-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RArIrJn13ak1GI9SYBo/4hv/vytjGBdvcVq+hIG0uR+VKQruCWXrIqy764t1JfSc Ny8/4WkuSPNslRfh/cAIOg== 0000716688-06-000004.txt : 20060810 0000716688-06-000004.hdr.sgml : 20060810 20060810153914 ACCESSION NUMBER: 0000716688-06-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060810 DATE AS OF CHANGE: 20060810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROWAVE FILTER CO INC /NY/ CENTRAL INDEX KEY: 0000716688 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 160928443 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10976 FILM NUMBER: 061021194 BUSINESS ADDRESS: STREET 1: 6743 KINNE ST CITY: E SYRACUSE STATE: NY ZIP: 13057 BUSINESS PHONE: 3154373953 MAIL ADDRESS: STREET 1: 6743 KINNE ST CITY: EAST SYRACUSE STATE: NY ZIP: 13057 10-Q 1 mfc10q.txt MFC 10-Q FOR 3RD QUARTER 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2006 Commission file number 0-10976 MICROWAVE FILTER COMPANY, INC. (Exact name of registrant as specified in its charter.) New York 16-0928443 (State of Incorporation) (I.R.S. Employer Identification Number) 6743 Kinne Street, East Syracuse, N.Y. 13057 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (315) 438-4700 Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check one): Large Accelerated Filer ( ) Accelerated Filer ( ) Non-Accelerated Filer ( X ) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ( ) NO ( X ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common Stock, $.10 Par Value - 2,902,352 shares as of June 30, 2006. PART I. - FINANCIAL INFORMATION MICROWAVE FILTER COMPANY, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands) June 30, 2006 September 30, 2005 (Unaudited) Assets Current Assets: Cash and cash equivalents $ 776 $ 1,252 Investments 804 823 Accounts receivable-trade, net 330 495 Federal and state income tax recoverable 50 0 Inventories 519 556 Prepaid expenses and other current assets 90 150 ------- ------- Total current assets 2,569 3,276 Property, plant and equipment, net 581 659 Deferred tax asset - noncurrent 49 49 ------- ------- Total assets $ 3,199 $ 3,984 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 131 $ 190 Customer deposits 37 10 Accrued federal and state income taxes 0 23 Accrued payroll and related expenses 62 60 Accrued compensated absences 230 228 Other current liabilities 53 142 ------- ------- Total current liabilities 513 653 ------- ------- Total liabilities 513 653 ------- ------- Stockholders' Equity: Common stock,$.10 par value 432 432 Additional paid-in capital 3,249 3,249 Retained earnings 525 1,159 ------- ------- 4,206 4,840 Common stock in treasury, at cost (1,520) (1,509) ------- ------- Total stockholders' equity 2,686 3,331 ------- ------- Total liabilities and stockholders' equity $ 3,199 $ 3,984 ======= ======= See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005 (Unaudited) (Amounts in thousands, except per share data) Three months ended Nine months ended June 30 June 30 2006 2005 2006 2005 Net sales $1,098 $1,547 $3,472 $4,140 Cost of goods sold 785 903 2,317 2,508 ------ ------ ------ ------ Gross profit 313 644 1,155 1,632 Selling, general and administrative expenses 513 505 1,557 1,416 ------ ------ ------ ------ (Loss) income from operations (200) 139 (402) 216 Other income (net), principally interest 22 12 60 30 ------ ------ ------ ------ (Loss) income before income taxes (178) 151 (342) 246 Provision for income taxes 0 30 0 38 ------ ------ ------ ------ NET (LOSS) INCOME ($178) $121 ($342) $208 ====== ====== ====== ====== Per share data: Basic (loss) earnings per share ($0.06) $0.04 ($0.12) $0.07 ====== ====== ====== ====== Diluted (loss) earnings per share ($0.06) $0.04 ($0.11) $0.07 ====== ====== ====== ====== Shares used in computing net (loss) earnings per share: Basic 2,902 2,910 2,906 2,908 Diluted 3,041 3,048 3,045 3,050 See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005 (Unaudited) (Amounts in thousands) Nine months ended June 30 2006 2005 Cash flows from operating activities: Net (loss) income ($ 342) $ 208 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 122 148 Change in assets and liabilities: Accounts receivable 165 2 Federal and state income tax recoverable (50) 0 Inventories 37 29 Prepaid expenses & other assets 60 3 Accounts payable & accrued expenses (168) (6) Customer deposits 27 (44) Federal and state income tax taxes payable (0) 38 ----- ----- Net cash (used in) provided by operating activities (149) 378 ----- ----- Cash flows from investing activities: Investments 19 19 Capital expenditures (44) (52) ----- ----- Net cash used in investing activities (25) (33) ----- ----- Cash flows from financing activities: Stock options exercised 0 9 Purchase of treasury stock (11) (2) Cash dividend paid (291) 0 ----- ----- Net cash (used in) provided by financing activities (302) 7 ----- ----- (Decrease) increase in cash and cash equivalents (476) 352 Cash and cash equivalents at beginning of period 1,252 818 ----- ----- Cash and cash equivalents at end of period $ 776 $1,170 ===== ====== See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 Note 1. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The operating results for the nine month period ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ended September 30, 2006. 