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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 June  30, 2013
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)
(315) 438-4700
Registrant's telephone number, including area code

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of  the Securities Exchange Act of  1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.     
YES __X__  NO____

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  YES __X__  NO____

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). 
Large accelerated filer ______
Accelerated filer ______
Non-accelerated filer ______ (Do not check if smaller reporting company)
Smaller reporting company ____X____. 

Indicate by check mark whether the registrant is a shell company (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 practicable date.  

Common Stock, $.10 Par Value -    2,585,086 shares as of August 1, 2013.

<PAGE>                                1
 
 
 
MICROWAVE FILTER COMPANY, INC.
Form 10-Q
Index
 
 
 
 
Item
Page
   
   
Part I Financial Information
   
   
   
Item 1. Financial Statements
   
   
          Condensed Consolidated Balance Sheets (unaudited)
3
   
   
          Condensed Consolidated Statements of Operations (unaudited)
4
   
   
           Condensed Consolidated Statements of Cash Flows (unaudited)
5
   
   
           Notes to Condensed Consolidated Financial Statements (unaudited)
6-8
 
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
9-16
 
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
17 
   
   
Item 4. Controls and Procedures
18 
   
   
Part II Other Information
19 
   
   
Signatures
20 
 
 
            



<PAGE>                                2

 
                        PART I. - FINANCIAL INFORMATION
Microwave Filter Company and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
 
 
 
 
 
 
 
   
June 30, 2013
September 30, 2012
 
 
 
 
 
 
 
 
 
Assets
   
   
   
 
   
   
   
 
Current Assets:
   
   
   
 
   
   
   
 
Cash and cash equivalents 
 
$
409,697 
 
 
$
1,023,017 
 
Accounts receivable-trade, net of
   
   
   
 
   
   
   
 
     allowance for doubtful accounts
   
   
   
 
   
   
   
 
     of $26,000 and $26,000
   
   
228,249 
 
   
   
263,385 
 
Inventories, net
   
   
593,006 
 
   
   
529,075 
 
Prepaid expenses and other current assets
   
   
86,736 
 
   
   
111,342 
 
   
   
   
   
 
   
   
   
 
Total current assets
   
   
1,317,688 
 
   
   
1,926,819 
 
   
   
   
   
 
   
   
   
 
Property, plant and equipment, net
   
   
621,703 
 
   
   
672,525 
 
   
   
   
   
 
   
   
   
 
Total assets
   
$
1,939,391 
 
   
$
2,599,344 
 
   
   
   
   
 
   
   
   
 
   
   
   
   
 
   
   
   
 
Liabilities and Stockholders' Equity
   
   
   
 
   
   
   
 
   
   
   
   
 
   
   
   
 
Current liabilities:
   
   
   
 
   
   
   
 
Accounts payable
   
$
84,926 
 
   
$
92,325 
 
Customer deposits
   
   
29,707 
 
   
   
30,563 
 
Accrued payroll and related expenses
   
   
42,373 
 
   
   
51,289 
 
Accrued compensated absences
   
   
117,568 
 
   
   
172,198 
 
Other current liabilities
   
   
28,865 
 
   
   
31,308 
 
   
   
   
   
 
   
   
   
 
Total current liabilities
   
   
303,439 
 
   
   
377,683 
 
   
   
   
 
 
   
   
   
 
Total liabilities
   
   
303,439 
 
   
   
377,683 
 
   
   
   
   
 
   
   
   
 
Stockholders' Equity:
   
   
   
 
   
   
   
 
Common stock, $.10 par value
   
   
   
 
   
   
   
 
     Authorized 5,000,000 shares, Issued
   
   
   
 
   
   
   
 
     4,324,140 shares in 2013 and 2012,
   
   
   
 
   
   
   
 
     Outstanding 2,585,086 shares in 2013
   
   
   
 
   
   
   
 
     and 2,585,321 in 2012
   
   
432,414 
 
   
   
432,414 
 
Additional paid-in capital
   
   
3,248,706 
 
   
   
