ITEM 1. BUSINESS.
FORWARD-LOOKING CAUTIONARY STATEMENT - ------------------------------------ In an effort to provide investors a balanced view of the Company's current condition and future growth opportunities, this Annual Report on Form 10-K may include 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 2006 Annual Report and Form 10-K for the fiscal year ended September 30, 2006 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.
GENERAL DEVELOPMENT OF BUSINESS - ------------------------------- 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 RF filters and related components for eliminating interference and facilitating signal processing for such markets as Cable Television, Broadcast, Commercial and Military Communications, Avionics, Radar, Navigation and Defense. The Company designs waveguide, stripline/ microstrip, transmission line, miniature/subminiature and lumped constant filters. Configurations include bandpass, highpass, lowpass, bandstop, multiplexers, tunable notch, tunable bandpass, high power filters, amplitude equalized, delay equalized and filter networks. The Company actively produces over 1,700 standard products and has designed more than 5,000 custom products for specialized applications.
The manufacturing facility includes a modern CAD 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.
Efficient computer 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 in most cases.
A network based CAD 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 a corrugated shipping case at a constant 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 depending upon model.
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. Most revenue for NSI is derived from spare parts and services for an installed base of Quadnumatic case packers throughout the United States and Canada.
MARKETS - ------- 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 analog 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 the cable television market. C-band satellite receive systems are prone to various types of terrestrial interference which are curable in many cases by applying MFC bandpass filters.
The CATV marketplace is changing due to the transition from analog to digital television. Digital Televison (DTV) is a new type of broadcasting technology that will transform television viewing. DTV enables broadcasters to offer television with movie-quality picture and sound. It also offers greater multicasting and interactive capabilities. DTV is a more flexible and efficient technology than the current NTSC "analog" broadcast system. Rather than being limited to providing one analog programming channel, a broadcaster will be able to provide a super sharp "high definition" (HDTV) program or multiple "standard definition" DTV programs simultaneously using the RF spectrum more efficiently. Providing several program streams on one broadcast channel is called "multicasting." The number of programs a station can send on one digital channel depends on the level of picture detail, also known as "resolution." DTV can provide interactive video and data services that are not possible with "analog" technology. Converting to DTV will eventually free up parts of the scarce and valuable broadcast airwaves. Those portions of the spectrum can then be used for other important services, such as advanced wireless and public safety services (police, fire, rescue squads, etc.). Televison stations serving all markets in the United States are currently airing digital television programming, although they still must provide analog programming until the target date set by Congress for completion of the transition to DTV - April 7, 2009. That date may be extended, however, until most homes (85%) in an area are able to watch the DTV programming. At that point, broadcasting on the current (analog) channels will end and that spectrum will be put to other uses reducing the need for analog filters which MFC currently supplies. Until the transition to DTV is complete, television stations will continue broadcasting on both their digital and analog channels. MFC has developed and is supplying filters for digital television; however, the demand for these filters is unknown at this time.
Broadcast - Several areas of broadcast are served by Microwave Filter Company with the most active being in the MDS/MMDS and UHF bands.
Formally used for Wireless Cable, the MDS/MMDS bands are now becoming popular for use by Internet Service Providers (ISP). Wireless Cable was a video delivery service that attempted to compete with cable television with limited success. This service delivered 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. Currently the trend is to use the same concept to provide internet service to the home (receive only).
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 site, additional expensive coaxial or waveguide runs up the tower become unnecessary. It remains to be seen whether activity will be popular in these bands.
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.
Radio and Television Broadcast - MFC primarily serves these broadcast areas with interference filters to reduce equipment harmonics and combiners for low power UHF applications. 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 - Microwave filters and IF filters 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.
Mobile Radio and Data Links - 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. More recently there has been demand for filters and diplexers for broadband microwave applications for Voice Over Internet Protocol ("VOIP") With the number of services increasing and ISP use. The advent of license exempt applications has increased the need for interference filtering. With the number of services increasing and our air waves becoming more congested, filters are increasingly important to many transmit operations.
RF and Microwave - 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.
WORLD TRADE - -----------
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 - ---------------------
There are no significant seasonal fluctuations in the Company's business.
GOVERNMENT CONTRACTS - --------------------
The Company is not dependent in any material respect on government contracts.
BACKLOG - -------
At September 30, 2006, the Company's total backlog of orders, which represents firm orders from customers, was $731,941 compared to $692,595 at September 30, 2005. Approximately 76% of the total Company backlog at September 30, 2006 is scheduled to ship during fiscal 2007. 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.
EMPLOYEES - ---------
At September 30, 2006, the Company employed 57 full-time 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 $420,570, $373,080 and $312,189 for the fiscal years 2006, 2005 and 2004, 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 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition or results of operations. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Demand for existing products may decline.
Demand for our products depends upon, among other factors, the level of capital expenditures by current and prospective customers, the rate of economic growth in the markets in which we compete and the competitiveness of our products. Changes in any of these factors could have an adverse effect on our financial condition or results of operations.
We must continue to assess and predict customer needs and evolving technologies. We must develop new products, including enhancements to existing products, and successfully manufacture, market and sell these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely affected.
Our inability to introduce new and enhanced products on a timely basis.
Delays in development, testing, manufacture and/or release of new products could adversely affect our sales and results of operations. In addition, there can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
Market acceptance of newly developed products may be slower than anticipated.
The markets for our products are competitive and may be characterized by rapid technological change, new product development and evolving industry standards. If technologies supported by our products become obsolete or fail to gain widespread acceptance, our business could be harmed. Current and potential competitors may have substantially greater financial, technical, marketing, distribution and other resources than us, and have greater name recognition and market acceptance of their products and technologies. Our competitors may develop new technologies or products that may offer superior price or performance features and may render our products and technologies obsolete and noncompetitive.
Pricing pressures from our customers and/or market pressure from competitors may reduce selling prices.
Many of customers are under continuous pressure to reduce costs and, therefore, we expect to continue to experience pressure from these customers to reduce the prices of the products that we sell to them. To offset declining average sales prices, we believe that we must achieve manufacturing cost reductions and increase our sales volumes. If we are unable to offset declining average selling prices, our gross margins will decline, and this decline could materially harm our business, financial condition and operating results. We also compete with companies which have substantially larger operations and greater financial, engineering, marketing, production and other resources than we have. These competitors may develop their products more quickly, devote greater marketing and sales resources, or offer more aggressive pricing, than we can. As a result, this could cause us to lose orders or customers or force reductions in selling prices, all of which would have a material adverse impact on our financial position and results of operations.
