10-Q 1 a5542427.txt VALPEY-FISHER CORPORATION 10-Q 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 September 30, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-4184 Valpey-Fisher Corporation (Exact name of registrant as specified in its charter) Maryland 06-0737363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 South St., Hopkinton, Massachusetts 01748 (Address of principal executive offices) (Zip Code) (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 large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act): (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of November 8, 2007, the number of shares outstanding of Registrant's Common Stock, par value $.05 was 4,282,503. - 1 -
Valpey-Fisher Corporation INDEX PAGE ----- ---- PART I. FINANCIAL INFORMATION ITEM 1. - Financial Statements - Consolidated Condensed Balance Sheets - September 30, 2007 (Unaudited) and December 31, 2006 (Audited) 3 Consolidated Statements of Operations - (Unaudited) Three Months and Nine Months Ended September 30, 2007 and October 1, 2006 4 Consolidated Condensed Statements of Cash Flows - (Unaudited) Nine Months Ended September 30, 2007 and October 1, 2006 5 Notes to Consolidated Condensed Financial Statements - (Unaudited) 6-9 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 ITEM 3. - Quantitative and Qualitative Disclosures About Market Risk 13 ITEM 4. - Controls and Procedures 13 PART II. OTHER INFORMATION ITEM 1A.- Risk Factors 14 ITEM 6. - Exhibits 14 SIGNATURES 15
- 2 - PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Valpey-Fisher Corporation and Subsidiaries Consolidated Condensed Balance Sheets (In thousands, except share data) 9/30/07 12/31/06 (Unaudited) (Audited) ---------------------------- ASSETS Current assets: Cash and cash equivalents $ 9,558 $ 9,184 Accounts receivable, net of allowances of $104 in 2007 and $115 in 2006 1,823 1,614 Inventories, net 1,206 810 Deferred income taxes 1,020 798 Other current assets 200 69 --------------------------------------------------------------------------------------------------------- Total current assets 13,807 12,475 Property, plant and equipment, at cost 10,999 10,719 Less accumulated depreciation 9,213 8,826 --------------------------------------------------------------------------------------------------------- 1,786 1,893 Other assets 175 161 --------------------------------------------------------------------------------------------------------- Total assets $ 15,768 $ 14,529 ========================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 675 $ 649 Accrued liabilities 1,756 1,674 --------------------------------------------------------------------------------------------------------- Total current liabilities 2,431 2,323 Deferred income taxes 273 343 Stockholders' equity: Preferred stock, $1.00 par value- Authorized 1,000,000 shares; issued none - - Common stock, $.05 par value- Authorized 10,000,000 shares; Issued and outstanding: 4,282,503 in 2007 and 4,256,503 shares in 2006 214 213 Capital surplus 5,476 5,276 Retained earnings 7,374 6,415 Less unearned compensation - (41) --------------------------------------------------------------------------------------------------------- Total stockholders' equity 13,064 11,863 --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 15,768 $ 14,529 ========================================================================================================= See notes to consolidated condensed financial statements.
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Valpey-Fisher Corporation and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended ----------------------------- --------------------------- 9/30/07 10/1/06 9/30/07 10/1/06 -------------- -------------- ------------ -------------- Net sales $ 3,386 $ 2,875 $ 10,053 $ 8,674 Cost of sales 1,988 1,813 5,962 5,529 ------------------------------------------------------------------------------------------------------------- Gross profit 1,398 1,062 4,091 3,145 Operating expenses: Selling and advertising 436 391 1,360 1,223 General and administrative 464 418 1,382 1,348 Research and development 115 137 349 380 ------------------------------------------------------------------------------------------------------------- 1,015 946 3,091 2,951 Operating profit 383 116 1,000 194 Other income (expense): Interest income 105 63 303 186 (Loss) on sale of asset - - - (6) ------------------------------------------------------------------------------------------------------------- 105 63 303 180 Earnings before income taxes 488 179 1,303 374 Income tax (expense) (145) (81) (344) (181) ------------------------------------------------------------------------------------------------------------- Net earnings $ 343 $ 98 $ 959 $ 193 ============================================================================================================= ------------------------------------------------------------------------------------------------------------- Basic earnings per share $ .08 $ .02 $ .23 $ .05 ------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ .08 $ .02 $ .22 $ .05 ------------------------------------------------------------------------------------------------------------- Basic weighted average shares 4,259 4,217 4,247 4,212 Diluted weighted average shares 4,431 4,264 4,394 4,257 See notes to consolidated condensed financial statements.
