 in 2006 versus net earnings of $245,000 in 2005.
 
-17-

Results of Operations - 2005 versus 2004

Net sales decreased $118,000 or 1% from 2004 mainly due to lower sales of manufactured products. Sales in the buy and resell product line increased slightly over the 2004 level. During 2005, the actual number of units sold has decreased about 21% from the prior year, as we continue to move to more value-added, high reliability (“high-rel”) products with higher overall average selling prices and higher margins. The book-to-bill ratio during 2005 was .99, versus 1.01 in 2004. Our backlog amounted to $1.6 million at December 31, 2005 compared to $1.8 million at December 31, 2004. While we experienced some modest growth in our principal market (telecommunication infrastructure) in 2005, it was offset by overall price compression and our conscious effort to discontinue low margin product. We believe that we will continue to be challenged by price compression and the industry-wide excess capacity issues 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.

We reported a $3,814,000 gross profit (33% of net sales) in 2005 versus a $3,260,000 gross profit (28% of net sales) in 2004. The higher margin was mainly attributable to decreases in raw material costs due to changes in product mix toward the more value-added, high-rel products with higher selling prices as well as some yield improvements. Direct labor and overhead costs as a percentage of sales in the 2005 remained fairly consistent with that in 2004.

Selling and advertising expenses were comparable to that in 2004. Decreases in personnel and benefit expenses of $64,000 and travel and entertainment expenses of $15,000 were offset by a $73,000 increase in bad debt expense. The increase in bad debt expense over the 2004 amount was mainly due to the 2004 expense provision benefiting from the $59,000 recovery of accounts receivable written-off in prior years.

General and administrative expenses decreased $53,000 (3%) from 2004 mainly as a result of a reduction in personnel and benefit expenses.

Research and development expenses increased $134,000 over 2004 primarily as a result of increased personnel and benefit expenses. This expense increase was consistent with our plan to make significant engineering investments in new product development in 2005.

The increase in interest income for 2005 over 2004 was due to a combination of higher average cash balances and higher interest rates during the current year. During 2004, we sold equipment and realized a $13,000 gain.
 
The combined federal and state effective income tax rate for 2005 is 39%. As we have state income tax NOL carryforwards available, there is no estimated state income tax provision. We reduced the valuation allowance by $45,500 in 2005 based on its assessment of the realization of certain deferred tax assets. For 2004, no provision for income taxes has been recorded. While for financial reporting purposes we recorded a loss, no income tax benefit was provided as we recorded a valuation allowance of $70,000. During both years, we are providing a valuation allowance for the full amount of the state income tax benefit relating to net operating loss carryforwards due to the uncertainty of realization.

During 2005, we reported an operating profit of $351,000 compared to an operating loss of $104,000 in 2004. The $454,000 improvement in operating performance over 2004 was due to the $554,000 increase in gross margin in 2005 offset in part by a $100,000 increase in operating expenses. Other income amounted to $148,000 in 2005 compared to $48,000 in 2004. As a result, we reported pre-tax profits of $499,000 from continuing operations during 2005 compared to a pre-tax loss of $55,000 in 2004. We reported after-tax losses of $59,700 in 2005 and $110,000 in 2004 from discontinued operations. In total, we reported net earnings of $245,000 in 2005 versus a net loss of $165,000 in 2004.
 
-18-

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet financing arrangements.
 
-19-

Contractual Obligations

During the normal course of business, we incur certain commitments to make future payments for the purchase of inventory, machinery and equipment and production supplies based on our projected requirements. At December 31, 2006, we had outstanding purchase commitments approximating
$911,000, all of which are expected to be fulfilled in 2007. At December 31, 2006, we 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 our current views and assumptions and involve risks and uncertainties that include, but not limited to: our 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, our ability, including our 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 our ability to comply with Section 404 of the Sarbanes-Oxley Act.

Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” (“FIN 48”) which is effective for fiscal years beginning after December 15, 2006. FIN 48 prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. We are currently evaluating our tax positions and do not expect this interpretation will have a material impact on our results of operations or financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “ Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting SFAS No. 157 on our results of operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” to address the process of quantifying financial statement misstatements. We adopted SAB No. 108 in the fourth quarter of 2006 and there was no impact on our consolidated financial statements.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our 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, 2006, and assuming the balance was totally invested in money market instruments for the full year, a hypothetical 1% point increase or decline in interest rates would result in an approximate $91,800 increase or decrease in interest income.
 
-20-

We purchase certain inventory from and sell 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 we purchase inventory or sell product could make the U.S. dollar equivalent of such transactions more or less favorable to us and the other involved parties.
 
-21-

Item 8. Financial Statements and Supplementary Data

Valpey-Fisher Corporation
Consolidated Balance Sheets

December 31,
  
2006
  
2005
  
Assets
          
Current assets:
          
Cash and cash equivalents
  
$
9,184,060
  
$
7,920,235
  
Accounts receivable, less allowance for doubtful accounts of
$115,000 in 2006 and 2005
    
1,613,713
    
1,494,910
  
Inventories, net
    
809,854
    
1,028,103
  
Deferred income taxes and other current assets
    
867,070
    
653,081
  
Total current assets
    
12,474,697
    
11,096,329
  
Property, plant and equipment, at cost:
              
Land and improvements
    
226,505
    
226,505
  
Buildings and improvements
    
2,042,975
    
2,042,975
  
Machinery and equipment
    
8,449,500
    
8,657,943
  
     
10,718,980
    
10,927,423
  
Less accumulated depreciation
    
8,825,859
    
8,559,693
  
     
1,893,121
    
2,367,730
  
Other assets
    
160,902
    
152,837
  
   
$
14,528,720
  
$
13,616,896
  
               
Liabilities and Stockholders’ Equity
              
Current liabilities:
              
Accounts payable
  
$
648,570
  
$
496,954
  
Accrued liabilities
    
1,673,938
    
1,707,568
  
Total current liabilities
    
2,322,508
    
2,204,522
  
Deferred income taxes
    
343,367
    
448,330
  
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: 4,256,503 and 4,246,503 shares, respectively
    
212,825
    
212,325
  
Capital surplus
    
5,276,189
    
5,105,201
  
Retained earnings
    
6,415,331
    
5,746,518
  
Less unearned compensation
    
(41,500
)
  
(100,000
)
Total stockholders’ equity
    
11,862,845
    
10,964,044
  
   
$
14,528,720
  
$
13,616,896
  

See notes to consolidated financial statements. 
   