Difficulty in obtaining an adequate supply of raw materials or components at reasonable prices.
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.
Loss of key personnel or the inability to attract new employees.
Our success depends in large part on the continued service of our key technical and management personnel, and on our ability to attract and retain qualified employees, particularly those involved in the development of new products and processes and the manufacture of existing products. The competition for these individuals is significant, and the loss of key employees could harm our business.
AVAILABLE INFORMATION - --------------------- Our Internet address is www.microwavefilter.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10- Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations link of our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
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.
ITEM 3. LEGAL PROCEEDINGS.
There are currently no material pending legal proceedings against the Company or its subsidiaries.
ITEM 4.
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.
PART II
ITEM 5.
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 2006 High Low
Oct. 1, 2005 to Dec. 31, 2005 $ 2.26 $ 1.30 Jan. 1, 2006 to Mar. 31, 2006 1.95 1.51 Apr. 1, 2006 to June 30, 2006 1.84 1.29 July 1, 2006 to Sept. 30, 2006 1.59 1.20
Fiscal 2005 High Low
Oct. 1, 2004 to Dec. 31, 2004 $ 2.47 $ 1.10 Jan. 1, 2005 to Mar. 31, 2005 3.30 1.31 Apr. 1, 2005 to June 30, 2005 2.24 1.21 July 1, 2005 to Sept. 30, 2005 2.05 1.33
The Company had approximately 650 holders of record of its common stock at September 30, 2006.
On November 9, 2005, the Board of Directors declared a ten cents per share cash dividend to shareholders of record on December 9, 2005 to be distributed on January 9, 2006.
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.
Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into consideration various factors, including the Company's financial condition, operating results and current and anticipated cash needs.
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. On June 21, 2004, the Board of Directors granted ISOs totaling 115,000 shares and NQSOs totaling 35,000 shares at an exercise price of $1.47. All options were 100% vested.
Additional information regarding our stock option plan and plan activity for 2006 is provided in our consolidated financial statements. See "Notes to Consolidated Financial Statements, Note 9 - Stock options."
ITEM 6.
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
ITEM 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 - ---------------------
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, 2006.
Product group (in thousands) Fiscal 2006 Fiscal 2005 Fiscal 2004
Microwave Filter: Cable TV $1,882 $2,598 $2,179 RF/Microwave 1,624 1,561 1,149 Satellite 893 1,020 1,082 Broadcast TV 116 166 235 Niagara Scientific 21 188 231 ------ ------ ------ Total $4,536 $5,533 $4,876 ====== ====== ====== Sales backlog at 9/30 $ 732 $ 693 $ 805 ====== ====== ======
Fiscal 2006 compared to fiscal 2005
Consolidated net sales for the fiscal year ended September 30, 2006 equaled $4,536,715, a decrease of $996,683 or 18%, when compared to consolidated net sales of $5,533,398 during the fiscal year ended September 30, 2005.
Microwave Filter Company, Inc. (MFC) sales decreased $829,927 or 15.5% to $4,515,502 during the fiscal year ended September 30, 2006 when compared to sales of $5,345,429 during the fiscal year ended September 30, 2005.
The decrease in MFC sales can primarily be attributed to the decrease in the sales of the Company's standard Cable TV products.
MFC's Cable TV product sales decreased $715,890 or 27.6% to $1,881,866 during the fiscal year ended September 30, 2006 when compared to Cable TV product sales of $2,597,756 during the fiscal year ended September 30, 2005. The decrease in sales can be attributed to the transition from analog to digital television. Digital Televison (DTV) is a new type of broadcasting technology that will transform television viewing. DTV enables broadcasters to offer television with movie-quality picture and sound. It also offers greater multicasting and interactive capabilities. DTV is a more flexible and efficient technology than the current NTSC "analog" broadcast system. Rather than being limited to providing one analog programming channel, a broadcaster will be able to provide a super sharp "high definition" (HDTV) program or multiple "standard definition" DTV programs simultaneously using the RF spectrum more efficiently. Providing several program streams on one broadcast channel is called "multicasting." The number of programs a station can send on one digital channel depends on the level of picture detail, also known as "resolution." DTV can provide interactive video and data services that are not possible with "analog" technology. Converting to DTV will eventually free up parts of the scarce and valuable broadcast airwaves. Those portions of the spectrum can then be used for other important services, such as advanced wireless and public safety services (police, fire, rescue squads, etc.). Televison stations serving all markets in the United States are currently airing digital television programming, although they still must provide analog programming until the target date set by Congress for completion of the transition to DTV - April 7, 2009. That date may be extended, however, until most homes (85%) in an area are able to watch the DTV programming. At that point, broadcasting on the current (analog) channels will end and that spectrum will be put to other uses reducing the need for analog filters which MFC currently supplies. Until the transition to DTV is complete, television stations will continue broadcasting on both their digital and analog channels. MFC has developed and is supplying filters for digital television; however, the demand for these filters is unknown at this time.
MFC's RF/Microwave product sales increased $62,794 or 4% to $1,624,435 during the fiscal year ended September 30, 2006 when compared to sales of $1,561,641 during the fiscal year ended September 30, 2005. These products are primarily sold to original equipment manufacturers (OEMs) that serve the mobile radio and commercial and defense electronics markets. Typical customers include the U.S. Government, General Dynamics, Motorola, Rockwell Collins, Lockheed Martin, Northrup Gruman and Raytheon. 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.
MFC's Satellite product sales decreased $127,729 or 12.5% to $892,717 during the fiscal year ended September 30, 2006 when compared to $1,020,446 during the fiscal year ended September 30, 2005. 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. Despite the decrease in 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 BTV/Wireless cable sales decreased $49,102 or 29.7% to $116,484 for the fiscal year ended September 30,2006 when compared to sales of $165,586 for the fiscal year ended September 30, 2005 primarily due to a decrease in demand for UHF Broadcast products.
