UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended December 31, 2003
Commission file number 0-10976
MICROWAVE FILTER COMPANY, INC.
(Exact name of registrant as specified in its charter.)
New York 16-0928443
(State of Incorporation) (I.R.S. Employer Identification Number)
6743 Kinne Street, East Syracuse, N.Y. 13057
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (315) 438-4700
Indicate by check mark whether 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 shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES ( x ) NO ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES ( ) NO ( x )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, $.10 Par Value - 2,904,781 shares as of December 31, 2003.
PART I. - FINANCIAL INFORMATION
MICROWAVE FILTER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31, 2003 SEPTEMBER 30, 2003
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 532 $ 647
Investments 866 876
Accounts receivable-trade, net 358 318
Federal and state income
tax recoverable 61 39
Inventories 577 708
Deferred tax asset - current 235 235
Prepaid expenses and other
current assets 76 93
-------- --------
Total current assets 2,705 2,916
Property, plant and equipment, net 941 975
Deferred tax asset - noncurrent 11 11
-------- --------
Total assets $ 3,657 $ 3,902
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 151 $ 172
Customer deposits 0 144
Accrued payroll and related
expenses 95 96
Accrued compensated absences 218 255
Other current liabilities 49 46
-------- --------
Total current liabilities 513 713
-------- --------
Total liabilities 513 713
-------- --------
Stockholders' Equity:
Common stock,$.10 par value 432 432
Additional paid-in capital 3,240 3,240
Retained earnings 978 1,023
-------- --------
4,650 4,695
Common stock in treasury,
at cost (1,506) (1,506)
-------- --------
Total stockholders' equity 3,144 3,189
-------- --------
Total liabilities and
stockholders' equity $ 3,657 $ 3,902
======== ========
See Accompanying Notes to Consolidated Financial Statements
MICROWAVE FILTER COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED DECEMBER 31, 2003 AND 2002
(Unaudited)
(Amounts in thousands, except per share data)
Three months ended
December 31
2003 2002
Net sales $1,233 $1,489
Cost of goods sold 889 1,039
------- -------
Gross profit 344 450
Selling, general and
administrative expenses 416 589
------- -------
Loss from operations (72) (139)
Other income (net),
principally interest 4 8
------- -------
Loss before income
taxes (68) (131)
Benefit for income
taxes (23) (45)
------- -------
NET LOSS ($45) ($86)
======= =======
Basic loss per
share ($.02) ($0.03)
======= =======
Weighted average number of
common shares outstanding 2,905 2,905
======= =======
See Accompanying Notes to Consolidated Financial Statements
MICROWAVE FILTER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31, 2003 AND 2002
(Unaudited)
(Amounts in thousands)
Three months ended
December 31
2003 2002
Cash flows from operating
activities:
Net loss $ (45) $ (86)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and amortization 55 76
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (39) (166)
Federal and state income
taxes recoverable (22)
Inventories 131 157
Prepaid expenses & other
assets 16 7
Increase (decrease) in:
Accounts payable & accrued
expenses (55) (127)
Customer deposits (144) (1)
Federal and state income
taxes payable (234)
------- -------
Net cash used in by
operating activities (103) (374)
------- -------
Cash flows from (used in)
investing activities:
Investments 10 10
Capital expenditures (22) (15)
------- -------
Net cash used in
investing activities (12) (5)
------- -------
Net decrease in cash
and cash equivalents (115) (379)
Cash and cash equivalents
at beginning of period 647 649
------- -------
Cash and cash equivalents
at end of period $ 532 $ 270
======= =======
See Accompanying Notes to Consolidated Financial Statements
MICROWAVE FILTER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
Note 1. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The Operating results for the three
month period ended December 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended September 30, 2004. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10K for the year ended
September 30, 2003.
Note 2. Industry Segment Data
The Company's primary business segments involve (1) operations of Microwave
Filter Company, Inc. (MFC) which 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; and (2) Niagara Scientific, Inc. (NSI), a wholly owned
subsidiary, which custom designs case packing machines to automatically pack
products into shipping cases. Customers are typically processors of food and
other commodity products with a need to reduce labor cost with a modest
investment and quick payback.
Information by segment is as follows:
Three months ended
(thousands of dollars) December 31
2003 2002
Net Sales (Unaffiliated):
MFC $1,050 $1,301
NSI 183 188
------ ------
Total $1,233 $1,489
====== ======
Operating loss: (a)
MFC ($60) ($10)
NSI (12) (129)
------ ------
Total ($72) ($139)
====== ======
Identifiable assets: (b)
MFC $3,034 $3,802
NSI 91 346
------ ------
Subtotal 3,125 4,148
Corporate Assets - Cash
And Cash Equivalents 532 270
------ ------
Total $3,657 $4,418
====== ======
(a) Operating profit (loss) is total revenue less cost of goods sold and
operating expenses. In computing operating profit, none of the following
items have been added or deducted: 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
Companies operations in each industry.