-22-

Valpey-Fisher Corporation
Consolidated Statements of Operations
 
For the Years Ended December 31,
  
2006 
  
2005 
  
2004 
  
Net sales
  
$
11,781,851
  
$
11,426,673
  
$
11,545,159
  
Cost of sales
    
7,313,214
    
7,612,645
    
8,284,788
  
Gross profit
   
4,468,637
    
3,814,028
    
3,260,371
  
Selling and advertising expenses
    
1,718,223
    
1,427,612
    
1,409,361
  
General and administrative expenses
    
1,776,863
    
1,684,203
    
1,736,619
  
Research and development expenses
    
482,283
    
351,687
    
218,164
  
     
3,977,369
    
3,463,502
    
3,364,144
  
Operating profit (loss)
    
491,268
    
350,526
    
(103,773
)
Other income (expense):
                    
Interest income
    
293,399
   
148,322
   
34,720
 
Gain (loss) on sales of assets
    
(6,916
)
  
-
   
13,667
  
     
286,483
    
148,322
    
48,387
  
Earnings (loss) from continuing operations before income taxes
    
777,751
    
498,848
    
(55,386
)
Income tax (expense) benefit
   
71,400
    
(194,600
)
  
-
  
Earnings (loss) from continuing operations
    
849,151
    
304,248
    
(55,386
)
(Loss) from discontinued operations, net of income tax benefit
    
(180,338
)
  
(59,700
)
  
(110,000
)
Net earnings (loss)
  
$
668,813
  
$
244,548
  
$
(165,386
)
                     
Basic and diluted earnings (loss) per share:
                    
Continuing operations
  
$
.20
  
$
.07
  
$
(.01
)
Discontinued operations
    
(.04
)
  
(.01
)
  
(.03
)
   
$
.16
  
$
.06
  
$
(.04
)

See notes to consolidated financial statements.
 
-23-

Valpey-Fisher Corporation
Consolidated Statements of Cash Flows

For the Years Ended December 31,
  
2006 
  
2005 
  
2004 
  
Cash Flows from Operating Activities:
              
Earnings (loss) from continuing operations
  
$
849,151
  
$
304,248
  
$
(55,386
)
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by operating activities:
                    
Depreciation
   
644,495
    
751,966
    
818,838
  
Changes in deferred income taxes
    
(365,738
)
  
(72,382
)
  
32,000
  
Stock based compensation
    
164,625
    
-
    
-
  
Non-cash restricted stock compensation, net of taxes
    
33,753
    
35,000
    
35,500
  
(Gain) loss on sales of assets
    
6,916
    
-
    
(13,667
)
Stock option income tax benefit
    
-
    
10,000
    
-
  
Changes in assets and liabilities:
                    
Accounts receivable
    
(118,803
)
  
(357,473
)
  
1,277,984
  
Inventories, net
    
218,249
    
472,592
    
70,278
  
Other current assets
    
(18,668
)
  
331
    
(22,338
)
Accounts payable and accrued liabilities
    
64,126
    
430,197
    
231,631
  
Net cash provided by operating activities of continuing operations
    
1,478,106
    
1,574,479
    
2,374,840
  
(Loss) from discontinued operations
    
(180,338
)
  
(59,700
)
  
(110,000
)
Change in deferred income taxes
    
70,384
    
(30,000
)
  
-
  
Change in accrued expenses
    
53, 53,860
    
67,415
    
68,900
  
Net cash (used) by operating activities of discontinued operations
    
(56,094
)
  
(22,285
)
  
(41,100
)
Net cash provided by operating activities
   
1,422,012
    
1,552,194
    
2,333,740
  
Cash Flows from Investing Activities:
                    
Capital expenditures
    
(299,302
)
  
(120,843
)
  
(140,672
)
Proceeds from sales of assets
    
122,500
    
-
    
24,600
  
Other
    
(8,065
)
  
(10,207
)
  
(8,065
)
Collection of notes receivable
    
-
    
-
    
19,351
  
Net cash (used) by investing activities
    
(184,867
)
  
(131,050
)
  
(104,786
)
Cash Flows from Financing Activities:
                    
Stock options exercised
   
26,680
    
61,750
    
16,964
  
Purchases of common stock
    
-
    
(17,932
)
  
-
  
Net cash provided by financing activities
    
26,680
    
43,818
    
16,964
  
Net Increase in Cash and Cash Equivalents
    
1,263,825
    
1,464,962
    
2,245,918
  
Cash and Cash Equivalents at beginning of year
    
7,920,235
    
6,455,273
    
4,209,355
  
Cash and Cash Equivalents at end of year
  
$
9,184,060
  
$
7,920,235
  
$
6,455,273
  
                     
Supplemental Disclosures of Cash Flow Information
                    
Cash paid during the year by continuing operations for income taxes
  
$
525,000
  
$
83,000
   $
-
  

Noncash Investing and Financing Activities:
In 2004, the Company issued 29,500 shares of common stock valued at $85,550 to four employees in payment for a bonus accrued in 2003.

See notes to consolidated financial statements.
 
-24-

Valpey-Fisher Corporation
Consolidated Statements of Stockholders’ Equity

   
Common Stock
  
Capital
  
Retained
  
Unearned
  
 
Shares 
  
Amount
  
Surplus
  
Earnings
  
Compensation
  
Balance, January 1, 2004
    
4,184,815
  
$
209,241
  
$
4,998,453
  
$
5,667,356
  
$
(217,000
)
Net (loss)
   
-
    
-
    
-
    
(165,386
)
  
-
  
Amortization of restricted stock grant
    
-
    
-
    
-
   
-
   
58,500
  
Tax effect of restricted stock grant
   
-
    
-
    
(23,000
)
  
-
    
-
  
Exercise of stock options
    
37,704
    
1,885
    
100,629
    
-
    
-
  
Balance, December 31, 2004
    
4,222,519
    
211,126
    
5,076,082
    
5,501,970
    
(158,500
)
Net earnings
   
-
    
-
    
-
    
244,548
    
-
  
Amortization of restricted stock grant
    
-
    
-
    
-
    
-
    
58,500
  
Tax effect of restricted stock grant
   
-
    
-
    
(23,500
)
  
-
    
-
  
Exercise of stock options
    
29,984
    
1,499
    
60,251
    
-
    
-
  
Purchases and retirement of common stock
    
(6,000
)
  
(300
)
  
(17,632
)
  
-
    
-
  
Stock option income tax benefit
    
-
    
-
    
10,000
    
-
    
-
  
Balance, December 31, 2005
    
4,246,503
    
212,325
    
5,105,201
    
5,746,518
    
(100,000
)
Net earnings
   
-
    
-
    
-
    
668,813
    
-
  
Amortization of restricted stock grant
    
-
    
-
    
-
    
-
    
58,500
  
Tax effect of restricted stock grant
   
-
    
-
    
(24,747
)
  
-
    
-
  
Exercise of stock options
    
10,000
    
500
    
26,180
    
-
    
-
  
Stock based compensation
   
-
    
-
    
169,555
    
-
    
-
  
Balance, December 31, 2006
    
4,256,503
  
$
212,825
  
$
5,276,189
  
$
6,415,331
  
$
(41,500
)

See notes to consolidated financial statements.
 
