SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-KSB
(Mark one)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended________September 30, 1998_____________________________
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from____________to____________________________________
Commission file number__________________0-10976_________________________________
_______________________________Microwave Filter Company, Inc____________________
(Exact name of registrant as specified in its charter)
__________New York__________________________16-0928443__________________________
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
_____6743 Kinne Street, East Syracuse, NY________13057_________________________
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code____(315) 438-4700_____________
Securities registered pursuant to Section 12(b) of the Act:_____None____________
Securities registered pursuant to Section 12(g) of the Act:
_________________________Common stock, par value $.10 per share_________________
Title of class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.__
The aggregate market value of the voting stock held by non-affiliates of the
registrant at the close of business on November 23, 1998 was $2,348,646.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at November 23, 1998: 3,304,583
Documents incorporated by reference: None.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
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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)
Since MFC was founded in 1967, the Company's mission has been to provide its
customers with the highest quality and most economically priced products
delivered on time. The Company has always worked closely with its customers to
provide the exact products necessary for their changing needs. As a result,
the Company has grown to become a state of the art manufacturing facility
which produces large and small filter orders in frequency ranges up to 50 GHz.
It is this commitment to the customer that has kept the Company in business
for over 30 years.
MFC manufactures filters for eliminating interference and signal processing
for such markets as Cable Television, Broadcast, Mobile Communications,
Avionics, Radar, Navigation and Defense Electronics. The Company designs
waveguide, stripline/ microstrip, transmission line, miniature/subminiature
and lumped constant filters in such filter styles as: bandpass, high pass, low
pass bandstop, multiplexers, tunable notch, tunable bandpass, high power
filters, filter networks, amplitude equalized and delay equalized.
Located in East Syracuse, NY, MFC occupies a 40,000 square foot plant where
state of the art equipment, engineering, manufacturing and a strong emphasis
on employee training form the foundation for providing quality products that
meet or often exceed specifications.
The Company actively produces over 1,700 standard products and has designed
more than 5,000 custom products for specialized applications.
When an order for a custom product arrives in-house, members of engineering
and production develop a quality plan to insure that all resources are in
place to design and manufacture a robust product for the customer. This
quality plan allows departments to focus as a team and identify any potential
design or manufacturing challenges before the project begins. Working as a
team encourages input from engineers, designers, fabricators and technicians
to mutually arrive at solutions. By forming a quality plan, the design to
shipping time for products is reduced because problems that could surface
later in production are avoided.
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In the design phase, engineering is equipped with Microstripes software to
perform three dimensional simulations to determine the performance
characteristics of components. Other software both purchased commercially and
developed in-house is used to simulate or verify filter performance. Once a
filter is designed, mechanical designers and drafters, using the latest
version of autocad complete drawings for production.
Facilities are in place to insure that products are manufactured quickly and
efficiently. CAD/CAM systems transfer prints to fabrication where computerized
mills and lathes automatically generate parts. Up to date quality assurance
equipment such as a surface plate with a digital height gauge, optical
comparators and high power Mantis microscopes are used to check components and
verify that they meet specification. The QA Department is compliant with MIL-
I-45208, inspection systems and MIL-STD-45662 calibration systems standards.
There is 100 percent in-process inspection conducted for electrical and
physical characteristics, workmanship and compliance to specifications.
Employee education plays a large part in the production process. All
technicians are well trained in filter design, the use of test and measuring
equipment and the most current soldering standards. A certified instructor is
on staff to train employees in J-STD-001, the ANSI soldering standard for
electrical and electronic assemblies.
Production is divided in two areas. One area handles large volume program
orders, and the other, custom circuits, designs and builds smaller volume
special need filters. Both areas are equipped with the design and test equipment
necessary to insure repeatability and quality. One such facility is a soldering
oven which allows a large number of parts to be soldered consistently and
simultaneously. Once products are complete, Hewlett-Packard scalar and vector
network analyzers are used to test any passive filter from DC to 50 GHz.