Niagara Scientific, Inc. (NSI) sales decreased $166,756 or 88.7% to $21,213 for the fiscal year ended September 30, 2006 when compared to sales of $187,969 for the fiscal year ended September 30, 2005. NSI sales consisted primarily of spare part orders during fiscal 2006. NSI has been concentrating on quoting low risk jobs in an effort to maintain targeted profit margins. Although this may impact sales levels, it should improve profit margins and also allow engineering resources to focus on higher priorities. Based on backlog, recent quote activity and the general economic climate, management is expecting little, if any, growth in sales for NSI for fiscal 2007.
At September 30, 2006, the Company's total backlog of orders, which represents firm orders from customers, equaled $731,941 compared to $692,595 at September 30, 2005. Approximately 76% of the total Company backlog at September 30, 2006 is scheduled to ship during fiscal 2007. 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 decreased $702,192 or 32% to $1,492,995 during the fiscal year ended September 30, 2006 when compared to gross profit of $2,195,187 during the fiscal year ended September 30, 2005. The dollar decrease can primarily be attributed to the lower sales volume. As a percentage of sales, gross profit decreased to 32.9% during the fiscal year ended September 30, 2006 compared to 39.7% during the fiscal year ended September 30, 2005. The decrease in gross profit as a percentage of sales can also be attributed to the lower sales volume, resulting in a lower base to absorb fixed expenses.
Selling, general and administrative (SG&A) expenses increased $111,534 or 5.8% to $2,022,485 during the fiscal year ended September 30, 2006 when compared to SG&A expenses of $1,910,951 during the fiscal year ended September 30, 2005. The increase is primarily due to planned increases in promotional expenses and higher payroll and payroll related expenses when compared to last year.
Income from operations decreased $813,726 to a loss of $529,490 during the fiscal year ended September 30, 2006 when compared to income from operations of $284,236 during the fiscal year ended September 30, 2005. The decrease can primarily be attributed to the lower sales volume this year when compared to last year.
Other income increased $12,879 to $80,609 for the twelve months ended September 30, 2006 compared to other income of $67,730 for the twelve months ended September 30, 2005. Other income is primarily interest income earned on invested cash balances. The increase in other income can primarily be attributed to the rise in market interest rates during this fiscal year when compared to the same period last year. Other income may fluctuate based on market interest rates and levels of invested cash balances.
The Company recorded a benefit for income taxes of $37,532, an effective rate of (8.4%), for the fiscal year ended September 30, 2006 compared to a provision for income taxes of $39,755, or an effective rate of 11.3%, for the fiscal year ended September 30, 2005. The benefit for the current year is primarily due to the Company's ability to carry back it's operating loss to fiscal 2005 and an increase in deferred tax assets offset by an increase in the valuation allowance since the realization of the deferred tax benefit is not considered more likely than not.
Fiscal 2005 compared to fiscal 2004
Consolidated net sales for the fiscal year ended September 30, 2005 equaled $5,533,398, an increase of $657,179 or 13.5% when compared to consolidated net sales of $4,876,219 during the fiscal year ended September 30, 2004.
Microwave Filter Company, Inc. (MFC) sales increased $700,073 or 15.1% to $5,345,429 during the fiscal year ended September 30, 2005 when compared to sales of $4,645,356 during the fiscal year ended September 30, 2004.
The increase in MFC sales can primarily be attributed to an increase in the sales of the Company's standard Cable TV product sales and an increase in the sales of the Company's RF/Microwave product sales when compared to last year.
MFC's Cable TV product sales increased $418,976 or 19.2% to $2,597,756 during the fiscal year ended September 30, 2005 when compared to Cable TV product sales of $2,178,780 during the fiscal year ended September 30, 2004. The increase in sales can be attributed to the improved economy mitigating any drop off in demand due to the transition from analog to digital television. Digital Televison (DTV) is a new type of broadcasting technology that will transform television viewing. DTV enables broadcasters to offer television with movie-quality picture and sound. It also offers greater ulticasting and interactive capabilities. DTV is a more flexible and efficient technology than the current NTSC "analog" broadcast system. Rather than being limited to providing one analog programming channel, a broadcaster will be able to provide a super sharp "high definition" (HDTV) program or multiple "standard definition" DTV programs simultaneously using the RF spectrum more efficiently. Providing several program streams on one broadcast channel is called "multicasting." The number of programs a station can send on one digital channel depends on the level of picture detail, also known as "resolution." DTV can provide interactive video and data services that are not possible with "analog" technology. Converting to DTV will eventually free up parts of the scarce and valuable broadcast airwaves. Those portions of the spectrum can then be used for other important services, such as advanced wireless and public safety services (police, fire, rescue squads, etc.). Televison stations serving all markets in the United States are currently airing digital television programming, although they still must provide analog programming until the target date set by Congress for completion of the transition to DTV - April 7, 2009. That date may be extended, however, until most homes (85%) in an area are able to watch the DTV programming. At that point, broadcasting on the current (analog) channels will end and that spectrum will be put to other uses reducing the need for analog filters which MFC currently supplies. Until the transition to DTV is complete, television stations will continue broadcasting on both their digital and analog channels. MFC has developed and is supplying filters for digital television; however, the demand for these filters is unknown at this time.
MFC's RF/Microwave product sales increased $412,951 or 35.9% to $1,561,641 during the fiscal year ended September 30, 2005 when compared to sales of $1,148,690 during the fiscal year ended September 30, 2004. These products are primarily sold to original equipment manufacturers (OEMs) that serve the mobile radio and commercial and defense electronics markets. Typical customers include the U.S. Government, General Dynamics, Motorola, Rockwell Collins, Lockheed Martin, Northrup Gruman and Raytheon. 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.
MFC's Satellite product sales decreased $61,940 or 5.7% to $1,020,446 during the fiscal year ended September 30, 2005 when compared to $1,082,386 during the fiscal year ended September 30, 2004. 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. Despite the slight decrease in 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 BTV/Wireless cable sales decreased $69,914 or 29.7% to $165,586 for the fiscal year ended September 30,2005 when compared to sales of $235,500 for the fiscal year ended September 30, 2004 primarily due to a decrease in demand for UHF Broadcast products.
