SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-K
(Mark one)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended________September 30, 2002_____________________________
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from____________to____________________________________
Commission file number__________________0-10976_________________________________
______________________Microwave Filter Company, Inc_____________________________
(Exact name of registrant as specified in its charter)
__________New York__________________________16-0928443__________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
_____6743 Kinne Street, East Syracuse, NY________13057_________________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code____(315) 438-4700_____________
Securities registered pursuant to Section 12(b) of the Act:_____None____________
Securities registered pursuant to Section 12(g) of the Act:
_________________________Common stock, par value $.10 per share_________________
Title of class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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.__
1
The aggregate market value of the voting stock held by non-affiliates of the
registrant at the close of business on December 2, 2002 was $2,842,905.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at December 2, 2002: 2,904,781
Documents incorporated by reference: None.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
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Microwave Filter Company, Inc. (hereinafter referred to as MFC) was
incorporated in New York State on September 26, 1967. MFC is the successor of
Microwave Filter Company which was founded in April of 1967.
On July 1, 1990, MFC acquired Niagara Scientific, Inc. (hereinafter referred
to as NSI.)
MFC and its subsidiaries are sometimes referred to collectively as the
"Company."
NARRATIVE DESCRIPTION OF BUSINESS
- ----------------------------------
Microwave Filter Company, Inc. (MFC)
Established in 1967 in East Syracuse, New York, MFC occupies a modern 40,000
square foot facility with an impressive complement of analytical and design
software, test instrumentation, prototype and manufacturing equipment to create
passive filters, components and sub systems in the frequency range of 10 MHz to
50 GHz.
MFC manufactures filters for eliminating interference and signal processing
for such markets as Cable Television, Broadcast, Mobile Communications,
Avionics, Radar, Navigation and Defense Electronics. The Company designs
waveguide, stripline/ microstrip, transmission line, miniature/subminiature
and lumped constant filters in such filter styles as: bandpass, highpass,
lowpass, bandstop, multiplexers, tunable notch, tunable bandpass, high power
filters, filter networks, amplitude equalized and delay equalized. The Company
actively produces over 1,700 standard products and has designed more than 5,000
custom products for specialized applications.
A quality plan is developed for each incoming order. Working as a team,
engineers, designers, fabricators and technicians identify any potential design
or manufacturing challenges before the project begins. With a quality plan,
design to shipping time is reduced due to careful resource planning.
The manufacturing facility includes a state-of-the-art CAD-CAM system, a test
department with automated network analyzers to 50 GHz, a high capacity conveyor
soldering oven, a fully compliant finishing operation and a TQM/ISO9000 based
quality assurance program to insure the intrinsic quality of the products
produced.
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Efficient simulation, design and analysis software enhanced by proprietary
MFC developed software, allow rapid and accurate filter development at
reasonable cost. Automated network analyzers provide rigorous product testing
and performance data storage on a serial number basis.
A network based CAD-CAM system allows the transfer of data and programs to
the CNC turning and milling centers for fabrication of machined parts.
Prototype PC boards are similarly produced by computer controlled PC board
mills.
A Grieve high capacity conveyor soldering oven is used for production of
large quantity assemblies while smaller production quantities are assembled at
hand soldering or brazing stations.
ISO-9000 contract and design review procedures coupled with a QA department
that is compliant with MIL-I-45208 inspection systems and MIL-STD-45622
calibration system standards assures process and product integrity. A
certified staff instructor regularly trains associates to MIL-STD-2000A (now
superceded by J-STD-001.)
Other in-house testing facilities include three environmental chambers
capable of testing products for temperatures of -0 to 200 degrees Celsius and
humidity up to 100 percent. Several high power amplifiers are available for
power tests up to 2500 watts at 220 MHz and 100 watts at 1,000 MHz. An
automated in-house anechoic chamber provides antenna pattern measurement
capability in the 2 to 8 GHz frequency range. Facilities are also available
for salt spray, sand and dust, shock and vibration, RFI leakage and altitude
testing.
Niagara Scientific, Inc. (NSI)
- ------------------------------
NSI manufactures material handling equipment for suppliers of consumer goods.
Such suppliers would include food processors or any other manufacturer of
packaged consumer products that need to be moved into shipping cartons at a
certain rate of speed.
The Schroeder Machines Division (SMD), in existence for over 50 years, is a
division of Niagara Scientific. SMD manufactures a number of case packing
solutions but is most noted for its Quadnumatic. The Quadnumatic is an
automatic case packing machine that performs all the functions of collating,
case forming, loading and sealing products into their shipping cartons at
packing speeds ranging from 12 to 30 cases per minute.
Other products offered by Schroeder include a servo pick-and-place machine
for top loading packaging applications and a case erector/bottom taping
machine for customers who still hand pack or need to add a case former to an
existing case packing machine.
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MARKETS
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Microwave Filter Company, Inc. (MFC)
- ------------------------------------
Cable Television (CATV) - MFC serves this market principally with three
product groups. One popular area includes standard and custom filters used at
the headend to process signals and remove interference. A very popular
application involves removing or re-routing channels to organize programming
line-ups.
A family of trap filters, "Fastrap," is used by cable operators to restrict
or permit the viewing of pay per view or other premium programming. The traps
can be ordered in small and large quantities, are 100% inspected and delivered
overnight.
Since all operators initially receive programming via satellite, products
from our satellite market cross over into cable television. C-band satellite
receive systems are prone to various types of terrestrial interference which
are curable in many cases by applying filters.
Cable television is establishing a place for itself in the afterglow of the
Telecommunications Act of 1996. This important federal legislation removed
restrictions from telephone companies offering video services and from cable
companies offering telephone service. Its purpose was to increase competition
among those service providers. A result of this legislation has been the
convergence of several industries such as the acquisition of TCI, the largest
US cable television company, by AT&T. Though it may appear as though this
legislation has encouraged monopoly, instead it has offered companies the
ability to combine resources and acquire capital for new projects. In recent
years, the demand for fast and varied data services has greatly increased. The
next few years will see these converged companies working towards delivering
consumers the high-speed voice and data services they demand.
Broadcast - Several areas of broadcast are served by Microwave Filter
Company with the most active being Wireless Cable.
Wireless Cable is a video delivery service that has attempted to compete with
cable television throughout this decade with limited success. This service
delivers programming over-the-air using microwave frequencies. Television
programming is received via a small rooftop antenna. The signals are then down
converted for reception by the television set. At the home, the equipment looks
the same as that supplied by a cable television company with the exception of
the rooftop antenna.
Forces that worked against the success of this market were limited financial
sources, access to programming, channel limitations and regulatory obstacles.
While some of these obstacles were overturned, the industry struggled for
financial backing. Unfortunately with modest finances, business plans could
not be met. Nor was it possible to invest in new technology necessary to offer
new services now being demanded by the public. Despite its problems, Wireless
Cable is a viable technology for fast two-way data delivery and telephony.
Interest in this technology is still keen. Over the last two years, several
telephone companies have been acquiring Wireless Cable systems because of
their potential in delivering high speed data. It is also a viable technology
in international markets that lack the infrastructure for cable television
delivery. The hope is that this market will rebound domestically with the help
of the telephone companies.
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The most significant product sold to this market is our channel combiner used
at the broadcast site to reduce tower costs. By combining channels at the
transmitter, additional expensive coaxial or waveguide runs up the tower
become unnecessary.
MFC offers the widest selection of channel combiners to meet a variety of
system specifications. Combiners in different configurations and constructed
of different materials offer the operator better or best options depending on
budget or other system requirements.
Another area which is predicted to revive Wireless Cable is LMDS,
frequencies between 28 and 31 GHz which have been designated for fixed
wireless broadband services. Canada has been leading the way in the
development of this market by rolling out voice and high speed internet
access. In the US, the FCC has also been auctioning off frequencies over the
last two years. Several systems utilizing this technology have also been
launched in numerous overseas markets. LMDS essentially uses the same
operating equipment as Wireless Cable providers. Microwave Filter Company
sells a notch and bandpass filter series to remove interference at the
transmitter to this market.
LPTV - Low Power Television or LPTV is an option in the U.S. as a
multichannel subscription television service. A system similar to Wireless
Cable can be configured to deliver channels of programming to areas
where off air signals cannot be received. The only difference between both
services is broadcast frequency and the type of antenna located at the
subscriber's home. An LPTV receive antenna would look like any other off air
broadcast antenna in contrast to the microwave antenna used for Wireless
Cable. LPTV frequencies are easier to obtain and there are more LPTV than
Wireless channels available. In fact, due to the limited number of Wireless
Cable frequencies, Wireless Cable operators are using a combination of Wireless
and LPTV frequencies to increase the number of channels offered to their
subscribers. As a broadcaster, LPTV differs from traditional television only
in broadcast power. With lower broadcast power, the service has a smaller
reception area than high power broadcast stations.