Other product testing facilities include environmental chambers capable of
testing products for temperatures of -70 to 200 degrees celsius and humidity to
100 percent. Several amps are available for power tests up to 2500 watts and
220 MHz and 100 watts and 1000 MHz. Antenna specifications in the 2 to 18
GHz range can be measured in an in-house anechoic chamber. Facilities are
also available for salt spray, sand and dust, shock and vibration, RFI leakage
and altitude testing.
MFC is in the final stages of gaining ISO 9001 certification and implementing
total quality management which will formalize the Company's existing commitment
to quality. Its service to customers is already reflected in the many repeat
orders from customers that have depended on the Company from its inception. It
also has received several awards from its customers. The Company is pleased to
serve any customer large or small from the largest prime government contractor
to the smallest broadcast facility. MFC will continue the same mission in the
future as is has in the past of continuing to work as a team with the customer
to deliver the filters the market needs, on time and at the best price.
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Niagara Scientific, Inc. (NSI)
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NSI also includes niche markets in its customer base: industrial customers
not addressed by larger competitors and larger customers having special needs.
Schroeder Machine Division (SMD) - A leading activity is custom designing
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 modest investment and quick payback. Operations are
also characterized by repeat orders as customer production expands.
SMD became a systems integrator for Staubli of Switzerland, manufacturer of
spherical robots used for high speed assembly and packaging operations. The
Staubli robots offer an additional robotic capabilty to Schroeder Machines. In
1997, SMD became a systems integrator for Adept Technology, Inc., of San Jose,
Ca, manufacturer of the SCARA style of robots. Robotics is becoming more
prevalent in the handling of food, pharmaceuticals and other large volume
consumer goods. This new capability will allow SMD to serve its customer base
with the most up-to-date material handling technology.
Schroeder Machines celebrated its 50Th anniversary this year. It marked its
anniversary with the introduction of several new products: 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. An economical compact machine capable of
handling 12 cases per minute was also redesigned and successfully debuted at a
major trade show this fall.
Schroeder Machines is one of the original manufacturers of fully automatic
and semi-automatic Quadnumatic side or end loading case packing machines.
Quadnumatic machines perform 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.
MARKETS
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Microwave Filter Company, Inc. (MFC)
- ------------------------------------
Cable Television (CATV) - MFC serves this industry largely 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 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.
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Since all operators initially receive programming via satellite, products
from our satellite market cross over into cable television. C-band satellite
receive systems are prone to various types of terrestrial interference which
are curable in many cases by applying filters.
Cable television will enjoy market growth in the years ahead as a result of
regulatory and technological changes. Cable television has the infrastructure
in place to offer the consumer a variety of two-way services such as data,
video and telephony. New digital compression technology now makes it possible
to transmit six to 10 channels in the space previously used for one. Cable
television has the ability to offer access to the internet that exceeds ISDN,
a high speed service currently offered by the telephone company, much less
the standard service over the telephone lines that most internet consumers
commonly use. With changes in federal legislation, both cable and telephone
companies have been combining resources and now cable television will no
longer be barred from offering telephone service.
Direct to home satellite is still a competitor to cable television, but it
cannot offer the consumer telephone or internet access. Hence, it is expected
that cable television will be a formidable player in the rush to deliver
consumers two-way service in the 21st century. With market growth, equipment
purchases will increase and MFC will reap financial benefits.
Broadcast - Several areas of broadcast are served by Microwave Filter
Company with the most active being Wireless Cable.
Wireless Cable is a multichannel subscription television service that is a
competitor to cable television. This service delivers programming over-the-
air using microwave frequencies. Television programming is received at
customer sites via a small rooftop antenna. The signals are then
downconverted for reception at the viewers' television sets. There is no
discernible difference between cable and wireless with respect to equipment
installed in subscribers' homes. This service differs from cable television
by its delivery method and that it offers fewer channels. Currently, over 33
channels can be delivered by Wireless Cable. Digital compression techniques
can increase these channels eight fold.
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, additional expensive coaxial or waveguide runs up the tower
become unnecessary.