-25-

 
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. In 2005, the Company dissolved all the consolidating subsidiaries, except for Matec International, Inc. 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, deferred income taxes and assumptions used to calculate stock compensation expense. 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 money market 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.
  Accounts receivable - Trade accounts receivable are recorded at the invoiced amount and do not bear interest. An allowance for doubtful accounts is maintained for potential credit losses based upon the Company’s expected collectibility of all accounts receivable. The Company determines the allowance based on numerous factors including the customer’s financial condition and collection history, and current economic trends. Account balances are charged-off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 
 Concentration of credit risk - Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents primarily in money market accounts and reduces its exposure to credit risk by maintaining such accounts with high quality financial institutions. At December 31, 2006, approximately $1,792,000 of the Company’s cash and cash equivalents balance were in excess of the applicable insurance limits. Concentrations of credit risk with respect to accounts receivable are primarily due to customers with large outstanding balances. At December 31, 2006, three customers each represented about 10% of the Company’s accounts receivable. At December 31, 2005, one customer represented about 10% of the Company’s accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations of its customers, but generally does not require advance payments or collateral. The Company maintains an allowance for doubtful accounts based upon the expected collectibilty of such receivables.
  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 of property, plant and equipment for financial reporting purposes and accelerated methods for tax purposes. The estimated lives used to compute depreciation are as follows: land improvements - 10 years, building and improvements - 15 to 40 years and machinery and equipment - 3 to 10 years. Expenditures for additions, renewals and betterments of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. As assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations.
 
-26-
 
Revenue recognition - Revenue is recognized when an agreement of sale exists, product delivery has occurred, title has passed, pricing is fixed or determinable, and collection is reasonably assured.
Research and development - Research and development costs are expensed as incurred.
Advertising - Advertising costs are expensed as incurred. Advertising expenses were $81,600 in 2006, $117,300 in 2005, and $114,900 in 2004.
 
-27-

Valpey-Fisher Corporation
Notes Continued

 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 stock 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 - 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 year ended December 31, 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 during the year ended December 31, 2006 (in thousands):

Cost of sales
  
$
31
  
Selling and advertising
    
29
  
General and administrative
    
99
  
Research and development
   
11
  
Pre-tax stock-based compensation expense
    
170
  
Income tax (benefit)
    
(5
)
Net stock-based compensation expense
  
$
165
  
 
-28-

Valpey-Fisher Corporation
Notes Continued

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 Year Ended December 31,
  
2005
  
2004
  
Net earnings (loss), as reported
 
$
244,548
  
$
(165,386
)
Deduct: Total stock-based employee compensation expense determined
  under the fair value based method for all awards, net of related tax effects
    
(173,271
)
  
(55,299
)
Pro forma net earnings (loss)
 
$
71,277
  
$
(220,685
)
               
Basic and diluted earnings (loss) per share, as reported
 
$
.06
  
$
(.04
)
Basic and diluted earnings (loss) per share, pro forma
 
$
.02
  
$
(.05
)

See Note 9 for further information regarding the Company’s stock-based compensation assumptions.
 
 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, 2006, 2005, and 2004, the Company had no items of other comprehensive income (loss).
 
 Recent accounting pronouncements - In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” (“FIN 48”) which is effective for fiscal years beginning after December 15, 2006. FIN 48 prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. We are currently evaluating our tax positions and do not expect this interpretation will have a material impact on our results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact of adopting SFAS No. 157 on our results of operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” to address the process of quantifying financial statement misstatements. We adopted SAB No. 108 in the fourth quarter of 2006 and there was no impact on our consolidated financial statements.
 
-29-

Valpey-Fisher Corporation
Notes Continued

(3) Discontinued Operations:
 
In 1998, the Company sold all the assets a subsidiary located in New Jersey. As a result of this sale, the Company was required to perform environmental cleanup at this site. During 2006, 2005 and 2004, the Company recorded pre-tax expenses of $285,500, $100,000 and $110,000, respectively, to increase the environmental expense accrual to reflect the then revised estimate to complete the remediation. These expense amounts, net of income tax benefit, are presented in the Consolidated Statements of Operations under the caption “(Loss) from discontinued operations, net of income tax benefit”. As of December 31, 2006, a total of $1,560,000 has been expensed for the cleanup and $450,000 (see Note 7) is accrued for the above agreement and other expenses relating to the cleanup.
 
(4) Inventories, net: Inventories, net of reserves, consist of the following:
  
2006
  
2005
  
Raw materials
  
$
480,830
  
$
636,715
  
Work in process
    
106,011
    
194,247
  
Finished goods
   
223,013
    
197,141
  
   
$
809,854
  
$
1,028,103
  
 
-30-

Valpey-Fisher Corporation
Notes Continued

(5) Income Taxes: The provision (benefit) for income taxes for continuing operations consisted of the following:
   
2006
  
2005
  
2004
  
Current:
              
Federal
 
$
399,700
  
$
278,100
  
$
-
  
State
    
(80,800
)
  
(800
)
  
-
  
 
    
318,900
    
277,300
    
-
  
Deferred:
                   
Federal
    
(101,100
)
  
(93,000
)
  
(47,500
)
State
    
(31,700
)
  
55,800
    
(22,500
)
     
(132,800
)
  
(37,200
)
  
(70,000
)
Valuation allowance
    
(257,500
)
  
(45,500
)
  
70,000
  
Total
  
$
(71,400
)
$
194,600
  
$
-
  

The Company recorded an income tax benefit relating to the discontinued operations of $105,000 in 2006, $40,300 in 2005 and $0 in 2004.

The total income tax provision (benefit) for continuing operations differs from that computed by applying the federal income tax rate to income before income taxes. The reasons for the difference are as follows:
   
2006
  
2005
  
2004
  
Income taxes at statutory rates
  
$
264,400
  
$
169,600
  
$
(56,230
)
State income taxes, net of federal tax effect
    
(62,900
)
  
36,300
   
(10,170
)
Federal tax effect of state tax operating losses utilized
   
41,800
    
31,200
    
-
  
Stock based compensation
    
53,500
    
-
    
-
  
Change in valuation allowance
    
(257,500
)
  
(45,500
)
  
70,000
 
Reversal of accruals
    
(80,800
)
  
-
    
(9,000
)
Other, net
    
(29,900
)
  
3,000
    
5,400
  
   
$
(71,400
)
$
194,600
  
$
-
  

-31-
 
The tax effects of significant items comprising the Company’s deferred tax assets and liabilities as of  December 31, 2006 and 2005 are as follows:
 
   
2006
  
2005
  
Deferred tax assets:
          
Inventory valuation
  
$
585,000
  
$
666,800
  
State tax loss carryforward
    
575,500
    
526,500
  
Accruals and allowances
    
103,500
    
137,800
  
Stock compensation
    
4,900
    
-
  
Valuation allowance
    
(471,000
)
  
(728,500
)
Net deferred tax assets
    
797,900
    
602,600
  
               
Deferred tax liabilities:
              
Depreciation
    
216,600
    
287,800
  
DISC commissions
    
126,800
    
160,500
  
Total deferred tax liabilities
    
343,400
    
448,300
  
Net deferred tax assets
 
$
454,500
  
$
154,300
  

At December 31, 2006, the Company has state tax loss benefit carryforwards of $575,500 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 $471,000 at December 31, 2006. Other current assets include deferred income taxes of approximately $797,900 in 2006 and $602,600 in 2005.