3,248,706 
 
Retained earnings (deficit)
   
 
(353,552)
 
   
   
232,013 
 
   
   
   
   
 
   
   
   
 
Common stock in treasury, at cost
 
 
 
 
 
 
 
 
     1,739,054 shares in 2013 and 1,738,819 
   
   
   
 
   
   
   
 
     shares in 2012
   
 
(1,691,616)
 
   
 
(1,691,472)
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
   
   
1,635,952 
 
   
   
2,221,661 
 
   
   
   
   
 
   
   
   
 
Total liabilities and  stockholders' equity
   
$
1,939,391 
 
   
$
2,599,344 
 
 
 
 

<FN>
See Accompanying Notes to Condensed Consolidated Financial Statements





<PAGE>                                3

 
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
Three months ended
   
 
Nine months ended
   
   
   
June 30,
   
 
June 30,
   
   
   
2013
 
 
2012
   
 
2013
 
 
2012
   
   
   
   
 
 
   
   
 
   
 
 
   
   
Net sales
$ 
705,148 
 
$
1,147,336 
   
$
2,084,735 
 
$
3,490,463 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
   
439,440 
 
 
713,193 
   
 
1,484,560 
 
 
2,215,494 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
   
265,708 
 
 
434,143 
   
 
600,175 
 
 
1,274,969 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and
   
   
 
 
   
   
 
   
 
 
   
   
     administrative expenses
   
317,827 
 
 
381,294 
   
 
1,190,719 
 
 
1,274,001 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income from operations
 
(52,119)
 
 
52,849 
 
 
(590,544)
 
 
968 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
Other income (net) 
   
1,579 
 
 
2,027 
   
 
4,979 
 
 
26,673 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income
 
 
 
 
 
 
 
 
 
 
 
 
    before income taxes
   
(50,540)
 
 
54,876 
 
 
(585,565)
 
 
27,641 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Benefit) provision
 
 
 
 
 
 
 
 
 
 
 
 
    for income taxes
   
 
 
(38,582)
   
 
 
 
(38,582)
   
   
   
   
 
 
   
   
 
   
 
 
   
   
Net (loss) income
$
(50,540)
 
$
93,458 
 
$
(585,565)
 
$
66,223 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (Loss) Income Per Common Share
   
   
 
 
   
   
 
   
 
 
   
   
Basic and diluted earnings per share
$  
(0.02)
 
$
0.04 
 
$
(0.23)
 
$
0.03 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Common Shares
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in computing net
   
   
 
 
   
   
 
   
 
 
   
   
     (loss) earnings per share:
   
2,585,156 
 
 
2,585,569 
   
 
2,585,243 
 
 
2,586,008 
   

<FN>

See Accompanying Notes to Condensed Consolidated Financial Statements

<PAGE>                               4

 
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
 
 
 
 
 
   
   
   
   
   
   
   
 
 
Nine months ended
 
 
 
June 30
 
   
   
2013
   
   
2012
   
   
   
   
   
   
   
   
Cash flows from operating activities:
   
   
   
   
   
   
Net (loss) income
$
(585,565)
   
$  
66,223 
 
 
 
 
 
 
 
 
Adjustments to reconcile net (loss)
   
   
   
   
   
   
     income to net cash provided by
   
   
   
   
   
   
     (used in) operating activities:
 
 
 
 
 
 
Depreciation
   
125,167 
   
   
117,172 
   
Gain on sale of fixed assets
 
 
 
(20,000)
 
Change in operating assets and liabilities:
   
   
   
   
   
   
Accounts receivable-trade
   
35,136 
   
   
38,096 
   
Federal and state income
 
 
 
 
 
 
     tax recoverable
 
 
 
(13,754)
 
Inventories
   
(63,931)
   
   
69,231 
 
Prepaid expenses and other assets
   
24,606 
   
   
421 
   
Accounts payable and customer
 
 
 
 
 
 
     deposits
   
(8,255)
   
   
(118,972)
 
Accrued payroll and related expenses
   
   
   