Microwave Filter Company provides channel combiners and interference filters
for this industry. The channel combiners are used to group channels and
eliminate additional coaxial runs to the broadcast tower. Filters are also
used in broadcast equipment to eliminate interference.
Radio and Television Broadcast - MFC primarily serves these broadcast areas
with interference filters to reduce equipment harmonics. Other broadcast areas
served also include AML, telemetry and STL/ENG relays.
Similar to cable television, the broadcast industry is also moving towards
the digital delivery of both audio and video broadcast.
Satellite - Filters and traps for removing interference are provided to both
commercial and home C-band TVRO antennas. A variety of products are available
that offer protection and or solutions to interference that affects the
feedhorn, downconverter, and receiver. A variety of filters are also available
for satellite services utilizing higher frequency bands such as 12, 13 and 18
GHz.
Direct Broadcast Satellite or DBS is a version of home satellite programming
delivered direct to the home. It differs from C-band TVRO by the size of the
receive antenna. DBS broadcasts at a higher frequency requiring a smaller
satellite dish than C-band TVRO. Both satellite dealers and cable television
systems market the service to offer consumers television options.
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Mobile Radio - MFC provides filters to a variety of mobile radio services
such as cellular telephone, two way radio and paging to eliminate interference
in transmit or receive equipment. With the number of services increasing and
our air waves becoming more congested, filters are increasingly important to
many transmit operations. Cellular telephone has been the largest mobile
radio growth market. The Cellular market is beginning to level off and now
Personal Communications Services (PCS) is an area of mobile radio on the rise.
Microwave and RF - This market encompasses both commercial and military
applications. Filters in defense applications are used for such purposes as
air to ground communications, radar and land communications. In commercial
areas, filters are used to protect such equipment as receivers, transmitters,
transceivers and any other electronics used for signal processing. In addition
to filters, this market is also served with MFC's Ferrosorb product line.
Ferrosorb is a microwave absorbing material available in sheets, loads and a
variety of other shapes. The product is used to offer protection by shielding
signals or absorbing selective bands.
In 1992, MFC's acquisition of certain assets of Chesterfield Products added
an expanded line of products to enhance the RF filter line. Many of MFC's
traditional filters are components added onto a system. Chesterfield provided
MFC with the capability to manufacture miniature and subminiature filters
which are components built into electronic systems. Another Chesterfield
capability has provided us with the resources to expand our filter design
range down to 5 KHz.
There has been an increased demand for filters in the OEM (Original Equipment
Manufacturer) market. In response to this demand, MFC has purchased new design,
fabrication and test equipment to design filters up to 50 GHz. OEM orders are
larger than those received for other markets and facilities such as a soldering
oven have been added in the manufacturing area for large volume production.
Niagara Scientific, Inc. (NSI)
- ------------------------------
NSI - Like MFC, NSI and its divisions seek niche markets arising from
certain demographic changes in the industrial work force which promotes
acceptance of automation in both large and small factories. NSI's typical
product is customized to the purchaser's operation and is the result of system
engineering. The product makes tactical use of precision mechanical movements
or sensors of physical characteristics under microprocessor control. These
smart machines reduce labor costs through faster operation and increased
quality.
Typical customers for case packing machines are food processors or makers of
cosmetics, pharmaceuticals, candies or hardware whose product must be cased
for shipping and storage.
Other custom equipment is designed for inspection-rejection, counting,
analyzing or otherwise monitoring, reporting or controlling a continuous
manufacturing or industrial process.
Typical customers are commodity mass producers in the food, drug and paint
industries.
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WORLD TRADE
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Management believes that world marketing is a route to substantial expansion
of sales for MFC/NSI. Export opportunities for MFC's communication related
products are many - especially in areas of the world such as China, the
Pacific Rim and South America. Marketing research reveals that the Company's
products are in high demand in these areas of the world. Significant efforts
have been made over the last year to identify key international markets and to
establish distributors with appropriate technical backgrounds to represent our
interests in those regions.
NSI products are less suitable for export for a number of reasons, including
their large size and complexity, less demand in underdeveloped areas for
automation and significant local competition. However, NSI is well qualified
to produce and or distribute complementary products under license.
SUPPLIERS
- ---------
The Company depends on outside suppliers for raw materials, components and
parts, and services. Although items are generally available from a number of
suppliers, the Company purchases certain raw materials and components from a
single supplier. If such a supplier should cease to supply an item, the
Company believes that new sources could be found to provide the raw materials
and components. However, manufacturing delays and added costs could result.
The Company has not experienced significant delays of this nature in the past,
but there can be no assurance that delays in delivery due to supply shortages
will not occur in the future. Substantial periods of lead time for delivery of
certain materials are sometimes experienced by the Company, making it
necessary to inventory varied quantities of materials.
PATENTS AND LICENSES
- --------------------
The Company has no patents, trademarks, copyrights, licenses or franchises of
material importance.
SEASONAL FLUCTUATIONS
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There are no significant seasonal fluctuations in the Company's business.
GOVERNMENT CONTRACTS
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The Company is not dependent in any material respect on government contracts.
BACKLOG
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At September 30, 2002, the Company's total backlog of orders was $705,578
compared to $466,384 at September 30, 2001. At September 30, 2002, MFC's
backlog of orders was $399,640 compared to $465,881 at September 30, 2001. At
September 30, 2002, NSI's backlog of orders was $305,938 compared to $503
at September 30, 2001. Approximately 80% of the total Company backlog at
September 30, 2002 is scheduled to ship during fiscal 2003. However, backlog
is not necessarily indicative of future sales. Accordingly, the Company does
not believe that its backlog as of any particular date is representative of
actual sales for any succeeding period.
7
EMPLOYEES
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At September 30, 2002, the Company employed 68 full-time permanent
employees.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company maintains and expects to continue to maintain an active research
and development program. The Company believes that such a program is needed
to maintain its competitive position in existing markets and to provide
products for emerging markets. Costs in connection with research and
development were $376,857, $362,518 and $320,789 for the fiscal years 2002,
2001 and 2000, respectively. Research and development costs are charged to
operations as incurred.
COMPETITION
- -----------
The principal competitive factors facing both MFC and NSI are price,
technical performance, service and the ability to produce in quantity to
specific delivery schedules. Based on these factors, the Company believes it
competes favorably in its markets.
ITEM 2. PROPERTIES.
MFC's office and manufacturing facility is located at 6743 Kinne Street,
East Syracuse, New York. This facility, which is owned by MFC, consists of
40,000 square feet of office and manufacturing space located on 3.7 acres.
MFC presently occupies approximately 35,000 square feet with the balance
(approximately 5,000 square feet) occupied by NSI.
ITEM 3. LEGAL PROCEEDINGS.
There are currently no material pending legal proceedings against the Company
or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this Form 10-K, there
were no matters submitted to a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MFC's common stock is traded on the NASDAQ over-the-counter market under the
symbol MFCO. The information set forth was obtained from statements provided
by the NASD. The following table shows the high and low sales prices for MFC's
common stock for each full quarterly period within the two most recent fiscal
years. The quotations represent prices in the over-the-counter market between
dealers in securities. They do not include retail mark-ups, mark-downs or
commissions.
Fiscal 2002 High Low
Oct. 1, 2001 to Dec. 31, 2001 $ 1.45 $ 1.00
Jan. 1, 2002 to Mar. 31, 2002 2.98 1.13
Apr. 1, 2002 to June 30, 2002 2.55 1.50
July 1, 2002 to Sept. 30, 2002 1.81 .94
Fiscal 2001 High Low
Oct. 1, 2000 to Dec. 31, 2000 $ 1.94 $ 1.06
Jan. 1, 2001 to Mar. 31, 2001 2.22 1.25
Apr. 1, 2001 to June 30, 2001 1.50 1.12
July 1, 2001 to Sept. 30, 2001 1.22 .90
The approximate number of stockholders on September 30, 2002 was 2,800.
On December 18, 2002, the Board of Directors declared a ten cents per share
cash dividend to shareholders of record on January 17, 2003 to be distributed
on January 31, 2003.
On February 13, 2002, the Board of Directors declared a seven cents per
share cash dividend to shareholders of record on February 27, 2002 to be
distributed on March 13, 2002.
On July 25, 2001, the Board of Directors declared a three cents per share
cash dividend to shareholders of record on August 22, 2001 to be distributed
on September 19, 2001.
On January 26, 2000, the Board of Directors declared a five cents per share
cash dividend to shareholders of record on February 18, 2000 to be distributed
on March 3, 2000.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information is derived from and should be
read in conjunction with the financial statements, including the notes
thereto, appearing in Item 8. - "Financial Statements and Supplemental Data."
