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 SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010OR[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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. Employerincorporation 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
The NASDAQ Stock Market LLC




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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [  ]   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: $5,074,832 (computed by reference to the last sales price of such common stock on July 2, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported in the NASDAQ Stock Market ).
 
 Number of shares of common stock outstanding at March 24, 2011:  4,347,785
 
 Documents incorporated by reference:
  Portions of the Registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
  2




Forward Looking Statements
 
 Information included or incorporated by reference in this Annual Report on Form 10-K may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.
 
 This Annual Report on Form 10-K contains forward-looking statements that  may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Business,” as well as in this Annual Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Annual Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Annual Report will in fact be accurate.
 
 
 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, development, production, import, and sale of various custom designed products including frequency control products, RF microwave components and ultrasonic transducers.
 
 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.
  3
 
 We provide a wide-frequency range of 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 telecom and wireless markets, and●
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, wireline 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.
 
 During the 4th quarter of 2009, the Company created a microwave product group to focus on the design, development, production, and marketing of high performance RF microwave components and integrated modules. During 2010, we have brought to market certain RF microwave components including: fixed and voltage variable attenuators, 90 degree hybrid couplers, directional couplers, and 2-way and 4-way power dividers.  The target markets for these products include the wireless infrastructure, microwave radio, point-to-point radio, RFID (radio-frequency identification), GPS, and military communications.
 
 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, acoustic microscopy and particle sizing.
 
 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 our customers.  Approximately 21% of our 2010 sales (14% in 2009) were attributable to products manufactured by one supplier.
 
 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.
  4
 
 Marketing and Customers
 
 The Company markets and sells its products using a combination of direct sales personnel, independent manufacturers’ representatives, distributors and our website.  We market our products using editorial and paid advertising in trade publications, participation in trade shows, product catalogs and detailed data sheets.
 
 We sell our frequency control products primarily to original equipment manufacturers(OEMs), electronics manufacturing services (EMS) companies, and distributors.  Our distributors also sell to both the OEMs and EMS companies. Targeted customers for our microwave products include OEMs and distributors.  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 EMS companies.  As a result, this has tended to increase the concentration of sales to the EMS companies.  Sales to Flextronics Corporation, an EMS company, accounted for approximately 12 % of our net sales in both 2010 and 2009.
 
 Sales to our five largest customers accounted for approximately 31% of our sales in 2010 compared to 32% of our sales in 2009.  Sales to EMS companies accounted for approximately 42% of our sales in 2010 compared to 35% in 2009.
 
 Export sales amounted to approximately 34% of our sales in 2010 and 2009.  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.
 
 Seasonal Fluctuations
 
 During the last few years, we have noticed that some of our customers, most notably the EMS 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.
  5
 
 Research and Development
 
 Research and development expenses amounted to $1,249,700 in 2010 and $627,100 in 2009.  Expenses related to the microwave product line accounted for about $489,000 of the increase in 2010.During 2011, we intend to continue our efforts to develop new products and manufacturing processes which would leverage off our expertise in the timing area and to invest in the expansion of our product offering in the microwave component product line.
 Backlog
 
 Our backlog of firm orders was approximately $1,762,000 at December 31, 2010 compared to $2,023,000 at December 31, 2009.  We expect to ship the entire December 31, 2010 backlog during 2011.
 
 Competition
 
 There are many domestic and foreign suppliers of frequency control and microwave products. 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, especially in the high-volume, standard product market.  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.
 
 Intellectual Property
 
 The Company has no patents, trademarks or licenses that are considered to be important to our business.  We believe our technical strength and competitiveness depends on our proprietary know-how and processes and the technical competence and creativity of our engineering and technical staff.  We rely on non-disclosure agreements with our employees to protect our intellectual property.
 
 Employees
 
 At December 31, 2010, we employed 60 people.  Our future success depends in large part on the continued service of our key technical and senior management personnel and on our ability to continue to attract and retain highly qualified technical and managerial personnel.  Competition for qualified employees in our industry is at times intense.   None of our employees are represented by a collective bargaining unit. We consider our relations with our employees to be satisfactory.
  6
 
 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 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Report, which Note is incorporated by reference.
 
 Available Information
 
 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.
  7
 
 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.
 
 Risks Related to Our Business and Industry
 Our results for 2011 may be negatively impacted by the current global economic conditions and uncertainties.
 
 While the global credit and financial markets appear to be recovering, the uncertainty concerning the current global economy persists as we enter 2011.  These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities.  In addition, our customers and suppliers also may face credit and debt issues, which could have an adverse effect on their operations.  A continued global economic downturn could have an adverse effect on our revenue, operating results and cash flow. In addition we could experience decreased demand for our products, increased risk of excess inventories, and increased risk in the collectability of accounts receivable from our customers.
 
 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 2010, sales to our top five customers accounted for approximately 31% of our sales compared to 32% in 2009.  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.
 
 We rely upon one supplier for a significant portion of our revenue.
 
 Approximately 21% of our 2010 revenue was attributable to products manufactured by one supplier and we expect this supplier to account for a similar percentage of our 2011 revenue.  We do not have a written, long-term supply contract with this supplier.  If this supplier is not able or not willing to manufacture and deliver products on time and at quantities and prices acceptable we may be forced to manufacture the products internally or find other replacement suppliers.  We could encounter difficulties in finding another source for these products based on the current supplier’s product knowledge and process capability.  As a result, a significant change in the supplier’s manufacturing capability or in our relationship with this supplier could have an adverse impact on our operating results and financial condition.
  8
 
 A significant portion of our revenues are to Electronics Manufacturing Services (EMS) companies.  If we fail to successfully obtain orders from the EMS companies, our operating results and financial condition could be negatively affected.
 