   
   
   
     and compensated absences
   
(63,546)
   
   
(65,091)
 
Other current liabilities
   
(2,443)
   
   
(52,740)
 
 
 
 
 
 
 
 
Net cash (used in) provided by
 
 
 
 
 
 
    operating activities
   
(538,831)
   
   
20,586 
   
   
   
   
   
   
   
   
Cash flows from investing activities:
   
   
   
   
   
   
Property, plant and equipment purchased
   
(74,345)
   
   
(198,225)
 
Proceeds from sale of fixed assets
 
 
 
20,000 
 
 
 
 
 
 
 
 
  Net cash used in investing activities
   
(74,345)
   
   
(178,225)
 
 
 
 
 
 
 
 
Cash flows from financing activities:
   
   
   
   
   
   
Purchase of treasury stock
   
(144)
   
   
(663)
 
 
 
 
 
 
 
 
  Net cash used in financing activities
   
(144)
   
   
(663)
 
 
 
 
 
 
 
 
Decrease in cash and cash equivalents
   
(613,320)
   
   
(158,302)
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
      at beginning of period
   
1,023,017 
   
   
1,258,885 
   
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
      at end of period
$
409,697 
   
$  
1,100,583 
   
 
 
 
 
 
 
 
Supplemental Schedule of Cash Flow Information:
 
 
 
 
 
 
     Income taxes paid
$
 
$
15,000 
 
 


<FN>


See Accompanying Notes to Condensed Consolidated Financial Statements




<PAGE>                                5

 
MICROWAVE FILTER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  JUNE  30, 2013


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 Regulation S-K. 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 nine month period ended June  30, 2013 are not necessarily indicative of the results that may be expected for the year ended September 30, 2013. For further information, refer to the condensed consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10K for the year ended September 30, 2012. 


Note 2. Industry Segment Data

  The Company's primary business segment involves the 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 communications and defense electronics.   


Note 3. Inventories                  
 
  Inventories are stated at the lower of cost determined on the first-in, first-out method or market.
   Inventories net of reserve for obsolescence consisted of the following:
 
 
 
 
 
 
 
 
 
 
   
June 30, 2013
 
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Raw materials and stock parts
   
$
502,276 
   
$  
455,000 
   
Work-in-process
   
   
16,011 
   
   
13,554 
   
Finished goods
   
   
74,719 
   
   
60,521 
   
   
   
   
   
   
   
   
   
   
   
$
593,006 
   
$  
529,075 
   
 
 The Company's reserve for obsolescence equaled $373,171 at June  30, 2013 and $408,340 at September 30, 2012. The Company provides for a valuation reserve for certain inventory that is deemed to be obsolete, of excess quantity or otherwise impaired. The decrease of $35,169 in inventory reserve at June 30, 2013 can be attributed to the sale of inventory that had been reserved.
 

<PAGE>                                6

 
 

Note 4. Income Taxes

  The Company accounts for income taxes under FASB ASC 740-10. 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. The Company has provided a full valuation allowance against its deferred tax assets.

  The Company adopted FASB ASC 740-10. FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements  and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company determined it has no uncertain tax positions and therefore no amounts are recorded.
 
Note 5. Legal Matters
  The State of New York Workers’ Compensation Board has commenced an action against Microwave Filter Company, Inc. to recover for an underfunded self insured program that Microwave Filter Company, Inc. participated in. Due to the relatively short period of time Microwave Filter Company, Inc. participated in the program and the limited amount of potential exposure, we do not expect the resolution of this action will have a material adverse effect on our financial condition, results of operations or cash flows. The Company has accrued $12,000 for this action in other current liabilities.

Note 6. 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.
 
Note 7. Significant Customers
  Sales to one customer represented approximately 17% of total sales for the nine months ended June  30, 2013 compared to approximately 20% of total sales for the nine months ended June  30, 2012.


<PAGE>                                7

 
 
 
Note 8. Subsequent Event 
 
 On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed.
 