Five Year Summary of Financial Data
September 30
2002 2001 2000 1999 1998
Net Sales $ 7,251,732 $ 6,848,191 $ 7,491,853 $ 6,572,949 $ 6,989,106
Net Income $ 434,287 $ 128,752 $ 338,736 $ 160,471 $ 69,424
Total Assets $ 4,865,885 $ 4,270,151 $ 5,142,708 $ 4,704,630 $ 5,051,078
Long Term Debt $ 0 $ 0 $ 0 $ 0 $ 0
Earnings Per Share $ .15 $ .04 $ .11 $ .05 $ .02
Weighted Average Number of
Common Shares Outstanding 2,904,781 2,946,284 3,169,061 3,283,098 3,535,522
Cash ($) Dividends Paid Per
Share $ .07 $ .03 $ .05 $ .05 $ .05
Net income as a percentage of: 2002 2001 2000 1999 1998
Sales............................. 6.0 1.9 4.5 2.4 1.0
Assets .................... 8.9 3.0 6.6 3.4 1.4
Equity............................ 11.5 3.6 8.8 4.3 1.7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Microwave Filter Company, Inc. operates primarily in the United States and
principally in two industries. The Company extends credit to business
customers, including original equipment manufacturers (OEMs), distributors and
other end users, based upon ongoing credit evaluations. Microwave Filter
Company, Inc. designs, develops, manufactures and sells electronic filters,
both for radio and microwave frequencies, to help process signal distribution
and to prevent unwanted signals from disrupting transmit or receive
operations. Markets served include cable television, television and radio
broadcast, satellite broadcast, mobile radio, commercial and defense
electronics. Niagara Scientific, Inc., a wholly owned subsidiary, custom
designs case packing machines to automatically pack products into shipping
cases. Customers are processors of food and other commodity products with a
need to reduce labor cost with a modest investment and quick payback.
RESULTS OF OPERATIONS
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The following table sets forth the Company's net sales by major product
groups for each of the fiscal years in the three year period ended September
30, 2002.
Product group (in thousands) Fiscal 2002 Fiscal 2001 Fiscal 2000
Niagara Scientific $552 $ 981 $1,285
Microwave Filter:
Cable/Satellite TV 5,326 4,022 4,328
RF/Microwave 980 1,184 960
Broadcast TV 394 661 919
Total $7,252 $6,848 $7,492
Sales backlog at 9/30 $706 $ 466 $ 832
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Fiscal 2002 compared to fiscal 2001
Consolidated net sales for the fiscal year ended September 30, 2002 equaled
$7,251,732, an increase of $403,541 or 5.9% when compared to consolidated net
sales of $6,848,191 during the fiscal year ended September 30, 2001.
Microwave Filter Company, Inc. (MFC) sales increased $832,797 or 14.2% to
$6,699,426 during the fiscal year ended September 30, 2002 when compared to
sales of $5,866,629 during the fiscal year ended September 30, 2001.
The increase in MFC sales can primarily be attributed to the increase in the
sales of the Company's standard Cable/Satellite TV product sales, which
management attributes to the increase in demand for the Company's standard
filters which suppress strong out-of-band interference caused by military and
civilian radar systems. This increase in demand can primarily be attributed to
the increased security measures that were taken as a result of the September
11th terrorist attacks. MFC's Cable/Satellite TV product sales increased
$1,304,173 or 32.4% to $5,326,122 during fiscal 2002 when compared to sales of
$4,021,949 for the fiscal year ended September 30, 2001. Substantially all of
this increase was realized during the first six months of the fiscal year.
Due to economic conditions, the Company experienced declines in sales in
other product areas. MFC's RF/Microwave product sales decreased $204,261 or
17.3% to $979,818 during the fiscal year ended September 30, 2002 when
compared to sales of $1,184,079 during the fiscal year ended September 30,
2001. The Company continues to invest in production engineering and
infrastructure development to penetrate OEM (Original Equipment Manufacturer)
market segments as they become popular. MFC is concentrating its technical
resources and product development efforts toward potential high volume
customers as part of a concentrated effort to provide substantial long-term
growth. MFC's BTV/Wireless cable sales decreased $267,115 or 40.4% to $393,486
for the fiscal year ended September 30,
2002 when compared to sales of $660,601 for the fiscal year ended September
30, 2001, primarily due to the downturn in the telecommunications marketplace.
Niagara Scientific, Inc. (NSI) sales decreased $429,256 or 43.7% to $552,306
for the fiscal year ended September 30, 2002 when compared to sales of
$981,562 for the fiscal year ended September 30, 2001. Sales of NSI related
equipment can be impacted by the timing of the shipment of the custom designed
equipment and the customer's scheduled delivery dates. Management attributes
the decrease in NSI sales to the downturn in the economy and reduced capital
spending.
At September 30, 2002, the Company's total backlog of orders equaled
$705,578 compared to $466,384 at September 30, 2001. At September 30, 2002,
MFC's backlog of orders equaled $399,640 compared to $465,881 at September 30,
2001. At September 30, 2002, NSI's backlog of orders equaled $305,938 compared
to $503 at September 30, 2001. Approximately 80% of the total Company backlog
at September 30, 2002 is scheduled to ship during fiscal 2003. However,
backlog is not necessarily indicative of future sales. Accordingly, the
Company does not believe that its backlog as of any particular date is
representative of actual sales for any succeeding period.
Gross profit increased $538,454 or 23.5% to $2,829,352 during the fiscal
year ended September 30, 2002 when compared to gross profit of $2,290,898
during the fiscal year ended September 30, 2001. The dollar increase in gross
profit during fiscal 2002, when compared to fiscal 2001, can be attributed to
both the improvement in gross profit as a percentage of sales and the increase
in sales volume. As a percentage of sales, gross profit equaled 39.0% during
the fiscal year ended September 30, 2002 compared to 33.5% during the fiscal
year ended September 30, 2001. The improvement in gross profit as a percentage
of sales, when compared to the same period last year, can primarily be
attributed to a favorable product sales mix experienced in the first six
months of the fiscal year and the operational efficiencies and economies of
scale gained due to the higher production volume.
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Selling, general and administrative (SG&A) expenses increased $11,741 or
0.5% to $2,272,362 during the fiscal year ended September 30, 2002 when
compared to SG&A expenses of $2,260,621 during the fiscal year ended September
30, 2001. As a percentage of sales, SG&A expenses decreased to 31.3% during
the fiscal year ended September 30, 2002 when compared to 33.0% during the
fiscal year ended September 30, 2001, primarily due to the increase in sales
during fiscal 2002 when compared to fiscal 2001. Due to the uncertain economic
climate, the Company has been emphasizing cost controls and cost cutting
measures to minimize operating expenses.
Income from operations increased $526,713 to $556,990 during the fiscal year
ended September 30, 2002 when compared to income from operations of $30,277
during the fiscal year ended September 30, 2001. On an industry segment basis,
MFC's income from operations increased $575,283 to $861,197 for the fiscal
year ended September 30, 2002 when compared to income from operations of
$285,914 for the fiscal year ended September 30, 2001, due primarily to the
improved profit margins and higher sales volume. NSI recorded a loss from
operations of $229,893 for the fiscal year ended September 30, 2002 compared
to a loss from operations of $180,020 for the fiscal year ended September 30,
2001. NSI's loss from operations can be attributed to the lower sales volume
and the absorption of fixed overhead expenses. Corporate expenses decreased
$1,303 to $74,314 for the fiscal year ended September 30, 2002 when compared
to corporate expenses of $75,617 for the fiscal year ended September 30, 2001.
The Company's income tax expense equaled $167,080, an effective income tax
rate of 27.8%, for the fiscal year ended September 30, 2002 compared to an
income tax benefit of $10,436 for the fiscal year ended September 30, 2001,
primarily due to the higher levels of pre-tax income for the fiscal year ended
September 30, 2002.
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Fiscal 2001 compared to fiscal 2000
Consolidated net sales for the fiscal year ended September 30, 2001 equaled
$6,848,191, a decrease of $643,662 or 8.6% when compared to consolidated net
sales of $7,491,853 during the fiscal year ended September 30, 2000. Both
Microwave Filter Company, Inc. and Niagara Scientific, Inc. have experienced
reductions in sales orders over the last nine months primarily due to the
unfavorable economic climate and reduced capital spending.
Microwave Filter Company, Inc. (MFC) sales decreased $340,159 or 5.5% to
$5,866,629 during the fiscal year ended September 30, 2001 when compared to
sales of $6,206,788 during the fiscal year ended September 30, 2000.
The decrease in MFC sales can primarily be attributed to the decrease in the
sales of the Company's standard Cable TV and wireless Cable TV product sales,
which management attributes to the downturn in the telecommunications
marketplace. MFC's Cable TV product sales were down $323,092 or 7.7% and MFC's
Broadcast TV product sales, which include wireless cable products, were down
$258,780 or 28.1% during the fiscal year ended September 30, 2001 when
compared to the fiscal year ended September 30, 2000.
MFC's RF/Microwave product sales increased $224,229 or 23.4% to $1,184,079
during the fiscal year ended September 30, 2001 when compared to sales of
$959,850 during the fiscal year ended September 30, 2000. The increase can be
attributed to an increase in sales to one customer on a long term contract
which is scheduled for completion in fiscal 2002. The Company continues to
invest in production engineering and infrastructure development to penetrate
OEM (Original Equipment Manufacturer) market segments as they become popular.