 Approximately 42% of the Company’s sales in 2010 were to EMS companies.  There is a continuing trend among original equipment manufacturers (OEMs) to outsource the manufacture of their product to EMS companies.  We first work with and receive design wins from OEMs.  We then have to negotiate pricing, quantities and delivery with the EMS companies.  If we fail to successfully obtain orders from the EMS companies, our operating results and financial condition could be negatively affected.
 
 We purchase products from foreign suppliers in U.S. dollars.  As exchange rates fluctuate, our costs for these products may become more expensive.
 
 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.
 
 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.
 
 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:
  9




●
the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired business,●
the possible adverse effects on the Company’s operating results during the integration period,●
the loss of key employees, customers and vendors as a result of the change in management, and●
our possible inability to achieve the intended objectives of the transaction.




In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of debt.
 
 Our success depends on our ability to retain our existing management and technical team and to recruit and retain qualified technical, sales and marketing and management personnel.
 
 Our future growth and success will depend in a large part on our ability to retain our existing management and technical team and to recruit and retain qualified technical, sales and marketing and management personnel.  Competition for qualified employees in our industry is at times intense.  The loss of any of these key personnel or our inability to attract and retain these key employees to operate and expand our business could adversely affect our operations.
 
 We face global business, political and economic risks which may adversely affect us.
 
 We sell our products to customers and purchase inventory from vendors located outside of the United States.  As a result, we face global business, political and economic risks which may adversely affect us.  These risks include, but are not limited to:
  ●
political and economic instability in countries where our products are sold or manufactured,●
expropriation or the imposition of government controls,●
export license requirements,●
trade restrictions,●
high levels of inflation or deflation,●
greater difficulty in collecting our accounts receivable and longer payment terms,●
less favorable intellectual property laws, and●
increases in duties.




10




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.
 
 Risks Related to Our Common Stock
 
 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 42% 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.
 
 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 42% of the outstanding shares on a fully diluted basis.  5% holders, other than our directors and executive officers, and institutional holders own approximately 24% of the outstanding shares.   During 2010, the average trading volume of our common stock was approximately 2,800 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.
  11
  Item 1B.  Unresolved Staff Comments
 
 Not applicable.
 
 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.
 
 We lease approximately 1,000 square feet of engineering space in Nashua, NH.
 
 Item 3.  Legal Proceedings
 
 Not applicable.
  Item 4.  Reserved
  12
 
 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 NASDAQ Capital Market 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,

2010


2009High


Low


High


Low4th quarter

$
4.50


$
2.24


$
1.59


$
1.203rd quarter


2.75



1.55



1.60



1.102nd quarter


2.85



1.54



1.58



1.001st quarter


1.68



1.25



1.95



0.91




No dividends were paid in 2010 and 2009.
 
 The number of stockholders of record on March 21, 2011 was 566.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, 2010 regarding the number of shares of our common stock that may be issued under our equity compensation plans.
 
 Plan Category

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights


Weighted-average

exercise price of

outstanding options,

warrants and rights


Number of securities

remaining available

for future issuance

under equity

compensation plans

(excluding securities

reflected in the first column)Equity compensationplans approved bysecurity holders (1)


495,403


$
1.29



77,090Equity compensationplans not approved bysecurity holders


-0-



-0-



-0-




(1)
Includes the 2003, 2001,and 1999 Stock Option Plans.




13




Stock Repurchases
 
 At December 31, 2010, under prior authorizations from the Board of Directors, we are authorized to purchase up to 219,700 shares of common stock through the open market or negotiated transactions.
 
 We made no repurchases of our common stock in the fourth quarter of 2010.
  14
 
 Item 6. Selected Financial Data
  Years Ended December 31,

2010


2009


2008


2007


2006(in thousands, except per share data)Continuing operations:Net sales

$
14,716


$
10,378


$
13,021


$
13,419


$
11,782Gross profit


5,651



3,452



5,061



5,441



4,469Earnings (loss) before income taxes


901



(300
)


1,328



1,712



778Income tax (expense) benefit


(278
)


87



(592
)


(521
)


71Earnings (loss)


623



(213
)


736



1,191



849Discontinued operations- net of income tax benefit


-



-



-



-



(180
)Net earnings (loss)

$
623


$
(213
)

$
736


$
1,191


$
669Basic earnings (loss) per share:Continuing operations

$
.14


$
(.05
)

$
.17


$
.28


$
.20Discontinued operations


-



-



-



-



(.04
)$
.14


$
(.05
)

$
.17


$
.28


$
.16Diluted earnings (loss) per share:Continuing operations

$
14


$
(.05
)

$
.17


$
.27


$
.20Discontinued operations


-



-



-



-



(.04
)$
.14


$
(.05
)

$
.17


$
.27


$
.16Cash dividends per share

$
-


$
-


$
1.50


$
-


$
-Total assets, end of year

$
11,075


$
9,549


$
10,086


$
15,950


$
14,529Long-term debt, end of year

$
-


$
-


$
-


$
-


$
-




15




Item 7.Management’s Discussion and Analysis of Financial Condition and
 Results of Operations
 
 Critical Accounting Policies
 
 Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.
 
 Management believes that judgments and estimates related to the following critical accounting policies could materially affect its consolidated financial statements.
  Accounts receivable - We perform on-going credit evaluations of our customers and assess the collectability 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 do not have a valuation allowance at December 31, 2010.   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 a valuation allowance, which could materially impact our financial position and results of operations.
 
 Financial Condition and Liquidity
 Cash and cash equivalents amounted to $4,452,000 at December 31, 2010, an increase of $398,800 over the December 31, 2009.  The primary source of funds was $965,100 of cash generated from our operations and the main use of cash was capital expenditures of $588,100.
 
