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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2005
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, 2005, the number of shares outstanding of Registrant's Common
Stock, par value $.05 was 4,246,503.
1
Valpey-Fisher Corporation
INDEX PAGE
----- -----
PART I. FINANCIAL INFORMATION
ITEM 1. - Financial Statements -
Consolidated Condensed Balance Sheets - April 3, 2005 (Unaudited) and
December 31, 2004 (Audited)
3
Consolidated Statements of Operations - (Unaudited)
Three Months Ended April 3, 2005 and March 28, 2004 4
Consolidated Condensed Statements of Cash Flows - (Unaudited)
Three Months Ended April 3, 2005 and March 28, 2004 5
Notes to Consolidated Condensed Financial Statements 6-7
ITEM 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
ITEM 3. - Quantitative and Qualitative Disclosures About Market Risk 10
ITEM 4. - Controls and Procedures 10-11
PART II. OTHER INFORMATION
ITEM 6. - Exhibits 11
SIGNATURES 12
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Valpey-Fisher Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(In thousands, except share data)
4/3/05 12/31/04
--------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,384 $ 6,455
Accounts receivable, net of allowances of $86 in 2005 and $100 in 2004 1,527 1,137
Inventories, net 1,235 1,501
Deferred income taxes and other current assets 663 629
- ----------------------------------------------------------------------------------------------------
Total current assets 9,809 9,722
Property, plant and equipment, at cost 10,853 10,807
Less accumulated depreciation 7,998 7,808
- ----------------------------------------------------------------------------------------------------
2,855 2,999
Other assets 153 143
- ----------------------------------------------------------------------------------------------------
$ 12,817 $ 12,864
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 593 $ 409
Accrued liabilities 996 1,246
- ----------------------------------------------------------------------------------------------------
Total current liabilities 1,589 1,655
Deferred income taxes 543 578
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: 4,222,519 and 4,222,519 shares 211 211
Capital surplus 5,070 5,076
Retained earnings 5,547 5,502
Less unearned compensation (143) (158)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 10,685 10,631
- ----------------------------------------------------------------------------------------------------
$ 12,817 $ 12,864
====================================================================================================
See notes to consolidated condensed financial statements.
3
Valpey-Fisher Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended
4/3/05 3/28/04
-------------------
Net sales $ 3,022 $ 2,767
Cost of sales 2,057 1,980
- --------------------------------------------------------------------------------
Gross profit 965 787
Operating expenses:
Selling and advertising 371 396
General and administrative 461 473
Research and development 87 61
- --------------------------------------------------------------------------------
919 930
Operating profit (loss) 46 (143)
Other income:
Interest income 23 6
- --------------------------------------------------------------------------------
23 6
Earnings (loss) before income taxes 69 (137)
Income tax (expense) benefit (24) -
- --------------------------------------------------------------------------------
Net earnings (loss) $ 45 $ (137)
================================================================================
- --------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share $ .01 $ (.03)
================================================================================
Basic weighted average shares 4,223 4,194
Diluted weighted average shares 4,312 4,194
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
-------------------
4/3/05 3/28/04
-------------------
Cash flows from operating activities:
Net earnings (loss) from operations $ 45 $ (137)
Adjustments to reconcile net earnings (loss) to net cash
(used) by operating activities:
Depreciation and amortization 190 209
Deferred income taxes (33) (10)
Net non-cash stock compensation 9 10
Changes in operating assets and liabilities (226) (198)
- --------------------------------------------------------------------------------
Net cash (used) by operating activities (15) (126)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (46) (56)
Collection of note receivables - 8
Other, net (10) (8)
- --------------------------------------------------------------------------------
Net cash (used) by investing activities (56) (56)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised - 1
- --------------------------------------------------------------------------------
Net cash provided by financing activities - 1
- --------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (71) (181)
Cash and cash equivalents:
Beginning of period 6,455 4,209
-------------------
End of period $ 6,384 $ 4,028
===================
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 unaudited interim financial statements should be read in conjunction
with the financial statements and related notes thereto included in the
Company's 2004 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 earnings (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) 4/3/05 3/28/04
- ------------------------------------------------------------------------------------------------
(unaudited)
Net earnings (loss), as reported $ 45 $ (137)
Deduct: Total stock-based employee compensation expense determined under
the fair value based method for all awards, net of related tax effects (37) (57)
----------------
Pro forma net earnings (loss) $ 8 $ (194)
================
Basic and diluted earnings (loss) per share, as reported $ .01 $ (.03)
================
Basic and diluted earnings (loss) per share, pro forma $ .00 $ (.05)
================
6
3. Comprehensive Income (Loss):
During the three months ended April 3, 2005 and March 28, 2004, there were
no differences between comprehensive income (loss) and net income (loss).
