10-K 1 a5640811.txt VALPEY-FISHER CORP. 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 1-4184 Valpey-Fisher Corporation (Exact name of registrant as specified in its charter) Maryland 06-0737363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 South St., Hopkinton, Massachusetts 01748 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 435-6831 Securities registered pursuant to Section 12 (b) of the Act: Title of each class: Name of each exchange on which registered: -------------------- ------------------------------------------ Common Stock $.05 par value American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] 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 [ ] 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 [ ] 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. [X] Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act: (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of voting stock held by non-affiliates: $12,333,352 (computed by reference to the last sales price of such common stock on June 29, 2007, 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 21, 2008: 4,280,383 Documents incorporated by reference: Portions of the Registrant's Proxy Statement for the 2008 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%, 11%, and 12% of our net sales in 2007, 2006, and 2005, respectively. Sales to our five largest customers accounted for approximately 30% of our sales in 2007, compared to 31% in 2006 and 33% in 2005. Sales to CM companies accounted for approximately 38% of our sales in 2007, compared to 33% in 2006, and 36% in 2005. Export sales amounted to approximately 29% of our sales in 2007, 26% in 2006 and 34% in 2005. 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 $495,000 in 2007, $482,000 in 2006 and $352,000 in 2005. During 2008, we intend to increase our efforts to develop new products which would leverage off our expertise in the timing area. Backlog ------- Our backlog of firm orders was approximately $2,134,000 at December 31, 2007 compared to $2,028,000 at December 31, 2006. We expect to ship the entire December 31, 2007 backlog during 2008. 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 we have including 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 best of 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. 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. 5 Employees --------- At December 31, 2007, we employed 55 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 $1,300,237 IN 2007, $491,300 IN 2006 AND $350,500 IN 2005, WE HAD INCURRED OPERATING LOSSES IN THE FOUR YEARS PRECEDING 2005 AND OUR RESULTS COULD FLUCTUATE IN THE FUTURE. While we reported an operating profit of $1,300,237 in 2007, $491,300 in 2006 and $350,500 in 2005, we had incurred operating losses in the four years preceding 2005 and our results could fluctuate in the future. A wide variety of factors affect our operating results. Factors that could affect our future operating results include: o changes in sales volume and mix, o price compression, o declines in gross margin, o increased research and development expenses associated with new product development, and o 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, customer acceptance, production, introduction and marketing of new products, including more-value added products. The time lag between our customer's acceptance of our product (a design win) and the receipt of production orders affects the timing of our sales growth and operating results. 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 MODEST INCREASE 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. A 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 2007, sales to our top five customers accounted for approximately 30% 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. All our sales are made on a purchase order basis and we do not have long-term purchase contracts with our customers. As a result, our customers may cancel or change delivery dates within a specific period of time without penalty. 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 38% of the Company's sales in 2007 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 beneficially own 50% of the outstanding shares on a fully diluted basis. Institutional and other 5% holders own approximately 18% of the outstanding shares. During 2007, the average trading volume of our common stock was 5,900 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: o the diversion of our management's attention from our existing business to integrate the operations and personnel of the acquired business, o the possible adverse effects on the Company's operating results during the integration period, o the loss of key employees, customers and vendors as a result of the change in management, and 8 o our possible inability to achieve the intended objectives of the transaction. 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: o political and economic instability in countries where our products are sold or manufactured, o expropriation or the imposition of government controls, o export license requirements, o trade restrictions, o high levels of inflation or deflation, o greater difficulty in collecting our accounts receivable and longer payment terms, o less favorable intellectual property laws, and o 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 EXECUTIVE OFFICERS 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 Executive Officers, beneficially own 50% of the currently outstanding shares of Common Stock on a fully diluted basis. 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 our 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, 2007 2006 -------------------------------------------------------------------------------- High Low High Low -------------------------------------------------------------------------------- 4th quarter $5.90 $4.55 $3.60 $3.29 -------------------------------------------------------------------------------- 3rd quarter 6.15 4.75 3.84 3.41 -------------------------------------------------------------------------------- 2nd quarter 7.25 4.31 4.00 3.30 -------------------------------------------------------------------------------- 1st quarter 4.30 3.21 3.59 3.00 -------------------------------------------------------------------------------- No dividend was paid in 2007 or 2006. The number of stockholders of record on March 20, 2008 was 692. 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, 2007 regarding the number of shares of our common stock that may be issued under our equity compensation plans.