Note 3. Inventories
Inventories net of reserve for obsolescence consisted of the following:
(thousands of dollars) December 31, 2003 September 30, 2003
Raw materials and stock parts $432 $427
Work-in-process 65 202
Finished goods 80 79
---- ----
$577 $708
==== ====
The Company's reserve for obsolescence equaled $390,985 at December 31,
2003 and $401,974 at September 30, 2003.
Note 4. Deferred Tax Assets
In recent quarters, the Company's operations have experienced losses before
income taxes for financial and tax reporting purposes; however, we believe
improvements in the order backlog, industry projections as well as changes in
our operations and cost structure are sufficient to generate the minimum
amounts of taxable income to utilize our deferred tax assets prior to their
expiration. If the Company's expectations for future operating results are not
met due to general economic conditions or other factors, the Company may need
to establish valuation allowances for all or a portion of its deferred tax
assets.
Although realization is not assured, the Company believes it is more likely
than not the net deferred tax asset balance as of December 31, 2003 will be
realized. The Company was able to support this conclusion based upon
projections of future operating results. Differences between forecasted and
actual future operating results could adversely impact our ability to realize
our deferred income tax assets; however, differences between forecasted and
actual future operating results are continually monitored to ensure the
Company has adequate support for the realization of the deferred tax assets.
MICROWAVE FILTER COMPANY, INC.
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 based upon ongoing credit evaluations. Microwave Filter Company,
Inc. (MFC) 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. (NSI), a wholly owned subsidiary, custom designs case packing
machines to automatically pack products into shipping cases. Customers are
typically processors of food and other commodity products with a need to
reduce labor cost with a modest investment and quick payback.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 vs. THREE MONTHS ENDED DECEMBER 31, 2002.
Net sales for the three months ended December 31, 2003 equaled $1,233,280, a
decrease of $255,877 or 17.2% when compared to net sales of $1,489,157 for the
three months ended December 31, 2002.
MFC sales for the three months ended December 31, 2003 equaled $1,050,104, a
decrease of $251,059 or 19.3% when compared to sales of $1,301,163 for the
three months ended December 31, 2002. The decrease in MFC sales can primarily
be attributed to a decrease in the sales of the company's standard
cable/satellite TV products. The Company attributes this decrease in sales to
the downturn in the telecommunications marketplace and the current economic
climate.
MFC's sales order backlog equaled $397,264 at December 31, 2003, an increase
of $68,455, when compared to sales order backlog of $328,809 at September 30,
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.
The total MFC sales order backlog at December 31, 2003 is scheduled to ship by
September 30, 2004.
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 did realize
a slight increase in the sales of the Company's RF/Microwave products sold to
this market segment during the quarter ended December 31, 2003 when compared
to the same period last year. MFC's RF/Microwave product sales equaled
$328,436 for the three months ended December 31, 2003 and $311,580 for the
three months ended December 31, 2002.
NSI sales for the three months ended December 31, 2003 equaled $183,176, a
decrease of $4,818 when compared to sales of $187,994 for the three months
ended December 31, 2002. Sales of NSI related equipment, on a quarter to
quarter basis, can be impacted by the timing of the shipment of the custom
designed equipment and the customer's scheduled delivery dates. Similar to
MFC, NSI's sales order levels have also been impacted negatively by the
sluggish economy and reduced capital spending. At December 31, 2003, NSI's
sales order backlog equaled $0 compared to sales order backlog of $123,980 at
September 30, 2003.
The Company recorded a net loss of $44,550, or a loss of $.02 per share, for
the three months ended December 31, 2003 compared to a net loss of $86,168, or
a loss of $.03 per share, for the three months ended December 31, 2002. The
decrease in the net loss this year, despite the lower sales volume, when
compared to the same period last year can primarily be attributed to a
reduction in operating expenses.
Gross profit for the three months ended December 31, 2003 equaled $344,575,
a decrease of $105,111 or 23.4%, when compared to gross profit of $449,686 for
the three months ended December 31, 2002. As a percentage of sales, gross
profit equaled 27.9% for the three months ended December 31, 2003 compared to
30.2% for the three months ended December 31, 2002. The decreases in gross
profit can primarily be attributed to the decrease in sales.
Selling, general and administrative (SGA) expenses for the three months
ended December 31, 2003 equaled $416,263, a decrease of $172,934 or 29.4%,
when compared to SG&A expenses of $589,197 for the three months ended December
31, 2002. Due to this dollar decrease, SGA expenses decreased to 33.8% of
sales for the three months ended December 31, 2003 compared to 39.6% of sales
for the three months ended December 31, 2002. The reductions were primarily
related to decreases in payroll and payroll related expenses and planned
reductions in media advertising costs and trade show expenses. Due to the
uncertain economic climate, the Company is emphasizing cost controls and cost
cutting measures to minimize operating expenses.