 The Company has secured this Note by: (a) a Mortgage, Assignment of Rents, Security Agreement and Fixture Filing which creates a 1st lien on real property situated in the Town of Dewitt, County of Onondaga, and State of New York and known as 6743 Kinne Street, East Syracuse, New York; (b) a General Assignment of Rents and Leases; (c) an Environmental Compliance and Indemnification; and (d) such other security as may now or hereafter b e given to Lender as collateral for the loan.
 
 
Note 9. Recent Accounting Pronouncements
  None applicable.


<PAGE>                                8

 
 
 
  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 one industry. 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 communications and defense electronics.

Critical Accounting Policies

  The Company's condensed consolidated financial statements are based on the application of United States 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. Note 1 to the condensed consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 describes the significant accounting policies used in preparation of the condensed consolidated financial statements. The most significant areas involving management judgments and estimates are described below and are considered by management to be critical to understanding the financial condition and results of operations of the Company.
  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 condensed 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 stated at the lower of cost determined on the first-in, first-out method 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.


<PAGE>                                9

 
 

  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 accounts for income taxes under FASB ASC 740-10. 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. The Company has provided a full valuation allowance against its deferred tax assets.


<PAGE>                                10

 
 
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE  30, 2013 vs. THREE MONTHS ENDED JUNE  30, 2012
The following table sets forth the Company's net sales by major product group  for the three months ended June  30, 2013 and 2012.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product group
Fiscal 2013
   
Fiscal 2012
   
Microwave Filter (MFC):
   
   
   
   
   
   
     RF/Microwave
$
243,621 
   
$  
412,104 
   
     Satellite
   
245,303 
   
   
326,759 
   
     Cable TV
   
152,314 
   
   
370,369 
   
     Broadcast TV
   
62,528 
   
   
37,394 
   
Niagara Scientific (NSI):
   
1,382 
   
   
710 
   
   
   
      
   
   
      
   
Total
$
705,148 
   
$  
1,147,336 
   
   
   
      
   
   
      
   
Sales backlog at June  30
$
262,690 
   
$  
394,680 
   
 

  Net sales for the three months ended June  30, 2013 equaled $705,148 a decrease of $442,188 or 38.5%, when compared to net sales of $1,147,336 for the three months ended June  30, 2012. Net sales have been decreasing since the quarter ended June  30, 2012. It is difficult to determine precisely the cause of this systemic erosion in sales but it is conjectured that the fear engendered by the sequester of budgetary funds for the Defense Department has had a major impact on MFC’s economic environment. It should be remembered that substantial Defense cuts occurred during FY 2012 which have affected the whole communications market place as suppliers to the Defense industry have made the commercial market place more competitive as they have sought to redirect their sales efforts away from Defense. Management also believes that the decrease in capital expenditures from non-defense oriented companies (such as Cable Television companies) has also contributed to the overall decline and demand across all market segments served by MFC. In order to mitigate the effects of this decline in demand for our products during this difficult period, management has adopted a plan of cost reduction, as well as, an accelerated development and acquisition of new products. This coupled with an increase in promotional activity for existing and new products will hopefully mitigate the systemic effects of the market place by allowing MFC to increase its market share by virtue of a plethora of products for a wider range of applications and for a larger customer segment. 
 MFC’s RF/Microwave product sales decreased $168,483 or 40.9% to $243,621 for the three months ended June 30, 2013 when compared to RF/Microwave product sales of $412,104 during the same period last year.  MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. The Company continues to invest in production engineering and infrastructure development to penetrate OEM 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. Sales to one OEM customer represented approximately 22% of total sales for both the three months ended June 30, 2013 and June 30, 2012.

<PAGE>                                11

 
 
   MFC’s Satellite product sales decreased $81,456 or 24.9% to $245,303 for the three months ended June  30, 2013 when compared to Satellite product sales of $326,759 during the same period last year. The decrease can be attributed to a decrease in demand for the Company's filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Although economic conditions do impact sales, management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference. 
   MFC’s Cable TV product sales decreased $218,055 or 58.9% to $152,314 for the three months ended June  30, 2013 when compared to Cable TV product sales of $370,369 during the same period last year. Management continues to project a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems. Management also believes that the decrease in capital expenditures from non-defense oriented companies (such as Cable Television companies) has also contributed to the decline in sales.