Number of securities remaining available for future issuance Number of securities Weighted-average under equity to be issued upon exercise price of compensation plans exercise of outstanding options, (excluding securities outstanding options, warrants and rights reflected in the first Plan Category warrants and rights column) ------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders (1) 460,250 $3.43 172,666 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 Executive Officer, 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 could not be sold or transferred, encumbered or otherwise disposed of for a period of five years. Said restrictions terminated as to 20% of the Restricted Stock upon each of October 23, 2003, 2004, 2005, 2006 and 2007. Pursuant to the Agreement, the Restriction was to 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, 2007, 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 2007. 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, 2002 and ending December 31, 2007 (assuming the investment of $100 on December 31, 2002, and the reinvestment of all dividends). [GRAPHIC OMITTED]
Base Years Ending Period Company Name / Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 --------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Valpey-Fisher Corporation $ 100.00 $ 112.77 $ 135.04 $ 113.87 $ 128.47 $ 167.88 American Stock Exchange Index $ 100.00 $ 142.36 $ 173.99 $ 213.38 $ 249.45 $ 292.29 Peer Group $ 100.00 $ 216.72 $ 229.82 $ 292.65 $ 272.77 $ 349.76
14 The Peer Group Index consists of the following companies: Advanced Energy Industries, 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, The JPM Company, LG. Philips LCD Co., Ltd (ADR), The LGL Group, Inc., Lumenon Innovative Lightwave Technology, Inc., Micronetics, Inc., Microvision, Inc., Microwave Filter Company, Inc., MSGI Security Solutions, Inc., Nortech Systems Incorporated, Photonic Products Group, Inc., Planar Systems, Inc., Power-One, Inc., Simclar, Inc., Sparton Corporation, Spectrum Control, Inc., Stoneridge, Inc., Synaptics Incorporated, TDK Corporation (ADS), Technitrol, Inc., uVuMobile, Inc., Veritec, Inc., and Vicor Corporation. 15 Item 6. Selected Financial Data ---------------------------------
------------------------------------------------------------------------------------------------------------- Years Ended December 31, 2007 (1) 2006 (1) 2005 2004 2003 ============================================================================================================= (in thousands, except per share data) ------------------------------------------------------------------------------------------------------------- Continuing operations: ------------------------------------------------------------------------------------------------------------- Net sales $ 13,419 $ 11,782 $ 11,427 $ 11,545 $ 8,496 ------------------------------------------------------------------------------------------------------------- Gross profit 5,441 4,469 3,814 3,260 989 ------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 1,712 778 499 (55) (2,423) ------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit (521) 71 (195) - 1,023 ------------------------------------------------------------------------------------------------------------- Earnings (loss) 1,191 849 304 (55) (1,400) ------------------------------------------------------------------------------------------------------------- Discontinued operations- net of income tax benefit - (180) (60) (110) - ============================================================================================================= Net earnings (loss) $ 1,191 $ 669 $ 244 $ (165) $ (1,400) ============================================================================================================= Basic earnings (loss) per share: ------------------------------------------------------------------------------------------------------------- Continuing operations $ .28 $ .20 $ .07 $ (.01) $ (.33) ------------------------------------------------------------------------------------------------------------- Discontinued operations - (.04) (.01) (.03) - ============================================================================================================= $ .28 $ .16 $ .06 $ (.04) $ (.33) ============================================================================================================= Diluted earnings (loss) per share: ------------------------------------------------------------------------------------------------------------- Continuing operations $ .27 $ .20 $ .07 $ (.01) $ (.33) ------------------------------------------------------------------------------------------------------------- Discontinued operations - (.04) (.01) (.03) - ============================================================================================================= $ .27 $ .16 $ .06 $ (.04) $ (.33) ============================================================================================================= ============================================================================================================= Cash dividends per share $ - $ - $ - $ - $ - ============================================================================================================= Total assets, end of year $ 15,950 $ 14,529 $ 13,617 $ 12,864 $ 12,744 ============================================================================================================= Long-term debt, end of year $ - $ - $ - $ - $ - =============================================================================================================
(1) As discussed in Note 2 in the Notes to Consolidated Financial Statements, effective January 1, 2006, we changed our method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123R "Share-Based Payment". 16 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 $190,000 at December 31, 2007. 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 $10,001,000 at December 31, 2007, an increase of $817,000 over the December 31, 2006 level. During 2007, our continuing operations provided cash of $1,269,000, investing activities used cash of $341,000, financing activities provided cash of $70,000, and discontinued operations used cash of $181,000. Cash provided from continuing operations amounted to $1,269,400 in 2007 compared to $1,478,000 in 2006. Operating cash flows during 2007 resulted from net earnings of $1,191,000, increased by net adjustments of $572,000 for the non-cash effects of depreciation, deferred income taxes, stock compensation expense and stock option income tax benefits and decreased by $493,000 due to an increase in components of working capital. The increase of $324,000 in accounts receivable over the 2006 amount was mainly due to an increase in the days sales outstanding and, to a lesser extent, to an increase in the current year's fourth quarter sales over the 2006 comparable period. The days sales outstanding amounted to 54 days at December 31, 2007 compared to 48 days at December 31, 2006. The inventory increase of $286,000 is mainly due to a combination of the lead times for certain raw material items and the necessary inventory to support the current level of shipments and backlog and to meet customer delivery requirements. Capital expenditures amounted to $323,000 in 2007. Our budget for 2008 capital expenditures is approximately $600,000. 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 2008. Results of Operations - 2007 versus 2006 Our 2007 net sales increased $1,637,000 or 14% over 2006. This sales increase is mainly attributable to a $1,486,000 or 54% sales increase in our high precision product line as unit sales increased 91% over the 2006 level. We continue to pursue sales of these more value-added, higher performance and higher average selling price products. Sales in our transducer product line increased approximately 13% over the 2006 amount and sales in our standard and high reliability oscillator product lines remained flat with 2006. The sales increase is mainly attributable to a combination of the higher backlog at the beginning of 2007 versus 2006 and the increased bookings in 2007. Our backlog amounted to $2,028,000 at January 1, 2007 compared to $1,602,000 at January 1, 2006. Total bookings for 2007 amounted to $13,435,000 versus $12,316,000 in 2006. At December 31, 2007, our backlog amounts to $2,134,000, a 5% increase over the December 31, 2006 amount. We reported a $5,441,000 gross profit (41% of net sales) in 2007 versus a $4,469,000 gross profit (38% of net sales) in 2006. The increase in margin percentage was mainly due to the overall higher percentage of sales from our high precision product line and the favorable effect of spreading the fixed overhead costs over the increased sales volume. Raw material costs as a percentage of overall sales in 2007 increased about 10% over 2006 period due to changes in product mix. Selling and advertising expenses amounted to $1,756,000 (13.1% of sales) in 2007 compared to $1,718,000 (14.6% of sales) in 2006. The selling and advertising expenses increase of $38,000 or 2% over 2006 was mainly due to higher personnel costs ($54,000) and commission expense to outside sales representatives ($52,000). These increases in 2007 were partially offset by decreases in bad debt expense ($38,000), travel and entertainment expenses ($15,000) and depreciation expense ($13,000). 