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Valpey-Fisher Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended ------------------------- 9/30/07 10/1/06 ------------------------- Cash flows from operating activities: Net earnings $ 959 $ 193 Adjustments to reconcile net earnings to net cash provided (used) by operating activities of continuing operations: Depreciation 387 504 Deferred income taxes (138) (85) Stock based compensation 125 127 Restricted stock compensation, net of taxes 29 26 Stock option income tax benefit 18 - Loss on sale of asset - 6 Changes in operating assets and liabilities: Accounts receivable, net (209) (288) Inventories, net (396) 241 Other current assets (131) (26) Accounts payable and accrued expenses (36) (198) --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities of continuing operations 608 500 Cash flows from operating activities: - Discontinued Operations Change in accrued expenses (10) (48) --------------------------------------------------------------------------------------------------------- Net cash (used) in operating activities of discontinued operations (10) (48) --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 598 452 --------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (280) (279) Proceeds from sale of assets - 27 Other, net (14) (8) --------------------------------------------------------------------------------------------------------- Net cash (used) in investing activities (294) (260) --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Stock options exercised 70 27 --------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 70 27 --------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 374 219 Cash and cash equivalents: Beginning of period 9,184 7,920 ------------------------- End of period $ 9,558 $ 8,139 ========================= Supplemental Cash Flow Information: Income taxes paid $ 571 $ 495 See notes to consolidated condensed financial statements.
- 5 - Valpey-Fisher Corporation and Subsidiaries Notes to Consolidated Condensed Financial Statements (Unaudited) 1. Financial Presentation: The unaudited interim financial statements, 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 2006 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. 2. Stock Compensation Plans: Effective January 1, 2006, the Company began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" using the modified prospective method. Under this method, compensation expense associated with stock options recognized in the 2007 and 2006 includes: (a) expense related to the remaining unvested portion of all stock option awards granted prior to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) expense related to all stock option awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. As a result of the adoption of SFAS No. 123R, the Company recorded the following stock-based compensation expense in the Consolidated Statement of Operations (in thousands):
Three Months Ended Nine Months Ended ------------------------------------------------------ 9/30/07 10/1/06 9/30/07 10/1/06 ------------------------------------------------------ Cost of sales $ 7 $ 8 $ 20 $ 25 Selling and advertising 8 7 22 21 General and administrative 25 25 75 74 Research and development 2 3 8 7 ------------------------------------------------------ Pre-tax stock-based compensation expense 42 43 125 127 Income tax (benefit) (1) (1) (3) (3) ------------------------------------------------------ Net stock-based compensation expense $ 41 $ 42 $ 122 $ 124 ======================================================
At September 30, 2007, the Company has four Stock Option Plans that allow for the granting of options to officers, key employees, non-employee director, and other individuals to purchase a maximum of 1,000,000 shares of the Company's common stock. At September 30, 2007, options for 172,666 shares remain available for future grants under the Plans. The option price and terms are recommended by the Company's Compensation Committee to the Company's Board of Directors for approval. The maximum contractual term of an option is ten years. The options granted may qualify as incentive stock options ("ISO's"). Options granted prior to December 31, 2005 generally vested 20% per year on each of the first, second, third, fourth, and fifth anniversaries of the date of grant with a contractual life of ten years. The options granted in 2006, vest 33% on each of the first, second and third anniversaries of the date of grant and have a contractual life of five years. Compensation expense related to stock options granted is recognized ratably over the vesting period of the option. The Company issues new shares upon the exercise of stock options. - 6 - There were no stock option grants in the quarter ended or nine months ended September 30, 2007 or in the quarter ended October 1, 2006. Stock options for 10,000 shares were granted in the nine months ended October 1, 2006. The estimated fair value of each option grant is determined on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for stock option grants during the nine months ended October 1, 2006: Stock options granted 10,000 Weighted-average exercise price $ 3.25 Weighted-average grant date fair value $ 1.06 Assumptions: Risk-free interest rate 4.6% Expected volatility 36% Expected term in years 3.5 Expected dividend yield 0% 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 the historic prices for a period commensurate with the expected term. The expected term of the option is determined by using the "simplified method" as provided for in Staff Accounting Bulletin No. 107. A summary of the activity under all the Company's stock option plans as of September 30, 2007 and the changes during the nine month period then ended are as follows:
Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Price Life Intrinsic Shares Per Share In Years Value -------------- -------------- ----------- ----------- Outstanding at December 31, 2006 486,250 $ 3.39 Options granted 0 Options exercised (26,000) 2.69 -------------- ----------- ----------- Outstanding at September 30, 2007 460,250 $ 3.43 5.8 $ 1,202,500 -------------- ----------- ----------- Exercisable at September 30, 2007 343,650 $ 3.59 5.4 $ 868,800 -------------- ----------- -----------
- 7 - A summary of the status of the Company's nonvested stock options as of September 30, 2007 and the changes during the nine month period then ended is as follows: Weighted-Average Grant-Date Shares Fair Value ---------------- --------------------- Nonvested at December 31, 2006 205,246 $ 1.76 Granted 0 0 Vested (88,646) 1.75 ---------------- --------------------- Nonvested at September 30, 2007 116,600 $ 1.77 ================ ===================== At September 30, 2007, there was approximately $172,400 of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of 1.8 years. The total grant-date fair value of stock options that vested during the nine months ended September 30, 2007 was approximately $155,400. At September 30, 2007 and December 31, 2006 there were 20,000 shares of nonvested restricted stock with a weighted-average grant-date fair value of $2.95 per share. 3. Comprehensive Income (Loss): During the three and nine months ended September 30, 2007 and October 1, 2006, 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) 9/30/07 12/31/06 ---------------------------------------------------------------------- (unaudited) Raw materials $ 716 $ 481 Work in process 165 106 Finished goods 325 223 ---------------------------- $ 1,206 $ 810 ============================ 5. Earnings Per Share: Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the net incremental shares that would be issued if dilutive outstanding stock options were exercised using the treasury stock method and vesting of restricted stock. The assumed proceeds under the treasury stock method include: o the amount paid to the Company upon exercise of the option; o compensation expense for future services that the Company has not yet recognized; and o the amount of excess tax benefits, if any, that would be credited to additional paid-in capital upon exercise of the options. The computation of diluted earnings per share excludes stock options with an exercise price in excess of the average market price as they are antidilutive. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. - 8 - The following table shows a reconciliation of weighted average shares (in thousands):
Three Months Ended Nine Months Ended -------------------- -------------------- 9/30/07 10/1/06 9/30/07 10/1/06 -------------------- -------------------- Weighted average shares outstanding 4,259 4,217 4,247 4,212 Dilutive effect of stock options outstanding, using the treasury stock method 152 7 127 5 Restricted stock 20 40 20 40 -------------------- -------------------- Diluted weighted average shares outstanding 4,431 4,264 4,394 4,257 ==================== ==================== The following table shows the potentially dilutive securities which have been excluded from the dilutive earnings per share calculation (in thousands): Three Months Ended Nine Months Ended -------------------- -------------------- 9/30/07 10/1/06 9/30/07 10/1/06 --------------------------------------------- Stock options where the exercise price was greater than the average market price 19 29 19 29 Stock options where the assumed proceeds exceed the average market price during the period - 396 - 391
6. Income Taxes: Effective January 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Adoption of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to retained earnings. At January 1, 2007 and September 30, 2007, the Company had no reserves for unrecognized tax benefits on the balance sheet. The Company's federal income tax return for 2004 has been examined by the IRS. The Company's state of Massachusetts tax returns for 2003 through 2006 are open tax years. The Company's policy is to include interest expense on underpayments of income taxes in the Company's income tax provision whereas penalties are included in general and administrative expense. At December 31, 2006, the Company had state tax loss benefit carryforwards of $575,500 that began to expire in 2007. Due to the uncertainty of the realization of this state tax benefit and management's estimate that operating income and the reversal of future taxable temporary differences would more likely than not be sufficient to recognize all of the other deferred tax assets, the Company established a valuation allowance of $471,000 at December 31, 2006. During the quarter and nine months ended September 30, 2007, the Company reduced the valuation allowance for deferred income taxes and income tax expense by $33,000 and $136,000, respectively. The reduction reflects the Company's expectation that it is more likely than not that it will generate future taxable income to utilize this ammount of deferred tax assets. 7. Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of adopting SFAS No. 157 on our consolidated financial statements. -9- In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 ("SFAS No. 159") which permits an entity to elect to measure certain assets and liabilities at fair value at specified election dates. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact of adopting SFAS No. 159 on our consolidated financial statements 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 our 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 our critical accounting policies could materially affect its consolidated financial statements. Our most critical accounting policies, which were discussed in our Annual Report on Form 10-K for the year ended December 31, 2006, pertain to accounts receivable, inventories and income taxes. These policies continue to be our 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 amounted to $9,558,000 at September 30, 2007, an increase of $374,000 from the December 31, 2006 balance. During this period, our operations provided cash of $598,000, investing activities used cash of $294,000 and financing activities provided cash of $70,000. Cash provided by operations of $598,000 resulted mainly from the net earnings of $959,000 and net adjustments of $421,000 for the non-cash effects of depreciation, deferred income taxes and stock compensation expense offset by a $782,000 increase in working capital. The inventory increase of $396,000 is mainly due to a combination of the lead times for certain raw material items and the necessary inventory to support the current level of shipments and backlog and to meet customer delivery requirements. The $209,000 increase in accounts receivable is mainly due to the increase in the current quarter's sales over the 4th quarter sales in 2006. Capital expenditures during the nine months ended September 30, 2007 amounted to $280,000. We believe that based on our current working capital and the expected cash flow from operations, our resources are sufficient to meet our financial needs and to fund our capital expenditures for at least the next twelve months. 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, equipment, and production supplies based on projected requirements. At September 30, 2007, we had outstanding purchase commitments totaling approximately $882,000, all of which are expected to be fulfilled within the next twelve months. -10- Results of Operations for the Three and Nine Months Ended September 30, 2007 Compared to the Three and Nine Months Ended October 1, 2006 During the quarter ended September 30, 2007, net sales increased $511,000 or 18% over the comparable period in 2006. The sales increase is mainly attributable to a $433,000 or 48% sales increase in our high precision oscillator and high reliability product lines as unit sales increased 92% over the comparable 2006 quarter. Total bookings during the current quarter amounted to $3,333,000 versus $3,190,000 in the 2006 comparable quarter. Our backlog amounted to $2,244,000 at September 30, 2007 compared to $2,161,000 at October 1, 2006. For the nine months ended September 30, 2007, net sales increased $1,379,000 or 16% over the comparable period in 2006. This sales increase is mainly attributable to a $1,492,000 or 52% sales increase in our high precision oscillator, timing module, and high reliability product lines as unit sales increased 60% over the 2006 period. This increase was partially offset by a $209,000 or 4% sales decrease in our standard oscillator product line as unit sales decreased 16% from the 2006 level. Year-to-date bookings during 2007 amounted to $10,195,000 versus $9,220,000 in 2006. The sales increases in both the quarter and nine months ended periods is mainly attributable to the higher beginning backlog and the increased levels of bookings during both periods. We continue to pursue sales of our more value-added, high reliability and higher average selling price products. We reported a $1,398,000 gross profit (41% of net sales) in the current quarter versus a $1,062,000 gross profit (37% of net sales) in the 2006 quarter. During the nine months ended September 30, 2007, the gross profit amounted to $4,091,000 (41% of net sales) compared to a gross profit of $3,145,000 (36% of net sales) in the 2006 period. During both periods ended September 30, 2007, the higher margin percentages were mainly due to the increased percentage of sales of our high precision oscillator, timing module, and high reliability product lines compared to sales of our standard oscillator product line. All product lines during both periods also benefited from the favorable effect of spreading the fixed overhead costs over the increased sales volume. Direct labor and raw material costs as a percentage of overall sales in the 2007 periods increased slightly over comparable 2006 periods due to changes in product mix. As a percentage of sales, selling and advertising expense amounted to 12.9% during the current quarter versus 13.6% in the same quarter of 2006. Total selling and advertising expenses increased $45,000 or 12% over the comparable quarter in 2006 mainly due to higher personnel costs ($42,000) and commission expense to outside sales representatives ($20,000), partially offset by lower advertising ($10,000) and travel and entertainment ($8,000) expenses. During the nine months ended September 30, 2007, selling and advertising expenses amounted to $1,360,000 (13.5% of sales) compared to $1,223,000 (14.1% of sales) in the same period last year. This overall expense increase of $137,000 or 11% over the comparable nine month period in 2006 is mainly due to higher personnel costs ($99,000) and increased commission expense to outside sales representatives ($46,000). For the quarter ended September 30, 2007, general and administrative expenses amounted to $464,000 (13.7% of sales) compared to $418,000 (14.5% of sales) in the 2006 period. The $46,000 expense increase over the 2006 period is mainly due to increases of $29,000 in personnel costs, resulting primarily from a higher provision for the key employee bonus plan and $14,000 in professional fees. During the nine months ended September 30, 2007, general and administrative expenses amounted to $1,382,000 (13.7% of sales) versus $1,348,000 (15.5% of sales) in the comparable 2006 period. The $34,000 expense increase over last year is mainly due to increases