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, 2005. Note 2. Industry Segment Data The Company's primary business segments involve (1) operations of Microwave Filter Company, Inc. (MFC) which designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics; and (2) Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, which custom designs case packing machines to automatically pack products into shipping cases. Customers are typically processors of food and other commodity products with a need to reduce labor cost with a modest investment and quick payback. Information by segment is as follows: Three months ended Nine months ended (thousands of dollars) June 30, June 30, 2006 2005 2006 2005 Net Sales (Unaffiliated): MFC $1,091 $1,542 $3,453 $3,957 NSI 7 5 19 183 ------ ------ ------ ------ Total $1,098 $1,547 $3,472 $4,140 ====== ====== ====== ====== Operating (loss) profit: (a) MFC ($192) $152 ($367) $212 NSI (8) (13) (35) 4 ----- ----- ----- ----- Total ($200) $139 ($402) $216 ===== ===== ===== ===== Identifiable assets: (b) MFC $2,375 $2,589 $2,375 $2,589 NSI 48 72 48 72 ------ ------ ------ ------ Subtotal 2,423 2,661 2,423 2,661 Corporate Assets - Cash And Cash Equivalents 776 1,170 776 1,170 ------ ------ ------ ------ Total $3,199 $3,831 $3,199 $3,831 ====== ====== ====== ====== (a) Operating profit (loss) is total revenue less cost of goods sold and operating expenses. In computing operating profit, none of the following items have been added or deducted: interest expense, income taxes and miscellaneous income. Expenses incurred on behalf of both Companies are allocated based upon estimates of their relationship to each entity. (b) Identifiable assets by industry are those assets that are used in the Companies operations in each industry. Note 3. Cash Dividend On November 9, 2005, the Board of Directors of Microwave Filter Company, Inc. declared a ten cents per share cash dividend to shareholders of record on December 9, 2005 to be distributed on January 9, 2006. The cash dividend totaled $290,914. Note 4. 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: (thousands of dollars) June 30, 2006 September 30, 2005 Raw materials and stock parts $428 $448 Work-in-process 41 42 Finished goods 50 66 ---- ---- $519 $556 ==== ==== The Company's reserve for obsolescence equaled $362,139 at June 30, 2006 and September 30, 2005. Note 5. 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. As a result of the Company's losses, the Company recorded a non-cash charge to establish a valuation allowance of $288,293 against net deferred tax assets during the fiscal year ended September 30, 2004. The charge was calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Evidence, such as operating results during the most recent three- year period, is given more weight when due to our current lack of visibility, there is a greater degree of uncertainty that the level of future profitability needed to record the deferred tax assets will be achieved. The Company's losses for that three-year period represented sufficient negative evidence to require a valuation allowance under the provisions of SFAS 109. The Company will maintain a valuation allowance until sufficient positive evidence exists to support its reduction or reversal. Note 6. 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. We account for our incentive stock plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for stock issued to employees. No compensation expense has been recognized in the accompanying financial statements relative to our stock option plan. A summary of all stock option activity and information related to all options outstanding follows:
Nine months ended June 30, 2006 ----------------- ISOs NQSOs -------- -------- Exercise Shares Exercise Shares Price Price -------- -------- -------- -------- Outstanding at beginning of period $1.47 108,548 $1.47 30,000 Granted - 0 - 0 Exercised - 0 - 0 Cancelled - 0 - 0 ------ -------- ------ -------- Outstanding at end of period $1.47 108,548 $1.47 30,000 ------ -------- ------ -------- Exercisable at end of period $1.47 108,548 $1.47 30,000 ------ -------- ------- --------
MICROWAVE FILTER COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Microwave Filter Company, Inc. operates primarily in the United States and principally in two industries. The Company extends credit to business customers based upon ongoing credit evaluations. Microwave Filter Company, Inc. (MFC) designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio, commercial communications and defense electronics. Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, custom designs case packing machines to automatically pack products into shipping cases. Customers are typically processors of food and other commodity products with a need to reduce labor cost with a modest investment and quick payback. Critical Accounting Policies The Company's consolidated financial statements are based on the application of generally accepted accounting principles (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, and taxes. Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 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. 