18 General and administrative expenses amounted to $1,890,000 (14.1% of sales) compared to $1,777,000 (15.1% of sales) in 2006. The $113,000 expense increase over 2006 is mainly due to an increase of $128,000 in professional fees resulting primarily from our decision to consider possible strategic alternatives to increase shareholder value. This increase was partially offset by a reduction of $17,000 in stock-based compensation expense. Research and development expenses amounted to $495,000 (3.7% of sales) compared to $482,000 (4.1% of sales) in 2006. The $12,000 increase results primarily from higher personnel costs. The 2007 increase in interest income over 2006 is due to a combination of higher average cash balances and higher interest rates during the current year. The combined federal and state income tax rate for 2007 is 30% compared to 9% in 2006. The 2007 rate is higher than the 2006 rate as the 2006 rate received more benefit from the reduction in the valuation allowance for deferred income taxes, the reversal of accrued income taxes and the net effect of state NOL carryforwards. We reduced the valuation allowance by $281,000 in 2007 and $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 current state income tax provision for 2007 and 2006. We reported an operating profit of $1,300,000 during 2007 compared to an operating profit of $491,000 in 2006. The current year increase in operating profit over last year results from the increased sales and the corresponding increase in gross profit offset in part by a $164,000 increase in operating expenses. Interest income amounted to $412,000 in 2007 compared to $293,000 in 2006. We reported a pre-tax profit of $1,712,000 from continuing operations in 2007 compared to a pre-tax profit of $778,000 in 2006. For 2007, we reported net earnings of $1,191,000 from continuing operations versus net earnings of $849,000 in 2006. In 2006, we reported an after-tax loss of $180,000 from discontinued operations. In total, we reported net earnings of $1,191,000 in 2007 versus net earnings of $669,000 in 2006. 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. 19 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. 20 Off-Balance Sheet Arrangements We do not maintain any off-balance sheet financing arrangements. Contractual Obligations During the normal course of business, we incur certain commitments to make future payments for the purchase of inventory, machinery and equipment and production supplies based on our projected requirements. At December 31, 2007, we had outstanding purchase commitments approximating $849,000, all of which are expected to be fulfilled in 2008. At December 31, 2007, 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 Effective January 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). 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. Adoption of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to retained earnings. At January 1, 2007 and December 31, 2007, the Company had no reserves for unrecognized tax benefits on the balance sheet. In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"), 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. The Company has not yet determined the impact of adopting SFAS No. 157 on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 ("SFAS No. 159") which permits an entity to elect to measure certain assets and liabilities at fair value at specified election dates. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of adopting SFAS No. 159 on our consolidated financial statements. 21 In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations", (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 110, extending under certain circumstances the provisions of SAB 107 relating to the use of the "simplified method" in developing estimates of the expected term of "plain vanilla" share options in accordance with SFAS No. 123R, Share-Based Payment. Through December 31, 2007, we used the "simplified method" to determine the expected life of option grants. SAB 110 is effective for stock option grants after December 31, 2007. We are evaluating what, if any, impact SAB 110 will have on our results of operations or financial position. 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, 2007, 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 $100,010 increase or decrease in interest income. 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. 22 Item 8. Financial Statements and Supplementary Data -----------------------------------------------------
Valpey-Fisher Corporation Consolidated Balance Sheets December 31, 2007 2006 ======================================================================================================================= Assets Current assets: ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $10,001,022 $ 9,184,060 ----------------------------------------------------------------------------------------------------------------------- Accounts receivable, less allowance for doubtful accounts of $105,000 in 2007 and $115,000 in 2006 1,937,951 1,613,713 ----------------------------------------------------------------------------------------------------------------------- Inventories, net 1,095,498 809,854 ----------------------------------------------------------------------------------------------------------------------- Deferred income taxes 959,422 797,923 ----------------------------------------------------------------------------------------------------------------------- Other current assets 61,570 69,147 ======================================================================================================================= Total current assets 14,055,463 12,474,697 ======================================================================================================================= 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 8,772,658 8,449,500 ======================================================================================================================= 11,042,138 10,718,980 ----------------------------------------------------------------------------------------------------------------------- Less accumulated depreciation 9,326,536 8,825,859 ======================================================================================================================= 1,715,602 1,893,121 ======================================================================================================================= Other assets 178,459 160,902 ======================================================================================================================= $15,949,524 $14,528,720 ======================================================================================================================= Liabilities and Stockholders' Equity Current liabilities: ----------------------------------------------------------------------------------------------------------------------- Accounts payable $ 619,746 $ 648,570 ----------------------------------------------------------------------------------------------------------------------- Accrued liabilities 1,757,467 1,673,938 ======================================================================================================================= Total current liabilities 2,377,213 2,322,508 ======================================================================================================================= Deferred income taxes 249,222 343,367 ----------------------------------------------------------------------------------------------------------------------- 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: 4,282,503 and 4,256,503 shares, respectively 214,125 212,825 ----------------------------------------------------------------------------------------------------------------------- Capital surplus 5,502,538 5,276,189 ----------------------------------------------------------------------------------------------------------------------- Retained earnings 7,606,426 6,415,331 ----------------------------------------------------------------------------------------------------------------------- Less unearned compensation - (41,500) ======================================================================================================================= Total stockholders' equity 13,323,089 11,862,845 ======================================================================================================================= $15,949,524 $14,528,720 =======================================================================================================================
