UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-4184
Valpey-Fisher Corporation
(Exact name of registrant as specified in its charter)
Maryland 06-0737363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 South St., Hopkinton, Massachusetts 01748
(Address of principal executive offices) (Zip Code)
(508) 435-6831
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
As of May 10, 2004, the number of shares outstanding of Registrant's Common
Stock, par value $.05 was 4,216,315.
1
Valpey-Fisher Corporation
INDEX PAGE
----- ----
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements - Unaudited
Consolidated Condensed Balance Sheets
- March 28, 2004 and December 31, 2003 3
Consolidated Statements of Operations
- Three Months Ended March 28, 2004 and March 30, 2003 4
Consolidated Condensed Statements of Cash Flows
- Three Months Ended March 28, 2004 and March 30, 2003 5
Notes to Consolidated Condensed Financial Statements 6-8
ITEM 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
ITEM 3. - Quantitative and Qualitative Disclosures
About Market Risk 12
ITEM 4. - Controls and Procedures 12
PART II. OTHER INFORMATION
ITEM 6. - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Valpey-Fisher Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(In thousands, except share data)
3/28/04 12/31/03
------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $4,028 $4,209
Receivables, net 2,779 2,467
Inventories, net 1,719 1,571
Deferred income taxes and other current assets 717 675
- ------------------------------------------------------------------------------------------------------
Total current assets 9,243 8,922
Property, plant and equipment, at cost 10,809 10,752
Less accumulated depreciation 7,273 7,064
- ------------------------------------------------------------------------------------------------------
3,536 3,688
Other assets 143 134
- ------------------------------------------------------------------------------------------------------
$12,922 $12,744
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $827 $540
Accrued liabilities 840 900
- ------------------------------------------------------------------------------------------------------
Total current liabilities 1,667 1,440
Deferred income taxes 636 646
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: 4,214,315 and 4,184,815 shares 211 209
Capital surplus 5,080 4,999
Retained earnings 5,530 5,667
Less unearned compensation (202) (217)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,619 10,658
- ------------------------------------------------------------------------------------------------------
$12,922 $12,744
- ------------------------------------------------------------------------------------------------------
See notes to consolidated condensed financial statements.
3
Valpey-Fisher Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
Three Months
Ended
3/28/04 3/30/03
----------------------
Net sales $2,767 $1,711
Cost of sales 1,980 1,626
- -------------------------------------------------------------------------
Gross profit 787 85
Operating expenses:
Selling and advertising 396 375
General and administrative 473 373
Research and development 61 37
- -------------------------------------------------------------------------
930 785
Operating (loss) (143) (700)
Other income (expense):
Interest income 6 20
Interest (expense) - (12)
- -------------------------------------------------------------------------
6 8
(Loss) before income taxes (137) (692)
Income tax benefit - 235
- -------------------------------------------------------------------------
Net (loss) $(137) $(457)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Basic and diluted (loss) per share $(.03) $(.11)
- -------------------------------------------------------------------------
Basic and diluted weighted average shares 4,194 4,197
See notes to consolidated condensed financial statements.
4
Valpey-Fisher Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months
Ended
----------------
3/28/04 3/30/03
----------------
Cash flows from operating activities:
Net (loss) from operations $(137) $(457)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation and amortization 209 202
Deferred income taxes (10) 16
Net non-cash stock compensation 10 9
Changes in operating assets and liabilities (198) (330)
- ----------------------------------------------------------------------
Net cash (used) by operating activities (126) (560)
- ----------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (56) (25)
Collection of note receivables 8 5
Other, net (8) (8)
- ----------------------------------------------------------------------
Net cash (used) by investing activities (56) (28)
- ----------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 1 -
Payments on long-term debt - (1,277)
Purchases of common stock - (37)
- ----------------------------------------------------------------------
Net cash provided (used) by financing activities 1 (1,314)
- ----------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (181) (1,902)
Cash and cash equivalents:
Beginning of period 4,209 5,758
----------------
End of period $4,028 $3,856
----------------
Noncash Investing and Financing Activities:
In 2004, the Company issued 29,500 shares of stock valued at $85,500 to four
employees in payment for a bonus accrued in 2003.