(6) 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 expense amounted to $25,700 in 2006 and $0 in 2005 and 2004. 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 approximately $81,000 in 2006, $76,000 in 2005 and $74,000 in 2004.

-32-

Valpey-Fisher Corporation
Notes Continued
 
         
(7) Accrued Liabilities: Accrued liabilities consist of the following items:
  
2006
  
2005
  
Employee compensation
  
$
693,400
  
$
611,600
  
Income taxes
    
19,000
   
334,300
  
Professional fees
    
145,000
    
160,000
  
Environmental costs (see Note 3)
    
450,000
    
220,600
  
Commissions
    
118,400
    
95,100
  
Other
    
248,138
    
285,968
  
 
$
1,673,938
  
$
1,707,568
  

(8) Debt: At December 31, 2006, the Company had no outstanding credit arrangements with banks or any other financial institution.

(9) Stockholders’ Equity: The Company has 4,256,503 and 4,246,503 shares of its $.05 par value Common Stock outstanding at December 31, 2006 and 2005, respectively.
 
During 2005, the Company acquired 6,000 shares of common stock at a cost of $17,900 and retired the shares. At December 31, 2006, under prior authorizations from the Board of Directors, the Company is authorized to purchase up to an additional 227,500 shares of stock through the open market or negotiated transactions.

In 2004, the Company issued options to four employees for 29,500 shares of common stock in payment for a bonus accrued in 2003. The option price was $.05 per share. At the date of grant, the fair market value of the 29,500 shares of common stock less the option price was $85,550.
 
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 or $2.95 per share. Unearned compensation, which is shown as a separate component of stockholders’ equity, is being amortized over the five year vesting period. At December 31, 2006 and 2005, 20,000 and 40,000, respectively, of these shares were nonvested. During 2006, 20,000 of these shares vested and no shares of restricted stock were granted or forfeited. The amount amortized to expense in each of the years 2006, 2005 and 2004 was $58,500. 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, 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. The option price and terms are recommended by the Company’s Compensation Committee to the Company’s Board of Directors for approval. The options granted may qualify as incentive stock options (“ISO’s”). Options granted prior to December 31, 2005 generally vested 20% 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. The Company issues new shares upon the exercise of stock options. At December 31, 2006, options for 172,666 shares remain available for future grants under the Plans and 486,250 common shares are reserved for issuance upon exercise of the outstanding stock options.
 
-33-

Valpey-Fisher Corporation
Notes Continued
 
The estimated fair value of each option is determined on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions for stock option grants:

   
For the Year Ended December 31,
 
 
  
2006
  
2005
 
2004
 
               
Weighed-average grant date fair value
  
$
1.06
  
$
1.84
  
$
1.65
  
Assumptions:
                    
Expected dividend yield
   
0
%
  
0
%
  
0
%
Risk-free interest rate
    
4.6
%
  
4.0
%
  
4.4
%
Expected life of options in years
    
3.5
    
7
    
7
  
Assumed volatility
    
36
%
  
57
%
  
60
%

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 weighted-average historic prices for a period commensurate with the expected term. For options granted in 2006, the expected term of the option is determined based on historical experiences by using the “simplified method” as provided for in Staff Accounting Bulletin No. 107. Prior to 2006, the expected term of the option was determined by taking the average of the vesting term and the contractual life of the option.

A summary of the status of the Company’s fixed stock option plans as of December 31, 2006, 2005, and 2004, and changes during the years ended on those dates is presented below:

   
2006
  
2005
  
2004
  
   
 
 
Number of
shares
 
Weighted-
Average
Exercise
Price
  
 
 
Number of
shares
  
Weighted-
Average
Exercise
Price
  
 
 
Number of
shares
  
Weighted-
Average
Exercise
Price
  
Outstanding, January 1
    
488,750
  
$
2.98
    
532,234
  
$
3.40
    
578,438
  
$
3.41
  
Granted
    
10,000
    
3.25
    
121,500
    
2.99
    
83,500
    
2.01
  
Exercised
    
(10,000
)
  
2.67
    
(29,984
)
  
2.06
   
(37,704
)
  
.45
  
Forfeited
    
(2,500
)
  
2.96
    
(135,000
)
  
3.42
    
(92,000
)
  
3.40
  
Outstanding, December 31
   
486,250
  
$
3.39
    
488,750
  
$
3.38
    
532,234
  
$
3.40
  
Exercisable, December 31
    
281,004
  
$
3.68
    
203,658
  
$
3.89
    
274,345
  
$
3.59
  

As of December 31, 2006, the intrinsic value (the difference between the exercise price and the market price) for all outstanding options was $211,275 and the intrinsic value for all options exercisable was $104,327. The total intrinsic value of all options exercised during the years ended December 31, 2006, 2005, and 2004 was $11,820, $28,680, and $121,640, respectively.
 
-34-

Valpey-Fisher Corporation
Notes Continued

The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2006:

   
Options Outstanding
  
Options Exercisable
  
 
Range of exercise prices
  
 
 
 
 
Number
  
 
Weighted
Average
Exercise
Price
  
Weighted
Average Remaining
Life in
Years
  
 
 
 
Number
  
Weighted
Average
Exercise
Price
  
Weighted
Average Remaining
Life inYears
  
                           
$2.48 - 2.96
    
168,500
  
$
2.80
    
7.4
    
59,500
  
$
2.71
    
7.0
  
$3.05 - 4.28
    
299,000
    
3.24
    
6.2
    
202,754
    
3.28
    
5.9
  
$11.04
    
18,750
    
11.04
    
3.8
    
18,750
   
11.04
    
3.8
  
     
486,250
  
$
3.39
    
6.5
    
281,004
  
$
3.68
    
6.0
  

 
A summary of the status of the Company’s nonvested stock options as of December 31, 2006 and the changes during the year then ended is as follows:

   
 
 
Shares
  
Weighted-Average
Grant-Date
Fair Value
  
Nonvested at December 31, 2005
    
285,092
  
$
1.80
  
Granted
    
10,000
    
1.06
  
Vested
    
(87,346
)
  
1.80
  
Forfeited
    
(2,500
)
  
1.82
  
Nonvested at December 31, 2006
    
205,246
  
$
1.76
  

At December 31, 2006, there was approximately $297,000 of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of 1.8 years.
 