MFC is concentrating its technical resources and product development efforts
toward potential high volume customers as part of a concentrated effort to
provide substantial long-term growth.
Niagara Scientific, Inc. (NSI) sales decreased $303,503 or 23.6% to $981,562
for the fiscal year ended September 30, 2001 when compared to sales of
$1,285,065 for the fiscal year ended September 30, 2000. Sales of NSI related
equipment can be impacted by the timing of the shipment of the custom designed
equipment and the customer's scheduled delivery dates. Management attributes
the decrease in NSI sales to the downturn in the economy and reduced capital
spending.
At September 30, 2001, the Company's total backlog of orders was $466,384
compared to $831,388 at September 30, 2000. At September 30, 2001, MFC's
backlog of orders was $465,881 compared to $630,434 at September 30, 2000. At
September 30, 2001, NSI's backlog of orders was $503 compared to $200,954 at
September 30, 2000. The total Company backlog at September 30, 2001 is
scheduled to ship during fiscal 2002. However, backlog is not necessarily
indicative of future sales. Accordingly, the Company does not believe that its
backlog as of any particular date is representative of actual sales for any
succeeding period. The Company attributes the decrease in sales order backlog
at September 30, 2001, when compared to the September 30, 2000, to the
reduction in sales orders experienced over the last nine months primarily due
to the unfavorable economic climate and reduced capital spending.
Gross profit decreased $320,158 or 12.3% to $2,290,898 during the fiscal
year ended September 30, 2001 when compared to gross profit of $2,611,056
during the fiscal year ended September 30, 2000. The dollar decrease in gross
profit during fiscal 2001 when compared to fiscal 2000 can primarily be
attributed to the decrease in sales. As a percentage of sales, gross profit
equaled 33.5% during the fiscal year ended September 30, 2001 compared to
34.9% during the fiscal year ended September 30, 2000. The decrease in gross
profit as a percentage of sales, when compared to last year, can be attributed
to the lower sales volume and product sales mix.
13
Selling, general and administrative (SG&A) expenses decreased $11,283 or
0.5% to $2,260,621 during the fiscal year ended September 30, 2001 when
compared to SG&A expenses of $2,271,904 during the fiscal year ended September
30, 2000. As a percentage of sales, SG&A expenses increased to 33.0% during
the fiscal year ended September 30, 2001 when compared to 30.3% during the
fiscal year ended September 30, 2000, primarily due to the decrease in sales
during fiscal 2001 when compared to fiscal 2000.
Income from operations decreased $308,875 to $30,277 during the fiscal year
ended September 30, 2001 when compared to income from operations of $339,152
during the fiscal year ended September 30, 2000. On an industry segment basis,
MFC's income from operations decreased $277,792 to $285,914 for the fiscal
year ended September 30, 2001 when compared to income from operations of
$563,706 for the fiscal year ended September 30, 2000. NSI recorded a loss
from operations of $180,020 for the fiscal year ended September 30, 2001
compared to a loss from operations of $150,906 for the fiscal year ended
September 30, 2000. The decreases in income from operations can primarily be
attributed to the decreases in sales during the fiscal year ended September
30, 2001 when compared to the fiscal year ended September 30, 2000. Corporate
expenses increased $2,029 to $75,617 for the fiscal year ended September 30,
2001 when compared to $73,588 for the fiscal year ended September 30, 2000.
The Company recognized an income tax benefit of $10,436 for the fiscal year
ended September 30, 2001 compared to income tax expense of $112,508 during
fiscal 2000 due primarily to the lower levels of pre-tax income for the fiscal
year ended September 30, 2001 and to the recognition of research and
experimentation tax credits in fiscal 2001.
14
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
MFC defines liquidity as the ability to generate adequate funds to meet its
operating and capital needs. The Company's primary source of liquidity has
been funds provided by operations.
September 30
2002 2001 2000
Cash & cash equivalents $649,196 $373,142 $625,447
Investments $1,377,765 $900,359 $925,067
Working capital $2,594,590 $2,288,932 $2,582,446
Current ratio 3.41 to 1 4.18 to 1 3.11 to 1
Long-term debt $ 0 $ 0 $ 0
Cash and cash equivalents increased $276,054 to $649,196 at September 30,
2002 when compared to $373,142 at September 30, 2001. The increase was a
result of $1,172,922 in net cash provided by operating activities, $693,534
in net cash used in investing activities and $203,334 in net cash used in
financing activities.
The net decrease of $221,451 in accounts receivable at September 30, 2002,
when compared to September 30, 2001, can primarily be attributed to the
decrease in shipments during the quarter ended September 30, 2002 when
compared to the same period last year.
The net increase of $79,188 in inventories at September 30, 2002, when
compared to September 30, 2001, can primarily be attributed to the increase in
the sales order backlog at September 30, 2002 when compared to September 30,
2001. The Company provides for a valuation reserve for certain inventory that
is deemed to be obsolete, of excess quantity or otherwise impaired. The
Company's inventory valuation reserves equaled $345,161 at September 30, 2002
compared to $297,634 at September 30, 2001. The increase of $47,527 in
inventory reserves at September 30, 2002, when compared to the same period
last year, can primarily be attributed to the obsolescence of specific
inventory items due to product enhancements. Based on current and expected
inventory levels, management believes any change to the inventory valuation
reserves will not have a material impact on future results of operations,
capital resources or liquidity. All such inventory items are written down to a
new cost basis.
The increase of $116,627 in customer deposits at September 30, 2002, when
compared to September 30, 2001, can be attributed to the increase in the sales
order backlog at September 30, 2002 when compared to September 30, 2001.
Payments received from customers in advance of products shipped are recorded
as customer deposits until earned.
The increase of $173,224 in accrued federal and state income taxes at
September 30, 2002, when compared to September 30, 2001, can primarily be
attributed to the increase in income.
The increase of $75,618 in other current liabilities at September 30, 2002,
when compared to September 30, 2001, can be attributed to the higher Company
discretionary profit sharing contribution accrued for the fiscal year ended
September 30, 2002 when compared to the fiscal year ended September 30, 2001.
Cash used in investing activities during fiscal 2002 consisted of funds used
to purchase investments ($477,406) and funds used for capital expenditures
($216,128).
Cash used in financing activities consisted of funds used to pay a cash
dividend ($203,334).
At September 30, 2001, the Company had unused aggregate lines of credit
totaling $600,000. Of these lines, $100,000 is for the purchase of equipment
and is collateralized by equipment and $500,000 is for working capital and is
collateralized by accounts receivable, inventories and equipment.
Management believes that its working capital requirements for the foreseeable
future will be met by its existing cash balances, future cash flows from
operations and its current credit arrangements.
15
Critical Accounting Policies
The Company's consolidated financial statements are based on the application
of generally accepted accounting principles (GAAP). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. The Company believes its use of estimates and underlying
accounting assumptions adhere to GAAP and are consistently applied. Valuations
based on estimates are reviewed for reasonableness and adequacy on a
consistent basis throughout the Company. Primary areas where financial
information of the Company is subject to the use of estimates, assumptions and
the application of judgment include revenues, receivables, inventories, and
taxes.
Revenues from product sales are recorded as the products are shipped and title
and risk of loss have passed to the customer, provided that no significant
vendor or post-contract support obligations remain and the collection of the
related receivable is probable. Billings in advance of the Company's
performance of such work are reflected as customer deposits in the
accompanying consolidated balance sheet.
Allowances for doubtful accounts are based on estimates of losses related to
customer receivable balances. The establishment of reserves requires the use
of judgment and assumptions regarding the potential for losses on receivable
balances.
The Company's inventories are valued at the lower of cost or market. The
Company uses certain estimates and judgments and considers several factors
including product demand and changes in technology to provide for excess and
obsolescence reserves to properly value inventory.
The Company has deferred tax assets that are reviewed for recoverability and
valued accordingly. These assets are evaluated by using estimates of future
taxable income streams and the impact of tax planning strategies. Valuations
related to tax accruals and assets can be impacted by changes to tax codes,
changes in statutory tax rates and the Company's future taxable income levels.
16
PENDING PRONOUNCEMENTS
- ----------------------
SFAS No. 141, "Business Combinations" was issued in June 2001 and requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and prohibits the use of the pooling-of-
interests method. The adoption of this standard has no impact on the
financial statements of the Company.
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in June 2001
and is effective for the Company on October 1, 2002. Under SFAS No. 142,
amortization of goodwill, including goodwill and intangible assets with
indefinite lives recorded in past business combinations, will discontinue upon
adoption of this standard. In addition, goodwill recorded as a result of
business combinations completed after July 1, 2001, will not be amortized.
Instead, all goodwill and intangible assets with indefinite lives will be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying
amount. We believe the adoption of this statement will not have a material
impact on the results of operations and financial position of the Company.