  MFC’s Broadcast TV/Wireless Cable product sales increased $25,134 to $62,528 for the three months ended June  30, 2013 when compared to sales of $37,394 during the same period last year. The increase can be attributed to an increase in demand for UHF Broadcast products which are primarily sold to system integrators for rural communities.
   MFC's sales order backlog equaled $262,690 at June  30, 2013 compared to sales order backlog of $394,680 at June  30, 2012. 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. Approximately 73% of the total sales order backlog at June  30, 2013 is scheduled to ship by September 30, 2013.
.
   Gross profit for the three months ended June  30, 2013 equaled $265,708, a decrease of $168,435 or 38.8%, when compared to gross profit of $434,143 for the three months ended June  30, 2012. The dollar decrease in gross profit can primarily be attributed to the lower sales volume this year when compared to the same period last year. As a percentage of sales, gross profit equaled 37.7% for the three months ended June  30, 2013 compared to 37.8% for the three months ended June  30, 2012. 
  Selling, general and administrative (SGA) expenses for the three months ended June  30, 2013 equaled $317,827, a decrease of $63,467 or 16.6%, when compared to SGA expenses of $381,294 for the three months ended June  30, 2012. The decrease can primarily be attributed to lower payroll and payroll related expenses. The Company has been participating in the New York State Shared Work program which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance benefits or elect to use accrued vacation. As a percentage of sales, SGA expenses increased to 45.1% for the three months ended June  30, 2013 when compared to 33.2% for the three months ended June  30, 2012 primarily due to the lower sales volume this year when compared to the same period last year.
  The Company recorded a loss from operations of $52,119 for the three months ended June  30, 2013 compared to  income from operations of $52,849 for the three months ended June  30, 2012. The decrease in operating income can primarily be attributed to the lower sales volume this year when compared to the same period last year.

<PAGE>                                12

 
 
   The (benefit) provision for income taxes equaled $0 for the three months ended June  30, 2013 and June  30, 2012. We have not recognized any (benefit) provision for income taxes.  Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not.  As required by FASB ASC 740 (Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.

   NINE MONTHS ENDED JUNE  30, 2013 vs. NINE MONTHS ENDED JUNE  30, 2012 
The following table sets forth the Company's net sales by major product group for the nine months ended June  30, 2013 and 2012.
 
 
 
 
 
 
 
   
   
   
   
   
   
   
Product group
Fiscal 2013
   
Fiscal 2012
   
Microwave Filter (MFC):
   
   
   
   
   
   
     RF/Microwave
$
759,027 
   
$  
1,307,148 
   
     Satellite
   
768,055 
   
   
1,029,089 
   
     Cable TV
   
432,896 
   
   
1,051,438 
   
     Broadcast TV
   
119,244 
   
   
98,344 
   
Niagara Scientific (NSI):
   
5,513 
   
   
4,444 
   
   
   
      
   
   
      
   
Total
$
2,084,735 
   
$  
3,490,463 
   
   
   
      
   
   
      
   
Sales backlog at June  30   
$
262,690 
   
$  
394,680 
   
 
  Net sales for the nine months ended June  30, 2013 equaled $2,084,735, a decrease of $1,405,728 or 40.3%, when compared to net sales of $3,490,463 for the nine months ended June  30, 2012. Net sales have been decreasing since the quarter ended June  30, 2012. It is difficult to determine precisely the cause of this systemic erosion in sales but it is conjectured that the fear engendered by the sequester of budgetary funds for the Defense Department has had a major impact on MFC’s economic environment. It should be remembered that substantial Defense cuts occurred during FY 2012 which have affected the whole communications market place as suppliers to the Defense industry have made the commercial market place more competitive as they have sought to redirect their sales efforts away from Defense. Management also believes that the decrease in capital expenditures from non-defense oriented companies (such as Cable Television companies) has also contributed to the overall decline and demand across all market segments served by MFC. In order to mitigate the effects of this decline in demand for our products during this difficult period, management has adopted a plan of cost reduction, as well as, an accelerated development and acquisition of new products. This coupled with an increase in promotional activity for existing and new products will hopefully mitigate the systemic effects of the market place by allowing MFC to increase its market share by virtue of a plethora of products for a wider range of applications and for a larger customer segment. 
 