-35-

Valpey-Fisher Corporation
Notes Continued

(10) Earnings (Loss) Per Share: The computation of basic and diluted earnings (loss) per share from continuing operations is as follows:

 
2006
  
2005
  
2004
  
Basic:
              
Earnings (loss) from continuing operations
  
$
849,151
  
$
304,248
  
$
(55,386
)
Weighted average shares outstanding
    
4,252,777
    
4,239,547
    
4,212,353
  
Basic earnings (loss) per share from continuing operations
  
$
.20
  
$
.07
  
$
(.01
)
Diluted:
                    
Earnings (loss) from continuing operations
  
$
849,151
  
$
304,248
  
$
(55,386
)
Weighted average shares outstanding
    
4,252,777
    
4,239,547
    
4,212,353
  
Diluted effect of stock options outstanding, using the treasury stock method
    
7,863
    
68,629
    
-
  
Diluted weighted average shares outstanding
    
4,260,640
    
4,308,176
    
4,212,353
  
Diluted earnings (loss) per share from continuing operations
  
$
.20
  
$
.07
  
$
(.01
)

In 2006, the computation of diluted earnings per share excluded stock options to purchase 378,000 shares as the assumed proceeds exceeded the average market price during the period. In 2006 and 2005, the computation of diluted earnings per share excluded stock options to purchase 28,750 shares as the exercise prices were greater than the average market price. The Company had 532,234 options outstanding in 2004, which were 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.
 
-36-

Valpey-Fisher Corporation
Notes Continued

(11) 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 11%, 12% and 11% of net sales in 2006, 2005 and 2004, respectively. A second customer accounted for approximately 10% of net sales in 2004. Export sales to foreign markets are as follows:
 
2006
  
2005
  
2004
  
Asia Pacific 
  
$
1,581,500
  
$
1,955,900
  
$
1,988,700
  
Europe and Middle East
    
875,900
    
1,190,600
    
708,600
  
Canada
    
607,600
    
704,200
    
1,044,600
  
Other
    
25,500
    
33,900
    
25,500
  
   
$
3,090,500
  
$
3,884,600
  
$
3,767,400
  

(12)  Quarterly Financial Data (unaudited): Selected unaudited quarterly financial data for 2006 and 2005 is set forth below:
 
First
  
Second
  
Third
 
Fourth
  
   
(in thousands, except per share data)
  
2006
      
Net sales from continuing operations
  
$
2,872
  
$
2,927
  
$
2,875
  
$
3,107
  
Gross profit
   
1,011
    
1,072
    
1,062
    
1,324
  
Earnings before income taxes
    
77
    
119
    
179
    
403
  
Net earnings (loss) from:
Continuing operations
    
33
    
62
    
98
    
656
  
Discontinued operations
    
-
    
-
    
-
    
(180
)
Net earnings
 
$
33
  
$
62
  
$
98
  
$
476
  
                           
Basic and diluted earnings (loss) per share:
Continuing operations
  
$
.01
  
$
.01
  
$
.02
  
$
.15
  
Discontinued operations
    
-
   
-
    
-
    
(.04
)
   
$
.01
  
$
.01
  
$
.02
  
$
.11
  
 
   
First
  
Second
  
Third
  
Fourth
  
   
(in thousands, except per share data)
  
2005
                  
Net sales from continuing operations
  
$
3,022
  
$
3,015
  
$
2,780
  
$
2,610
  
Gross profit
   
965
    
1,056
    
967
    
826
  
Earnings before income taxes
    
69
    
145
    
146
    
139
  
Net earnings (loss) from:
Continuing operations
    
45
    
96
    
96
    
67
  
Discontinued operations
    
-
    
-
    
-
    
(60
)
Net earnings
 
$
45
  
$
96
  
$
96
  
$
7
  
                           
Basic and diluted (loss) per share:
Continuing operations
  
$
.01
  
$
.02
  
$
.02
  
$
.01
  
Discontinued operations
    
-
   
-
    
-
    
(.01
)
   
$
.01
  
$
.02
  
$
.02
  
$
-
  
 
-37-
 
Valpey-Fisher Corporation
Notes Continued

Earnings (loss) per share calculations for each of the quarters is 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 (loss) per share amounts.

In the fourth quarter of 2006, the Company reduced the valuation allowance for deferred tax assets and reversed income tax accruals. As a result, income tax expense was reduced by $338,300 or $.08 per share.
 
 
(13) Commitments and Contingencies: During the normal course of business, the Company incurs certain commitments to make future payments for the purchase of inventory, machinery and equipment and production supplies based on its projected requirements. At December 31, 2006, the Company has outstanding purchase commitments approximating $911,000, all of which are expected to be fulfilled in 2007.

In connection with the sale of its Bergen Cable Technologies, Inc. subsidiary in 1998, the Company was required to perform environmental cleanup at this site (see Note 3).
 
-38-

Report of Independent Registered Public Accounting Firm

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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Valpey-Fisher Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Notes 2 and 9 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments under SFAS No. 123(R) as of January 1, 2006.
 
/s/ Grant Thornton LLP 
Boston, Massachusetts
February 16, 2007
 
-39-

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures.
 
As of December 31, 2006, we carried out an evaluation, under the supervision and with our management, including our President and Chief Executive Officer and our Company’s Chief Financial Officer, of the effectiveness of the design and operation of our 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, except as noted below, that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. We believe that this deficiency did not affect the accuracy of our financial statements in this report.

Our independent registered accounting firm has advised management and the audit committee that the following identified internal control deficiency constitutes a significant deficiency in our internal control.

1.  
Reliance on the Chief Financial Officer for period end financial reporting functions, accounting estimates and income taxes.

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.

Other than as discussed above, such evaluation did not identify any change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
-40-

Item 9B. Other Information

None

PART III

We have adopted a Code of Business Conduct and Ethics that applies to our board of directors, officers, employees and consultants. In addition, we have adopted a Code of Ethics for our chief executive officer and our chief financial and accounting officer. These codes are posted in the Corporate Governance section of our website (www.valpeyfisher.com).If we make any substantive changes or grant any waivers to these codes, we will disclose the nature of such change or waiver on our website and in a report on Form 8-K.

The remaining 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”, “Corporate Governance”, “Executive Compensation” and “Principal Accountant Fees and Services” in Registrant’s definitive proxy statement for the 2007 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.

-41-

PART IV

Item 15. Exhibits and Financial Statement Schedules

(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, 2006 and 2005
 
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
 
Consolidated Statements of Stockholders’ Equity for the Years Ended
 
December 31, 2006, 2005 and 2004
 
Notes to Consolidated Financial Statement
 
Report of Independent Registered Public Accounting Firm
 
2.
The following schedule to the Consolidated Financial Statements and the Report of Independent
 
Registered Accounting Firm on Schedule are filed as part of this report.
 
Registered Accounting Firm on Schedule are filed as part of this report.
Report of Independent Registered Public Accounting Firm on Supplementary Schedule
Schedule II - Valuation Reserves  
 
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.
 
-42-

3. The exhibits filed in this report or incorporated by reference, listed on the Exhibit Index 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
  
By-Laws effective May 8, 2003
10.1
*
1992 Stock Option Plan
10.2
*
1999 Stock Option Plan
10.3
*
2001 Stock Option Plan
10.4
*
Restricted Stock Agreement
10.5
*
2003 Stock Option Plan
10.6
*
Key Employee Bonus Plan for 2006
14
  
Code of Ethics of the Chief Executive Officer and the Chief Financial and Accounting Officer
14.1
  
Code of Business Conduct and Ethics
21
  
Subsidiaries of the Registrant
23
  
Independent Registered Public Accounting Firm’s 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 15(c) of this report.