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.
It was a difficult year for most Wireless Cable Television companies. By
year's end, the top three systems were facing financial problems. Yet members
of the industry remain optimistic that the market will rebound when the
Wireless Cable industry begins to offer two-way services. Wireless Cable has
the technical ability to provide internet access (downloading) at much higher
speeds than over phone lines.
There is opportunity for Wireless Cable growth internationally particularly
in countries where television service is becoming popular but there is no cable
infrastructure in place.
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Cellular Television - A new wireless service. Most people are familiar with
cellular phones but here's a new twist - cellular television or (LMDS). This
system operates like cellular phone in theory. An omni-directional transmitter
at the center of a six mile cell sends out a video signal carrying 49 channels
of programming. Subscribers at locations throughout that cell can receive the
signal with small, square, flat antennas. One system, Cellular Vision USA
already exists in New York City. Now the FCC is preparing to auction off
additional frequencies (between 29 and 31 GHz) for similar services to
establish themselves. Microwave Filter Company sells a notch and bandpass
filter series to remove interference at the transmitter to this new
market.
LPTV - Low Power Television or LPTV is an option in the U.S. as a
multichannel subscription television service. A system similar to Wireless
Cable can be configured to deliver channels of programming to areas
where off air signals cannot be received. The only difference between both
services is broadcast frequency and the type of antenna located at the
subscriber's home. An LPTV receive antenna would look like any other off air
broadcast antenna in contrast to the microwave antenna used for Wireless
Cable. LPTV frequencies are easier to obtain and there are more LPTV than
Wireless channels available. In fact, due to the limited number of Wireless
Cable frequencies, Wireless Cable operators are using a combination of Wireless
and LPTV frequencies to increase the number of channels offered to their
subscribers. As a broadcaster, LPTV differs from traditional television only
in broadcast power. With lower broadcast power, the service has a smaller
reception area than high power broadcast stations.
Microwave Filter Company provides channel combiners and interference filters
for this industry. The channel combiners are used to group channels and
eliminate additional coaxial runs to the broadcast tower. Filters are also
used in broadcast equipment to eliminate interference.
Radio and Television Broadcast - MFC primarily serves these broadcast areas
with interference filters to reduce equipment harmonics. 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 - Filters and traps 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.
Direct Broadcast Satellite or DBS is a version of home satellite programming
delivered direct to the home. It differs from C-band TVRO by the size of the
receive antenna. DBS broadcasts at a higher frequency requiring a smaller
satellite dish than C-band TVRO. Both satellite dealers and cable television
systems market the service to offer consumers television options.
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Mobile Radio - 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. With the number of services increasing and
our air waves becoming more congested, filters are increasingly important to
many transmit operations. Cellular telephone has been the largest mobile
radio growth market. The Cellular market is beginning to level off and now
Personal Communications Services (PCS) is an area of mobile radio on the rise.
Microwave and RF - 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)
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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. Recent customers for typical machines include
DuPont, Knorr, Planters-Lifesavers, the Fountainhead Group, Mutek, Ecco D'oro
Food Coop and CSP Foods.
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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
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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.
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
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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
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There are no significant seasonal fluctuations in the Company's business.
GOVERNMENT CONTRACTS
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The Company is not dependent in any material respect on government contracts.
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BACKLOG
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At September 30, 1998, the Company's total backlog of orders was $746,795
compared to $1,190,048 at September 30, 1997. At September 30, 1998, MFC's
backlog of orders was $647,270 compared to $1,190,048 at September 30, 1997.
At September 30, 1998, NSI's backlog of orders was $99,525 compared to $0 at
September 30, 1997. The total Company backlog at September 30, 1998 is
scheduled to ship during fiscal 1999.
EMPLOYEES
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At September 30, 1998, the Company employed 73 full-time permanent
employees, 4 part-time permanent employees, and 10 full-time temporary
employees.
RESEARCH AND DEVELOPMENT
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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 $490,153, $337,250 and $359,934 for the fiscal years 1998,
1997 and 1996, respectively. Research and development costs are charged to
operations as incurred.