SFAS No. 143, "Accounting for Asset Retirement Obligations", was issued in
June 2001 and is effective for the Company on October 1, 2002. SFAS No. 143
establishes financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated assets' retirement
costs. It applies to all legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
and/or the normal operation of a long-lived asset. We believe that the
implementation of this statement will not have a material impact on the
results of operations and financial position of the Company.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", was issued in August 2001 and is effective for the Company on October
1, 2002. SFAS No. 144 provides new guidance on the recognition of impairment
losses on long-lived assets to be held and used or to be disposed of and also
broadens the definition of what constitutes a discontinued operation and how
the results of discontinued operations are to be measured and presented. SFAS
No. 144 supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and a portion of
Accounting Principle Board (APB) No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business," while retaining
many of the requirements of these two statements. Under SFAS No. 144,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they occur.
We believe the implementation of the statement will not have a material impact
on the results of operations and financial position of the Company.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No 13, and Technical Corrections as of April 2002", was issued
in May 2002. SFAS 145 amends existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. Generally, the provisions in SFAS 145
are effective for transactions occurring after May 15, 2002, with early
application encouraged. The adoption of this standard has no impact on the
financial statements of the Company.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued June 2002 and is effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity Including Certain Costs Incurred in a
Restructuring." We believe that the implementation of the statement will not
have a material impact on the results of operations and financial position of
the Company.
17
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Any statements contained in this report which are not historical facts are
forward looking statements; and, many important factors could cause actual
results to differ materially from those in the forward looking statements. Such
factors include, but are not limited to, changes (legislative, regulatory and
otherwise) in the MMDS, LPTV or Cable industry, demand for the Company's
products (both domestically and internationally), the development of
competitive products, competitive pricing, market acceptance of new product
introductions, technological changes, general economic conditions, litigation
and other factors, risks and uncertainties which may be identified in the
Company's Securities and Exchange Commission filings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has limited exposure to market risk as the Company has no long
term debt as of September 30, 2002. The Company's available line of credit is
based on a factor of the prime rate; however, there are no outstanding
borrowings under the line of credit. The Company does not trade in derivative
financial instruments. Investments generally consist of commercial paper,
government backed obligations and other guaranteed commercial debt that have
an original maturity of more than three months and a remaining maturity of
less than one year. Investments are carried at cost which approximates market.
The Company's policy is to hold investments until maturity. The Company's
practice is to invest cash with financial institutions that have acceptable
credit ratings.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Financial Statement Schedules called for by this
item are submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names of, and certain information with respect to, the directors of MFC
is set forth below:
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 12/2/02 Class
TRUDI B. ARTINI Mrs. Artini is an independent 82,435 2.8%
(a)(b)(d) investor in MFC and various other
Age 80 business enterprises in Syracuse,
Director since 1974 New York.
DAVID B. ROBINSON MD Dr. Robinson is Emeritus Professor 58,571 2.0%
(a)(b)(d) of Psychiatry at Upstate Medical
Age 78 University, State University of New
Director since 1977 York at Syracuse. He was a faculty
member from 1958 until his retirement
in 1985 and served as Acting Chairman
of the Dept. of Psychiatry for six
of those years. He was elected to
serve as a Skaneateles Town Councilman
from 1990 to 1998. In 1980, he was a
founding member of the Skaneateles
Festival of Chamber Music.
LOUIS MISENTI President and Principal 264,814 9.1%
Age 75 shareholder of SCI Corp.,
Director since 1976 Syracuse, New York since 1984.
SCI manufactures polishing
compounds for the automobile and
silverware industries. Mr.
Misenti is also the managing
partner of Northern Pines Golf
Course, Cicero, New York which was
founded in 1970. He was elected
Chairman of the Board of
Directors of MFC on March 27,
1993.
19
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 12/2/02 Class
CARL F. FAHRENKRUG PE Mr. Fahrenkrug was appointed 132,373 4.6%
(a)(d) President and Chief Executive
Age 60 Officer of MFC on October 7,
Director since 1984 1992. He has also served as
President and Chief Executive
Officer of NSI since prior to
1986. He served as Vice
President of Engineering at
Microwave Systems, Inc.,
Syracuse, N.Y. from 1972-1976.
Mr. Fahrenkrug has a B.S. and
M.S. in Engineering and an MBA
from Syracuse University.
MILO PETERSON Mr. Peterson has served as 80,000 2.8%
(a)(d) Executive Vice President and
Age 62 Corporate Secretary of NSI since
Director since 1990 January 1, 1992. Mr. Peterson
graduated from programs at Yale
University and Syracuse
University. He served as Vice
President of Manufacturing of
Microwave Systems, Inc.,
Syracuse, N.Y. from 1970-1976.
He was elected Vice President
And Corporate Secretary of MFC
On March 27, 1993.
FRANK S. MARKOVICH Mr. Markovich is a consultant in 4,340 *
(c)(d) the manufacturing operations
Age 57 and training field. Prior to that
Director since 1992 he was the Director of the
Manufacturing Extension
Partnership at UNIPEG Binghamton.
He held various high level
positions in operations, quality
and product management in a 20
year career with BF Goodrich
Aerospace, Simmonds Precision
Engine Systems of Norwich, New
York. He completed US Navy
Electronics and Communications
Schools and received an MBA from
Syracuse University.
20
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 12/2/02 Class
ROBERT R. ANDREWS Mr. Andrews is the President and 1,214 *
(a)(c) Principal shareholder of Morse
Age 61 Manufacturing Co., Inc., East
Director since 1992 Syracuse, N.Y. which produces
specialized material handling
equipment and has served in that
capacity since prior to 1985. He
received a B.A degree from
Arkansas University and has
served as Vice President and a
director of the Manufacturers'
Association of Central New York,
President of the Citizens
Foundation, a Trustee of Dewitt
Community Church, director of the
Salvation Army and Chairman of
the Business and Industry
Council of Onondaga Community
College.
SIDNEY CHONG Mr. Chong is a corporate 3,335 *
(a)(b)(c) accountant for Carrols Corp. in
Age 61 Syracuse. Prior to joining Carrols
Director since 1995 Corp., he was a Senior Accountant
with Price Waterhouse and Co. in
New York City. Mr. Chong has a
Bachelor of Science degree in
accounting from California State
University.
Daniel Galbally Mr. Galbally is an accountant 1,489 *
(b)(c) for Nucor Steel Auburn, Inc.
Age 55 in Auburn, New York. Prior to
Director since 1995 joining Nucor Steel Auburn, he
was the controller of Diamond Card
Exchange, Inc. in Syracuse, New
York. He was the controller of
Evaporated Metal Films (EMF) in
Ithaca, N.Y. Before joining EMF,
he worked as controller and acting
vice president of finance at
Philips Display Components Co.
He has a bachelor's degree in
accounting and an MBA from
Syracuse University.
(a)Member of Executive Committee
(b)Member of Compensation Committee
(c)Member of Finance and Audit Committee
(d)Member of Nominating Committee
* Denotes less than one percent of class.
21
The Directors listed above and executive officers as a group own 630,457
shares or approximately 22% of the outstanding common shares of the Company.
IDENTIFICATION OF EXECUTIVE OFFICERS
Name Age Position
Carl F. Fahrenkrug 60 President and Chief Executive Officer
Richard L. Jones 54 Vice President and Chief Financial
Officer
Milo J. Peterson 62 Vice President and Corporate Secretary
Paul W. Mears 43 Vice President of Engineering
Terry C. Owens 48 Vice President of Sales
All of the officers serve at the pleasure of the Board of Directors.
Carl F. Fahrenkrug was elected President and Chief Executive Officer of MFC on
October 7, 1992. Prior to that date, he had been Executive Vice President and
Chief Operating Officer of MFC. Prior to January 1, 1992, he was President and
CEO of NSI and Vice President of Corporate Development for MFC.
Richard L. Jones joined MFC in August 1983 as controller. In February 1985, he
was appointed Vice President and Treasurer of MFC. On October 7, 1992, he was
appointed Vice President and Chief Financial Officer.
Milo J. Peterson was elected Vice President and Corporate Secretary of MFC on
March 27, 1993. Mr. Peterson has served as Executive Vice President and
Corporate Secretary of NSI. He served as Vice President of Manufacturing of
Microwave Systems, Inc., Syracuse, NY, from 1970 - 1976.
Paul W. Mears began his association with MFC as a Co-op while attending RIT in
1981. He became a full time employee in 1984 when he began his duties as an
Electrical Engineer in Research and Development. In 1988 he became a Senior
Design and Quotation Engineer and in 1989, he was promoted to Assistant Chief
Engineer, Manager of Engineering of the Filter Division and in April of 1998,
Was appointed Vice President of Engineering.
Terry C. Owens began his association with MFC in 1982 as an Associate Chief
Engineer. He served as a Project Engineer with Anaren Microwave from 1988
until 1992 when he began employment with Laser Precision Corp., in Utica,
New York, as a Product Specialist. He returned to MFC as Sales Manager,
Assistant Marketing Manager in February of 1995 and in April 1998, was
appointed Vice President of Sales.