-43-

 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 30, 2007 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 30, 2007
Ted Valpey, Jr.
and Director
  
     
/s/ Michael J. Ferrantino
President, Chief Executive Officer
March 30, 2007
Michael J. Ferrantino
and Director (Principal
  
 
Executive Officer)
  
/s/ Michael J. Kroll
Vice President, Treasurer and
March 30, 2007
Michael J. Kroll
Chief Financial Officer
  
 
(Principal Financial Officer
  
 
and Principal Accounting
  
 
Officer)
  
     
/s/Mario Alosco   
Director
March 30, 2007
Mario Alosco
    
     
/s/Richard W. Anderson 
Director
March 30, 2007
Richard W. Anderson
    
     
/s/Eli Fleisher
Director
March 30, 2007
Eli Fleisher
    
     
/s/Lawrence Holsborg 
Director
March 30, 2007
Lawrence Holsborg
    
     
/s/John J. McArdle III 
Director
March 30, 2007
John J. McArdle III
    
 
-44-

Report of Independent Registered Public Accounting Firm on Supplementary Schedule

Board of Directors and Stockholders of Valpey-Fisher Corporation:
 
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Valpey-Fisher Corporation and Subsidiaries referred to in our report dated February 16, 2007, which is included in the Company’s 2006 Annual Report to Stockholders. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GRANT THORNTON LLP

Boston, Massachusetts
February 16, 2007
 
-45-

Valpey-Fisher Corporation and Subsidiaries
 
 Schedule II - Valuation and Qualifying Accounts
 
   
Additions
          
 
 
Description
  
Balance at
Beginning
of Period
  
Charged to
Costs and
Expenses
  
Charged to
Other
Accounts
  
 
 
Deductions (1)
  
Balance at
End
of Period
  
                       
Allowance for
Doubtful Accounts:
                      
Year Ended:
                      
                       
December 31, 2006
  
$
115,000
  
$
38,575
  
$
-
  
$
(38,575
)
$
115,000
  
                                 
December 31, 2005
  
$
100,000
  
$
36,100
  
$
-
  
$
(21,100
)
$
115,000
  
                                 
December 31, 2004
  
$
80,000
  
$
(36,600
)
$
-
  
$
56,600
  
$
100,000
  
                                 
                                 
Inventory Reserve:
                                
                                 
Year Ended:
                                
                                 
December 31, 2006
  
$
1,163,100
  
$
109,600
  
$
-
  
$
(221,700
)
$
1,051,000
  
                                 
December 31, 2005
  
$
1,019,500
  
$
351,800
  
$
-
  
$
(208,200
)
$
1,163,100
  
                                 
December 31, 2004
  
$
1,002,000
  
$
371,300
  
$
-
  
$
(353,800
)
$
1,019,500
  

(1) Deductions related to the allowance for doubtful accounts represent the amounts written-off against the reserve, less recoveries.
 
-46-

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 2 on Registrant’s Form 10-K for the year ended December 31, 2004).
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
  
By-Laws effective May 8, 2003 (incorporated by reference to Exhibit 3.3 on Registrant’s Form 10-K for the year ended December 31, 2003).
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 10.2 on Registrant’s Form 10-K for the year ended December 31, 2004).
10.3
  
2001 Stock Option Plan. Filed herewith.
10.4
  
Restricted Stock Agreement (incorporated by reference to Exhibit 10.5 on Registrant’s Form 10-K for the year ended December 31, 2003).
10.5
  
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).
10.6
  
Key Employee Bonus Plan for 2006. (incorporated by reference to Exhibit 10.1 on Registrant’s Form 10-Q for the quarterly period ended April 2, 2006).
14
  
Code of Ethics of the Chief Executive Officer and the Chief Financial and Accounting Officer (incorporated by reference to Exhibit 14 on Registrant’s Form 10-K for the year ended December 31, 2003).
14.1
  
Code of Business Conduct and Ethics. (incorporated by reference to Exhibit 14.1 on Registrant’s Form 10-K for the year ended December 31, 2004).
21
  
Subsidiaries of the Registrant. Filed herewith.
23
  
Consent of Independent Registered Public Accounting Firm. 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.
 
-47-
 
 EX-10.3 2 a5365619ex10_3.htm EXHIBIT 10.3 Unassociated Document
Exhibit 10.3
 

MATEC CORPORATION

2001 STOCK OPTION PLAN

1. PURPOSE

The Plan is intended to expand and improve the profitability and prosperity of MATEC Corporation for the benefit of its stockholders by permitting the Corporation to grant to officers and other key employees of, and consultants and advisers to, the Corporation and its ubsidiaries, options to purchase shares of the Corporation's Common Stock. These grants are intended to provide additional incentive to such persons by offering them a greater stake in the Corporation's continued success. The Plan is also intended as a means of reinforcing the commonality of interest between the Corporation's stockholders and such persons, and as an aid in attracting and retaining the services of individuals of outstanding and specialized skills.

2. DEFINITIONS

For Plan purposes, except where the context otherwise indicates, the following terms shall have the meanings which follow:

(a) "Agreement" shall mean a written instrument executed and delivered on behalf of the Corporation which specifies the terms and conditions of a Stock Option granted to a Participant.

(b) "Beneficiary" shall mean the person or persons who may be designated by a Participant from time to time in writing to the Committee, to receive, if the Participant dies, any Option exercise rights held by the Participant.

(c) "Board" shall mean the Board of Directors of the Corporation.

(d) "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder.

(e) "Committee" shall mean a Committee of the Board composed of two or more persons which shall be designated by the Board to administer the Plan. Each member of the Committee, while serving as such, shall be a member of the Board and shall be a "non- employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934.

(f) "Common Stock" shall mean the Common Stock of the Corporation having a par value of $0.05 per share.
- 1 -
 
(g) "Corporation" shall mean MATEC Corporation, a Maryland corporation.

(h) "Employee" shall mean any person who is employed by the Corporation or any Subsidiary corporation.

(i) "Exercise Price" shall mean the per share price for which a Participant upon exercise of a Stock Option may purchase a share of Common Stock.

(j) "Fair Market Value" shall mean the value of a share of Common Stock to be determined by, and in accordance with procedures established by, the Committee. Such fair market value shall be deemed conclusive upon the determination of the Committee made in good faith. The preceding notwithstanding, so long as the Common Stock is listed on a national stock exchange, the "Fair Market Value" shall mean with respect to any given day, the mean between the highest and lowest reported sales prices of the Common Stock on the principal national stock exchange on which the Common Stock is listed, or if such exchange was closed on such day or if it was open but the Common Stock was not traded on such day, then on the next preceding day that the Common Stock was traded on such exchange, as reported by a responsible reporting service.

(k) "Incentive Stock Option" shall mean a Stock Option which is intended to meet and comply with the terms and conditions for an "incentive stock option" as set forth in Section 422 of the Code, or any other form of tax qualified stock option which may be incorporated and defined in the Code as it may from time to time be amended.