COMPETITION
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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.
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ITEM 2. PROPERTIES.
MFC's office and manufacturing facility is located at 6743 Kinne Street,
East Syracuse, New York. This facility, which is beneficially 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.
MFC's purchase of the facility was financed through the issuance of Onondaga
County Industrial Revenue Bonds. Because of the manner in which the
transaction was structured and in order to afford MFC certain sales and real
property tax abatements, record title to the facility is held by the Onondaga
County Industrial Development Agency (OCIDA). MFC leases the facility from
OCIDA for nominal rent and, upon repayment of the bonds, is required to
purchase the facility from OCIDA for $1.00.
ITEM 3. LEGAL PROCEEDINGS.
There are currently no material pending legal proceedings against the Company
or its subsidiaries.
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.
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PART II
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 1998 High Low
Oct. 1, 1997 to Dec. 31, 1997 $ 1.38 $ .88
Jan. 1, 1998 to Mar. 31, 1998 1.38 .94
Apr. 1, 1998 to June 30, 1998 1.31 1.00
July 1, 1998 to Sept. 30, 1998 1.19 .75
Fiscal 1997 High Low
Oct. 1, 1996 to Dec. 31, 1996 $ 1.38 $ 1.00
Jan. 1, 1997 to Mar. 31, 1997 1.50 1.06
Apr. 1, 1997 to June 30, 1997 1.75 .94
July 1, 1997 to Sept. 30, 1997 1.38 1.00
Adjusted for all stock dividends.
The approximate number of stockholders on September 30, 1998 was 1,800.
On November 4, 1998, the Board of Directors declared a five cents per share
cash dividend to shareholders of record on February 2, 1999, to be distributed
on February 17, 1999.
On October 29, 1997, the Board of Directors declared a five cents per share
cash dividend to shareholders of record on February 3, 1998, to be distributed
on February 18, 1998.
On January 15, 1997, the Board of Directors declared a five cents per share
cash dividend to shareholders of record on February 3, 1997, to be distributed
on February 18, 1997.
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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
<TABLE>
<CAPTION>
September 30
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Sales $ 6,989,106 $ 6,175,425 $ 7,532,710 $ 7,655,198 $ 8,616,861
Net Income (1) $ 69,424 $ 434,772 $ 504,295 $ 19,164 $ 117,529
Earnings Per Share $ .02 $ .12 $ .14 $ .01 $ .03
Weighted Average Number of
Common Shares Outstanding* 3,535,522 3,548,240 3,525,362 3,478,451 3,508,923
Stock (%) Dividends 5% 5% 5%
Cash ($) Dividends Paid $ .05 $ .05 .05
Total Assets $ 5,059,135 $ 5,173,481 $ 5,410,266 $ 5,273,931 $ 5,597,991
Long Term Debt $ 0 $ 46,065 $ 102,774 $ 439,545 $ 583,354
*Adjusted for all stock dividends.
Net income as a percentage of: 1998 1997 1996 1995 1994
Sales............................. 1.0 7.0 6.7 0.3 1.4
Assets............................ 1.4 8.4 9.3 0.4 2.1
Equity............................ 1.7 10.2 12.7 0.5 3.3
</TABLE>
(1) In the fourth quarter of 1997, the Company received life insurance death
benefits of $350,000 as a result of the death of a former officer.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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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, 1998.
Product group (in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
Niagara Scientific $ 211 $ 587 $ 609
Microwave Filter:
Cable TV 3,588 3,592 3,951
RF/Microwave 2,119 740 1,074
Broadcast TV 940 1,096 1,788
Satellite Communications 131 160 111
Total $6,989 $6,175 $7,533
Sales backlog at 9/30 $ 747 $1,190 $1,262
Fiscal 1998 compared to fiscal 1997
Consolidated net sales for the fiscal year ended September 30, 1998 equalled
$6,989,106, an increase of $813,681 or 13.2% when compared to consolidated net
sales of $6,175,425 during the fiscal year ended September 30, 1997.