4. Inventories, net:
Inventories, net of reserves, consist of the following:
(in thousands) 4/3/05 12/31/04
---------------------------------------------------------------------------
(unaudited)
Raw materials $ 707 $ 964
Work in process 281 204
Finished goods 247 333
-------------------
$ 1,235 $ 1,501
===================
5. Earnings (Loss) Per Share:
Basic earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share reflects the net incremental shares that would
be issued if dilutive outstanding stock options were exercised using the
treasury stock method. The computation of diluted earnings (loss) per share
excludes stock options with an exercise price in excess of the average market
price as they are antidilutive. During the three months ended April 3, 2005, the
computation of dilutive earnings (loss) per share included 89,790 of net
incremental shares from dilutive stock options and excluded 28,750 of stock
options, as the exercise prices were greater than the average market price.
During the three months ended March 28, 2004, 488,438 common shares issuable
under stock options have not been included in the computation of "Diluted
Earnings (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 this period.
6. Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment,"
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under SFAS No.
123 will no longer be an alternative to financial statement recognition. On
April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule
amending compliance dates for SFAS No. 123R. In accordance with the new rule,
the Company will be required to adopt the accounting provisions of SFAS No. 123R
in its first quarter of 2006, beginning January 1, 2006. The Company is
currently evaluating the impact of the adoption of this statement.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosure of
contingent assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes that judgments and estimates related to the Company's
critical accounting policies could materially affect its consolidated financial
statements. The Company's most critical accounting policies, which were
discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, pertain to accounts receivable, inventories and income taxes.
Those policies continue to be the Company's most critical accounting policies
for the period covered by this report and there were no significant changes in
the application of those policies during this reporting period.
Liquidity and Capital Resources
Cash and cash equivalents decreased $71,000 during the three months ended
April 3, 2005. During this period, the Company's operations used cash of $15,000
and investing activities used cash of $56,000.
Cash used for operations of $15,000 resulted mainly from the net earnings
of $45,000 adjusted for the net effect of non-cash items, mainly depreciation
and amortization, of $166,000 offset by a $226,000 increase in working capital.
The net increase in working capital was mainly due to a $390,000 increase in
accounts receivable, net and a $250,000 reduction in accrued liabilities offset
in part by a $266,000 reduction in inventory and an $184,000 increase in
accounts payable. The increase in accounts receivable is mainly due to a
combination of the increased sales level compared to the 4th quarter of 2004 and
the increase in the days sales outstanding from 44 days at December 31, 2004 to
49 days at April 3, 2005. The reduction in accrued liabilities is mainly due to
the $340,000 payment of incentive compensation to employees. The reduction in
inventory is mainly due to a continuing control of inventory levels. The
increase in accounts payable is primarily due to the timing of inventory and
equipment purchases.
Management believes that based on its current working capital and the
expected cash flow from operations, the Company's resources are sufficient to
meet its financial needs and to fund the capital expenditures for the projected
levels of business in 2005.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet financing arrangements.
Contractual Obligations
During the normal course of business, the Company incurs certain
commitments to make future payments for the purchase of inventory and production
supplies based on projected requirements. At April 3, 2005, the Company has
outstanding purchase commitments totaling approximately $573,000, all of which
are expected to be fulfilled in 2005.
8
Results of Operations
During the quarter ended April 3, 2005, net sales increased $255,000 or 9%
over the comparable quarter in 2004 mainly due to a combination of increased
sales of its high reliability ("high-rel") products and higher sales to
customers in the telecom market. While the actual number of units sold decreased
from the prior year, the sales increase was due to an increase in the average
selling prices of products sold as the Company continues to move to more
value-added, high-rel products. The Company also saw an increase in bookings
during the current quarter compared to the 3rd and 4th quarters of 2004. The
book-to-bill ratio during the quarter ended April 3, 2005 was 1.03 versus 1.17
during the comparable period in 2004. The Company's backlog amounted to $1.9
million at April 3, 2005 compared to $1.8 million at December 31, 2004 and $2.3
million at 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 $965,000 gross profit (32% of net sales) in the
current quarter versus a $787,000 gross profit (28% of net sales) in the 2004
quarter. The higher margin was mainly attributable to a decrease in raw material
costs due to changes in product mix toward the more value-added, high-rel
products and yield improvements. Direct labor and overhead costs as a percentage
of sales in 2005 remained fairly consistent with that in the 2004 period.
Selling and advertising expenses decreased $25,000 or 6% from the
comparable quarter in 2004. The primary reasons for the decrease were reductions
in travel and entertainment expenses ($21,500) and personnel expense ($10,000)
being partially offset by a $10,000 increase in advertising expense.