of $39,000 in personnel costs, resulting primarily from a higher provision for the key employee bonus plan and $36,000 in professional fees, partially offset by a reduction of $20,000 in insurance expense and a net $21,000 reduction in the remaining overall expenses. -11- During the quarter and nine months ended September 30, 2007, research and development expenses decreased $22,000 and $31,000, respectively, from the comparable periods in 2006 primarily as a result of decreased personnel costs. The 2007 increases in interest income over both 2006 periods were due to a combination of higher average cash balances and higher interest rates during the current year. The estimated annual combined federal and state income tax rate for 2007 is 26% compared to 48% in 2006. The 2007 projected rate includes a reduction in the valuation allowance for deferred income taxes which amounts to approximately a 10% point reduction in the 2007 rate. The effect of this valuation adjustment was to reduce income tax expense by $33,000 and $136,000 during the quarter and nine months ended September 30, 2007, respectively. The 2007 and 2006 projected rates were increased by approximately 3% points and 14% points, respectively, as a result of the effect of nondeductible stock option expense resulting from the adoption of SFAS No. 123R. The majority of the stock option expense results from incentive stock options and under SFAS No. 123R, the expense does not generate a tax deduction and related tax benefit. As we have state income tax NOL carryforwards available, there is no estimated state income tax provision for 2007 and 2006. For the quarter ended September 30, 2007, we reported an operating profit of $383,000 compared to an operating profit of $116,000 in comparable quarter of 2006. The operating profit in 2007 and 2006 was net of $42,000 and $43,000, respectively, for stock option expense resulting from the effect of SFAS No. 123R. Interest income amounted to $105,000 in 2007 compared to $63,000 in 2006. We reported a pre-tax profit of $488,000 during the quarter ended September 30, 2007 compared to a pre-tax profit of $179,000 in comparable 2006 period. For the quarter ended September 30, 2007, we reported net earnings of $343,000 versus net earnings of $98,000 in 2006. We reported an operating profit of $1,000,000 for the nine months ended September 30, 2007 compared to an operating profit of $194,000 for the comparable period of 2006. The operating profit in 2007 and 2006 was net of $125,000 and $127,000, respectively, for stock option expense resulting from the effect of SFAS No. 123R. Interest income amounted to $303,000 in 2007 compared to $186,000 in 2006. We reported a pre-tax profit of $1,303,000 during the nine months ended September 30, 2007 compared to a pre-tax profit $374,000 in comparable 2006 period. For the nine months ended September 30, 2007, we reported net earnings of $959,000 versus net earnings of $193,000 in 2006. 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 our current views and assumptions and involve risks and uncertainties that include, but not limited to: our ability to continue to achieve profitability, the current production over-capacity within the suppliers of frequency control devices, the ability to develop, market and manufacture new innovative products competitively, the fluctuations in product demand of the telecommunications industry, the ability of us and our suppliers to produce and deliver materials and products competitively, the ability to limit the amount of the negative effect on operating results caused by pricing pressure and our ability to comply with Section 404 of the Sarbanes-Oxley Act. -12- Item 3. 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 September 30, 2007, 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 $95,600 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. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with our 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 2006 Form 10-K, the Company's independent registered accounting firm advised management and the audit committee, that the following identified internal control deficiency constituted a significant deficiency in the Company's internal control. Reliance on the Chief Financial Officer for period end financial reporting functions, accounting estimates and income taxes. We believe that this deficiency did not affect the accuracy of our financial statements in this report. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties and whether the potential benefits of adding employees to clearly segregate duties or other alternatives justifies the expense associated with the changes. In addition, management will be reviewing this matter with its outside consultants to examine other available alternative solutions. Changes in internal control. During the third quarter of 2007, 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. -13- PART II - OTHER INFORMATION Item1A. Risk Factors Information regarding risk factors are set forth under the caption "Forward-Looking Statements" in Part 1, Item 2 of this Form 10-Q and in Part 1, Item 1A. of the Company's Annual Report on Form 10-K for the Year Ended December 31, 2006. There have been no material changes from the risk factors previously disclosed in the Company's 2006 Annual Report on Form 10-K. Item 6. Exhibits 3.3 By-Laws effective October 24, 2007. 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. -14- 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: November 12, 2007 /s/ Michael J. Ferrantino ------------------------- Michael J. Ferrantino, President and Chief Executive Officer Date: November 12, 2007 /s/ Michael J. Kroll --------------------- Michael J. Kroll Vice President, Treasurer and Chief Financial Officer -15-