See notes to consolidated condensed financial statements.
5
Valpey-Fisher Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
1. Financial Presentation:
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for fair presentation of results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year.
These interim financial statements should be read in conjunction with
the financial statements and related notes thereto included in the Company's
2003 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.
2. Stock Compensation Plans:
The Company applies the intrinsic value method, Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock option plans. The Company provides
the disclosure requirements of Statement of Financial Accounting Standards Nos.
123 and 148, "Accounting for Stock-Based Compensation," and related
interpretations and amendments.
The Company adopted the disclosure-only option under SFAS No.123
"Accounting for Stock-Based Compensation." The following table illustrates the
effect on net (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No.123 to stock-based compensation.
Three Months Ended
(in thousands, except per share amounts) 3/28/04 3/30/03
- -----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Net (loss), as reported $ (137) $ (457)
Deduct: Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related tax benefit (57) (35)
------------------------------
Pro forma net (loss) $ (194) $ (492)
==============================
Basic and diluted (loss) per share, as reported $ (.03) $ (.11)
==============================
Basic and diluted (loss) per share, pro forma $ (.05) $ (.12)
==============================
6
3. Acquisition:
On May 28, 2003, pursuant to an Asset Purchase Agreement dated April
30, 2003, the Company purchased certain assets consisting primarily of
inventories, machinery and equipment and the customer order backlog from MF
Electronics Corp. ("MF"), a privately held company located in New Rochelle, NY.
MF designs and manufactures a wide range of frequency control products. The
results of MF's operations have been included in the consolidated financial
statements since the date of acquisition. During the week of June 30, 2003, the
purchased assets and operations of MF were moved to the Company's facility
located in Hopkinton, MA.
The following unaudited pro forma financial information presents the
results of the Company as if the acquisition of MF was completed January 1, 2003
(in thousands, except for per share amounts):
Three Months Ended 3/30/03
Net sales $ 2,923
Net (loss) (661)
Basic and diluted (loss) per share $ (.16)
This pro forma financial information is presented for informational
purposes and is not necessarily indicative of the Company's operating results if
the acquisition had been in effect for the period presented. In addition, they
are not intended to be a projection of future results and do not reflect any
anticipated cost savings or operating efficiencies that the Company believes are
achievable.
4. Comprehensive Income (Loss):
During the three months ended March 28, 2004 and March 30, 2003, there
were no differences between comprehensive (loss) and net (loss).
5. Receivables, net:
Receivables, net of allowances, consist of the following:
(in thousands) 3/28/04 12/31/03
--------------------------------------------------------------------------------------------------------------------------
(unaudited)
Accounts receivable, less allowance for doubtful accounts of $86 and $80 $ 1,480 $ 1,161
Refundable income taxes 1,287 1,287
Other 12 19
----------------------------
$ 2,779 $ 2,467
============================
7
6. Inventories, net:
Inventories, net of reserves, consist of the following:
(in thousands) 3/28/04 12/31/03
---------------------------------------------------------------------------------------------------------------------------
(unaudited)
Raw materials $ 1,145 $ 1,110
Work in process 350 275
Finished goods 224 186
----------------------------
$ 1,719 $ 1,571
============================
7. (Loss) Per Share:
The computation of basic and diluted (loss) per share is computed
using the weighted average number of common shares outstanding during the three
months ended March 28, 2004 and March 30, 2003. During the three months ended
March 28, 2004 and March 30, 2003, 488,438 and 509,938, respectively of common
shares issuable under stock options have not been included in the computation of
"Diluted (Loss) per Share". These shares were not included because of the
antidilutive effect of the options since the Company reported a loss from
operations in these periods.
8. Reclassifications:
Certain reclassifications have been made to the 2003 financial
statements to conform to the current year presentation.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosure of
contingent assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes that judgments and estimates related to the following
critical accounting policies could materially affect its consolidated financial
statements.
Accounts receivable - The Company performs on-going credit evaluations of
its customers and assesses the collectibility of its accounts receivable based
on a number of factors including the customer's financial condition and
collection history, and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts.