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 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. As a result of the Company's losses, the Company recorded a non-cash charge to establish a valuation allowance of $288,293 against net deferred tax assets for the fiscal year ended September 30, 2004. The charge was calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance. Evidence, such as operating results during the most recent three- year period, is given more weight when due to our current lack of visibility, there is a greater degree of uncertainty that the level of future profitability needed to record the deferred tax assets will be achieved. The Company's losses for that three-year period represented sufficient negative evidence to require a valuation allowance under the provisions of SFAS 109. The Company will maintain a valuation allowance until sufficient positive evidence exists to support its reduction or reversal. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2006 vs. THREE MONTHS ENDED JUNE 30, 2005 The following table sets forth the Company's net sales by major product group for the three months ended June 30, 2006 and 2005. Product group (in thousands) Fiscal 2006 Fiscal 2005 Niagara Scientific $ 7 $ 5 Microwave Filter: Cable TV 503 808 Satellite 222 281 RF/Microwave 353 423 Broadcast TV 13 30 ------ ------ Total $1,098 $1,547 ====== ====== Sales backlog at 6/30 $ 418 $ 455 ====== ====== Net sales for the three months ended June 30, 2006 equaled $1,098,396, a decrease of $448,762 or 29%, when compared to net sales of $1,547,158 for the three months ended June 30, 2005. MFC sales for the three months ended June 30, 2006 equaled $1,091,350, a decrease of $450,763 or 29.2%, when compared to sales of $1,542,113 for the three months ended June 30, 2005. The decrease in MFC sales can primarily be attributed to a decrease in the sales of the Company's standard Cable TV products. MFC's Cable TV product sales decreased $304,388 or 37.7% to $503,352 during the three months ended June 30, 2006 when compared to Cable TV product sales of $807,740 during the same period last year. Management attributes the decrease in Cable TV product sales to the transition from analog to digital television and the shipment of one order totaling approximately $200,000 during the quarter ended June 30, 2005. MFC's RF/Microwave product sales decreased $70,783 or 16.7% to $352,652 for the three months ended June 30, 2006 when compared to RF/Microwave product sales of $423,435 during the same period last year. MFC's RF/Microwave products are sold primarily to original equipment manufacturers (OEMs) 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 (Original Equipment Manufacturer) market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. MFC's Satellite product sales, which consist primarily of TVRO Interference Filters which suppress strong out-of-band interference caused by military and civilian radar systems, decreased $59,007 or 21% to $222,105 during the three months ended June 30, 2006 when compared to sales of $281,112 during the three months ended June 30, 2005. With the proliferation of earth stations world wide and increased sources of interference, management expects demand for these types of filters to continue. MFC's Broadcast TV/Wireless cable product sales decreased $16,585 or 55.6% to $13,241 during the three months ended June 30, 2006 when compared to sales of $29,826 during the three months ended June 30, 2005 due to a decrease in demand for UHF Broadcast products. MFC's sales order backlog equaled $418,430 at June 30, 2006 compared to sales order backlog of $692,595 at September 30, 2005 and $455,142 at June 30, 2005. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period. Approximately 80% of the sales order backlog at June 30, 2006 is scheduled to ship by September 30, 2006. NSI sales for the three months ended June 30, 2006 equaled $7,046 compared to sales of $5,045 for the three months ended June 30, 2005. For the last six quarters NSI's sales have consisted primarily of spare part orders and management expects this trend to continue. Gross profit for the three months ended June 30, 2006 equaled $312,785, a decrease of $331,713 or 51.5%, when compared to gross profit of $644,498 for the three months ended June 30, 2005. As a percentage of sales, gross profit equaled 28.5% for the three months ended June 30, 2006 compared to 41.7% for the three months ended June 30, 2005. The decreases in gross profit can primarily be attributed to the decrease in sales volume this year when compared to the same period last year, resulting in a lower base to absorb fixed expenses. Selling, general and administrative (SGA) expenses for the three months ended June 30, 2006 equaled $512,912, an increase of $7,756 or 1.5%, when compared to SG&A expenses of $505,156 for the three months ended June 30, 2005. As a percentage of sales, SGA expenses increased to 46.7% for the three months ended June 30, 2006 compared to 32.7% for the three months ended June 30, 2005 primarily due to the lower sales volume this year compared to the same period last year. The Company recorded a loss from operations of $200,127 for the third quarter ended June 30, 2006 compared to income from operations of $139,342 for the three months ended June 30, 2005. The decrease 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 June 30, 2006 equaled $21,612, an increase of $9,592 when compared to other income of $12,020 for the three months ended June 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 when compared to the same period last year. Other income may fluctuate based on market interest rates and levels of invested cash balances. The provision (benefit) for income taxes equaled $0 for the three months ended June 30, 2006. The benefit for the current year loss has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. NINE MONTHS ENDED JUNE 30, 2006 vs. NINE MONTHS ENDED JUNE 30, 2005 The following table sets forth the Company's net sales by major product group for the nine months ended June 30, 2006 and 2005. Product group (in thousands) Fiscal 2006 Fiscal 2005 Niagara Scientific $ 19 $ 183 Microwave Filter: Cable TV 1,275 1,894 Satellite 726 727 RF/Microwave 1,375 1,197 Broadcast TV 77 139 ------ ------ Total $3,472 $4,140 ====== ====== Net sales for the nine months ended June 30, 2006 equaled $3,471,660, a decrease of $667,972 or 16.1%, when compared to net sales of $4,139,632 for the nine months ended June 30, 2005. MFC sales for the nine months ended June 30, 2006 equaled $3,452,737, a decrease of $504,231 or 12.7%, when compared to sales of $3,956,968 for the nine months ended June 30, 2005. The decrease in MFC sales can primarily be attributed to a decrease in the sales of the company's Cable TV products. MFC's Cable TV product sales decreased $618,911 or 32.7% to $1,275,344 during the nine months ended June 30, 2006 when compared to Cable TV product sales of $1,894,255 during the nine months ended June 30, 2005. The decrease can primarily be attributed to the transition from analog to digital television. MFC's RF/Microwave product sales increased $177,448 or 14.8% to $1,374,767 for the nine months ended June 30, 2006 when compared to RF/Microwave product sales of $1,197,319 during the same period last year. The Company continues to invest in production engineering and infrastructure development to penetrate OEM (Original Equipment Manufacturer) market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. MFC's Broadcast TV/Wireless cable product sales decreased $62,198 or 44.7% to $76,837 during the nine months ended June 30, 2006 when compared to sales of $139,035 during the nine months ended June 30, 2005 due primarily to a decrease in demand for UHF Broadcast products. NSI sales for the nine months ended June 30, 2006 equaled $18,923, a decrease of $163,741, when compared to sales of $182,664 for the nine months ended June 30, 2005. NSI sales for fiscal 2006 consist primarily of spare part orders. Gross profit for the nine months ended June 30, 2006 equaled $1,154,609 a decrease of $476,977, or 29.2%, when compared to gross profit of $1,631,586 for the nine months ended June 30, 2005. As a percentage of sales, gross profit equaled 33.3% for the nine months ended June 30, 2006 compared to 39.4% for the nine months ended June 30, 2005. The decreases in gross profit can be attributed to the lower sales volume this year when compared to last year resulting in a lower base to absorb fixed expenses. SG&A expenses for the nine months ended June 30, 2006 equaled $1,556,369, an increase of $140,795 or 9.9%, when compared to SG&A expenses of $1,415,574 for the nine months ended June 30, 2005. The increase can primarily be attributed to increases in payroll and payroll related expenses, marketing expenses and sales commissions during the nine months ended June 30, 2006 when compared to the same period last year. SGA expenses equaled 44.8% of sales for the nine months ended June 30, 2006 compared to 34.2% of sales for the nine months ended June 30, 2005 due to both the lower sales volume and higher SGA expenses this year when compared to the same period last year. The Company recorded a loss from operations of $401,760 for the nine months ended June 30, 2006 compared to income from operations of $216,012 for the nine months ended June 30, 2005. The decrease can primarily be attributed to the lower sales volume and higher SGA expenses this year when compared to the same period last year. Other income for the nine months ended June 30, 2006 equaled $59,549, an increase of $30,003, when compared to other income of $29,546 for the nine months ended June 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 when compared to the same period last year. Other income may fluctuate based on market interest rates and levels of invested cash balances. The provision (benefit) for income taxes equaled $0 for the nine months ended June 30, 2006. The benefit for the current year loss has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. Off-Balance Sheet Arrangements At June 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. LIQUIDITY and CAPITAL RESOURCES June 30, 2006 Sep. 30, 2005 Cash & cash equivalents $776,394 $1,251,594 Investments $803,600 $822,651 Working capital $2,056,302 $2,622,768 Current ratio 5.00 to 1 5.02 to 1 Long-term debt $ 0 $ 0 Cash and cash equivalents decreased $475,200 to $776,394, at June 30,2006 when compared to cash and cash equivalents of $1,251,594 at September 30, 2005. The decrease was a result of $148,438 in net cash used in operating activities, $24,569 in net cash used in investing activities and $302,193 in net cash used in financing activities. Cash used in operating activities can primarily be attributed to the net loss before depreciation and amortization. The net decrease of $165,226 in accounts receivable at June 30, 2006, when compared to September 30, 2005, can primarily be attributed to the decrease in sales during the quarter ended June 30, 2006 when compared to the quarter ended September 30, 2005. The decrease in accounts