Niagara Scientific, Inc. (NSI) sales decreased $42,894 or 18.6% to $187,969 for the fiscal year ended September 30, 2005 when compared to sales of $230,863 for the fiscal year ended September 30, 2004. 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. NSI has been concentrating on quoting low risk jobs in an effort to maintain targeted profit margins. Although this may impact sales levels, it should improve profit margins and also allow engineering resources to focus on higher priorities. Based on backlog, recent quote activity and the general economic climate, management is expecting little, if any, growth in sales for NSI for fiscal 2006.
At September 30, 2005, the Company's total backlog of orders, which represents firm orders from customers, equaled $692,595 compared to $805,244 at September 30, 2004. At September 30, 2005, MFC's backlog of orders equaled $692,595 compared to $661,109 at September 30, 2004. At September 30, 2005, NSI's backlog of orders equaled $0 compared to $144,135 at September 30, 2004. The total Company backlog at September 30, 2005 is scheduled to ship during fiscal 2006. 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 $515,745 or 30.7% to $2,195,187 during the fiscal year ended September 30, 2005 when compared to gross profit of $1,679,442 during the fiscal year ended September 30, 2004. As a percentage of sales, gross profit increased to 39.7% during the fiscal year ended September 30, 2005 compared to 34.4% during the fiscal year ended September 30, 2004. The increases in gross profit can primarily be attributed to the higher sales volume and a favorable product sales mix this year when compared to last year. Typically, CATV products generate a higher gross margin than other product groups and; this year, the increase in the RF/Microwave product sales were from higher margin products.
Selling, general and administrative (SG&A) expenses increased $167,330 or 9.6% to $1,910,951, or 34.5% of sales, during the fiscal year ended September 30, 2005 when compared to SG&A expenses of $1,743,621, or 35.8% of sales, during the fiscal year ended September 30, 2004. The dollar increase is primarily related to increases in payroll and payroll related expenses.
Income from operations increased $348,415 to $284,236 during the fiscal year ended September 30, 2005 when compared to a loss from operations of $64,179 during the fiscal year ended September 30, 2004. The improvement can primarily be attributed to the higher sales volume and improved margins this year when compared to last year. MFC's income from operations increased $265,017 to $297,337 for the fiscal year ended September 30, 2005 compared to income from operations of $32,320 for the fiscal year ended September 30, 2004, due primarily to MFC's higher sales volume and improved margins. NSI recorded a loss from operations of $13,101 for the fiscal year ended September 30, 2005 compared to a loss from operations of $96,499 for the fiscal year ended September 30, 2004. NSI's improvement can be attributed to improved margins and planned reductions in SG&A expenses.
The Company recorded a provision for income taxes of $39,755, or an effective rate of 11.3%, for the fiscal year ended September 30, 2005 which reflects the U.S. Federal Alternative Minimum Tax and State income taxes that are due based on certain statutory limitations on the use of the Company's net operating loss carryforwards. The Company recorded a provison for income taxes of $145,889 for the fiscal year ended September 30, 2004 due primarily to the Company providing a full valuation allowance on its deferred tax assets.
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 2006 2005 2004 Cash & cash equivalents $705,646 $1,251,594 $817,338 Investments $798,544 $822,651 $851,157 Working capital $2,063,269 $2,622,768 $2,213,155 Current ratio 5.05 to 1 5.02 to 1 4.60 to 1 Long-term debt $ 0 $ 0 $ 0
Cash and cash equivalents decreased $545,948 to $705,646 at September 30, 2006 when compared to $1,251,594 at September 30, 2005. The decrease was a result of $209,258 in net cash used in operating activities, $34,497 in net cash used in investing activities and $302,193 in net cash used in financing activities.
The net decrease of $151,048 in accounts receivable at September 30, 2006, when compared to September 30, 2005, can primarily be attributed to the decrease in shipments during the month ended September 30, 2006 when compared to the month ended September 30, 2005.
The net decrease of $64,755 in inventories at September 30, 2006, when compared to September 30, 2005, can primarily be attributed to a decrease in purchases due to the lower sales volume this year compared to last year, our customers scheduled delivery dates and an increase in the reserve for obsolescence. 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 $389,200 at September 30, 2006 compared to $362,139 at September 30, 2005. The increase of $27,061 in inventory reserves at September 30, 2006, when compared to September 30, 2005, can primarily be attributed to the obsolescence of specific inventory items due to product enhancements or the slow movement of certain inventory items due to a decrease in demand. 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 their estimated net realizable value.
The net decrease in other current assets of $55,364 at September 30, 2006, when compared to September 30, 2005, can primarily be attributed to a decrease in prepaid expenses due primarily to the timing of the payments when compared to last year.
The net decrease of $88,342 in other current liabilities at September 30, 2006, when compared to September 30, 2005, can primarily be attributed to a discretionary profit sharing contribution of $62,000 accrued at September 30, 2005. No discretionary profit sharing contribution was accrued at September 30, 2006.
Cash used in investing activities during fiscal 2006 consisted of funds provided by the sale of investments of $24,107 and funds used for capital expenditures of $58,604.
Cash used in financing activities during fiscal 2006 consisted of funds used to pay a cash dividend of $290,916 and cash used to purchase treasury stock of $11,277.
At September 30, 2006, 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 foreseeable future will be met by its existing cash balances, future cash flows from operations and its current credit arrangements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITON OR BUSINESS - -------------------------------------------------------------------------------
An investment in our common stock involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition or results of operations. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Demand for existing products may decline.
Demand for our products depends upon, among other factors, the level of capital expenditures by current and prospective customers, the rate of economic growth in the markets in which we compete and the competitiveness of our products. Changes in any of these factors could have an adverse effect on our financial condition or results of operations.
We must continue to assess and predict customer needs and evolving technologies. We must develop new products, including enhancements to existing products, and successfully manufacture, market and sell these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely affected.
Our inability to introduce new and enhanced products on a timely basis.
Delays in development, testing, manufacture and/or release of new products could adversely affect our sales and results of operations. In addition, there can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
Market acceptance of newly developed products may be slower than anticipated.
The markets for our products are competitive and may be characterized by rapid technological change, new product development and evolving industry standards. If technologies supported by our products become obsolete or fail to gain widespread acceptance, our business could be harmed. Current and potential competitors may have substantially greater financial, technical, marketing, distribution and other resources than us, and have greater name recognition and market acceptance of their products and technologies. Our competitors may develop new technologies or products that may offer superior price or performance features and may render our products and technologies obsolete and noncompetitive.