During the quarter ended April 3, 2005, general and administrative expenses
decreased $12,000 or 3% from the comparable 2004 period as the Company continues
to control its discretionary expenses.
Research and development expenses increased $26,000 over the $61,000
reported in the comparable 2004 period primarily as a result of increased
personnel expenses. The 43% increase is consistent with the Company's plan to
make significant engineering investments in new product development in 2005.
The $17,000 increase in interest income in 2005 was due to a combination of
higher average cash balances and higher interest rates during the current year.
The annual combined federal and state income tax rate for 2005 is estimated
to be 34%. As the Company has state income tax NOL carryforwards available,
there is no estimated state income tax provision for 2005. During the quarter
ended March 28, 2004, the Company did not provide for income taxes based on the
estimated taxable loss for the year and the uncertainty surrounding the
realization of these future tax benefits.
For the quarter ended April 3, 2005, the Company reported an operating
profit of $46,000 compared to an operating loss of $143,000 in comparable
quarter of 2004. The improvement in the operating performance was mainly due to
the increases in sales and gross margin in 2005 and a slight reduction in
operating expenses. As a result, the Company reported a pre-tax profit of
$69,000 during the quarter ended April 3, 2005 compared to a pre-tax loss of
$137,000 in comparable 2004 period. For the quarter ended April 3, 2005, the
Company reported net earnings of $45,000 versus a net loss of $137,000 in 2004.
9
Forward-Looking Statements
Certain statements made herein contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Words such as
"expects", "believes", "estimates", "plans" or similar expressions are intended
to identify such forward-looking statements. The forward-looking statements are
based on the Company's current views and assumptions and involve risks and
uncertainties that include, but not limited to: the Company's ability to
continue to achieve profitability, the current production over-capacity within
the suppliers of frequency control devices, the ability to develop, market and
manufacture new innovative products competitively, the fluctuations in product
demand of the telecommunications industry, the ability of the Company and its
suppliers to produce and deliver materials and products competitively, the
ability to limit the amount of the negative effect on operating results caused
by pricing pressure and the Company's ability to comply with Section 404 of the
Sarbanes-Oxley Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's cash balances in excess of operating requirements are
currently invested in money market accounts. These money market accounts are
subject to interest rate risk and interest income will fluctuate in relation to
general money market rates. Based on the cash and cash equivalent balance at
April 3, 2005, and assuming the balance was totally invested in money market
instruments for the full year, a hypothetical 1% point increase or decrease in
interest rates would result in an approximate $63,800 increase or decrease in
interest income.
The Company purchases certain inventory from and sells product in foreign
countries. As these activities are currently transacted in U.S. dollars, they
are not subject to foreign currency exchange risk. However, significant
fluctuation in the currencies where the Company purchases inventory or sells
product could make the U.S. dollar equivalent of such transactions more or less
favorable to the Company and the other involved parties.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
At the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the Company's management, including
the Company's President and Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation,
the President and Chief Executive Officer and the Chief Financial Officer
concluded, except as noted below, that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC filings and that
information required to be disclosed by the Company in these periodic filings is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
As stated in the Company's 2004 Form 10-K, the Company's independent
registered accounting firm advised management and the audit committee in March
2005, that the following identified internal control deficiencies constituted a
significant deficiency in the Company's internal control.
1. Reliance on the Chief Financial Officer for period end financial reporting
functions, accounting estimates and income taxes.
10
2. The lack of adequate segregation of duties in certain accounts payable and
payroll functions and certain account reconciliations.
We believe that these deficiencies did not affect the accuracy of our
financial statements in this report. As of April 3, 2005, the Company has
instituted certain management review procedures to correct certain of the lack
of segregation of duties and account reconciliations described above. Management
will continue to evaluate the employees involved and the control procedures in
place, the risks associated with such lack of segregation of duties and whether
the potential benefits of adding employees to clearly segregate duties or other
alternatives justifies the expense associated with the changes. 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 is aware that there is a lack of
segregation of duties in some areas due to the size of the Company and the
limited number of employees within the financial and administrative departments
of the Company. In addition, management will review this matter with its outside
consultants to examine other available alternative solutions.
Changes in internal control.
Other than as discussed above, during the first quarter of 2005, there were
no changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits
10.1 Key Employee Bonus Plan for 2005. Filed herewith.
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
11
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, 2005 By /s/ Michael J. Ferrantino
----------------------------
Michael J. Ferrantino,
President and Chief Executive Officer
Date: May 10, 2005 By /s/ Michael J. Kroll
-----------------------
Michael J. Kroll
Vice President, Treasurer and Chief
Financial Officer
12