payable of $59,458 at June 30, 2006, when compared to September 30, 2005, can be attributed to a decrease in purchases during the quarter ended June 30, 2006 when compared to the quarter ended September 30, 2005 primarily due to the lower sales volume. Cash used in investing activities during the nine months ended June 30, 2006 consisted of funds provided by the sale of investments of $19,051 and funds used for capital expenditures of $43,620. Cash used in financing activities during the nine months ended June 30, 2006 consisted of funds used to pay a cash dividend of $290,914 and funds used to purchase treasury stock of $11,279. At June 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 forseeable 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. Our inability to introduce new and enhanced products on a timely basis. Market acceptance of newly developed products may be slower than anticipated. Pricing pressures from our customers and/or market pressure from competitors may reduce selling prices. Difficulty in obtaining an adequate supply of raw materials or components at reasonable prices. Loss of key personnel or the inability to attract new employees. Governmental regulatory actions could adversely affect our business. RECENT PRONOUNCEMENTS - ---------------------- In May 2005, the FASB published Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections. Statement 154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements. The Statement changes the accounting for, and reporting of, a change in accounting principle. Statement 154 requires retrospective application to prior periods' financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Statement 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 (the Company's fiscal 2007). Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005 (the Company's fiscal 2006). 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 2005 Annual Report and Form 10-K for the fiscal year ended September 30, 2005 and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or "incorporated by reference" from other documents. You can find many of these statements by looking for words like "believes," "expects," "anticipates," "estimates," or similar expressions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in our exposures to market risk during the nine months ended June 30, 2006. For a detailed discussion of market risk, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk. ITEM 4. 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 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q, 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 period covered by this Quarterly Report on Form 10-Q, 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is unaware of any material threatened or pending litigation against the Company. Item 1A. The Company is exposed to certain risk factors that may effect operations and/or financial results. The significant factors known to the Company are described in the Company's most recently filed annual report on Form 10-K and above. There have been no material changes from the risk factors as previously disclosed in the Company's annual report on Form 10-K. Item 2. Changes in Securities None during this reporting period. Item 3. Defaults Upon Senior Securities The Company has no senior securities. Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 31.1 Section 13a-14(a)/15d-14(a) Certification of Carl F. Fahrenkrug 31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones 32.1 Section 1350 Certification of Carl F. Fahrenkrug 32.2 Section 1350 Certification of Richard L. Jones b. Reports on Form 8-K None. Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROWAVE FILTER COMPANY, INC. August 10, 2006 Carl F. Fahrenkrug (Date) -------------------------- Carl F. Fahrenkrug Chief Executive Officer August 10, 2006 Richard L. Jones (Date) -------------------------- Richard L. Jones Chief Financial Officer EX-31 3 ex31.txt EXHIBIT 31 Exhibit 31.1 CERTIFICATION I, Carl F. Fahrenkrug, Chief Executive Officer of Microwave Filter Company, Inc. certify that: 1. I have reviewed this Form 10-Q of Microwave Filter Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: August 10, 2006 /s/ Carl F. Fahrenkrug Carl F. Fahrenkrug Exhibit 31.2 CERTIFICATION I, Richard L. Jones, Chief Financial Officer of Microwave Filter Company, Inc. certify that: 1. I have reviewed this Form 10-Q of Microwave Filter Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: August 10, 2006 /s/ Richard L. Jones Richard L. Jones EX-32 4 ex32.txt EXHIBIT 32 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Carl F. Fahrenkrug, Chief Executive Officer of Microwave Filter Company, Inc. (the Company), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the quarterly Report on Form 10-Q of the Company for the period ended June 30, 2006 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 10, 2006 /s/ Carl F. Fahrenkrug Carl F. Fahrenkrug Chief Executive Officer Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard L. Jones, Chief Financial Officer of Microwave Filter Company, Inc. (the Company), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the quarterly Report on Form 10-Q of the Company for the period ended June 30, 2006 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 10, 2006 /s/ Richard L. Jones Richard L. Jones Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----