Inventory - The Company estimates the carrying value of its inventory based
upon historic usage and management's assumptions relating to projected customer
purchases, product design changes and product obsolescence. The changing
technology markets that we supply also affect these estimates. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Income Taxes - The Company has recorded deferred tax assets and liabilities
resulting from differing treatment of items for tax and financial statement
reporting purposes. The Company must estimate its income tax valuation allowance
by assessing which deferred tax assets are more likely than not to be recovered
in the future. Based on our assessment of the realization of these assets, the
Company has recorded a valuation allowance of $704,000 at March 28, 2004. In
reaching our conclusion, we evaluated the existence of deferred tax liabilities
that can be used to absorb deferred tax assets, the deductibility of the
disposal of scrap and worthless inventory, taxable income in prior carryback
years and taxable income by jurisdiction in which we operate and the period over
which the deferred tax assets would be recoverable. In the event that actual
results differ from these estimates in future periods, the Company may need to
establish an additional valuation allowance or reduce the valuation allowance,
which could materially impact our financial position and results of operations.
Liquidity and Capital Resources
Cash and cash equivalents decreased $181,000 during the three months
ended March 28, 2004. During this period, the Company's operations used cash of
$126,000 and investing activities used cash of $56,000.
Cash used for operations of $126,000 resulted mainly from the net loss
of $137,000 adjusted for the non-cash effect of depreciation of $209,000 and the
$198,000 increase in working capital. The net increase in working capital was
mainly due to a $325,000 increase in trade accounts receivables, a $148,000
increase in inventory offset in part by a $287,000 increase in accounts payable.
The increase in accounts receivable is mainly due to the increased sales level
and to a lesser extent an increase in the days sales outstanding from 47 days at
December 31, 2003 to 51 days at March 28, 2004. The inventory increase is mainly
to support the increased level of sales and backlog. The increase in accounts
payable is due to the timing of inventory and equipment purchases.
9
While the Company is projecting a loss in 2004 based on the current
conditions in the telecom market, management believes that based on its current
working capital and the expected cash flows from operations, the Company's
resources are sufficient to meet its financial needs in 2004 including a
remaining capital expenditures budget of approximately $200,000.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet financing
arrangements.
Contractual Obligations
During the normal course of business, we incur certain commitments to
make future payments for the purchase of inventory and production supplies based
on projected requirements. At March 28, 2004, the Company has outstanding
purchase commitments totaling approximately $825,000, all of which are expected
to be fulfilled in 2004.
Results of Operations
For the quarter ended March 28, 2004, net sales increased $1,056,000 or
62% over the comparable quarter in 2003. Sales from the MF Electronics product
line acquired at the end of May 2003 accounted for approximately 55% of the
sales increase. Increased unit sales accounted for the majority of the sales
increase from the remaining product lines. The book-to-bill ratio during the
quarter ended March 24, 2004 was 1.17 versus 1.1 during the comparable period in
2003. The Company's backlog amounted to $2.3 million at March 28, 2004 compared
to $1.8 million at December 31, 2003 and $1.2 million at March 30, 2003. The
Company saw increased activity in the IT markets (servers, switches and storage)
and some slight increase in the telecom market during the quarter ended March
28, 2004. Management believes that the market conditions for the Company's
products, in particular those for the telecom market, are slowly starting to
stabilize and in fact show modest growth. However, our near-term visibility
continues to be poor and we continue to see customer orders for small quantities
with near-term delivery dates. Management is not sure of the potential impact on
its future operations from the current continuing telecom market uncertainties
and our industry's over capacity issues.
The Company reported a $787,000 gross profit (28% of net sales) in
the current quarter versus a $85,000 gross profit (5% of net sales) in the 2003
quarter. Approximately 55% of the increase was due to the gross profit provided
by the MF Electronics product line sales. The remaining increase was generated
from the higher margins from the existing product lines resulting mainly from
the favorable effect of spreading the fixed overhead costs over the higher sales
level. During the current period, as a percentage of sales, direct labor
remained fairly constant with the 2003 quarter and raw material costs decreased
slightly from the 2003 period manly due to changes in product mix and yield
improvements.