(l) "Non-Qualified Option" shall mean a Stock Option which does not meet the requirements of Section 422 of the Code or the terms of which provide that it will not be treated as an Incentive Stock Option.

(m) "Participant" shall mean any person who is granted a Stock Option under the Plan.

(n) "Plan" shall mean the MATEC Corporation 2001 Stock Option Plan as set forth herein and as amended from time to time.

(o) "Stock Option" or "Option" shall mean a right to purchase a stated number of shares of Common Stock subject to such terms and conditions as are set forth in the Plan and an Agreement.

(p) "Subsidiary corporation" or "Subsidiary" shall mean any corporation which is a "subsidiary corporation" of the Corporation as defined in Section 424(f) of the Code.
- 2 -
 
3. ADMINISTRATION

(a) The Committee shall administer the Plan and, accordingly, it shall have full power to grant Stock Options under the plan, to construe and interpret the Plan, and to establish rules and regulations and perform all other acts it believes reasonable and proper, including the authority to delegate responsibilities to others to assist in administering the Plan.

(b) The determination of those eligible to receive Stock Options, and the amount, type and terms and conditions of each Stock Option shall rest in the sole discretion of the Committee, subject to the provisions of the Plan.

(c) The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan to be conditioned upon the granting to the Participant of a new Option for the same or a different number of shares as the Option surrendered, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Participant. Such new Option shall be exercisable at the price, during the period and in accordance with any other terms or conditions specified by the Committee at the time the new Option is granted, all determined in accordance with the provisions of the Plan without regard to the price, period of exercise, or any other terms or conditions of the Option surrendered.


4. COMMON STOCK LIMITS

The total number of shares of Common Stock which may be issued on exercise of Stock Options shall not exceed 200,000 shares, subject to adjustment in accordance with Paragraph 9 of the Plan. Shares issued under the Plan may be, in whole or in part, as determined by the Committee, authorized but unissued or treasury shares of Common Stock. If any Options granted under the Plan shall expire or terminate without having been exercised, the shares subject to such Options shall be added back to the number of shares of Common Stock which may be issued on exercise of Stock Options.


5. ELIGIBILITY FOR PARTICIPATION

(a) Consistent with Plan objectives, the following persons shall be eligible to become Participants in the Plan: officers and other key Employees and consultants and advisers to the Corporation or any Subsidiary corporation, provided that members of the Board who are not Employees shall not be eligible.

(b) The foregoing subparagraph (a) notwithstanding, Incentive Stock Options shall be granted only to officers and other key Employees, and no Incentive Stock Options shall be granted to an Employee who owns more than 10% of the Common Stock determined in accordance with the provisions of Section 422(b)(6) of the Code, unless the Option meets the requirements of Section 422(c)(5) of the Code.
- 3 -
 
(c) Options shall be granted to consultants and advisers only for bona fide services rendered other than in connection with the offer or sale of securities.

6. STOCK OPTIONS - TERMS AND CONDITIONS

All Stock Options granted under the Plan shall be evidenced by Agreements which shall contain such provisions as shall be required by the Plan together with such other provisions as the Committee may prescribe, including the following provisions:

(a) Price: The Committee shall establish the Exercise Price, provided, however, that in the case of an Incentive Stock Option the Exercise Price shall not be less than the Fair Market Value of a share of Common Stock on the date of the grant of the Option.

(b) Period: The Committee shall establish the term of any Option awarded under the Plan, provided, however, that no Option shall be exercisable after the expiration of 10 years from the date of the grant of the Option.

(c) Time of Exercise: The Committee shall establish the time or times at which an Option, or portion thereof, shall be exercisable. The Committee, subsequent to the grant of an Option, may accelerate the date or dates on which the Option may be exercisable.

(d) Exercise: An Option, or portion thereof, shall be exercised by delivery or a written notice of exercise to the Corporation together with payment of the full purchase price of the shares as to which the Option is exercised ("Purchase Price"). Payment may be made:

(i) in United States dollars by good check, bank draft or money order payable to the order of the Corporation, or

(ii) at the discretion of the Committee by the transfer to the Corporation of shares of Common Stock owned by the Participant having an aggregate Fair Market Value on the date of exercise equal to the Purchase Price or the portion thereof being so paid, or

(iii) at the discretion of the Committee and subject to any restrictions or conditions as it deems appropriate (including any restrictions as may be set forth in Rule 16b-3 under the Securities Exchange Act of 1934), by electing to have the Corporation withhold from the shares issuable upon exercise of the Option such number of shares of Common Stock as shall have an aggregate Fair Market Value on the date of exercise equal to the Purchase Price or the portion thereof being so paid, or

(iv) at the discretion of the Committee by a combination of (i) and (ii) or (i) and (iii) above.

The Committee shall determine the procedures for the use of Common Stock in payment of the Purchase Price and may impose such limitations and prohibitions on such use as it deems appropriate.
- 4 -
 
(e) Special Rules for Incentive Stock Options: Notwithstanding any other provisions of the Plan, with respect to Incentive Stock Options granted under the Plan (in addition to any other provisions specifically made applicable to Incentive Stock Options), the following provisions will apply:

(i) To the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which Incentive Stock Options (whether granted hereunder or pursuant to any other plan of the Corporation or a Subsidiary) are first exercisable by a Participant during any calendar year exceeds $100,000 (or such other limit as may be in effect from time to time under the Code), such Options shall be treated as Non-Qualified Options.

(ii) Any Participant who disposes of shares of Common Stock acquired on the exercise of an Incentive Stock Option by sale or exchange either (a) within two years after the date of the grant of the Option under which such shares were acquired or (b) within one year after the acquisition of such shares, shall notify the Corporation in writing of such disposition and of the amount realized upon such disposition promptly after the disposition.


7. TERMINATION OF EMPLOYMENT

If a Participant holding an Option shall cease to be employed (or in the case of a Participant who is not an Employee, shall cease to be engaged) by the Corporation or any Subsidiary corporation by reason of death or any other reason other than voluntary quitting, discharge for cause or permanent and total disability as defined in Section 22(e)(3) of the Code (hereinafter called a "Disability"), as determined by the Committee, such Participant (or, if applicable, such Participant's Beneficiary or legal representative) may, but only within the three months next succeeding such cessation of employment or engagement, exercise such Option to the extent that such Participant would have been entitled to do so on the date of such cessation of employments or engagements. If a Participant holding an Option voluntarily quits or is discharged for cause, such Option shall terminate on the date of cessation of employment or engagement.

8. DISABILITY

If a Participant holding an Option shall cease to be employed (or, in the case of a Participant who is not an Employee, shall cease to be engaged) by the Corporation or any Subsidiary corporation by reason of a Disability, the Option shall be exercisable by such Participant or such Participant's duly appointed guardian or other legal representative, to the extent that such Participant would have been entitled to do so on the date of such cessation of employment, but only within one year following such cessation of employment due to said Disability.
 
