NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
Note 1. Summary of Significant Accounting
Policies
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation
S-K. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The
operating results for the three month period ended December 31,
2012 are not necessarily indicative of the results that may be
expected for the year ended September 30, 2013. For further
information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10K
for the year ended September 30, 2012.
Note 2. Industry Segment Data
The Company's business involves the operations of
Microwave Filter Company, Inc. (MFC) which designs, develops,
manufactures and sells electronic filters, both for radio and
microwave frequencies, to help process signal distribution and to
prevent unwanted signals from disrupting transmit or receive
operations. Markets served include cable television, television
and radio broadcast, satellite broadcast, mobile radio, commercial
communications and defense electronics.
Note 3.
Inventories
Inventories are stated at the lower of cost determined on
the first-in, first-out method or market.
Inventories net of
reserve for obsolescence consisted of the following:
December
31, 2012
|
September
30, 2012
|
|
|
|
|
|
|
|
|
|
|
Raw
materials and stock parts
|
|
|
$
|
468,732
|
|
$
|
455,000
|
|
Work-in-process
|
|
|
|
14,170
|
|
|
13,554
|
|
Finished
goods
|
|
|
|
70,135
|
|
|
60,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
553,037
|
|
$
|
529,075
|
|
The Company's reserve for obsolescence equaled $408,340 at
December 31, 2012 and September 30, 2012.
<PAGE>
6
Note
4. Income Taxes
The Company accounts for income taxes under FASB ASC 740-10.
Deferred tax assets and liabilities are based on the difference
between the financial statement and tax basis of assets and
liabilities as measured by the enacted tax rates which are
anticipated to be in effect when these differences reverse. The
deferred tax provision is the result of the net change in the
deferred tax assets and liabilities. A valuation allowance is
established when it is necessary to reduce deferred tax assets to
amounts expected to be realized. The Company has provided a full
valuation allowance against its deferred tax assets.
FASB ASC 740-10 clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements
and prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax position taken or expected
to be taken on a tax return. Additionally, it provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The Company determined
it has no uncertain tax positions and therefore no amounts are
recorded.
Note 5. Legal Matters
The State of New York Workers’ Compensation Board has
commenced an action against Microwave Filter Company, Inc. to
recover for an underfunded self insured program that Microwave
Filter Company, Inc. participated in. Due to the relatively short
period of time Microwave Filter Company, Inc. participated in the
program and the limited amount of potential exposure, we do not
expect the resolution of this action will have a material adverse
effect on our financial condition, results of operations or cash
flows. The Company has accrued $12,000 for this action in other
current liabilities.
Note 6. Fair Value of Financial Instruments
The carrying values of the Company cash and cash equivalents,
accounts receivable and accounts payable approximate fair value
because of the short maturity of those instruments.
The Company currently does not trade in or utilize
derivative financial instruments.
Note 7. Significant Customers
Sales to one customer represented approximately 22% of
total sales for the three months ended December 31, 2012 compared
to 16% of total sales for the three months ended December 31,
2011.
Note 8. Recent Accounting Pronouncements
None applicable
.
<PAGE>
7
MICROWAVE FILTER COMPANY, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Microwave Filter Company, Inc. operates primarily in
the United States and principally in one industry. The Company
extends credit to business customers based upon ongoing credit
evaluations. Microwave Filter Company, Inc. (MFC) designs,
develops, manufactures and sells electronic filters, both for
radio and microwave frequencies, to help process signal
distribution and to prevent unwanted signals from disrupting
transmit or receive operations. Markets served include cable
television, television and radio broadcast, satellite broadcast,
mobile radio, commercial communications and defense electronics.
Critical Accounting Policies
The Company's consolidated financial statements are based
on the application of United States generally accepted accounting
principles (GAAP). GAAP requires the use of estimates,
assumptions, judgments and subjective interpretations of
accounting principles that have an impact on the assets,
liabilities, revenue and expense amounts reported. The Company
believes its use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently applied.
Valuations based on estimates are reviewed for reasonableness and
adequacy on a consistent basis throughout the Company. Primary
areas where financial information of the Company is subject to the
use of estimates, assumptions and the application of judgment
include revenues, receivables, inventories, and taxes. Note 1 to
the consolidated financial statements in our Annual Report on Form
10-K for the fiscal year ended September 30, 2012 describes the
significant accounting policies used in preparation of the
consolidated financial statements. The most significant areas
involving management judgments and estimates are described below
and are considered by management to be critical to understanding
the financial condition and results of operations of the Company.
Revenues from product sales are recorded as the
products are shipped and title and risk of loss have passed to the
customer, provided that no significant vendor or post-contract
support obligations remain and the collection of the related
receivable is probable. Billings in advance of the Company's
performance of such work are reflected as customer deposits in the
accompanying consolidated balance sheet.
Allowances for doubtful accounts are based on
estimates of losses related to customer receivable balances. The
establishment of reserves requires the use of judgment and
assumptions regarding the potential for losses on receivable
balances.
The Company's inventories are stated at the lower of
cost determined on the first-in, first-out method or market. The
Company uses certain estimates and judgments and considers several
factors including product demand and changes in technology to
provide for excess and obsolescence reserves to properly value
inventory.