Selling and advertising expenses increased $21,000 or 6% over the
comparable quarter in 2003. As a result of the 2004 sales increase, sales
commission expense to outside manufacturers' representatives increased $47,000
over the 2003 quarter. Travel expense increased approximately $15,000 as a
result of increased customer visits. These increases were partially offset by a
$40,000 reduction in personnel expense. .
10
During the quarter ended March 28, 2004, general and administrative
expenses increased $100,000 or 27% over the comparable 2003 period. Increased
professional fees, primarily as a result of costs relating to the new financial
reporting and corporate governance requirements, and personnel costs accounted
for a majority of the increase.
Research and development expenses amounted to $61,000 during the
quarter ended March 28, 2004, a $24,000 increase from the $37,000 reported in
the comparable 2003 period. The increase was primarily due to increased
personnel expenses.
The decrease in interest income was mainly due to the lower average
cash balances in 2004 and, to a lesser extent, lower interest rates during the
current year. The decrease in interest expense from the 2003 amount is due to
the Company paying-off the balance of its outstanding term-debt in the first
quarter of 2003.
During the quarter ended March 28, 2004, the Company did not provide
for income taxes based on the estimated taxable loss this year due to the
uncertainty surrounding the realization of these future tax benefits. The
estimated effective federal and state income tax rate for 2003 is 33%. The
Company is providing a valuation allowance for the full amount of the state
income tax benefit in 2003 due to the uncertainty of realization.
For the quarter ended March 28, 2004, the Company reported an operating
loss of $143,000 compared to an operating loss of $700,000 in comparable quarter
of 2003. The reduction in operating losses was mainly due to the increases in
sales and gross margin in 2004, offset in part by higher operating expenses. As
a result, the Company reported a pre-tax loss of $137,000 during the quarter
ended March 28, 2004 compared to a pre-tax loss of $692,000 in comparable 2003
period. For the quarter ended March 28, 2004, the Company reported a net loss of
$137,000 versus a net loss of $457,000 in 2003.
Forward-Looking Statements
Certain statements made herein contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Words such as
"expects", "believes", "estimates", "plans" or similar expressions are intended
to identify such forward-looking statements. The forward-looking statements are
based on the Company's current views and assumptions and involve risks and
uncertainties that include, but not limited to: the Company's ability to achieve
profitability, the current production over-capacity within the suppliers
frequency control devices, the ability to develop, market and manufacture new
innovative products competitively, the fluctuations in product demand of the
telecommunications industry, the ability of the Company and its suppliers to
produce and deliver materials and products competitively, and the ability to
limit the amount of the negative effect on operating results caused by pricing
pressure.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's cash balances in excess of operating requirements are
currently invested in money market accounts. These money market accounts are
subject to interest rate risk and interest income will fluctuate in relation to
general money market rates. Based on the cash and cash equivalent balance at
March 28, 2004, and assuming the balance was totally invested in money market
instruments for the full year, a hypothetical 1% point decline in interest rates
would result in an approximate $40,300 decrease in interest income.
The Company purchases certain inventory from and sells product in
foreign countries. As these activities are currently transacted in U.S. dollars,
they are not subject to foreign currency exchange risk. However, significant
fluctuation in the currencies where the Company purchases inventory or sells
product could make the U.S. dollar equivalent of such transactions more or less
favorable to the Company and the other involved parties.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
At the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective.
Changes in internal control.
During the first quarter of 2004, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
(b) Reports on Form 8-K
On February 27, 2004, the Registrant filed a report on Form 8-K
dated February 27, 2004 reporting under Item 7.(c) Exhibits and
Item 12. Results of Operations and Financial Condition.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Valpey-Fisher Corporation
Date: May 10, 2004 By /s/ Michael J. Ferrantino
----------------------------
Michael J. Ferrantino,
President and Chief Executive Officer
Date: May 10, 2004 By /s/ Michael J. Kroll
-----------------------
Michael J. Kroll
Vice President, Treasurer and
Chief Financial Officer
14