- 5 -
 
9. ADJUSTMENTS

In the event of a recapitalization, stock split, stock combination, stock dividend, exchange of shares, or a change in the corporate structure or shares of the Corporation, or similar event, the Board of Directors upon recommendation of the Committee shall make appropriate adjustments in the kind or number of shares which may be issued upon exercise of Options and in the kind or number of
shares issuable upon exercise of Options theretofore granted and in the exercise price of such options.


10. MERGER, CONSOLIDATION OR SALE OF ASSETS

If the Corporation shall be a party to a merger or consolidation or shall sell substantially all its assets, each outstanding Option shall pertain and apply to the securities and/or property which a holder of the number of shares of Common Stock subject to the Option immediately prior to such merger, consolidation, or sale of assets would be entitled to receive in such merger, consolidation or sale of assets.


11. AMENDMENT AND TERMINATION OF PLAN

(a) The Board, without further approval of the stockholders, may at any time, and from time to time, suspend or terminate the Plan in whole or in part or amend it from time to time in such respects as the Board may deem appropriate and in the best interests of the Corporation; provided, however, that no such amendment shall be made, without approval of the stockholders, to the extent such approval is required by applicable law, regulation or rule, or which would:

(i) modify the eligibility requirements for participation in the Plan; or

(ii) increase the total number of shares of Common Stock which may be issued pursuant to Stock Options, except as is provided for in accordance with Paragraph 9 of the Plan.

(b) No amendment, suspension or termination of this Plan shall, without the Participant's consent, alter or impair any of the rights or obligations under any Stock Option theretofore granted to the Participant under the Plan.

(c) The Board may amend the Plan, subject to the limitations cited above, in such manner as it deems necessary to permit the granting of Stock Options meeting the requirements of future amendments the Plan.
- 6 -
 
12. GOVERNMENT AND OTHER REGULATIONS

The granting of Stock Options under the Plan and the obligation of the Corporation to issue or transfer and deliver shares for Stock Options exercised under the Plan shall be subject to all applicable laws, regulations, rules and orders which shall then be in effect.

13. MISCELLANEOUS PROVISIONS

(a) Rights to Continued Employment: No person shall have any claim or right to be granted a Stock Option under the Plan, and the grant of an Option under the Plan shall not be construed as giving any Participant the right to be retained in the employ of the Corporation or any Subsidiary corporation (or to be otherwise retained in the case of a Participant who is not an Employee) and the Corporation expressly reserves the right at any time to dismiss a Participant with or without cause, free of any liability or any claim under the Plan, except as provided herein or in an Agreement.

(b) Who Shall Exercise: Except as provided by the Plan, an Incentive Stock Option shall be exercisable during the lifetime of the Participant to whom it is granted only by such Participant, and it may be exercised only if such Participant has been in the continuous employ of the Corporation or any Subsidiary corporation from the date of grant of the Option to the date of its exercise.

(c) Non-Transferability: No right or interest of any Participant in the Plan or an Agreement shall be assignable or transferable except by will or the laws of descent and distribution, and no right or interest of any Participant shall be liable for, or subject to, any lien, obligation or liability of such Participant; provided that in the discretion of the Committee a Non- Qualified Option may be made transferable and assignable on such terms and conditions as the Committee shall in its discretion determine.

(d) Withholding Taxes: The Corporation may require a payment to cover applicable withholding for income and employment taxes in connection with a Stock Option.

(e) Rights as Stockholder: A Participant as such shall not have any of the rights or privileges of a holder of Common Stock until such time as shares of Common Stock are issued or are transferred to the Participant upon exercise of an Option.

(f) Plan Expenses: Any expenses of administering this Plan shall be borne by the Corporation.

(g) Legal Considerations: The Corporation shall not be required to issue, transfer or deliver shares of Common Stock upon exercise of Options until all applicable legal, listing or registration requirements, as determined by legal counsel, have been satisfied, and any necessary or appropriate written representations have been given by the Participant.
- 7 -
(h) Other Plans: Nothing contained herein shall prevent the Corporation from establishing other incentive and benefit plans in which Participants in the Plan may also participate.
 
(i) No Warranty of Tax Effect: Except as may be contained in any Agreement, no opinion shall be deemed to be expressed or warranties made as to the effect for federal, state or local tax purposes of any grants hereunder.

(j) Construction of Plan: The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined in accordance with the laws of the State of Maryland.


14. STOCKHOLDER APPROVAL - TERM OF PLAN

Upon approval by the stockholders of the Corporation, the Plan shall become unconditionally effective as of February 22, 2001. No Option shall be granted after February 21, 2011, provided, however, that the Plan and all outstanding Options granted under the Plan prior to such date shall remain in effect until the applicable Options have expired. If the stockholders shall not approve the Plan, the Plan shall not be effective and any and all actions taken prior thereto shall be null and void or shall, if necessary, be deemed to have been fully rescinded.
 
 
- 8 -
 EX-21 3 a5365619ex21.htm EXHIBIT 21 Unassociated Document
Exhibit 21

Subsidiaries of the Registrant
 

The following is a 100% owned subsidiary of the Registrant:

Matec International, Inc. (incorporated in Massachusetts)
 EX-23 4 a5365619ex23.htm EXHIBIT 23 Exhibit 23
Exhibit 23


Consent of Independent Registered Public Accounting Firm

We have issued our reports dated February 16, 2007, which reports an unqualified opinion and include an explanatory paragraph relating to the application of Statement of Financial Accounting Standards No. 123(R) as of December 31, 2006, accompanying the consolidated financial statements and supplementary schedule in the Annual Report of Valpey-Fisher Corporation (formerly known as MATEC Corporation) and subsidiaries on Form 10-K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of said reports in Registration Statements of Valpey-Fisher Corporation on Form S-8 (File No. 333-116001, effective May 28, 2004, File Number 333-94491, effective January 12, 2000, File Number 033-77554, effective April 8, 1994 and File Number 333-67726, effective August 16, 2001).


/s/ Grant Thornton LLP

Boston, Massachusetts
March 28, 2007
EX-31.1 5 a5365619ex31_1.htm EXHIBIT 31.1 Unassociated Document
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 annual report on Form 10-K 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 annual report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer 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: March 30, 2007
By /s/ Michael J. Ferrantino
 
Michael J. Ferrantino
 
President and Chief Executive Officer
 
 
 EX-31.2 6 a5365619ex31_2.htm EXHIBIT 31.2 Unassociated Document
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 annual report on Form 10-K 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 annual report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer 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: March 30, 2007
By /s/ Michael J. Kroll
 
Michael J. Kroll
 
Vice President, Treasurer and Chief Financial Officer
EX-32.1 7 a5365619ex32_1.htm EXHIBIT 32.1 Unassociated Document
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 Annual Report on Form 10-K for the year ended December 31, 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: March 30, 2007
By /s/ Michael J. Ferrantino
 
Michael J. Ferrantino,
 
President and Chief Executive Officer
   
Date: March 30 2007
By /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-K 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.
 
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