See notes to consolidated financial statements. 23
Valpey-Fisher Corporation Consolidated Statements of Operations For the Years Ended December 31, 2007 2006 2005 ========================================================================================================================== Net sales $13,419,213 $11,781,851 $11,426,673 -------------------------------------------------------------------------------------------------------------------------- Cost of sales 7,978,044 7,313,214 7,612,645 ========================================================================================================================== Gross profit 5,441,169 4,468,637 3,814,028 ========================================================================================================================== Selling and advertising expenses 1,756,465 1,718,223 1,427,612 -------------------------------------------------------------------------------------------------------------------------- General and administrative expenses 1,889,826 1,776,863 1,684,203 -------------------------------------------------------------------------------------------------------------------------- Research and development expenses 494,641 482,283 351,687 ========================================================================================================================== 4,140,932 3,977,369 3,463,502 ========================================================================================================================== Operating profit 1,300,237 491,268 350,526 -------------------------------------------------------------------------------------------------------------------------- Other income (expense): -------------------------------------------------------------------------------------------------------------------------- Interest income 411,858 293,399 148,322 -------------------------------------------------------------------------------------------------------------------------- Gain (loss) on sales of assets - (6,916) - ========================================================================================================================== 411,858 286,483 148,322 ========================================================================================================================== Earnings from continuing operations before income taxes 1,712,095 777,751 498,848 -------------------------------------------------------------------------------------------------------------------------- Income tax (expense) benefit (521,000) 71,400 (194,600) ========================================================================================================================== Earnings from continuing operations 1,191,095 849,151 304,248 -------------------------------------------------------------------------------------------------------------------------- (Loss) from discontinued operations, net of income tax benefit - (180,338) (59,700) ========================================================================================================================== Net earnings $ 1,191,095 $ 668,813 $ 244,548 ========================================================================================================================== Basic earnings (loss) per share: -------------------------------------------------------------------------------------------------------------------------- Continuing operations $ .28 $ .20 $ .07 -------------------------------------------------------------------------------------------------------------------------- Discontinued operations - (.04) (.01) ========================================================================================================================== $ .28 $ .16 $ .06 ========================================================================================================================== Diluted earnings (loss) per share: -------------------------------------------------------------------------------------------------------------------------- Continuing operations $ .27 $ .20 $ .07 -------------------------------------------------------------------------------------------------------------------------- Discontinued operations - (.04) (.01) ========================================================================================================================== $ .27 $ .16 $ .06 ==========================================================================================================================
See notes to consolidated financial statements. 24
Valpey-Fisher Corporation Consolidated Statements of Cash Flows For the Years Ended December 31, 2007 2006 2005 ========================================================================================================================== Cash Flows from Operating Activities: -------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 1,191,095 $ 849,151 $ 304,248 -------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: -------------------------------------------------------------------------------------------------------------------------- Depreciation 500,677 644,495 751,966 -------------------------------------------------------------------------------------------------------------------------- Changes in deferred income taxes (128,046) (365,738) (72,382) -------------------------------------------------------------------------------------------------------------------------- Stock based compensation 148,579 164,625 - -------------------------------------------------------------------------------------------------------------------------- Non-cash restricted stock compensation, net of taxes 24,800 33,753 35,000 -------------------------------------------------------------------------------------------------------------------------- Stock option income tax benefit 25,800 - 10,000 -------------------------------------------------------------------------------------------------------------------------- (Gain) loss on sales of assets - 6,916 - -------------------------------------------------------------------------------------------------------------------------- Changes in assets and liabilities: -------------------------------------------------------------------------------------------------------------------------- Accounts receivable, net (324,238) (118,803) (357,473) -------------------------------------------------------------------------------------------------------------------------- Inventories, net (285,644) 218,249 472,592 -------------------------------------------------------------------------------------------------------------------------- Other current assets 7,577 (18,668) 331 -------------------------------------------------------------------------------------------------------------------------- Accounts payable and accrued liabilities 108,848 64,126 430,197 ========================================================================================================================== Net cash provided by operating activities of continuing operations 1,269,448 1,478,106 1,574,479 -------------------------------------------------------------------------------------------------------------------------- (Loss) from discontinued operations - (180,338) (59,700) -------------------------------------------------------------------------------------------------------------------------- Change in deferred income taxes 27,400 70,384 (30,000) -------------------------------------------------------------------------------------------------------------------------- Change in accrued expenses (209,141) 53,860 67,415 ========================================================================================================================== Net cash (used) by operating activities of discontinued operations (181,741) (22,285) (22,285) ========================================================================================================================== Net cash provided by operating activities 1,087,707 1,422,012 1,552,194 ========================================================================================================================== Cash Flows from Investing Activities: -------------------------------------------------------------------------------------------------------------------------- Capital expenditures (323,158) (299,302) (120,843) -------------------------------------------------------------------------------------------------------------------------- Proceeds from sales