Pricing pressures from our customers and/or market pressure from competitors may reduce selling prices.
Many of customers are under continuous pressure to reduce costs and, therefore, we expect to continue to experience pressure from these customers to reduce the prices of the products that we sell to them. To offset declining average sales prices, we believe that we must achieve manufacturing cost reductions and increase our sales volumes. If we are unable to offset declining average selling prices, our gross margins will decline, and this decline could materially harm our business, financial condition and operating results. We also compete with companies which have substantially larger operations and greater financial, engineering, marketing, production and other resources than we have. These competitors may develop their products more quickly, devote greater marketing and sales resources, or offer more aggressive pricing, than we can. As a result, this could cause us to lose orders or customers or force reductions in selling prices, all of which would have a material adverse impact on our financial position and results of operations.
Difficulty in obtaining an adequate supply of raw materials or components at reasonable prices.
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.
Loss of key personnel or the inability to attract new employees.
Our success depends in large part on the continued service of our key technical and management personnel, and on our ability to attract and retain qualified employees, particularly those involved in the development of new products and processes and the manufacture of existing products. The competition for these individuals is significant, and the loss of key employees could harm our business.
Off-Balance Sheet Arrangements
At September 30, 2006 and 2005, 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 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. The Company has provided a full valuation allowance against its deferred tax assets.
NEW ACCOUNTING PRONOUNCEMENTS - -----------------------------
FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2008 fiscal year). The company is currently analyzing the financial statement impact of adopting this pronouncement.
Accounting for Pension and Other Postretirement Benefits -- In September 2006, the FASB published Statement of Financial Accounting No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires companies to report on their balance sheets the funded status of pension and other post retirement benefit plans. The proposal would also require companies to measure plan assets and obligations as of the employer's balance-sheet date. As a result, companies would recognize on their balance sheets actuarial gains and losses and prior service cost that have not yet been included in income. This could significantly increase reported liabilities for many companies with a corresponding reduction in equity reported as accumulated other comprehensive income. The provisions for the statement are effective for fiscal years ending after December 15, 2006, (the Company's 2007 fiscal year) with earlier application encouraged. The Company does not expect the adoption of SFAS No. 158 in fiscal 2008 to have an impact on its results of operations or financial position.
In September 2006, SEC Staff Accounting Bulletin No. 108 was issued to provide guidance on Quantifying Financial Statement Misstatements. Staff Accounting Bulletin No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The SAB requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The SAB does not change the staff's previous guidance in SAB 99 on evaluating the materiality of misstatements. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006 (the Company's fiscal 2007).
Fair Value Measurements. In September 2006, the FASB published Statement of Financial Accounting No. 157, Fair Value Measurements. This Statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. It will also affect current practices by nullifying the Emerging Issues Task Force (EITF) guidance that prohibited recognition of gains or losses at the inception of derivative transactions whose fair value is estimated by applying a model and by eliminating the use of "blockage" factors by brokers, dealers, and investment companies that have been applying AICPA Guides. The Statement is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 (the Company's fiscal 2009) and interim periods within those fiscal years. Early application is permissible only if no annual or interim financial statements have been issued for the earlier periods. The requirements of the Statement are applied prospectively, except for changes in fair value related to estimating he fair value of a large block position and instruments measured at fair value at initial recognition based on transaction price in accordance with EITF 02-3 or Statement 155.
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 Annual Report on Form 10-K may include 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 2006 Annual Report and Form 10-K for the fiscal year ended September 30, 2006 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 7A.
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, 2006. 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Financial Statement Schedule called for by this item are submitted as a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
1. On January 31, 2005, PricewaterhouseCoopers LLP ("PwC") resigned as the independent registered public accounting firm for Microwave Filter Company, Inc. (the "Company"). The reports of PwC on the Company's financial statements as of and for the years ended September 30, 2004 and 2003 did not contain an adverse opinion, a disclaimer of opinion, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended September 30, 2004 and 2003 and through January 31, 2005, there were no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved, to PwC's satisfaction, would have caused them to make reference thereto in their reports on the financial statements for such years.
2. On March 8, 2005, the Audit Committee of the Board of Directors of Microwave Filter Company, Inc. engaged the services of Rotenberg & Co. LLP as its new independent accountants to audit its financial statements for the fiscal year ended September 30, 2005.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
1. Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective.
2. Changes in internal control over financial reporting. During the quarter ended September 30, 2006, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
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 12/1/06 Class
ROBERT R. ANDREWS Mr. Andrews is the President and 1,214 * (a)(c) Principal shareholder of Morse Age 65 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. Mr. Andrews was elected Chairman of the Board of Directors of Microwave Filter Company, Inc. on November 17, 2004.
TRUDI B. ARTINI Mrs. Artini is an independent 32,435 1.1% (a)(b)(d) investor in MFC and various other Age 84 business enterprises in Syracuse, Director since 1974 New York.
SIDNEY CHONG Mr. Chong is a corporate 335 * (a)(b)(c) accountant for Carrols Corp. in Age 65 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.
Common Shares Actually or Percent Beneficially of Director Principal occupation Owned 12/1/06 Class
CARL F. FAHRENKRUG PE Mr. Fahrenkrug was appointed 72,298 2.5% (a) President and Chief Executive Age 64 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.
DANIEL GALBALLY Mr. Galbally is an accountant 0 (b)(c)(d) for Nucor Steel Auburn, Inc. Age 59 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.
RICHARD L. JONES Mr. Jones was appointed a Director 0 Age 58 of Microwave Filter Company, Inc. on Director since 2004 September 7, 2004. Mr. Jones has served as a Vice President and the Chief Financial Officer of Microwave Filter Company, Inc. since October 7, 1992. He has a Bachelor of Science degree in accounting from Syracuse University.
Common Shares Actually or Percent Beneficially of Director Principal occupation Owned 12/1/06 Class
FRANK S. MARKOVICH Mr. Markovich is a consultant in 4,340 * (c)(d) the manufacturing operations Age 61 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.
MILO PETERSON Mr. Peterson has served as 42,250 1.5% (a) Executive Vice President and Age 66 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.