22
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended September 30, 2002,
2001 and 2000, compensation paid by MFC to the named executive officers in all
capacities in which they served.
SUMMARY COMPENSATION TABLE
Annual Compensation
Salary Bonus
Name and principal position Year ___$___ ___$___
Carl F. Fahrenkrug 2002 127,274 -
President and CEO 2001 126,832 -
2000 120,197 -
PROFIT SHARING
- --------------
MFC has a profit sharing plan for all employees over the age of 21 with one
year of service. Annual contributions are determined by the Board of
Directors and are made from current or accumulated net income. Allocation of
contributions to plan participants are based upon annual compensation.
Participants vest on the basis of 20% after 3 years of service, 40% at 4
years, 60% at 5 years, 80% at 6 years and 100% at 7 years.
MFC also has a voluntary 401-K plan. Eligibility is the same as the Profit
Sharing Plan. Contributions to the 401-K plan are currently matched at a rate
of 100% of an employee's first 3% of contributions and 50% of an employee's
next 2% of contributions. The maximum corporate match is 4% of an employee's
compensation.
MFC's contributions to the plans for the years ended September 30, 2002,
2001 and 2000 amounted to $187,488, $112,461 and $115,932, respectively.
STOCK OPTIONS
- -------------
On April 9, 1998, the Board of Directors and Shareholders of Microwave
Filter Company, Inc. approved the 1998 Microwave Filter Company, Inc.
Incentive Stock Plan (the "1998 Plan"). Under the 1998 Plan, the Company may
grant incentive stock options ("ISOs"), non-qualified stock options ("NQSOs")
and stock appreciation rights to directors, officers and employees of the
Company and its affiliates. The 1998 Plan reserves 150,000 shares for
issuance. The exercise price of the ISOs and NQSOs will be 100% of the fair
market value of the Common Stock on the date the ISOs and NQSOs are granted.
The 1998 Plan will terminate on April 10, 2008. There were no stock options or
stock appreciation rights granted or outstanding at September 30, 2002 or
2001.
23
COMPENSATION OF DIRECTORS
- -------------------------
Non-officer directors receive fees of $400.00 per board and committee
meetings. MFC also reimburses directors for reasonable expenses incurred in
attending meetings. The Chairman of the Board and Officer members receive no
compensation for their attendance at meetings. During fiscal 2002, the Company
paid Louis S. Misenti $25,000 in compensation for his services as Chairman of
the Board of Directors of Microwave Filter Company, Inc.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth information as to the only persons known by
the Company to own beneficially more than 5% of the Common Stock of the Company
on December 2, 2002.
% of
Outstanding
Number of shares
Common
Name of Beneficial Owner Address Beneficially Owned ____Stock____
Frederick A. Dix & 209 Watson Rd. 244,007 8.4%
Marjorie Dix N. Syracuse, NY 13212
Louis S. Misenti 140 Clearview Rd. 264,814 9.1%
Dewitt, NY 13214
The information relating to the ownership of common stock held by the
directors and executive officers of the corporation is set forth in item 10 of
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
24
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including the Company's Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based upon, and as of the
date of that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective,
in all material respects, to ensure that information required to be disclosed
in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent
to the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and,
therefore, no corrective actions were taken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the list of Financial Statements and
the Financial Statement Schedule submitted as a separate
section of this report.
(b) Reports On Form 8-K:
There are no reports on Form 8-K for the three months ended
September 30, 2002.
(C) Exhibits:
Reference is made to the List of Exhibits submitted as a separate
section of this report.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Microwave Filter Company, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROWAVE FILTER COMPANY, INC.
|S| Carl F. Fahrenkrug
- --------------------------
By: Carl F. Fahrenkrug
(President and Chief Executive Officer)
|S| Richard Jones
- ---------------------
By: Richard Jones
(Vice President and Chief Financial Officer)
Dated: December 20, 2002
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 date indicated:
|S| Louis S. Misenti |S| Carl F. Fahrenkrug
- ------------------------ --------------------------
Louis S. Misenti Carl F. Fahrenkrug
(Director) (Director)
|S| Milo J. Peterson |S| Robert R. Andrews
- ------------------------ -----------------------
Milo J. Peterson Robert R. Andrews
(Director) (Director)
|S| Sidney Chong
- --------------------
Sidney Chong
(Director)
Dated: December 20, 2002
26
Certifications
Pursuant to the requirements of Rule 13a-14 of the Securities and Exchange Act
of 1934,as amended, Carl F. Fahrenkrug provides the following certification.
I, Carl F. Fahrenkrug, Chief Executive Officer of Microwave Filter Company,
Inc. ("Company"), certify that:
1. I have reviewed this Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have designed such disclosure controls and procedures to
ensure that material information relating to the Company is made known to
me by others, particularly during the period in which this annual report is
being prepared;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the audit committee of our board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weakness in internal controls, and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 20, 2002 /s/ Carl F. Fahrenkrug
Carl F. Fahrenkrug
27
Pursuant to the requirements of Rule 13a-14 of the Securities and Exchange Act
of 1934,as amended, Richard L. Jones provides the following certification.
I, Richard L. Jones, Chief Financial Officer of Microwave Filter Company,
Inc. ("Company"), certify that:
1. I have reviewed this Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
Procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have designed such disclosure controls and procedures to
ensure that material information relating to the Company is made known to
me by others, particularly during the period in which this annual report is
being prepared;
5. I have disclosed, based on my most recent evaluation, to the Company's
auditors and the audit committee of our board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weakness in internal controls, and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 20, 2002 /s/ Richard L. Jones
Richard L. Jones
28
ANNUAL REPORT ON FORM 10-K
MICROWAVE FILTER COMPANY, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 8, ITEM 14(a)(1) and (2)
CONSOLIDATED FINANCIAL STATEMENTS: Page
Independent Auditors' Report.....................................30
Consolidated Balance Sheets as of September 30, 2002 and 2001....31
Consolidated Statements of Operations for the Years
Ended September 30, 2002, 2001 and 2000 .......................32
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2002, 2001 and 2000 .......................33
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2002, 2001 and 2000 .......................34
Notes to Consolidated Financial Statements.......................35-41
SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000:
Independent Auditors' Report on Schedules........................44
II-Valuation and Qualifying Accounts.............................45
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Microwave Filter Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Microwave
Filter Company, Inc. and Subsidiaries at September 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit 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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Syracuse, New York
November 19, 2002
30
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
September 30
Assets 2002 2001
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 649,196 $ 373,142
Investments 1,377,765 900,359
Accounts receivable-trade, net of allowance for
doubtful accounts of $49,000 and $41,000 378,636 600,087
Inventories 963,167 883,979
Deferred tax asset - current 179,779 164,928
Prepaid expenses and other current assets 120,579 86,949
--------- ---------
Total current assets 3,669,122 3,009,444
Property, plant and equipment, net 1,196,763 1,260,707
--------- ---------
Total Assets $4,865,885 $4,270,151
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 179,686 $ 192,146
Customer deposits 139,466 22,839
Accrued federal and state income taxes 233,846 60,622
Accrued payroll and related expenses 126,352 108,741
Accrued compensated absences 248,867 265,467
Other current liabilities 146,315 70,697
--------- ---------
Total current liabilities 1,074,532 720,512
Deferred tax liability - noncurrent 29,999 19,238
--------- ---------
Total liabilities 1,104,531 739,750
--------- ---------
Commitments
Stockholders' equity:
Common stock, $.10 par value. Authorized 5,000,000 shares
Issued 4,317,688 in 2002 and 2001 431,769 431,769
Additional paid-in capital 3,239,867 3,239,867
Retained earnings 1,595,432 1,364,479
Common stock in treasury, at cost,
1,412,907 shares in 2002 and 2001 (1,505,714) (1,505,714)
--------- ---------
Total stockholders' equity 3,761,354 3,530,401
--------- ---------
Total Liabilities and Stockholders' Equity $4,865,885 $4,270,151
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
Microwave Filter Company and Subsidiaries
Consolidated Statements of Operations
For the Years Ended September 30
2002 2001 2000
---- ---- ----
Net sales $7,251,732 $6,848,191 $7,491,853
Cost of goods sold 4,422,380 4,557,293 4,880,797
--------- --------- ---------
Gross profit 2,829,352 2,290,898 2,611,056
Selling, general
and administrative expenses 2,272,362 2,260,621 2,271,904
--------- --------- ---------
Income from operations 556,990 30,277 339,152
Non-operating Income (Expense)
Interest income 37,513 56,519 66,976
Interest expense 0 (229) (902)
Miscellaneous 6,864 31,749 46,018
--------- --------- ---------
Income before income taxes 601,367 118,316 451,244
Provision (benefit) for
income taxes 167,080 (10,436) 112,508
--------- --------- ---------
NET INCOME $434,287 $128,752 $338,736
========= ========= =========