 The cash generated from operations resulted from net earnings of $623,100 and the net positive adjustments of $604,300 from the non-cash effects of depreciation and provisions for inventory, deferred income taxes and stock compensation offset by the net cash outflow of $262,300 from changes in our operating assets and liabilities.  The major items accounting for the net cash outflow from changes in our operating assets and liabilities were increases of $669,000 in receivables and $408,700 in inventory offset in part by a $748,200 increase in accounts payable and accrued liabilities.  Theincrease in accounts receivable is mainly due to the 27% increase in the current year’s 4th quarter sales over the comparable quarter in 2009 and, to a lesser extent, due to a 7% increase in the number of day’s sales outstanding.
  16
  .
  Capital expenditures amounted to $588,100 in 2010 and related primarily to new production and test equipment capabilities in connection with in introduction of new products and enhancements to our existing products.  We expect our 2011 capital expenditures to be in the range of $1.5 million as we continue to increase and expand our product offerings and capabilities.
 
 On December 30, 2010, we entered into a loan agreement and security agreement with a bank.  The agreement provides for a $1,000,000 revolving loan and a $1,000,000 revolving equipment loan.  The loans are secured by accounts receivable, inventory and equipment. There were no amounts outstanding under the revolving equipment loan at December 31, 2010.  The Company had $799,000 available under the revolving loan at December 31, 2010, net of a $201,000 irrevocable standby letter of credit.
  We believe that based on our current working capital, the expected cash flows from operations and our borrowing availability under our current credit arrangement, our resources are sufficient to meet our financial needs and to fund our capital expenditures for the projected levels of business in 2011.
 
 Results of Operations – 2010 versus 2009
 
 Our net sales increased $4,338,000 (42%) from 2009 as all product lines experienced sales growth resulting primarily from an increase in the overall number of units sold.  The higher sales levels resulted from an increase in demand for our products as our bookings began to improve in the 4th quarter of 2009and continued to improve through most of 2010.During most of 2009 the global economic factors adversely impacted our bookings, revenue and operating performance.  Bookings during 2010 were $3,755,000 (35%) higher than in 2009.  At December 31, 2010 our backlog amounted to $1,762,000 versus $2,023,000 at December 31, 2009.
 
 Our gross profit in 2010 increased $2,198,900 (64%) over 2009 and as a percentage of sales was 38% compared to 33% in 2009.  The favorable effect of spreading the fixed overhead costs over the higher sales volume, offset in part by an increase in the raw material percentage, was the main reason for the increase in the gross profit percentage.  Raw material costs as a percentage of sales were about 2 percentage points higher in 2010 compared to 2009 mainly due to changes in the product mix of sales.
 
 Selling and advertising expenses increased $463,800 (29%) over 2009.  The main reasons for the higher expense were increases of $198,000 in employee compensation and benefits, $91,000 in commission expense to outside sales representatives, $65,000 in incentive compensation under the Company’s key employee bonus plan for 2010 and $54,000 in advertising expense.  The increase in employee compensation and benefits is mainly due to an increase in the number of employees.During the 4th quarter of 2009, the Company decided to expand its product offering with the formation of a microwave product line that will focus on microwave components and modules. Expenses related to the microwave product line accounted for about $238,000 of the 2010 expense increase.
  General and administrative expenses increased $161,300 (13%) from 2009 mainly as a result of an increase of $225,000 in incentive compensation under the Company’s key employee bonus plan for 2010, partially offset by a $67,000 reduction in employee compensation and benefits.   The reduction in employee compensation and benefits mainly results from the difference in salaries of the current CEO and the former CEO.
  17
 
 Research and development expenses increased $622,600 over the $627,100 recorded in 2009.  Increases of $309,800 in employee compensation and benefits and $229,800 in operating supplies were the main reasons for the higher expense.  Employee compensation included an increase of $75,100 in incentive compensation expense over 2009 under the Company’s key employee bonus plan for 2010 with the remaining increase mainly due to an increase in the number of employees.   Expenses related to the microwave product line accounted for about $489,000 of the increase in 2010.
 
 In the third quarter of 2009, the Company and Michael Ferrantino, Sr., the Chief Executive Officer (“CEO”) and a Director of the Company at that time, entered into a Retirement Agreement and General Release.   Effective October 31, 2009, Mr. Ferrantino resigned as CEO and a Director of the Company.   Pursuant to the Retirement Agreement, the Company paid Mr. Ferrantino a lump sum retirement payment of $265,225 on November 9, 2009 and Mr. Ferrantino agreed to a one year non-compete provision, an eighteen month non-solicitation provision and a general release of claims.
 
 During 2010 interest income decreased $15,500 (49%) from 2009 as a result of the effect of interest rates being approximately 70 basis points lower during 2010.
 
 The combined federal and state income tax rate for 2010 is 31% compared to 29% in 2009.  The 2010 rate differs from the expected combined rate of 40% mainly due to the effects of the research activities tax credit and state tax provisions.  The 2009 rate differs from the expected combined rate of 40% mainly due to the effects of non-deductible stock option and meals and entertainment expenses.
 
 We reported an operating profit of $885,000 in 2010 compared to an operating loss of $332,000 in 2009.  The operating profit improvement of $1,216,000 results from a $2,199,000 increase in gross profit partially offset by a $983,000 increase in operating expenses.  The higher gross profit was primarily due to the 42% sales increase.  The $983,000 net increase in operating expenses includes $727,000 of costs incurred in the developing and marketing of the Company’s new microwave product line in 2010, offset by the $265,225 expense in 2009 related to the retirement agreement with the former CEO. We reported pre-tax earnings of $901,000 during 2010 compared to a pre-tax loss of $300,000 in 2009.  For 2010, we reported net earnings of $623,000 versus a net loss of $213,000 in 2009.
 
 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, 2010, we had outstanding purchase commitments approximating $1,934,000, all of which we expect to be fulfilled in 2011.  At December 31, 2010, we had no contractual obligations for capital leases, no material contractual obligation for operating leases and no long-term debt outstanding.
 