of assets - 122,500 - -------------------------------------------------------------------------------------------------------------------------- Other (17,557) (8,065) (10,207) ========================================================================================================================== Net cash (used) by investing activities (340,715) (184,867) (131,050) ========================================================================================================================== Cash Flows from Financing Activities: -------------------------------------------------------------------------------------------------------------------------- Stock options exercised 69,970 26,680 61,750 -------------------------------------------------------------------------------------------------------------------------- Purchases of common stock - - (17,932) ========================================================================================================================== Net cash provided by financing activities 69,970 26,680 43,818 ========================================================================================================================== Net Increase in Cash and Cash Equivalents 816,962 1,263,825 1,464,962 -------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at beginning of year 9,184,060 7,920,235 6,455,273 ========================================================================================================================== Cash and Cash Equivalents at end of year $10,001,022 $ 9,184,060 $ 7,920,235 ========================================================================================================================== Supplemental Disclosures of Cash Flow Information Cash paid during the year by continuing operations for income taxes $ 667,500 $ 525,000 $ 83,000
See notes to consolidated financial statements. 25
Valpey-Fisher Corporation Consolidated Statements of Stockholders' Equity Common Stock Capital Retained Unearned -------------- -------------- Shares Amount Surplus Earnings Compensation ========================================================================================================================== Balance, January 1, 2005 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) ========================================================================================================================== Net earnings - - - 1,191,095 - -------------------------------------------------------------------------------------------------------------------------- Amortization of restricted stock grant - - - - 41,500 -------------------------------------------------------------------------------------------------------------------------- Tax effect of restricted stock grant - - (16,700) - - -------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 26,000 1,300 68,670 - - -------------------------------------------------------------------------------------------------------------------------- Stock option income tax benefit - - 25,800 - - -------------------------------------------------------------------------------------------------------------------------- Stock based compensation - - 148,579 - - ========================================================================================================================== Balance, December 31, 2007 4,282,503 $ 214,125 $ 5,502,538 $ 7,606,426 $ - ==========================================================================================================================
See notes to consolidated financial statements. 26 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, 2007, approximately $1,333,000 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, 2007, two customers represented about 18% and 11%, respectively, of the Company's accounts receivable. At December 31, 2006, three customers each 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 collectibility 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). 27 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. 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 $79,500 in 2007, $81,600 in 2006, and $117,300 in 2005. 28 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 per share - Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the net incremental shares that would be issued using the treasury stock method assuming dilutive outstanding stock options were exercised and dilutive unvested restricted stock were vested. The assumed proceeds under the treasury stock method include: o the amount paid to the Company upon exercise of the option; o compensation expense for future services that the Company has not yet recognized; and o the amount of excess tax benefits, if any, that would be credited to additional paid-in capital upon exercise of the options. The computation of diluted earnings per share excludes stock options and restricted stock with an exercise price in excess of the average market price as they are antidilutive. In calculating diluted earnings per share, the dilutive effect of stock options and restricted stock are computed using the average market price for the respective period. Stock compensation plans - Effective January 1, 2006, the Company began recording compensation expense associated with stock-based payments 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-based payments. Accordingly, the Company did not recognize compensation expense for stock-based payments 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-based payments recognized beginning January 1, 2006 includes: (a) expense related to the remaining unvested portion of all stock-based payment 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- based payment 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. 29 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 (in thousands): For the Year Ended December 31, 2007 2006 ================================================================================ Cost of sales $ 27 $ 31 -------------------------------------------------------------------------------- Selling and advertising 29 29 -------------------------------------------------------------------------------- General and administrative 82 99 -------------------------------------------------------------------------------- Research and development 11 11 ================================================================================ Pre-tax stock-based compensation expense 149 170 -------------------------------------------------------------------------------- Income tax (benefit) (5) (5) ================================================================================ Net stock-based compensation expense $ 144 $ 165 ================================================================================ 30 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 ================================================================================ Net earnings, as reported $ 244,548 -------------------------------------------------------------------------------- Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (173,271) ================================================================================ Pro forma net earnings $ 71,277 ================================================================================ Basic and diluted earnings per share, as reported $ .06 ================================================================================ Basic and diluted earnings per share, pro forma $ .02 ================================================================================ 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, 2007, 2006, and 2005, the Company had no items of other comprehensive income (loss). Recent accounting pronouncements - Effective January 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). 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. Adoption of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to retained earnings. At January 1, 2007 and December 31, 2007, the Company had no reserves for unrecognized tax benefits on the balance sheet. In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"), 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. The Company has not yet determined the impact of adopting SFAS No. 157 on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 ("SFAS No. 159") which permits an entity to elect to measure certain assets and liabilities at fair value at specified election dates. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of adopting SFAS No. 159 on our consolidated financial statements. 