Earnings Per Common Share $0.15 $0.04 $0.11
========= ========= =========
Weighted average number of common
shares outstanding 2,904,781 2,946,284 3,169,061
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
32
Microwave Filter Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended September 30, 2002, 2001 and 2000
-----------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amt Capital Earnings Shares Amt Equity
------ --- ------- -------- ------ --- ------
Balance,
September 30, 1999 4,317,688 $431,769 $3,239,867 $1,142,344 1,103,636 ($1,063,739) $3,750,241
Net income 338,736 338,736
Purchase of treasury stock 49,866 (60,441) (60,441)
Cash dividend paid
($.05 per share) (158,209) (158,209)
--------- -------- ---------- -------- ------- ---------- ----------
Balance,
September 30, 2000 4,317,688 431,769 3,239,867 1,322,871 1,153,502 (1,124,180) 3,870,327
Net income 128,752 128,752
Purchase of treasury stock 259,400 (381,534) (381,534)
Donated capital 5
Cash dividend paid
($.03 per share) (87,144) (87,144)
---------- --------- ---------- ---------- ------- ---------- ----------
Balance
September 30, 2001 4,317,688 431,769 3,239,867 1,364,479 1,412,907 (1,505,714) 3,530,401
Net income 434,287 434,287
Cash dividend paid
($.07 per share) (203,334) (203,334)
---------- --------- ---------- ---------- ------- ---------- ----------
Balance
September 30, 2002 4,317,688 $431,769 $3,239,867 $1,595,432 1,412,907 ($1,505,714) $3,761,354
========== ======== ========== ========== ========= =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
33
Microwave Filter Company and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
For the Years Ended September 30
--------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $434,287 $128,752 $338,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 280,072 300,950 308,145
Provision for doubtful accounts 18,469 0 0
Inventory obsolescence provision 50,000 0 0
Deferred income taxes (4,090) (16,065) 27,890
Changes in assets and liabilities:
Accounts receivable-trade, net 202,982 296,734 (200,144)
Federal and state income taxes 173,224 (128,147) 113,241
Inventories (129,188) 219,851 88,429
Other assets (33,630) (9,494) (11,341)
Accounts payable and customer deposits 104,167 (332,505) 61,366
Accrued payroll, compensated absences and
related expenses 1,011 6,824 56,783
Other current liabilities 75,618 (49,765) 49,267
Deferred compensation 0 0 (5,396)
--------- -------- -------
Net cash provided by operating activities 1,172,922 417,135 826,976
--------- -------- -------
Cash flows from investing activities:
Investments (477,406) 24,708 (150,418)
Capital expenditures (216,128) (225,500) (96,578)
-------- -------- --------
Net cash used in investing activities (693,534) (200,792) (246,996)
-------- -------- ----------
Cash flows from financing activities:
Purchase of treasury stock 0 (381,534) (60,441)
Cash dividend paid (203,334) (87,144) (158,209)
-------- -------- --------
Net cash used in financing activities (203,334) (468,678) (218,650)
-------- -------- --------
Net increase (decrease)
in cash and cash equivalents 276,054 (252,335) 361,330
Cash and cash equivalents at beginning of year 373,142 625,477 264,147
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $649,196 $373,142 $625,477
======== ======== ==========
Supplemental disclosures of cash flows:
Cash paid during the year for (approximately):
Interest $0 $200 $900
Income taxes $0 $128,800 $5,700
The accompanying notes are an integral part of the consolidated financial
statements.
34
Microwave Filter Company and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Nature of Business
Microwave Filter Company, Inc. operates primarily in the United States and
principally in two industries. The Company extends credit to business
customers, including original equipment manufacturers (OEMs), distributors
and other end users, based upon ongoing credit evaluations. Microwave Filter
Company, Inc. designs, develops, manufactures and sells electronic filters,
both for radio and microwave frequencies, to help process signal distribution
and to prevent unwanted signals from disrupting transmit or receive operations.
Markets served include cable television, television and radio broadcast,
satellite broadcast, mobile radio, commercial and defense electronics. Niagara
Scientific, Inc. custom designs case packing machines to automatically pack
products into shipping cases. Customers are processors of food and other
commodity products with a need to reduce labor cost with a modest investment
and quick payback.
b. Basis of Consolidation
The consolidated financial statements include the accounts of Microwave
Filter Company, Inc. (MFC) and its wholly-owned subsidiaries, Niagara
Scientific, Inc. (NSI) and Microwave Filter International, LTD. (MFI); located
in Syracuse, New York. All significant intercompany balances and transactions
have been eliminated in consolidation.
c. Revenue Recognition
The Company recognizes revenue at the time products are shipped to customers
and title and risk of loss have passed to the customer. The Company is not
required to install any of its products. Payments received from customers in
advance of products shipped are recorded as customer advance payments until
earned.
d. Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. The carrying
value at September 30, 2002 and September 30, 2001 approximates fair value.
Substantially all cash balances were invested at one financial institution at
September 30, 2002 and 2001.
e. Investments
Investments generally consist of commercial paper, government backed
obligations and other guaranteed commercial debt that have an original
maturity of more than three months and a remaining maturity of less than one
year. Investments are carried at cost which approximates market. The Company's
policy is to hold investments until maturity. The Company's practice is to
invest cash with financial institutions that have acceptable credit ratings.
35
f. Inventories
Inventories are stated at the lower of cost determined on the first-in, first-
out method or market.
g. Research and Development
Costs in connection with research and development, which amount to $376,857,
$362,518 and $320,789 for the fiscal years 2002, 2001 and 2000, respectively,
are charged to operations as incurred.
h. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets. Buildings and building improvements are depreciated over an
estimated service life of 20 to 30 years. Machinery and equipment are
depreciated over an estimated useful life of 3 to 10 years. Office equipment
and fixtures are depreciated over an estimated useful life of 3 to 10 years.
At the time of sale or retirement, the cost and accumulated depreciation are
removed from the respective accounts and the resulting gain or loss is
recognized in income.
i. Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109. Deferred tax assets and liabilities are based on
the difference between the financial statement and tax basis of assets and
liabilities as measured by the enacted tax rates which are anticipated to be
in effect when these differences reverse. The deferred tax provision is the
result of the net change in the deferred tax assets and liabilities. A
valuation allowance is established when it is necessary to reduce deferred tax
assets to amounts expected to be realized.
j. Earnings Per Share
The Company presents basic earnings per share ("EPS"), computed based on the
weighted average number of common shares outstanding for the period, and when
applicable diluted EPS, which gives the effect to all dilutive potential
shares outstanding (i.e. options) during the period after restatement for any
stock dividends. The Company had no dilutive potential common shares
outstanding for the years ended September 30, 2002, 2001 or 2000. Income used
in the EPS calculation is net income for each year.
k. Fair Value of Financial Instruments
The carrying values of the Company cash and cash equivalents, accounts
receivable and accounts payable approximate fair value because of the short
maturity of those instruments.
The Company currently does not trade in or utilize derivative financial
instruments.
l. Miscellaneous Non-operating Income
Miscellaneous non-operating income generally consists of sales of scrap
material, stock transfer fees, the forfeiture of non-refundable deposits and
other incidental items.
m. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
36
2. INVENTORIES
Inventories net of provision for obsolescence
consisted of the following: September 30
2002 2001
---- ----
Raw materials and stock parts $635,930 $701,974
Work-in-process 256,970 105,713
Finished goods 70,267 76,292
-------- ---------
$963,167 $883,979
======== ==========
The Company's reserve for obsolescence equaled $345,161 at September 30,
2002 and $297,634 at September 30, 2001.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30
2002 2001
---- ----
Land $143,000 $143,000
Building and improvements 1,818,633 1,803,653
Machinery and equipment 3,042,103 2,898,848
Office equipment and fixtures 1,513,266 1,455,373
--------- ---------
6,517,002 6,300,874
Less: Accumulated depreciation 5,320,239 5,040,167
--------- ---------
$1,196,763 $1,260,707
========== ==========
37
4. CREDIT FACILITIES
The Company has unused aggregate lines of credit totaling $600,000. Of these
lines, $100,000 is for the purchase of equipment and is collateralized by
equipment and $500,000 is for working capital and is collateralized by
accounts receivable, inventories and equipment.
5. PROFIT SHARING AND 401-K PLANS
The Company maintains both a non-contributory profit sharing plan and a
contributory 401-K plan for all employees over the age of 21 with one year of
service. Annual contributions to the profit sharing plan are determined by
the Board of Directors and are made from current or accumulated earnings,
while contributions to the 401-K plan are currently matched at a rate of 100%
of an employee's first 3% of contributions and 50% of an employee's next 2% of
contributions. The maximum corporate match is 4% of an employee's
compensation.
The Company's matching contributions to the 401-K plan for the years ended
September 30, 2002, 2001 and 2000 were $87,488, $92,461 and $65,932 ,
respectively. Additionally, the Company may make discretionary contributions
to the non-contributory profit sharing plan. These contributions were $100,000,
$20,000 and $50,000 in 2002, 2001 and 2000, respectively.