<PAGE>                                13

 
 
  MFC’s RF/Microwave product sales decreased $548,121 or 41.9% to $759,027 for the nine months ended June  30, 2013 when compared to RF/Microwave product sales of $1,307,148 during the same period last year.  MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. The Company continues to invest in production engineering and infrastructure development to penetrate OEM 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. Sales to one OEM customer represented approximately 17% of total sales for the nine months ended June  30, 2013 compared to approximately 20% of total sales for the nine months ended June  30, 2012. 
   MFC’s Satellite product sales decreased $261,034 or 25.4% to $768,055 for the nine months ended June  30, 2013 when compared to satellite product sales of $1,029,089 during the same period last year. The decrease can be attributed to a decrease in demand for the Company’s filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Although economic conditions do impact sales, management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference.
  MFC’s Cable TV product sales decreased $618,542 or 58.8% to $432,896 for the nine months ended June  30, 2013 when compared to Cable TV product sales of $1,051,438 during the same period last year. Management continues to project a decrease in demand for Cable TV products due to the shift from analog to digital television. Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems. Management also believes that the decrease in capital expenditures from non-defense oriented companies (such as Cable Television companies) has also contributed to the decline in sales.
  MFC’s Broadcast TV/Wireless Cable product sales increased $20,900 or 21.3% to $119,244 for the nine months ended June  30, 2013 when compared to sales of $98,344 during the same period last year. The increase can be attributed to an increase in demand for UHF Broadcast products which are primarily sold to system integrators for rural communities.

  Gross profit for the nine months ended June  30, 2013 equaled $600,175, a decrease of $674,794 or 52.9%, when compared to gross profit of $1,274,969 for the nine months ended June  30, 2012. The decrease can primarily be attributed to the lower sales volume this year when compared to the same period last year. As a percentage of sales, gross profit equaled to 28.8% for the nine months ended June  30, 2013 compared to 36.5% for the nine months ended June  30, 2012. The decrease in gross profit as a percentage of sales can primarily be attributed to the lower sales volume this year providing a lower base to absorb fixed expenses.

  SG&A expenses for the nine months ended June  30, 2013 equaled $1,190,719 a decrease of $83,282 or 6.5%, when compared to SG&A expenses of $1,274,001 for the nine months ended June  30, 2012. As a percentage of sales, SGA expenses increased to 57.1% for the nine months ended June  30, 2013 compared to 36.5% for the nine months ended June  30, 2012 primarily due to the lower sales volume this year when compared to the same period last year.
   
 

<PAGE>                                14

 
 
   The Company recorded a loss from operations of $590,544 for the nine months ended June  30, 2013 compared to income from operations of $968 for the nine months ended June  30, 2012. The decrease in operating income can primarily be attributed to the lower sales volume this year when compared to the same period last year.
  Other income for the nine months ended June  30, 2013 equaled $4,979, a decrease of $21,694 when compared to other income of $26,673 for the nine months ended June  30, 2012. The decrease can be attributed to a $20,000 gain on the sale of a fixed asset last year.
  The (benefit) provision for income taxes equaled $0 for the nine months ended June  30, 2013 and June  30, 2012. We have not recognized any (benefit) provision for income taxes.  Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not.  As required by FASB ASC 740 (Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established.