ARNOLD POLTENSON Mr. Poltenson retired in 1989 as 0 Age 70 president and owner of Salina Press, Director since 2006 Inc., a commercial printing company. He holds a BA from Amherst College and a MBA from Syracuse University. After his retirement, Mr. Poltenson spent several years teaching at the Business School at Syracuse University in the department of Law and Public Policy. He has worked for the Hospice of Central New York and the Central New York Community Foundation. He has been active on many non-profit boards in the area and currently serves on the executive committee of the Onondaga Historical Association.
(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.
The Directors listed above and executive officers as a group own 152,872 shares or approximately 5% of the outstanding common shares of the Company.
The Board of Directors of Microwave Filter Company, Inc. has determined that Mr. Chong and Mr. Galbally, both members of the Audit Committee, are "audit committee financial experts" as defined by the SEC's regulations.
IDENTIFICATION OF EXECUTIVE OFFICERS
Name Age Position
Carl F. Fahrenkrug 64 President and Chief Executive Officer
Richard L. Jones 58 Vice President and Chief Financial Officer
Milo J. Peterson 66 Vice President and Corporate Secretary
Paul W. Mears 47 Vice President of Engineering
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.
The Company has adopted a Code of Ethics and Business Conduct for all of our employees and directors, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics and Business Conduct is available free of charge on our Company web site at www.microwavefilter.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended September 30, 2006, 2005 and 2004, 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 2006 116,188 - President and CEO 2005 122,687 - 2004 117,869 -
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 were matched at a rate of 100% of an employee's first 6% of contributions during fiscal 2006. The maximum corporate match was 6% of an employee's compensation during fiscal 2006.
MFC's contributions to the plans for the years ended September 30, 2006, 2005 and 2004 amounted to $97,748, $134,126 and $67,675, 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. On June 21, 2004, the Board of Directors granted ISOs totaling 115,000 shares and NQSOs totaling 35,000 shares at an exercise price of $1.47. All options were 100% vested.
A summary of all stock option activity and information related to all options outstanding follows:
COMPENSATION OF DIRECTORS - -------------------------
Non-officer directors currently receive fees of $300.00 per board and committee meetings. MFC also reimburses directors for reasonable expenses incurred in attending meetings. The Chairman of the Board receives $500.00 per board and committee meetings. Officer members receive no compensation for their attendance at meetings.
ITEM 12.
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 1, 2006.
% 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
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is contained in the Company's proxy statement filed with respect to the 2007 Annual Meeting of Shareholders and is incorporated by reference herein.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Schedule:
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:
None
(C) Exhibits:
Reference is made to the List of Exhibits submitted as a separate section of this report.
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 21, 2006
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| Robert R. Andrews |S| Carl F. Fahrenkrug - ------------------------ -------------------------- Robert R. Andrews Carl F. Fahrenkrug (Director) (Director)
|S| Milo J. Peterson |S| Richard L. Jones - ------------------------ ----------------------- Milo J. Peterson Richard L. Jones (Director) (Director)
|S| Sidney Chong - -------------------- Sidney Chong (Director)
Dated: December 21, 2006
ANNUAL REPORT ON FORM 10-K
MICROWAVE FILTER COMPANY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
ITEM 8, ITEM 15(a)(1) and (2)
CONSOLIDATED FINANCIAL STATEMENTS: Page
Reports of Independent Registered Public Accounting Firms........39-40 Consolidated Balance Sheets as of September 30, 2006 and 2005....41 Consolidated Statements of Operations for the Years Ended September 30, 2006, 2005 and 2004 .......................42 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2006, 2005 and 2004 .......................43 Consolidated Statements of Cash Flows for the Years Ended September 30, 2006, 2005 and 2004 .......................44 Notes to Consolidated Financial Statements.......................45-56
SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004:
II-Valuation and Qualifying Accounts.............................58
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Microwave Filter Company, Inc. and Subsidiary East Syracuse, New York
We have audited the accompanying consolidated balance sheets of Microwave Filter Company, Inc. and Subsidiary as of September 30, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the two years in the period ended September 30, 2006 and 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2006 and 2005, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.
Rotenberg & Co., LLP Rochester, New York November 17, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Microwave Filter Company, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a) (1) present fairly, in all material respects, the results of operations and cash flows of Microwave Filter Company, Inc. and its subsidiaries for the year ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 15(a) (2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 December 10, 2004
Microwave Filter Company and Subsidiaries Consolidated Balance Sheets
September 30 Assets 2006 2005 - ------ ---- ---- Current assets: Cash and cash equivalents $ 705,646 $1,251,594 Investments 798,544 822,651 Accounts receivable-trade, net of allowance for doubtful accounts of $12,000 and $16,000 344,134 495,182 Accrued federal and state income tax recoverable 137,986 0 Inventories 491,135 555,890 Prepaid expenses and other current assets 94,826 150,190 --------- --------- Total current assets 2,572,271 3,275,507
Property, plant and equipment, net 554,102 658,898
Deferred tax asset - noncurrent 0 49,247 ---------- ----------
Total Assets $3,126,373 $3,983,652 ========== ========== Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable $ 179,800 $ 190,372 Customer deposits 20,298 9,874 Accrued federal and state income taxes 0 23,099 Accrued payroll and related expenses 61,028 59,432 Accrued compensated absences 210,825 227,717 Other current liabilities 37,051 142,245 --------- --------- Total current liabilities 509,002 652,739 --------- --------- Total liabilities 509,002 652,739 --------- --------- Commitments (Note 6)
Stockholders' equity: Common stock, $.10 par value. Authorized 5,000,000 shares Issued 4,324,140 in 2006 and 2005 432,414 432,414 Additional paid-in capital 3,248,706 3,248,706 Retained earnings 456,183 1,158,448
Common stock in treasury, at cost, 1,421,788 shares in 2006 and 1,414,840 shares in 2005 (1,519,932) (1,508,655) --------- --------- Total stockholders' equity 2,617,371 3,330,913 --------- --------- Total Liabilities and Stockholders' Equity $3,126,373 $3,983,652 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries Consolidated Statements of Operations
For the Years Ended September 30 2006 2005 2004 ---- ---- ----
Net sales $4,536,715 $5,533,398 $4,876,219