31 In December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations", (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 110, extending under certain circumstances the provisions of SAB 107 relating to the use of the "simplified method" in developing estimates of the expected term of "plain vanilla" share options in accordance with SFAS No. 123R, Share-Based Payment. Through December 31, 2007, we used the "simplified method" to determine the expected life of option grants. SAB 110 is effective for stock option grants after December 31, 2007. We are evaluating what, if any, impact SAB 110 will have on our results of operations or financial position. 32 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 and 2005, the Company recorded pre-tax expenses of $285,500 and $100,000, 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, 2007, a total of $1,560,000 has been expensed for the cleanup and $381,900 (see Note 7) is accrued for expenses relating to the cleanup. (4) Inventories, net: Inventories, net of reserves, consist of the following: 2007 2006 ================================================================================ Raw materials $ 757,625 $ 480,830 -------------------------------------------------------------------------------- Work in process 101,012 106,011 -------------------------------------------------------------------------------- Finished goods 236,861 223,013 ================================================================================ $1,095,498 $ 809,854 ================================================================================ 33 Valpey-Fisher Corporation Notes Continued (5) Income Taxes: The provision (benefit) for income taxes for continuing operations consisted of the following: 2007 2006 2005 ================================================================================ Current: -------------------------------------------------------------------------------- Federal $ 612,600 $ 399,700 $ 278,100 -------------------------------------------------------------------------------- State - (80,800) (800) ================================================================================ 612,600 318,900 277,300 ================================================================================ Deferred: -------------------------------------------------------------------------------- Federal 16,700 (101,100) (93,000) -------------------------------------------------------------------------------- State 172,900 (31,700) 55,800 ================================================================================ 189,600 (132,800) (37,200) ================================================================================ Valuation allowance (281,000) (257,500) (45,500) ================================================================================ Total $ 521,000 $ (71,400) $ 194,600 ================================================================================ The Company recorded an income tax benefit relating to the discontinued operations of $105,000 in 2006 and $40,300 in 2005. 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: 2007 2006 2005 ================================================================================ Income taxes at statutory rates $ 582,100 $ 264,400 $ 169,600 -------------------------------------------------------------------------------- State income taxes, net of federal tax effect 31,200 (62,900) 36,300 -------------------------------------------------------------------------------- Federal tax effect of state tax operating losses utilized 115,700 41,800 31,200 -------------------------------------------------------------------------------- Stock based compensation 46,400 53,500 - -------------------------------------------------------------------------------- Change in valuation allowance (281,000) (257,500) (45,500) -------------------------------------------------------------------------------- Reversal of accruals - (80,800) - -------------------------------------------------------------------------------- Other, net 26,600 (29,900) 3,000 ================================================================================ $ 521,000 $ (71,400) $ 194,600 ================================================================================ 34 The tax effects of significant items comprising the Company's deferred tax assets and liabilities as of December 31, 2007 and 2006 are as follows: 2007 2006 ================================================================================ Deferred tax assets: -------------------------------------------------------------------------------- Inventory valuation $ 538,600 $ 585,000 -------------------------------------------------------------------------------- State tax loss carryforward 356,200 575,500 -------------------------------------------------------------------------------- Accruals and allowances 244,700 103,500 -------------------------------------------------------------------------------- Stock compensation 9,900 4,900 -------------------------------------------------------------------------------- Valuation allowance (190,000) (471,000) ================================================================================ Net deferred tax assets 959,400 797,900 ================================================================================ -------------------------------------------------------------------------------- Deferred tax liabilities: -------------------------------------------------------------------------------- Depreciation 186,200 216,600 -------------------------------------------------------------------------------- DISC commissions 63,000 126,800 ================================================================================ Total deferred tax liabilities 249,200 343,400 ================================================================================ Net deferred tax assets $ 710,200 $ 454,500 ================================================================================ At December 31, 2007, the Company has state tax loss benefit carryforwards of $356,200 that expire in 2008. During 2007 and 2006, the Company reduced the valuation allowance based on the Company's ability to utilize state tax loss carryforwards previously reserved for. 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 $190,000 at December 31, 2007. (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 $60,000 in 2007, $25,700 in 2006 and $0 in 2005. 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 $55,000 in 2007, $81,000 in 2006 and $76,000 in 2005. 35 Valpey-Fisher Corporation Notes Continued (7) Accrued Liabilities: Accrued liabilities consist of the following items: 2007 2006 ================================================================================ Employee compensation $ 833,800 $ 693,400 -------------------------------------------------------------------------------- Income taxes - 19,000 -------------------------------------------------------------------------------- Professional fees 165,000 145,000 -------------------------------------------------------------------------------- Environmental costs (see Note 3) 381,900 450,000 -------------------------------------------------------------------------------- Commissions 115,000 118,400 -------------------------------------------------------------------------------- Other 261,767 248,138 -------------------------------------------------------------------------------- $1,757,467 $1,673,938 ================================================================================ (8) Debt: At December 31, 2007, the Company had no outstanding credit arrangements with banks or any other financial institution. (9) Stockholders' Equity: The Company has 4,282,503 and 4,256,503 shares of its $.05 par value Common Stock outstanding at December 31, 2007 and 2006, respectively. At December 31, 2007, 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 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, 2007 all shares were vested and at December 31, 2006, 20,000 of these shares were nonvested. During 2007, 20,000 of these shares vested and no shares of restricted stock were granted or forfeited. The amount amortized to expense was $41,500 in 2007, $58,500 in 2006, and $58,500 in 2005. 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, 2007, 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, 2007, options for 172,666 shares remain available for future grants under the Plans and 460,250 common shares are reserved for issuance upon exercise of the outstanding stock options. 36 Valpey-Fisher Corporation Notes Continued There were no options granted in 2007. The estimated fair value of each option granted in 2006 and 2005 was 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 ================================================================================ -------------------------------------------------------------------------------- Weighed-average grant date fair value $ 1.06 $ 1.84 -------------------------------------------------------------------------------- Assumptions: -------------------------------------------------------------------------------- Expected dividend yield 0% 0% -------------------------------------------------------------------------------- Risk-free interest rate 4.6% 4.0% -------------------------------------------------------------------------------- Expected life of options in years 3.5 7 -------------------------------------------------------------------------------- Assumed volatility 36% 57% -------------------------------------------------------------------------------- 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, 2007, 2006, and 2005, and changes during the years ended on those dates is presented below:
2007 2006 2005 =============================================================================================== Weighted- Weighted- Weighted- Average Average Average Number of Exercise Number of Exercise Number of Exercise shares Price shares Price shares Price ----------------------------------------------------------------------------------------------------------------------------- Outstanding, January 1 486,250 $3.39 488,750 $2.98 532,234 $3.40 ----------------------------------------------------------------------------------------------------------------------------- Granted - - 10,000 3.25 121,500 2.99 ----------------------------------------------------------------------------------------------------------------------------- Exercised (26,000) 2.69 (10,000) 2.67 (29,984) 2.06 ----------------------------------------------------------------------------------------------------------------------------- Forfeited - - (2,500) 2.96 (135,000) 3.42 ============================================================================================================================= Outstanding, December 31 460,250 $3.43 486,250 $3.39 488,750 $3.38 ============================================================================================================================= Exercisable, December 31 343,683 $3.59 281,004 $3.68 203,658 $3.89 =============================================================================================================================
As of December 31, 2007, the intrinsic value (the difference between the exercise price and the market price) for all outstanding options was $659,445 and the intrinsic value for all options exercisable was $469,259. The total intrinsic value of all options exercised during the years ended December 31, 2007, 2006, and 2005 was $87,690, $11,820, and $28,680, respectively. 37 Valpey-Fisher Corporation Notes Continued The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2007:
Options Outstanding Options Exercisable ======================================= ======================================= Weighted Weighted Weighted Average Weighted Average Range of Average Remaining Average Remaining exercise Exercise Life in Exercise Life in prices Number Price Years Number Price Years ========================================================== ======================================= ---------------------------------------------------------- --------------------------------------- $2.48 - 2.96 144,500 $ 2.83 6.6 71,200 $ 2.77 6.3 ---------------------------------------------------------- --------------------------------------- $3.05 - 4.28 297,000 3.24 5.2 253,733 3.26 5.0 ---------------------------------------------------------- --------------------------------------- $11.04 18,750 11.04 2.8 18,750 11.04 2.8 ======================================= ======================================= 460,250 $ 3.43 5.5 343,683 $ 3.59 5.2 ======================================= =======================================
A summary of the status of the Company's nonvested stock options as of December 31, 2007 and the changes during the year then ended is as follows:
Weighted-Average Grant-Date Shares Fair Value ============================================================================================= Nonvested at December 31, 2006 205,246 $ 1.76 --------------------------------------------------------------------------------------------- Granted - - --------------------------------------------------------------------------------------------- Vested (88,679) 1.75 --------------------------------------------------------------------------------------------- Forfeited - - ============================================================================================= Nonvested at December 31, 2007 116,567 $ 1.77 =============================================================================================
At December 31, 2007, there was approximately $149,000 of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of 1.6 years. 38 Valpey-Fisher Corporation Notes Continued (10) Earnings Per Share: The computation of basic and diluted earnings per share from continuing operations is as follows:
2007 2006 2005 ============================================================================================================================= Basic: ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 1,191,095 $ 849,151 $ 304,248 ----------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 4,254,807 4,216,558 4,183,328 ============================================================================================================================= Basic earnings per share from continuing operations $ .28 $ .20 $ .07 ============================================================================================================================= Diluted: ----------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 1,191,095 $ 849,151 $ 304,248 ----------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 4,254,807 4,216,558 4,183,328 ----------------------------------------------------------------------------------------------------------------------------- Diluted effect of stock options outstanding, using the treasury stock method 132,721 7,863 68,629 ----------------------------------------------------------------------------------------------------------------------------- Dilutive effect of unvested restricted stock, using the treasury stock method 12,892 16,267 20,102 ============================================================================================================================= Diluted weighted average shares outstanding 4,400,420 4,240,688 4,272,059 ============================================================================================================================= Diluted earnings per share from continuing operations $ .27 $ .20 $ .07 =============================================================================================================================
The computation of diluted earnings per share excluded stock options to purchase 18,750 shares in 2007 and 28,750 shares in 2006 and 2005 as the exercise prices were greater than the average market price. 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. 39 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%, 11% and 12% of net sales in 2007, 2006 and 2005, respectively. Export sales to foreign markets are as follows:
2007 2006 2005 ============================================================================================= Asia Pacific $ 2,272,200 $ 1,581,500 $ 1,955,900 --------------------------------------------------------------------------------------------- Europe and Middle East 828,500 875,900 1,190,600 --------------------------------------------------------------------------------------------- Canada 499,200 607,600 704,200 --------------------------------------------------------------------------------------------- Mexico 315,100 18,300 12,400 --------------------------------------------------------------------------------------------- Other 13,700 7,200 21,500 --------------------------------------------------------------------------------------------- $ 3,928,700 $ 3,090,500 $ 3,884,600 =============================================================================================
(12) Quarterly Financial Data (unaudited): Selected unaudited quarterly financial data for 2007 and 2006 is set forth below:
First Second Third Fourth ======================================================================================================== (in thousands, except per share data) -------------------------------------------------------------------------------------------------------- 2007 -------------------------------------------------------------------------------------------------------- Net sales from continuing operations $ 3,242 $ 3,425 $ 3,386 $ 3,366 -------------------------------------------------------------------------------------------------------- Gross profit 1,321 1,371 1,398 1,351 -------------------------------------------------------------------------------------------------------- Earnings before income taxes 373 442 488 409 -------------------------------------------------------------------------------------------------------- Net earnings from: Continuing operations 280 336 343 232 -------------------------------------------------------------------------------------------------------- Discontinued operations - - - - ======================================================================================================== Net earnings $ 280 $ 336 $ 343 $ 232 ======================================================================================================== Basic and diluted earnings per share: Continuing operations $ .07 $ .08 $ .08 $ .05 -------------------------------------------------------------------------------------------------------- Discontinued operations - - - - ======================================================================================================== $ .07 $ .08 $ .08 $ .05 ======================================================================================================== First Second Third Fourth ======================================================================================================== 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 (loss) per share: Continuing operations $ .01 $ .01 $ .02 $ .15 -------------------------------------------------------------------------------------------------------- Discontinued operations - - - (.04) ======================================================================================================== $ .01 $ .01 $ .02 $ .11 ========================================================================================================
40 Valpey-Fisher Corporation Notes Continued Earnings 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 per share amounts. The fourth quarter of 2007 general and administrative expense includes $75,000 of professional fees incurred by the Company in considering possible strategic alternatives to increase shareholder value. This amount had previously been classified as a current asset. Of the $75,000 expense correction recorded in the fourth quarter, $8,000, $25,000 and $42,000 relates to the first, second, and third quarters, respectively, of 2007. This correction did not affect cash flow and its effect on the Company's current years net income and stockholders' equity is not material. In the fourth quarter of 2006, the Company reduced the valuation allowance for deferred tax assets based on the assessment of the realization of 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, 2007, the Company has outstanding purchase commitments approximating $849,000, all of which are expected to be fulfilled in 2008. 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). 41 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 (a Maryland corporation) and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. 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 March 31, 2008 42 Item 9. Changes in and Disagreements with Accountants on Accounting and ------------------------------------------------------------------------- Financial Disclosure -------------------- Not applicable. Item 9A(T). Controls and Procedures ------------------------------------ Evaluation of disclosure controls and procedures. 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 that our disclosure controls and procedures are effective as of December 31, 2007 in timely alerting them to material information relating to us required to be included in our periodic SEC filings. 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's Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Company's Chief Financial Officer we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO Framework"). Based on our evaluation , our management concluded that our internal control over financial reporting was effective as of December 31, 2007. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. 43 Changes in internal control. Our evaluation did not identify any change in our internal controls over financial reporting that occurred during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 44 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 2008 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. 45 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, 2007 and 2006 Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2007, 2006 and 2005 Notes to Consolidated Financial Statement Report of Independent Registered Public Accounting Firm 2. The following schedule to the Consolidated Financial Statements is filed as part of this report. 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. 46 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 2007 10.7 * Amendment dated April 4, 2007 to Letter Agreement dated September 10, 2002, between the Company and Michael J. Ferrantino 10.8 * Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll 10.9 * Change in Control Retention Agreement, dated April 4, 2007, between the Company and Michael J. Ferrantino, Jr. 10.10 * Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa. 10.11 * Retention Bonus Plan 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. 47 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 31, 2008 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 and March 31, 2008 ------------------- Director Ted Valpey, Jr. /s/ Michael J. Ferrantino President, Chief Executive March 31, 2008 ------------------------- Officer and Director Michael J. Ferrantino (Principal Executive Officer) /s/ Michael J. Kroll Vice President, Treasurer and March 31, 2008 -------------------- Chief Financial Officer Michael J. Kroll (Principal Financial Officer and Principal Accounting Officer) /s/ Mario Alosco Director March 31, 2008 ---------------- Mario Alosco /s/ Richard W. Anderson Director March 31, 2008 ----------------------- Richard W. Anderson /s/ Eli Fleisher Director March 31, 2008 ---------------- Eli Fleisher /s/ Lawrence Holsborg Director March 31, 2008 --------------------- Lawrence Holsborg /s/ John J. McArdle III Director March 31, 2008 ----------------------- John J. McArdle III 48
Valpey-Fisher Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts ----------------------------------------------- Additions --------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period ----------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts: Year Ended: December 31, 2007 $ 115,000 $ 600 $ - $ (10,600) (1) $ 105,000 ------------------------------------------------------------------------------------- December 31, 2006 $ 115,000 $ 38,575 $ - $ (38,575) (1) $ 115,000 ------------------------------------------------------------------------------------- December 31, 2005 $ 100,000 $ 36,100 $ - $ (21,100) (1) $ 115,000 ------------------------------------------------------------------------------------- Inventory Reserve: Year Ended: December 31, 2007 $ 1,051,000 $ 25,184 $ - $ (151,184) (2) $ 925,000 ------------------------------------------------------------------------------------- December 31, 2006 $ 1,163,100 $ 109,600 $ - $ (221,700) (2) $ 1,051,000 ------------------------------------------------------------------------------------- December 31, 2005 $ 1,019,500 $ 351,800 $ - $ (208,200) (2) $ 1,163,100 -------------------------------------------------------------------------------------
(1) Amounts written-off, less recoveries. (2) Inventory disposed of. 49 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. Filed herewith. 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. Filed herewith. 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. (incorporated by reference to Exhibit 10.3 on Registrant's Form 10-K for the year ended December 31, 2006). 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 2007. (incorporated by reference to Exhibit 10.1 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 10.7 Amendment dated April 4, 2007 to Letter Agreement dated September 10, 2002, between the Company and Michael J. Ferrantino. (incorporated by reference to Exhibit 10.2 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 10.8 Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll. (incorporated by reference to Exhibit 10.3 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 10.9 Change in Control Retention Agreement, dated April 4, 2007, between the Company and Michael J. Ferrantino, Jr. (incorporated by reference to Exhibit 10.4 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 10.10 Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa. (incorporated by reference to Exhibit 10.5 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 10.11 Retention Bonus Plan. incorporated by reference to Exhibit 10.6 on Registrant's Form 10-Q for the quarterly period ended April 1, 2007). 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. 50 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. 51