<PAGE>
8
The Company established a warranty reserve which provides for
the estimated cost of product returns based upon historical
experience and any known conditions or circumstances. Our warranty
obligation is affected by product that does not meet specifications
and performance requirements and any related costs of addressing
such matters.
The Company accounts for income taxes under FASB ASC
740-10. Deferred tax assets and liabilities are based on the
difference between the financial statement and tax basis of assets
and liabilities as measured by the enacted tax rates which are
anticipated to be in effect when these differences reverse. The
deferred tax provision is the result of the net change in the
deferred tax assets and liabilities. A valuation allowance is
established when it is necessary to reduce deferred tax assets to
amounts expected to be realized. The Company has provided a full
valuation allowance against its deferred tax assets.
<PAGE>
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2012 vs.
THREE MONTHS ENDED DECEMBER 31, 2011.
The following table sets forth the
Company's net sales by major product group for the three months
ended December 31, 2012 and 2011.
|
|
Quarter ended
|
|
|
Quarter ended
|
|
Product group
|
Dec. 31, 2012
|
|
Dec. 31, 2011
|
|
Microwave Filter (MFC):
|
|
|
|
|
|
|
RF/Microwave
|
$
|
324,127
|
|
$
|
525,932
|
|
Cable TV
|
|
183,390
|
|
|
433,447
|
|
Satellite
|
|
243,130
|
|
|
331,354
|
|
Broadcast
TV
|
|
18,627
|
|
|
25,128
|
|
Niagara
Scientific (NSI):
|
|
1,970
|
|
|
1,346
|
|
|
|
|
|
|
|
|
Total
|
$
|
771,244
|
|
$
|
1,317,207
|
|
|
|
|
|
|
|
|
Sales
backlog at December 31
|
$
|
325,852
|
|
$
|
303,666
|
|
Net sales for the three months ended December 31, 2012
equaled $771,244, a decrease of $545,963 or 41.4%, when compared to
net sales of $1,317,207 for the three months ended December 31,
2011. The Company has been experiencing a slowdown in quote activity
and orders which management attributes to the specific decrease in
the economic activity in the military/aerospace sector and related
national and international markets. It is believed that the
documented general slowdown in business capital expenditures has
exacerbated the turn down in MFC sales activity. Many of MFC
products are utilized in capital projects such as new satellite
communication systems and cable plant expansions. The Company is
actively sourcing complimentary products to distribute to augment
sales as well as additions to our traditional product lines.
MFC’s RF/Microwave product sales decreased $201,805 or 38.4%
to $324,127 for the three months ended December 31, 2012 when
compared to RF/Microwave product sales of $525,932 during the same
period last year. MFC’s RF/Microwave products are sold primarily to
Original Equipment Manufacturers that serve the mobile radio,
commercial communications and defense electronics markets. The
Company continues to invest in production engineering and
infrastructure development to penetrate OEM market segments as they
become popular. MFC is concentrating its technical resources and
product development efforts toward potential high volume customers
as part of a concentrated effort to provide substantial long-term
growth. Sales to one OEM customer represented approximately 22% of
total sales for the quarter ended December 31, 2012 compared to
approximately 16% of total sales for the quarter ended December 31,
2011.
MFC’s Cable TV product sales decreased $250,057 or 57.7%
to $183,390 for the three months ended December 31, 2012 when
compared to Cable TV product sales of $433,447 during the same
period last year. Management has projected a decrease in demand for
Cable TV products due to the shift from analog to digital
television. Due to the inherent nature of digital modulation versus
analog modulation, fewer filters will be required. The Company has
developed filters for digital television and there will still be
requirements for analog filters for limited applications in
commercial and private cable systems.
<PAGE>
10
MFC’s Satellite product sales decreased $88,224 or
26.6% to $243,130 for the three months ended December 31, 2012
when compared to Satellite product sales of $331,354 during the
same period last year. The decrease can be attributed to a
decrease in demand for the Company’s filters which suppress strong
out-of-band interference caused by military and civilian radar
systems and other sources. Management attributes the decrease in
sales to global economic conditions. Although economic conditions
do impact sales, management expects demand for these types of
filters to continue with the proliferation of earth stations world
wide and increased sources of interference.
MFC’s Broadcast TV/Wireless
Cable product sales decreased $6,501 or 25.9% to $18,627 for the
three months ended December 31, 2011 when compared to sales of
$25,128 during the same period last year. The decrease can be
attributed to a decrease in demand for UHF Broadcast products
which are primarily sold to system integrators for rural
communities.
MFC's sales order backlog equaled $325,852 at December
31, 2012 compared to sales order backlog of $303,666 at December
31, 2011. However, backlog is not necessarily indicative of future
sales. Accordingly, the Company does not believe that its backlog
as of any particular date is representative of actual sales for
any succeeding period. The total sales order backlog at December
31, 2012 is scheduled to ship by September 30, 2013.