 Recent accounting pronouncements
  In January 2010, the FASB issued ASU 2010-06, which is an update to Topic 820, “Fair Value Measurement and Disclosures”. This update establishes further disclosure requirements regarding transfers in and out of levels 1 and 2 (effective for all interim and annual reporting periods beginning after December 15, 2009) and activity in level 3 fair value measurements (effective for all interim and annual reporting periods beginning after December 15, 2010). The update also provides clarification as to the level of disaggregation for each class of assets and liabilities, requires disclosures about inputs and valuation techniques, and also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets.  The adoption of this standard has not and is not expected to have a material impact on the Company’s financial position or results of operation.
  18
 In February 2010, the FASB issued ASU 2010-09, which is an update to Topic 855, “Subsequent Events”.  This update clarifies the date through which the Company is required to evaluate subsequent events. SEC filers will be required to evaluate subsequent events though the date that the financial statements are issued. ASU 2010-09 was effective upon issuance, and did not have a material impact on the Company’s financial position or results of operation.
 
 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, 2010, 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 $44,500 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.
  19
 
 Item 8. Financial Statements and Supplementary Data
 
 Valpey-Fisher Corporation
 Consolidated Balance Sheets
  December 31,

2010


2009AssetsCurrent assets:Cash and cash equivalents

$
4,451,511


$
4,052,721Receivables, net


2,412,518



1,743,494Inventories, net


1,457,546



1,105,417Deferred income taxes


822,331



848,021Other current assets


43,682



110,932Total current assets


9,187,588



7,860,585Property, plant and equipment, at cost:Land and improvements


246,846



226,505Buildings and improvements


2,058,873



2,058,873Machinery and equipment


9,895,734



9,328,00812,201,453



11,613,386Less accumulated depreciation


10,530,072



10,127,6241,671,381



1,485,762Other assets


215,898



202,502$
11,074,867


$
9,548,849Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable

$
1,032,740


$
948,799Accrued liabilities


1,525,383



861,145Total current liabilities


2,558,123



1,809,944Deferred income taxes


252,431



175,171Commitments 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: 4,328,527 and 4,297,898 shares, respectively


216,426



214,895Capital surplus


5,742,898



5,666,925Retained earnings


2,304,989



1,681,914Total stockholders’ equity


8,264,313



7,563,734$
11,074,867


$
9,548,849




See notes to consolidated financial statements.
  20
 
 Valpey-Fisher Corporation
 Consolidated Statements of Operations
 
 For the Years Ended December 31,

2010


2009Net sales

$
14,716,169


$
10,378,206Cost of sales


9,064,852



6,925,823Gross profit


5,651,317



3,452,383Selling and advertising expenses


2,076,461



1,612,622General and administrative expenses


1,440,591



1,279,301Research and development expenses


1,249,657



627,100Retirement agreement


-



265,2254,766,709



3,784,248Operating profit (loss)


884,608



(331,865
)Interest income


16,317



31,796Earnings (loss) before income taxes


900,925



(300,069
)Income tax expense (benefit)


277,850



(86,600
)Net earnings (loss)

$
623,075


$
(213,469
)Basic and diluted earnings (loss)  per share

$
.14


$
( .05
)Cash dividend per share

$
-


$
-
 
 See notes to consolidated financial statements.
  21
 
 Valpey-Fisher Corporation
 Consolidated Statements of Cash Flows
 
 For the Years Ended December 31,

2010


2009Cash Flows from Operating Activities:Net earnings (loss)

$
623,075


$
(213,469
)Adjustments to reconcile net earnings (loss) to netcash provided (used) by operating activities:Depreciation


402,448



378,749Provisions for inventory


56,599



188,775Deferred income taxes


95,150



(103,100
)Stock based compensation


42,314



57,317Changes in operating assets and liabilities:Receivables, net


(669,024
)


(112,453
)Inventories


(408,728
)


82,158Other current assets


67,250



(70,894
)Accounts payable and accrued liabilities


769,182



(212,181
)Net cash provided (used) by operating activities of continuingoperations


978,266



(5,098
)Deferred income taxes


7,800



59,600Change in accrued liabilities


(21,003
)


(148,077
)Net cash (used) by operating activities of discontinued operations


(13,203
)


(88,477
)Net cash provided (used) by operating activities


965,063



(93,575
)Cash Flows from Investing Activities:Capital expenditures


(588,067
)


(356,319
)Other


(13,396
)


(12,370
)Net cash (used) by investing activities


(601,463
)


(368,689
)Cash Flows from Financing Activities:Stock options exercised


35,190



-Net cash provided by financing activities


35,190



-Net Increase (Decrease) in Cash and Cash Equivalents


398,790



(462,264
)Cash and Cash Equivalents at beginning of year


4,052,721



4,514,985Cash and Cash Equivalents at end of year

$
4,451,511


$
4,052,721
 
 Supplemental Disclosures of Cash Flow InformationCash paid during the year by continuing operations for income taxes

$
255,500


$
87,500
 
 See notes to consolidated financial statements.
  22




Valpey-Fisher Corporation
 Consolidated Statements of Stockholders’ Equity
  Common Stock


Capital


RetainedShares


Amount


Surplus


EarningsBalance, January 1, 2009


4,297,898


$
214,895


$
5,609,608


$
1,895,383Net (loss)


-



-



-



(213,469
)Stock based compensation


-



-



57,317



-Balance, December 31, 2009


4,297,898



214,895



5,666,925



1,681,914Net earnings


-



-



-



623,075Exercise of stock options


30,629



1,531



33,659



-Stock based compensation


-



-



42,314



-Balance, December 31, 2010


4,328,527


$
216,426


$
5,742,898


$
2,304,989
 
 See notes to consolidated financial statements.
  23




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, development, production, import, and sale of various custom designed products including frequency control products, RF microwave components and ultrasonic transducers.   The Company’s broad product offering addresses a wide range of world-wide end markets including wireless and wireline infrastructure, microwave radio, military communications, instrumentation, test and measurement, imaging and industrial applications.
 