Cost of goods sold 3,043,720 3,338,211 3,196,777 --------- --------- ---------
Gross profit 1,492,995 2,195,187 1,679,442
Selling, general and administrative expenses 2,022,485 1,910,951 1,743,621 --------- --------- ---------
(Loss) income from operations (529,490) 284,236 (64,179)
Non-operating Income Interest income 71,297 41,862 14,734 Miscellaneous 9,312 25,868 19,017 ------- ------- -------
(Loss) income before income taxes (448,881) 351,966 (30,428)
(Benefit) provision for income taxes (37,532) 39,755 145,889 -------- --------- ---------
NET (LOSS) INCOME ($411,349) $312,211 ($176,317) ======== ========= =========
Per share data: Basic (Loss) Earnings Per Common Share ($0.14) $0.11 ($0.06) ========= ========= ========= Diluted (Loss) Earnings per Common Share ($0.13) $0.10 ($0.06) ========= ========= ========= Shares used in computing net (loss) earnings per common share: Basic 2,905,355 2,908,503 2,904,669 Diluted 3,043,903 3,049,115 2,946,482
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries Consolidated Statements of Stockholders' Equity For the Years Ended September 30, 2006, 2005 and 2004
-----------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
Microwave Filter Company and Subsidiaries Consolidated Statements of Cash Flows Increase (Decrease) in Cash and Cash Equivalents ------------------------------------------------
For the Years Ended September 30 -------------------------------- 2006 2005 2004 ---- ---- ----
Cash flows from operating activities: Net (loss) income ($411,349) $312,211 ($176,317)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation 163,400 198,476 222,799 Provision for doubtful accounts (4,853) (8,473) (40,137) Inventory obsolescence provision (27,061) (24,610) (15,225) Deferred income taxes 32,395 (32,395) 246,377 Changes in assets and liabilities: Accounts receivable-trade 155,901 (32,865) (95,356) Federal and state income taxes (161,085) 22,673 39,910 Inventories 91,816 106,890 84,645 Other assets 55,364 (82,568) 25,044 Accounts payable and customer deposits (148) (46,468) (69,513) Accrued payroll, compensated absences and related expenses (15,296) (47,526) (16,695) Other current liabilities (88,342) 92,232 (12,310) --------- -------- ------- Net cash (used in) provided by operating activities (209,258) 457,577 193,222 --------- -------- --------- Cash flows from investing activities: Investments 24,107 28,506 24,514 Capital expenditures (58,604) (58,900) (46,754) -------- -------- -------- Net cash used in investing activities (34,497) (30,394) (22,240) -------- -------- -------- Cash flows from financing activities: Purchase of treasury stock (11,277) (2,411) (530) Stock options exercised 0 9,484 0 Cash dividend paid (290,916) 0 0 -------- -------- -------- Net cash (used in) provided by financing activities (302,193) 7,073 (530) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (545,948) 434,256 170,452
Cash and cash equivalents at beginning of year 1,251,594 817,338 646,886 --------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $705,646 $1,251,594 $817,338 ========= ========== ========
Supplemental disclosures of cash flows: Cash paid (refunded) during the year for (approximately): Interest $0 $0 $0 Income taxes $91,000 $50,000 ($116,000)
The accompanying notes are an integral part of the consolidated financial statements.
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) (dormant); 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 and Cash Equivalents
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company's cash is held at federally insured institutions and balances may periodically exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company also routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited.
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.
f. Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
g. Inventories and Reserve for Obsolescence
Inventories are stated at the lower of cost determined on the first-in, first- out method or market.
The Company records a reserve for obsolete or excess inventory. The Company considers inventory quantities greater than a one-year supply based on current year activity as well as any additional specifically identified inventory to be excess. The Company also provides for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies.
h. Research and Development
Costs in connection with research and development, which amount to $420,570, $373,080 and $312,189 for the fiscal years 2006, 2005 and 2004, respectively, are charged to operations as incurred.
i. 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.
j. 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. The Company has provided a full valuation allowance against its deferred tax assets.
k. 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. Income used in the EPS calculation is net income for each year.
l. 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.
m. 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.
n. 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.
o. Warranty Costs
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. Warranty costs were approximately $3,000, $7,000 and $6,000 for the fiscal years 2006, 2005 and 2004, respectively.
p. Impairment of Long-Lived Assets
The carrying values of long-lived assets other than goodwill are generally evaluated for impairment only if events or changes in facts and circumstances indicate that carrying values may not be recoverable. Any impairment determined would be recorded in the current period and would be measured by comparing the fair value of the related asset to its carrying value. Fair value is generally determined by identifying estimated undiscounted cash flows to be generated by those assets. No impairments have been recorded for the years ended September 30, 2006, 2005, and 2004.
q. New Accounting Pronouncements
FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2008 fiscal year). The company is currently analyzing the financial statement impact of adopting this pronouncement.
Accounting for Pension and Other Postretirement Benefits -- In September 2006, the FASB published Statement of Financial Accounting No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires companies to report on their balance sheets the funded status of pension and other post retirement benefit plans. The proposal would also require companies to measure plan assets and obligations as of the employer's balance-sheet date. As a result, companies would recognize on their balance sheets actuarial gains and losses and prior service cost that have not yet been included in income. This could significantly increase reported liabilities for many companies with a corresponding reduction in equity reported as accumulated other comprehensive income. The provisions for the statement are effective for fiscal years ending after December 15, 2006, (the Company's 2007 fiscal year) with earlier application encouraged. The Company does not expect the adoption of SFAS No. 158 in fiscal 2008 to have an impact on its results of operations or financial position.
In September 2006, SEC Staff Accounting Bulletin No. 108 was issued to provide guidance on Quantifying Financial Statement Misstatements. Staff Accounting Bulletin No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The SAB requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The SAB does not change the staff's previous guidance in SAB 99 on evaluating the materiality of misstatements. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006 (the Company's fiscal 2007).