On an industry segment basis, MFC recorded a loss from operations of $60,271
for the three months ended December 31, 2003 compared to a loss from
operations of $10,600 for the three months ended December 31, 2002 primarily
due to the decrease in sales. NSI recorded a loss from operations of $11,417
for the three months ended December 31, 2003 compared to a loss from
operations of $128,911 for the three months ended December 31, 2002. NSI's
improvement can directly be attributed to improved gross profit margins and
planned reductions in SGA expenses.
Off-Balance Sheet Arrangements
At December 31, 2003 and 2002, the Company did not have any unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which might have been
established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting Policies
The Company's consolidated financial statements are based on the application
of accounting principles generally accepted in the United States of America
(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 established a warranty reserve which provides for the estimated
cost of product returns based upon historical experience and any known
conditions or circumstances. Our warranty obligation is affected by product
that does not meet specifications and performance requirements and any related
costs of addressing such matters.
The Company had net deferred tax assets of approximately $246,000 reflecting
basis differences between book and tax and other deductions available to
reduce taxable income in future years. In assessing the realization of the
Company's deferred tax assets, we consider whether it is more likely than not
the deferred tax assets will be realized. The ultimate realization of our
deferred income tax assets depends upon our ability to generate future taxable
incomes during the periods in which our basis differences and other deductions
become deductible and prior to the expiration of our net operating loss carry
forwards. On a quarterly basis, the Company evaluates the recoverability of
its deferred tax assets based upon historical results and forecasted results
over future years and matches this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss carry forwards to ensure there is adequate support for the
realization of the deferred tax assets. In the event we were to determine that
we would not be able to realize all or part of our net deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged as a
reduction to income in the period such determination was made. Likewise,
should we determine that we would be able to realize future deferred tax
assets in excess of its net recorded amount, an adjustment to the deferred tax
assets would increase income in the period such determination was made.
LIQUIDITY and CAPITAL RESOURCES
Cash and cash equivalents decreased $115,138 to $531,748 at December 31,2003
when compared to $646,886 at September 30, 2003. The decrease was a result of
$103,346, in net cash used in operating activities and $11,792 in net cash
used in investing activities.
The increase of $39,691 in accounts receivable at December 31, 2003, when
compared to September 30, 2003, can primarily be attributable to the increase
in shipments during the month ended December 31, 2003 when compared to the
month ended September 30, 2003.
The decrease of $130,954 in inventories at December 31, 2003, when compared
to September 30, 2003, can primarily be attributable to the scheduled delivery
of NSI's sales order backlog of September 30, 2003 during the quarter ended
December 31, 2003.
The decrease of $144,390 in customer deposits at December 31, 2003, when
compared to September 30, 2003, can primarily be attributed to the shipment of
NSI's sales order backlog of September 30, 2003 during the quarter ended
December 31, 2003.
Cash used in investing activities during the three months ended December 31,
2003 consisted of funds provided by the sale of investments of $9,922 and
funds used for capital expenditures of $21,714.
At December 31, 2003, the Company had unused aggregate lines of credit
totaling $750,000 collateralized by all inventory, equipment and accounts
receivable.
Management believes that its working capital requirements for the forseeable
future will be met by its existing cash balances, future cash flows from
operations and its current credit arrangements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
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Any statements contained in this report which are not historical facts are
forward looking statements; and, therefore, 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 4. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time period specified in the
rules and forms of the Securities and Exchange Commission. Based upon their
evaluation of those controls and procedures performed as of December 31, 2003,
the Chief Executive and Chief Financial Officers of the Company concluded,
based upon their best judgement, that the Company's disclosure controls and
procedures were adequate.
The Company made no significant changes in its internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of the evaluation of those controls by the Chief Executive and Chief
Financial Officers. There were no significant deficiencies or material
weaknesses identified in the evaluation and, therefore, no corrective actions
were taken. While the Chief Executive and Chief Financial Officers of the
Company believe that the Company's existing disclosure controls and procedures
have been effective to accomplish its objectives, the Chief Executive and
Chief Financial Officers of the Company intend to examine, refine and
formalize our disclosure controls and procedures and monitor ongoing
developments.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its consolidated subsidiaries to disclose
material information otherwise required to be set forth in the Company's
periodic reports.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is unaware of any material threatened or pending
litigation against the Company.
Item 2. Changes in Securities
None during this reporting period.
Item 3. Defaults Upon Senior Securities
The Company has no senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
None during this reporting period.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Section 13a-14(a)/15d-14(a) Certification of Carl F. Fahrenkrug
31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones
32.1 Section 1350 Certification of Carl F. Fahrenkrug
32.2 Section 1350 Certification of Richard L. Jones
b. Reports on Form 8-K
None.
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MICROWAVE FILTER COMPANY, INC.
February 14, 2004 Carl F. Fahrenkrug
(Date) --------------------------
Carl F. Fahrenkrug
Chief Executive Officer
February 14, 2004 Richard L. Jones
(Date) --------------------------
Richard L. Jones
Chief Financial Officer