 (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 subsidiary, 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 receivableare 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 collectability of all accounts receivable.The Company determines the allowance based on numerousfactors 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, 2010, approximately $1,641,000 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, 2010 and 2009, one customer represented about 23% and 17%, respectively, 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 collectability of such receivables.
 Inventories – Inventories are stated at the lower of cost or market and are determined by the first-in, first out method (FIFO).
 Property, plant and equipment – The Company uses the straight-line method of providing for depreciation of property, plant and equipment for financial reporting purposes and accelerated methods for tax purposes. The estimated lives used to compute depreciation are as follows: land improvements – 10 years, building and improvements - 15 to 40 years and machinery and equipment – 3 to 10 years.
  24
 
 Valpey-Fisher Corporation
 Notes to Consolidated Financial Statements (continued)
 
 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 $137,700 in 2010 and $83,200 in 2009.
 Income taxes – The Company computes deferred income taxes based on the differences between the financial statement and tax basis of assets and liabilities using enacted rates in effect in the years in which the differences are expected to reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.  The tax effect of the differences between stock compensation expense for financial statement and income tax purposes is charged or credited to capital surplus.
 Earnings (loss) per share–Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) 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, except when anti-dilutive.  The computation of diluted earnings per share excludes stock options with an exercise price in excess of the average market price as they are anti-dilutive.  In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period.
  Stock-based compensation –The Company measures stock based compensation cost at the grant date based on the fair value of the award.  The cost is recognized as an expense, net of estimated forfeitures, on a straight line basis, over the vesting period.  The Company calculates the grant-date fair value using the Black-Scholes valuation model.  The valuation model requires the Company to make estimates of assumptions for expected volatility, expected term, risk-free interest rate, and expected dividend.
 
 The Company recorded the following stock-based compensation expense in the Consolidated Statement of Operations (in thousands):
 
 2010


2009Cost of sales

$
10


$
14Selling and advertising


6



15General and administrative


18



18Research and development


8



10Pre-tax stock-based compensation expense


42



57Income tax (benefit)


(2
)


(4
)Net stock-based compensation expense

$
40


$
53
 
 See Note 9 for additional information relating to stock-based compensation.
  25
 
 Valpey-Fisher Corporation
 Notes to Consolidated Financial Statements (continued)
 
 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, 2010 and 2009 the Company had no items of other comprehensive income (loss).
  Recent accounting pronouncements –
 
 In January 2010, the FASB issued ASU 2010-06, which is an update to Topic 820, “Fair Value Measurement and Disclosures”. This update establishes further disclosure requirements regarding transfers in and out of levels 1 and 2 (effective for all interim and annual reporting periods beginning after December 15, 2009) and activity in level 3 fair value measurements (effective for all interim and annual reporting periods beginning after December 15, 2010). The update also provides clarification as to the level of disaggregation for each class of assets and liabilities, requires disclosures about inputs and valuation techniques, and also includes conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets.  The adoption of this standard has not and is not expected to have a material impact on the Company’s financial position or results of operation.
  In February 2010, the FASB issued ASU 2010-09, which is an update to Topic 855, “Subsequent Events”.  This update clarifies the date through which the Company is required to evaluate subsequent events. SEC filers will be required to evaluate subsequent events though the date that the financial statements are issued. ASU 2010-09 was effective upon issuance, and did not have a material impact on the Company’s financial position or results of operation.
  (3)  Receivables, net:Receivables, net of allowances, consist of the following:

2010


2009Accounts receivables, less allowance for doubtful accounts of$100,000 in 2010 and 2009

$
2,313,018


$
1,672,894Refundable income taxes


99,500



70,600$
2,412,518


$
1,743,494
 
 (4) Inventories, net:Inventories, net of reserves, consist of the following:

2010


2009Raw materials

$
865,728


$
634,334Work in process


180,019



182,020Finished goods


411,799



289,063$
1,457,546


$
1,105,417
 
 At December 31, 2010 and 2009, inventories are presented net of inventory reserves of $1,195,000 and $1,200,000, respectively.
  26




Valpey-Fisher Corporation


Notes to Consolidated Financial Statements (continued)


(5) Income Taxes:The provision (benefit) for income taxes for continuing operations consisted of the following:





2010


2009Current:Federal

$
154,085


$
2,500State


28,615



14,000182,700



16,500Deferred:Federal


50,150



(66,525
)State


45,000



(36,575
)95,150



(103,100
)Total

$
277,850


$
(86,600
)





The total income tax provision 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:





2010


2009Income taxes at statutory rates

$
306,315


$
(102,000
)State income taxes, net of federal tax effect


33,400



(14,900
)Research activities tax credit


(65,000
)


-Stock based compensation


12,515



16,200Other, net


(9,380
)


14,100$
277,850


$
( 86,600
)
 
 The tax effects of significant items comprising the Company’s deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows:




2010


2009Deferred tax assets:Inventory valuation

$
617,303


$
676,693Accruals and allowances


186,811



152,211Stock compensation


18,217



16,692State tax loss carryforward


-



2,425Net deferred tax assets


822,331



848,021Deferred tax liabilities:Depreciation


252,431



175,171Total deferred tax liabilities


252,431



175,171Net deferred tax assets

$
569,900


$
672,850





At December 31, 2010 and 2009, the Company had no reserves for unrecognized tax benefits on the balance sheet.    During 2009 the Company’s tax return for 2007 was examined by the Internal Revenue  Service which resulted in no changes to the tax return.  The federal income tax returns for 2009 and 2008 and the Massachusetts tax returns for 2007 through 2009 are open tax years.  The Company’s policy is to include interest expense on underpayments of income taxes in our income tax provision whereas penalties are included in general and administrative expense.