Fair Value Measurements. In September 2006, the FASB published Statement of Financial Accounting No. 157, Fair Value Measurements. This Statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. It will also affect current practices by nullifying the Emerging Issues Task Force (EITF) guidance that prohibited recognition of gains or losses at the inception of derivative transactions whose fair value is estimated by applying a model and by eliminating the use of "blockage" factors by brokers, dealers, and investment companies that have been applying AICPA Guides. The Statement is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 (the Company's fiscal 2009) and interim periods within those fiscal years. Early application is permissible only if no annual or interim financial statements have been issued for the earlier periods. The requirements of the Statement are applied prospectively, except for changes in fair value related to estimating the fair value of a large block position and instruments measured at fair value at initial recognition based on transaction price in accordance with EITF 02-3 or Statement 155.
2. INVENTORIES
Inventories net of provision for obsolescence consisted of the following: September 30 2006 2005 ---- ---- Raw materials and stock parts $411,885 $448,176 Work-in-process 20,437 42,250 Finished goods 58,813 65,464 -------- --------- $491,135 $555,890 ======== ==========
The Company's reserve for obsolescence equaled $389,200 at September 30, 2006 and $362,139 at September 30, 2005.
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
September 30 2006 2005 ---- ----
Land $143,000 $143,000 Building and improvements 1,818,633 1,818,633 Machinery and equipment 3,106,412 3,094,390 Office equipment and fixtures 1,644,200 1,597,618 --------- --------- 6,712,245 6,653,641 Less: Accumulated depreciation 6,158,143 5,994,743 --------- --------- $554,102 $658,898 ========== ==========
4. CREDIT FACILITIES
The Company has unused aggregate lines of credit totaling $750,000 collateralized by inventory, equipment and accounts receivable.
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 were matched at a rate of 100% of an employee's first 6% of contributions during fiscal 2006. The maximum corporate match was 6% of an employee's compensation during fiscal 2006.
The Company's matching contributions to the 401-K plan for the years ended September 30, 2006, 2005 and 2004 were $97,748, $72,126 and $67,675, respectively. Additionally, the Company may make discretionary contributions to the non-contributory profit sharing plan. These contributions were $0, $62,000 and $0 in 2006, 2005 and 2004, respectively.
6. OBLIGATIONS UNDER OPERATING LEASES
The Company leases equipment under operating lease agreements expiring at various dates through September 30, 2009. Rental expense under these leases for the years ended September 30, 2006, 2005 and 2004 amounted to $11,159, $11,180 and $11,074, respectively.
Minimum rental commitments at September 30, 2006 for these leases are:
Year Ended Lease September 30 Payments ------------ -------- 2007 11,159 2008 9,587 2009 2,436 2010 0 2011 0 ------- $23,182 =======
7. INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended September 30 2006 2005 2004 Currently payable: Federal ($128,967) $71,500 ($100,913) State 650 650 425 Deferred (credit) 90,785 (32,395) 246,377 ------- ------- ------- ($37,532) $39,755 $145,889 ======= ======= ========
A reconciliation of the statutory federal income tax rate and the Company's effective income tax rate is as follows:
Year ended September 30 ______2006______ ______2005______ ______2004______ Amount % Amount % Amount % Statutory tax rate ($152,620)(34.0%) $119,668 34.0% ($10,346) (34.0%) Surtax exemption State income tax net of: Federal benefit 429 0.1% 429 0.1% 0 0.0% Research and experimentation tax credits 0 0.0% (26,431) (7.5%) 0 0.0% Valuation allowance 90,785 20.2% 0 0.0% 246,377 809.7% Revision of estimated taxes payable 0 0.0% 0 0.0% (92,907)(305.3%) Federal AMT rate differential 0 0.0% (54,255)(15.4%) 0 0.0% Other 23,874 5.3% 344 0.1% 2,765 9.1% ------- ---- ------- ---- -------- ----- ($37,532) (8.4%) $39,755 11.3% $145,889 479.5% ======= ==== ======= ==== ======== =====
The temporary differences which give rise to deferred tax assets and (liabilities) at September 30 are as follows:
2006 2005 ---- ---- Inventory $138,789 $129,527 Accrued warranty 4,250 4,250 Accrued vacation 61,242 64,300 Accounts receivable 3,923 5,573 Valuation allowance (208,204) (220,502) ------- ------- Net deferred tax assets (liabilities) - current $0 ($16,852) -------- -------
Accelerated depreciation ($11,983) ($38,482) Research and experimentation tax credit carry forward 143,458 116,121 AMT credit carry forward 39,399 39,399 Valuation allowance (170,874) (67,791) ------- ------- Net deferred tax assets (liabilities) - noncurrent $0 $49,247 ------- ------- Net deferred tax assets $0 $32,395 ======== =======
As required by Statement of Financial Accounting Standards No. 109, 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. The research and experimentation tax credit carry forwards expire in 2025. At September 30, 2006, the Company's federal AMT credit can be carried forward indefinitely.
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) 2006 2005 2004 Net Sales (Unaffiliated): MFC $4,516 $5,345 $4,645 NSI 21 188 231 Total $4,537 $5,533 $4,876
Operating Profit (Loss): (a) MFC ($476) $297 $32 NSI (53) (13) (96) Total ($529) $284 ($64)
Identifiable Assets: (b) MFC $2,386 $2,680 $2,671 NSI 35 52 139 Subtotal 2,421 2,732 2,810 Corporate Assets-Cash and Cash Equivalents 706 1,252 817 Total $3,127 $3,984 $3,627
Depreciation Expense: MFC $163 $196 $219 NSI 0 2 4 Total $163 $198 $223
Capital Expenditures: MFC $ 59 $ 59 $ 47 NSI 0 0 0 Total $ 59 $ 59 $ 47
Significant Export Sales: MFC $279 $355 $309
Customers:
In 2005, sales to one MFC customer totaled approximately $624,000 and exceeded 10% of consolidated net sales.
(a) Operating profit (loss) is total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: interest income, 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.
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. On June 21, 2004, the Board of Directors granted ISOs totaling 115,000 shares and NQSOs totaling 35,000 shares at an exercise price of $1.47. All options granted were 100% vested.
A summary of all stock option activity and information related to all options outstanding follows:
10. LEGAL MATTERS
There are currently no material pending legal proceedings against the Company or its subsidiaries.
11. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth certain unaudited quarterly financial information For the years ended September 30, 2006 and 2005:
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.
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
* Previously filed
Microwave Filter Company and Subsidiaries
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
SEPTEMBER 30, 2006, 2005 and 2004