6. OBLIGATIONS UNDER OPERATING LEASES
The Company leases equipment under operating lease agreements expiring at
various dates through September 30, 2005. Rental expense under these leases
for the years ended September 30, 2002, 2001 and 2000 amounted to $14,888,
$14,410 and $15,353, respectively.
Minimum rental commitments at September 30, 2002 for these leases are:
Year Ended Lease
September 30 Payments
------------ --------
2003 11,580
2004 4,965
2005 1,655
-------
$18,200
=======
38
7. INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended September 30
2002 2001 2000
Currently payable:
Federal $162,170 $4,629 $78,618
State 9,000 1,000 6,000
Deferred (credit) (4,090) (16,065) 27,890
------- ------- -------
$167,080 ($10,436) $112,508
======== ======= ========
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
Year ended September 30
______2002______ ______2001______ ______2000______
Amount % Amount % Amount %
Statutory tax rate $204,465 34.0% $40,227 34.0% $153,423 34.0%
Surtax exemption (7,995) (6.8%)
State income tax net of:
Federal benefit 5,940 1.0% 660 0.6% 3,960 0.9%
Foreign sales benefit (3,973) (0.7%) (7,912) (6.7%) (14,712) (3.3%)
Research and experimentation
tax credits (31,158) (5.2%) (31,860) (26.9%) (29,398) (6.5%)
Other (8,194) (1.3%) (3,556) (3.0%) (765) (0.2%)
-------- ------ ------- ------ ------- ------
$167,080 27.8% ($10,436) (8.8%) $112,508 24.9%
======== ===== ======== ===== ======== =====
The temporary differences which give rise to deferred tax assets and
liabilities at September 30 are as follows:
2002 2001
---- ----
Inventory $106,444 $90,289
Accrued vacation 59,031 62,704
Accounts receivable 14,304 11,935
------- -------
Net deferred tax assets - current $179,779 $164,928
======== ========
Accelerated depreciation ($94,523) ($86,604)
Research and experimentation
tax credit carry forward 25,125 27,967
AMT credit carry forward 39,399 39,399
------ --------
Net deferred tax liabilities
- noncurrent ($29,999) ($19,238)
======= =======
Based on the Company's history of taxable earnings and its expectations for
the future, management has determined that operating income will more likely
than not be sufficient to recognize its deferred tax assets. Research and
experimentation tax credit carry forwards expire in 2022. At September 30, 2002,
the Company's federal AMT credit can be carried forward indefinitely.
39
8. INDUSTRY SEGMENT DATA
The Company's primary business segments involve (1) operations of Microwave
Filter Company, Inc. (MFC) which manufactures electronic filters used for
preventing interference or signal processing in cable television, satellite,
broadcast, aerospace and government markets; and (2) operations of Niagara
Scientific, Inc. (NSI) which manufactures industrial automation equipment.
Information by industry segment is as follows: (thousands of dollars)
2002 2001 2000
Net Sales (Unaffiliated):
MFC $6,700 $5,867 $6,207
NSI 552 981 1,285
Total $7,252 $6,848 $7,492
Operating Profit (Loss): (a)
MFC $861 $286 $563
NSI (230) (180) (151)
Corporate (74) (76) (73)
Total $557 $30 $339
Identifiable Assets: (b)
MFC $3,907 $3,696 $3,921
NSI 310 201 597
Subtotal 4,217 3,897 4,518
Corporate Assets-Cash and
Cash Equivalents 649 373 625
Total $4,866 $4,270 $5,143
Depreciation Expense:
MFC $275 $296 $282
NSI 5 5 26
Total $280 $301 $308
Capital Expenditures:
MFC $216 $226 $91
NSI 0 0 6
Total $216 $226 $97
Significant Export Sales:
MFC $339 $554 $808
(a) Operating profit (loss) is total revenue less operating expenses. In
computing operating profit, none of the following items have been added or
deducted: general corporate expenses, interest expense, income taxes and
miscellaneous income. Expenses incurred on behalf of both Companies are
allocated based upon estimates of their relationship to each entity.
(b) Identifiable assets by industry are those assets that are used in the
Company's operations in each industry.
40
9. STOCK OPTIONS
On April 9, 1998, the Board of Directors and Shareholders of Microwave Filter
Company, Inc. approved the 1998 Microwave Filter Company, Inc. Incentive Stock
Plan (the "1998 Plan"). Under the 1998 Plan, the Company may grant incentive
stock options ("ISOs"), non-qualified stock options ("NQSOs") and stock
appreciation rights to directors, officers and employees of the Company and its
affiliates. The 1998 Plan reserves 150,000 shares for issuance. The exercise
price of the ISOs and NQSOs will be 100% of the fair market value of the Common
Stock on the date the ISOs and NQSOs are granted. The 1998 Plan will terminate
on April 10, 2008. There were no stock options or stock appreciation rights
granted or outstanding at September 30, 2002, 2001 or 2000.
10. LEGAL MATTERS
There are currently no material pending legal proceedings against the
Company or its subsidiaries.
11. SUBSEQUENT EVENTS
On December 18, 2002, the Board of Directors of Microwave Filter Company,
Inc. declared a ten cents per share cash dividend to shareholders of record on
January 17, 2003 to be distributed on January 31, 2003.
41
12. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth certain unaudited quarterly financial
information For the years ended September 30, 2002 and 2001:
2002 Quarter Ended
-----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
------------ ------------ ------------ -----------
Net sales $2,390,460 $2,110,951 $1,517,312 $1,233,009
Cost of sales $1,220,369 $1,317,345 $1,104,293 $ 780,373
Net income (loss) $ 375,492 $ 158,781 $ (80,194) $ (19,792)
Earnings (loss)
per common share: $ .13 $ .05 $ (.03) $ .00
2001 Quarter Ended
-----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
------------ ------------ ------------ -----------
Net sales $1,929,618 $1,679,454 $1,782,032 $1,457,087
Cost of sales $1,251,200 $1,116,206 $1,286,199 $ 903,688
Net income (loss) $ 78,575 $ 8,091 $ (24,696) $ 66,782
Earnings (loss)
per common share: $ .03 $ .00 $ (.01) $ .02
42
EXHIBIT INDEX
Page
Exhibit No. Description Number
3.1 MFC Certificate of Corporation, as amended. *
3.2 MFC Amended and Restated Bylaws. *
10.1 Bond Purchase Agreement dated as of February 22,1984 *
among MFC, Onondaga County Industrial Development Agency
("OCIDA") and Key Bank of Central New York ("Bondholder").
10.2 Lease Agreement dated as of February 22, 1984 between MFC and OCIDA. *
10.3 Mortgage and Security Agreement dated as of February 22, 1984 from *
MFC and OCIDA to the Bondholder.
10.4 Guaranty Agreement dated as of February 22, 1984 from MFC to OCIDA *
and the Bondholder.
* Previously filed
43
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Microwave Filter Company, Inc.
Our audits of the consolidated financial statements referred to in our report
dated November 19, 2002 included in this 2002 Annual Report on Form 10-K of
Microwave Filter Company, Inc. and Subsidiaries also included an audit of the
financial statement schedule listed in ITEM 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Syracuse, New York
November 19, 2002
44
Microwave Filter Company and Subsidiaries
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
SEPTEMBER 30, 2002, 2001 and 2000
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- --------- ----------------------- ---------- ----------
Year ended September 30, 2002
Allowance for doubtful accounts $41,155 $18,469 $10,299 $49,325
Inventory valuation reserves 297,634 50,000 2,473 345,161
-------- -------- ------- ------- --------
$338,789 $68,469 $0 $12,772 $394,486
======== ======== ======= ======== ========
Year ended September 30, 2001
Allowance for doubtful accounts $44,023 $2,868 $41,155
Inventory valuation reserves 323,101 25,467 297,634
-------- -------- ------- ------- --------
$367,124 $0 $0 $28,335 $338,789
======== ======== ======= ======== ========
Year ended September 30, 2000
Allowance for doubtful accounts $45,970 $1,947 $44,023
Inventory valuation reserves 373,162 50,061 323,101
-------- -------- ------- ------- --------
$419,132 $0 $0 $52,008 $367,124
======== ======== ======= ======== ========
45
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl F. Fahrenkrug, Chief Executive Officer of Microwave Filter Company,
Inc. (the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350, that:
(1) the annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 2002 (the Report) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d); and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 20, 2002 /s/ Carl F. Fahrenkrug
Carl F. Fahrenkrug
Chief Executive Officer
Exhibit 99.3
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard L. Jones, Chief Financial Officer of Microwave Filter Company, Inc.
(the Company), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
(1) the annual Report on Form 10-K of the Company for the fiscal year ended
September 30, 2002 (the Report) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d); and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: December 20, 2002 /s/ Richard L. Jones
Richard L. Jones
Chief Financial Officer
46