27





Valpey-Fisher Corporation


Notes to Consolidated Financial Statements (continued)




(6) Profit Sharing and Savings Plan: The Company has a 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 $52,500 in 2010 and $ 0 in 2009.  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 $86,400 in 2010 and $80,200 in 2009.




(7) Accrued Liabilities:Accrued liabilities consist of the following items:

2010


2009Employee compensation

$
900,700


$
250,900Environmental costs


144,600



166,300Professional fees


102,000



90,000Profit sharing 401(k)


95,900



99,900Other


282,183



254,045$
1,525,383


$
861,145





In 1998, the Company sold all the assets of a subsidiary located in New Jersey which is reported as a Discontinued Operation in the financial statements.  As a result of this sale, the Company was required to perform environmental cleanup at this site.  As of December 31, 2010, a total of $1,560,000 has been expensed for the cleanup and $144,600 is accrued for expenses relating to the cleanup.





(8) Credit Agreement and Commitments:On December 30, 2010 the Company entered into a loan agreement and security agreement with a bank that provides for a $1,000,000 Revolving Loan and a $1,000,000 Revolving Equipment Loan.  The Revolving Loan is due on demand and bears interest at the higher of the Bank’s base rate or 4%.  The Company had $799,000 available under this Revolving Loan at December 31, 2010, net of a $201,000 irrevocable standby letter of credit. This letter of credit has been issued as security for the Company’s performance under a remediation agreement with the New Jersey Department of Environmental Protection.  The Revolving Equipment Loan provides for a 3 year to 5 year term option at the election of the Company with an interest rate between 5.5% and 5.75% depending on the term.  There were no amounts outstanding under the Revolving Equipment Loan at December 31, 2010.  The Loans are secured by accounts receivable, inventory and equipment.  The loan agreement contains a quarterly financial covenant of a minimum debt service coverage of 1.20 : 1 or a cash balance on deposit in specified accounts with the lending bank of $500,000.




28




Valpey-Fisher Corporation
 Notes to Consolidated Financial Statements (continued)
 (9) Stockholders’ Equity: The Company has 4,328,527 and 4,297,898 shares of its $.05 par value Common Stock outstanding at December 31, 2010 and 2009, respectively.
  At December 31, 2010, under prior authorizations from the Board of Directors, the Company is authorized to purchase up to an additional 219,700 shares of stock through the open market or negotiated transactions.
  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 1,387,215 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.  Options granted after December 31, 2005 have vested 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, 2010, options for 77,090 shares remain available for future grants under the Plans and 495,403 common shares are reserved for issuance upon exercise of the outstanding stock options.
 
 The estimated fair value of each option granted in 2010 and 2009 was determined on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions for stock option grants:
  2010


2009Expected dividend yield


0
%


0
%Risk-free interest rate


2.4
%


2.3
%Expected life of options in years


4.8



4.7Assumed volatility


46
%


46
%
  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.  The expected term of the option is determined by using historical data.
 
 A summary of the status of the Company’s stock option plans as of December 31, 2010 and 2009, and changes during the years then ended is presented below:
 2010


2009Number of

shares


Weighted-

Average

Exercise

Price


Number of

shares


Weighted-

Average

Exercise

PriceOutstanding, January 1


887,891


$
1.45



823,265


$
1.45Granted


60,000



1.32



75,000



1.39Exercised


(30,629
)


1.15



-



-Forfeited or expired


(421,859
)


1.64



(10,374
)


1.26Outstanding, December 31


495,403


$
1.29



887,891


$
1.45Exercisable, December 31


367,208


$
1.25



757,149


$
1.46
  29
 
 Valpey-Fisher Corporation
 Notes to Consolidated Financial Statements (continued)
 
 The weighted average grant date fair value of options granted in 2010 and 2009 was $0.55 and $0.58, respectively.  As of December 31, 2010, the intrinsic value (the difference between the exercise price and the market price) for all outstanding options was $1,040,834 and the intrinsic value for all options
 exercisable was $785,186.  The total intrinsic value of all options exercised during the year ended December 31, 2010 was $45,665.
 
 The following table summarizes information about fixed stock options outstanding and exercisable at December 31, 2010:
 
 Options Outstanding


Options ExercisableRange of

exercise

prices


Number


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Life in

Years


Number


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Life in

Years$1.09 -1.24



216,739


$
1.19



3.6



216,739


$
1.19



3.6$1.27 -1.32



176,745



1.30



3.8



110,078



1.30



3.6$1.35 -1.72



101,919



1.47



3.1



40,391



1.47



2.7495,403


$
1.29



3.6



367,208


$
1.25



3.5
 
 A summary of the status of the Company’s nonvested stock options as of December 31, 2010 and the changes during the year then ended is as follows:
 
 Shares


Weighted-Average

Grant-Date

Fair ValueNonvested at December 31, 2009


130,742


$
1.05Granted


60,000



.55Vested


(61,769
)


1.33Forfeited


(778
)


1.80Nonvested at December 31, 2010


128,195


$
.68
 
 At December 31, 2010, there was approximately $53,000 of total unrecognized compensation cost related to nonvested stock options granted.  That cost is expected to be recognized as follows: $30,000 in 2011, $21,000 in 2012 and $2,000 in 2013.
  30


Valpey-Fisher Corporation


Notes to Consolidated Financial Statements (continued)





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


2010


2009Basic:Net earnings (loss)

$
623,075


$
(213,469
)Weighted average shares outstanding


4,307,174



4,297,898Basic earnings (loss) per share

$
.14


$
(.05
)Diluted:Net earnings (loss)

$
623,075


$
(213,469
)Weighted average shares outstanding


4,307,174



4,297,898Diluted effect of stock options outstanding, using the treasury stockmethod


187,561



-Diluted weighted average shares outstanding


4,494,735



4,297,898Diluted earnings (loss) per share

$
.14


$
(.05
)





In 2010 stock options to purchase 36,125 common shares were not included in the computation of "Diluted Earnings (Loss) per Share" because the exercise price was greater than the average market price.