 
Off-Balance Sheet Arrangements

  At June  30, 2013 and 2012, 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.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

<PAGE>                                15

 
 
 
LIQUIDITY and CAPITAL RESOURCES
 
 
 
 
   
   
   
   
   
June  30, 2013
September 30, 2012
   
   
   
   
   
Cash & cash equivalents
$409,697 
$1,023,017
   
Working capital
$1,014,249 
$1,549,136
   
Current ratio
4.34 to 1
5.10 to 1
   
Long-term debt
$0
$0
   
 

  Cash and cash equivalents decreased $613,320 to $409,697 at June  30, 2013 when compared to cash and cash equivalents of $1,023,017 at September 30, 2012. The decrease was a result of $538,831 in net cash used in operating activities primarily due to the net loss, $74,345 in net cash used for capital expenditures and $144 used to purchase treasury stock.
  The decrease in accounts receivable of $35,136 at June  30, 2013 when compared to September 30, 2012 can primarily be attributed to the decrease in sales for the month ended June  30, 2013 when compared to the month ended September 30, 2012.
  The increase in inventories of $63,931 at June  30, 2013 when compared to September 30, 2012 can be attributed to the addition of new products, prior purchase commitments and lower than expected sales orders.
  The decrease in accrued compensated absences of $54,630 at June  30, 2013 when compared to September 30, 2012 can be attributed to accrued vacation used during the nine months ended June 30, 2013. Due to the lower sales volume, the Company has been participating in the New York State Shared Work program which allows employers to reduce the hours of all or a particular group of employees. The employees whose hours are reduced can receive partial unemployment insurance benefits or elect to use accrued vacation.
  At June  30, 2013, the Company had unused aggregate lines of credit totaling $750,000 collateralized by all inventory, equipment and accounts receivable.
   On July 2, 2013, Microwave Filter Company, Inc. (the “Company”) entered into a Ten Year Term Loan with KeyBank National Association in the amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The amount of all advances outstanding together with accrued interest thereon shall be due and payable on July 2, 2023 (“Maturity”). The Company shall pay interest on the outstanding principal balance of this Note at the rate per annum equal to 4.5%. The net proceeds from the Term Loan will be available to provide working capital as needed.
   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. 
 
 
 

<PAGE>                                16

 
 
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


  In an effort to provide investors a balanced view of the Company's current condition and future growth opportunities, this Quarterly Report on Form 10-Q includes comments by the Company's management about future performance. These statements which are not historical information are "forward-looking statements" pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. These risks and uncertainties include, but are not limited to: risks associated with demand for and market acceptance of existing and newly developed products as to which the Company has made significant investments; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those detailed from time to time in the Company's Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. You are encouraged to review Microwave Filter Company’s 2012 Annual Report and Form 10-K for the fiscal year ended September 30, 2012 and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or “incorporated by reference” from other documents. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” or similar expressions.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  There has been no significant change in our exposures to market risk during the nine months ended June  30, 2013. For a detailed discussion of market risk, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk.



<PAGE>                                17

 
 
ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

<PAGE>                                18

 
 

                     PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         The State of New York Workers’ Compensation Board has commenced an action   
         against Microwave Filter Company, Inc. to recover for an underfunded self
         insured program that Microwave Filter Company, Inc. participated in.
         Due to the relatively short period of time Microwave Filter Company, Inc.
         participated in the program and the limited amount of potential exposure,
         we do not expect the resolution of this action will have a material adverse
         effect on our financial condition, results of operations or cash flows.
         The Company has accrued $12,000 for this action in other current liabilities.

Item 1A. Risk Factors

         Not applicable.

Item 2.  Changes in Securities

         None during this reporting period.

Item 3.  Defaults Upon Senior Securities

         The Company has no senior securities.
   
Item 4.  Mine Safety Disclosures
    
          Not applicable.

Item 5.  Other Information

         None. 

Item 6.  Exhibits

         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

   



<PAGE>                                19

 

    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.


   August  13, 2013           Carl F. Fahrenkrug
(Date)                              --------------------------
                                        Carl F. Fahrenkrug
                                        Chief Executive Officer

   August  13, 2013            Richard L. Jones
(Date)                               --------------------------
                                         Richard L. Jones
                                         Chief Financial Officer

<PAGE>                                20