Gross profit for the three months ended December 31, 2012
equaled $203,200, a decrease of $300,012 or 59.6%, when compared
to gross profit of $503,212 for the three months ended December
31, 2011. As a percentage of sales, gross profit decreased to
26.3% for the three months ended December 31, 2012 compared to
38.2% for the three months ended December 31, 2011.The decrease in
gross profit can primarily be attributed to fixed manufacturing
overhead costs and lower sales volume this year when compared to
the same period last year.
Selling, general and administrative (SGA) expenses for
the three months ended December 31, 2012 equaled $430,415, an
increase of $8,445 or 2.0%, when compared to SGA expenses of
$421,970 for the three months ended December 31, 2011. As a
percentage of sales, SGA expenses increased to 55.8% for the three
months ended December 31, 2012 when compared to 32.0% for the
three months ended December 31, 2011 primarily due to the lower
sales volume this year when compared to the same period last year.
The Company recorded a loss from operations of $227,215
for the three months ended December 31, 2012 compared to income
from operations of $81,242 for the three months ended December 31,
2011. The decrease in operating income can primarily be attributed
to the lower sales volume this year when compared to the same
period last year.
Other income for the three months ended December 31, 2012
equaled $2,190, a decrease of $19,385, when compared to other
income of $21,575 for the three months ended December 31, 2011.
The decrease can be attributed to a $20,000 gain on the sale of a
fixed asset during the quarter ended December 31, 2011.
The provision (benefit) for income taxes equaled $0 for
the three months ended December 31, 2012 and December 31, 2011. We
have not recognized any provision for income taxes because taxable
income was reduced by bonus tax basis depreciation and offset by a
reduction in our deferred tax asset valuation reserve. Any benefit
for losses has been subject to a valuation allowance since the
realization of the deferred tax benefit is not considered more
likely than not. As required by FASB ASC 740, 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.
<PAGE>
11
Off-Balance Sheet Arrangements
At December 31, 2012 and 2011, 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.
LIQUIDITY and CAPITAL RESOURCES
|
|
|
|
|
December 31, 2012
|
September 30, 2012
|
|
|
|
|
|
Cash & cash equivalents
|
$860,596
|
$1,023,017
|
|
Working capital
|
$1,292,195
|
$1,549,136
|
|
Current ratio
|
4.37 to 1
|
5.10 to 1
|
|
Long-term debt
|
$0
|
$0
|
|
Cash and cash equivalents increased $162,421 to $860,596 at
December 31, 2012 when compared to cash and cash equivalents of
$1,023,017 at September 30, 2012. The decrease was a result of
$89,168 in net cash used in operating activities and $73,253 in net
cash used for capital expenditures.
The net decrease in accounts receivable of $100,422 at
December 31, 2012 when compared to September 30, 2012 can
primarily be attributed to the lower shipments during the quarter
ended December 31, 2012 when compared to the quarter ended
September 30, 2012. Net sales for the quarter ended December 31,
2012 equaled $771,244 compared to net sales of $968,356 for the
quarter ended September 30, 2012.
The increase in inventories of $23,962 at December 31,
2012 when compared to September 30, 2012 can be attributed to the
higher sales order backlog at December 31, 2012 when compared to
September 30, 2012, our customer's scheduled delivery dates and
the lower than expected sales volume during the quarter ended
December 31, 2012. At December 31, 2012, the Company's total
backlog of orders, which represents firm orders from customers,
equaled $325,852 compared to $272,318 at September 30, 2012.
The increase in accounts payable of $22,485 at December 31,
2012 when compared to September 30, 2012 can primarily be
attributed to the higher inventories at December 31, 2012 when
compared to September 30, 2012.
At December 31, 2012, the Company had unused
aggregate lines of credit totaling $750,000 collateralized by all
inventory, equipment and accounts receivable.
Management believes that its working capital requirements
for the forseeable future will be met by its existing cash
balances, future cash flows from operations and its current credit
arrangements.
<PAGE>
12
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
In an effort to provide investors a balanced view of the
Company's current condition and future growth opportunities, this
Quarterly Report on Form 10-Q includes comments by the Company's
management about future performance. These statements which are not
historical information are "forward-looking statements" pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These, and other forward-looking statements, are
subject to business and economic risks and uncertainties that could
cause actual results to differ materially from those discussed.
These risks and uncertainties include, but are not limited to: risks
associated with demand for and market acceptance of existing and
newly developed products as to which the Company has made
significant investments; general economic and industry conditions;
slower than anticipated penetration into the satellite
communications, mobile radio and commercial and defense electronics
markets; competitive products and pricing pressures; increased
pricing pressure from our customers; risks relating to governmental
regulatory actions in broadcast, communications and defense
programs; as well as other risks and uncertainties, including but
not limited to those detailed from time to time in the Company's
Securities and Exchange Commission filings. These forward-looking
statements are made only as of the date hereof, and the Company
undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or
otherwise. You are encouraged to review Microwave Filter Company’s
2012 Annual Report and Form 10-K for the fiscal year ended September
30, 2012 and other Securities and Exchange Commission filings.
Forward looking statements may be made directly in this document or
“incorporated by reference” from other documents. You can find many
of these statements by looking for words like “believes,” “expects,”
“anticipates,” “estimates,” or similar expressions.