In 2009 stock options to purchase 887,891 common shares were not included in the computation of "Diluted Earnings (Loss) per Share" because of the anti-dilutive effect of the options since the Company reported a net loss.





(11) Industry Segment: The Company operates in one segment: the design, development, production, import, and sale of various custom designed products including frequency control products, RF microwave components and ultrasonic transducers.  The Company’s chief operating decision maker is considered to be its Chief Executive Officer.  The chief operating decision maker allocates resources and assesses performance and other activities at the operating segment level.




Export sales to foreign markets, based on the location of the customer, are as follows:




2010


2009Asia Pacific

$
3,657,900


$
2,209,500Mexico


593,000



394,900Europe and Middle East


450,900



581,200Canada


310,300



278,800Other


23,100



34,300$
5,035,200


$
3,498,700





(12) Concentration Risks:One customer accounted for approximately 12% of net sales in both 2010 and 2009.





Products manufactured by one supplier accounted for approximately 21% and 14% of our revenue in 2010 and 2009, respectively.




31





Valpey-Fisher Corporation


Notes to Consolidated Financial Statements (continued)





(13)Quarterly Financial Data (unaudited):Selected unaudited quarterly financial data for 2010 and 2009 is set forth below:




First


Second


Third


Fourth(in thousands, except per share data)2010Net sales

$
3,567


$
3,799


$
3,803


$
3,547Gross profit


1,381



1,416



1,493



1,361Earnings before income taxes


186



199



274



242Net earnings

$
95


$
136


$
174


$
218Basic and diluted earnings per share

$
.02


$
.03


$
.04


$
.05







First


Second


Third


Fourth(in thousands, except per share data)2009Net sales

$
2,582


$
2,496


$
2,502


$
2,798Gross profit


849



815



881



908Earnings (loss) before income taxes


(44
)


(57
)


(257
)


59Net earnings (loss)

$
(16
)

$
(82
)

$
(138
)

$
23Basic and diluted earnings (loss) per share

$
-


$
(.02
)

$
(.03
)

$
.01





The fourth quarter of 2010 includes the full year 2010 net tax benefit of $65,000 for the extension of the U.S. Research and Development tax credit, which became law in December 2010.





The third quarter of 2009 includes $265,255 of expense relating to a retirement agreement and general release with the former Chief Executive Officer of the Company.





(14) 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, 2010, the Company has outstanding purchase commitments approximating $1,938,000, all of which are expected to be fulfilled in 2011.





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 7).





(15) Subsequent Events:The Company has evaluated all subsequent events through the date these financial statements are being filed with the Securities & Exchange Commission, and has determined there were no events or transactions deemed to be reportable.




32




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, 2010 and 2009, and the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2010.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our 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, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
 
 /s/ Stowe & Degon, LLC
 Westborough, Massachusetts
 March 1, 2011
  33
 
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 Not applicable.
 
 Item 9A.  Controls and Procedures
 
 Evaluation of disclosure controls and procedures.
 
 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, 2010.
 
 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, 2010.
 
 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, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 Item 9B. Other Information
 
 None
  34
 
 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”,  “Principal Accountant Fees and Services”, “Executive Officers of the Company”, and “Executive Compensation” in Registrant’s definitive proxy statement for the 2011 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.
 
 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, 2010 and 2009Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009Consolidated Statements of Stockholders’ Equity for the Years EndedDecember 31, 2010 and 2009Notes to Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm2.
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.




35





3.  The exhibits filed in this report or incorporated by reference, listed on the Exhibit Index are as follows:





Exhibit No.

Description2.

Agreement of Merger and Recapitalization3.1

Restated and Amended Articles of Incorporation3.2

By-Laws effective July 23, 20094.1

Loan Agreement dated as of December 30, 2010 among  Valpey-Fisher Corporation, as Borrower, the Guarantors from time to time part hereto and Middlesex Savings Bank, as Lender4.2

Security Agreement among Valpey-Fisher Corporation as Borrower, The Guarantors Party hereto and Middlesex Savings Bank as Secured Party Dated as of December 30, 20104.3

$1,000,000 Revolving Note dated December 30, 2010 issued by Valpey-Fisher Corporation to Middlesex Savings Bank4.4

$1,000,000 Revolving Equipment Note dated December 30, 2010 issued by Valpey-Fisher Corporation to Middlesex Savings Bank10.1
*
1999 Stock Option Plan, as amended10.2
*
2001 Stock Option Plan, as amended10.3
*
2003 Stock Option Plan, as amended10.4
*
Key Employee Bonus Plan for 201010.5
*
Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll10.6
*
Amendment effective August 7, 2008 to Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll.10.7
*
Change in Control Severance Agreement, dated October 21, 2009, between the Company and Michael J. Ferrantino, Jr.10.8
*
Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa10.9
*
Amendment effective August 7, 2008 to Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa.10.10
*
Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated October 21, 2009, between the Company and Michael J. Ferrantino, Jr.10.11
*
Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll10.12
*
Amendment effective October 28, 2010 to Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa14

Code of Ethics of the Chief Executive Officer and the Chief Financial and Accounting Officer14.1

Code of Business Conduct and Ethics23

Independent Registered Public Accounting Firm’s Consent31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

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.
  36
 
 
 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 CorporationDate:  March 28, 2011

By:
/s/ Michael J. FerrantinoMichael J. Ferrantino, Jr.President and Chief Executive Officer(Principal Executive Officer)




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
  Signature
Title
Date/s/ Ted Valpey, Jr.
Chairman of the Board
March 28, 2011Ted Valpey, Jr.
and Director/s/ Michael J. Ferrantino, Jr.
President, Chief Executive Officer
March 28, 2011Michael J. Ferrantino, Jr.
and Director (Principal Executive Officer)/s/ Michael J. Kroll
Vice President, Treasurer and
March 28, 2011Michael J. Kroll
Chief Financial Officer(Principal Financial Officerand Principal AccountingOfficer)/s/ Mario Alosco
Director
March 28, 2011Mario Alosco/s/Gary Ambrosino
Director
March 28, 2011Gary Ambrosino/s/Richard W. Anderson
Director
March 28, 2011Richard W. Anderson/s/Eli Fleisher
Director
March 28, 2011Eli Fleisher/s/Lawrence Holsborg
Director
March 28, 2011Lawrence Holsborg/s/Steven Schaefer
Director
March 28, 2011Steven Schaefer




37




Valpey-Fisher Corporation
  Schedule II – Valuation and Qualifying Accounts
  Additions


AdditionsDescription

Balance at

Beginning

of Period


Charged to

Costs and

Expenses


Charged to

Other

Accounts


Deductions


Balance at

End

of PeriodAllowance forDoubtful Accounts:Year Ended:December 31, 2010

$
100,000


$
38,259


$
-


$
(38,259
) (1)

$
100,000December 31, 2009

$
105,000


$
5,086


$
-


$
(10,086
) (1)

$
100,000Inventory Reserve:Year Ended:December 31, 2010

$
1,200,000


$
56,599


$
-


$
(61,559
)(2)

$
1,195,000December 31, 2009

$
1,050,000


$
188,775


$
-


$
(38,775
)(2)

$
1,200,000




(1)
Amounts written-off, less recoveries.(2)
Inventory disposed of.




38




EXHIBIT INDEX
 
 Exhibit

(inapplicable items are omitted)No.2.

Agreement of Merger and Recapitalization between MATEC Corporation a Delaware corporation and MATEC Corporation a Maryland corporation.  Filed herewith.3.1

Restated and Amended Articles of Incorporation as of June 3, 2002.  (incorporated by reference to Exhibit 3.1 on Registrant’s Form 10-K for the year ended December 31, 2007).3.2

By-Laws effective July 23, 2009.  (incorporated by reference to Exhibit 3.3 on Registrant’s Form 8-K dated July 23, 2009).4.1

Loan Agreement dated as of December 30, 2010 among Valpey-Fisher Corporation, as Borrower, the Guarantors from time to time part hereto and Middlesex Savings Bank, as Lender.(incorporated by reference to Exhibit 4.1 on Registrant’s Form 8-K dated December 27, 2010).4.2

Security Agreement among Valpey-Fisher Corporation as Borrower, The Guarantors Party hereto and Middlesex Savings Bank as Secured Party Dated as of December 30, 2010 (incorporated by reference to Exhibit 4.2 on Registrant’s Form 8-K dated December 27, 2010).4.3

$1,000,000 Revolving Note dated December 30, 2010 issued by Valpey-Fisher Corporation to Middlesex Savings Bank (incorporated by reference to Exhibit 4.3 on Registrant’s Form 8-K dated December 27, 2010).4.4

$1,000,000 Revolving Equipment Note dated December 30, 2010 issued by Valpey-Fisher Corporation to Middlesex Savings Bank (incorporated by reference to Exhibit 4.4 on Registrant’s Form 8-K dated December 27, 2010).10.1

1999 Stock Option Plan, as amended.  (incorporated by reference to Exhibit 10.2 on Registrant’s Form 10-K for the year ended December 31, 2008).10.2

2001 Stock Option Plan, as amended.  (incorporated by reference to Exhibit 10.3 on Registrant’s Form 10-K for the year ended December 31, 2008).10.3

2003 Stock Option Plan, as amended. (incorporated by reference to Exhibit 10.5 on Registrant’s Form 10-K for the year ended December 31, 2008).10.4

Key Employee Bonus Plan for 2010. (incorporated by reference to Exhibit 10.1 on Registrant’s Form 10-Q for the quarterly period ended April 4, 2010).




39




10.5

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).10.6

Amendment effective August 7, 2008 to Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll. (incorporated by reference to Exhibit 10.11 on Registrant’s Form 10-K for the year ended December 31, 2008).10.7

Change in Control Severance Agreement, dated October 21, 2009, between the Company and Michael J. Ferrantino, Jr.(incorporated by reference to Exhibit 10.1 on Registrant’s Form 8-K dated October 27, 2009).10.8

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).10.9

Amendment effective August 7, 2008 to Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa.  (incorporated by reference to Exhibit 10.15 on Registrant’s Form 10-K for the year ended December 31, 2008).10.10

Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated October 21, 2009, between the Company and Michael J. Ferrantino, Jr. (incorporated by reference to Exhibit 10.1 on Registrant’s Form 10-Q for the quarterly period ended October 3, 2010).10.11

Amendment effective October 28, 2010 to Change in Control Severance Agreement, dated April 4, 2007, between the Company and Michael J. Kroll (incorporated by reference to Exhibit 10.2 on Registrant’s Form 10-Q for the quarterly period ended October 3, 2010).10.12

Amendment effective October 28, 2010 to Change in Control Retention Agreement, dated April 4, 2007, between the Company and Walt Oliwa (incorporated by reference to Exhibit 10.3 on Registrant’s Form 10-Q for the quarterly period ended October 3, 2010).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, 2009).14.1

Code of Business Conduct and Ethics.  Filed herewith.23

Consent of Independent Registered Public Accounting Firm.  Filed herewith.




40




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.