Microwave Filter Company, Inc. (MFC) sales increased $1,189,932 or 21.3% to
$6,777,794 during the fiscal year ended September 30, 1998 when compared to
sales of $5,587,862 during the fiscal year ended September 30, 1997.
The increase in MFC sales can primarily be attributed to an increase in the
sales of the Company's RF/Microwave products to OEMs (Original Equipment
Manufacturers). MFC's RF/Microwave product sales increased $1,378,589 or
186.2% to $2,119,051 during the fiscal year ended September 30, 1998 when
compared to sales of $740,462 during the the fiscal year ended September 30,
1997. There has been increased demand for filters in the OEM market. Part of
the Company's long term strategy has been to invest in product and
infrastructure development to exploit new markets such as LMDS (Cellular TV),
PCS and PCN; and, continue to develop OEM relationships. This strategy is
proving successful and has helped offset the hiatus in demand in Wireless
Cable; as well as a decrease in sales in the Schroeder Machines Division of
Niagara Scientific, Inc., a wholly owned subsidiary.
MFC's Cable TV product sales were essentially identical to the same period
last year. Net sales were $ 3,587,908, a decrease of $4,282 or 0.1%, during
the fiscal year ended September 30, 1998 when compared to net sales of
$3,592,190 during the fiscal year ended September 30, 1997. Competition in the
form of Direct Broadcast Satellite (DBS) continues to grow at the expense of
the Cable TV industry and this has impacted our sales. DBS offers more
channels and high quality digital reception. However, DBS cannot offer local
stations and is strictly a one-way service. CATV operators, while facing
competition, are beginning to expand their operations. Standards and
technology were introduced by Cable TV operators during 1998 for the
implementation of two-way services as telephony and internet access. Cable has
the capacity to offer clear, reliable and fast services in these areas. With
these new offerings to the marketplace, Cable TV operators will increase their
equipment purchases which should positively impact our sales to this market.
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MFC's Broadcast TV product sales, which includes wireless cable products,
decreased $155,458 or 14.2% to $940,162 during the fiscal year ended September
30, 1998 when compared to sales of $1,095,620 during the fiscal year ended
September 30, 1997. The decrease in sales can primarily be attributed to
market conditions. Demand in the Multichannel Multipoint Distribution Service
(MMDS) continues to be low as operators have waited for the successful testing
and implementation of digital compression technology. Wireless Cable has not
been able to offer services to subscribers that are on a par with Cable
Television or Direct Broadcast Satellite. In addition, the major Wireless
Cable operators in the U.S. are having cash flow problems, and it appears that
industry demand domestically will not improve until additional funding sources
are found. However, there are still viable markets internationally for this
technology, particularly in South America. Under developed countries that are
not wired for Cable Television service are attracted to Wireless Cable which
does not involve as large an effort for installation of service.
Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, sales decreased
$376,251 or 64% to $211,312 for the fiscal year ended September 30, 1998 when
compared to sales of $587,563 for the twelve months ended September 30, 1997.
During the past fiscal year, NSI has expanded its effort to develop new
products by introducing several standard low price products and a new
capability to integrate "Robotics" into case packing and other material
handling machines.
Gross profit increased $262,211 or 10.6% to $2,745,158 during the fiscal
year ended September 30, 1998 when compared to gross profit of $2,482,947
during the fiscal year ended September 30, 1997. The dollar increase in gross
profit during fiscal 1998 when compared to fiscal 1997 can primarily be
attributed to the increase in sales. As a percentage of sales, gross profit
equalled 39.3% during the fiscal year ended September 30, 1998 when compared
to 40.2% during the fiscal year ended September 30, 1997. The Company did
incur significant manufacturing (excess scrap and rework) costs associated
with new product development during the second and primarily the third quarter
of the fiscal year ended September 30, 1998.
Selling, general and administrative (SG&A) expenses increased $288,657 or
11.7% to $2,761,422 during the fiscal year ended September 30, 1998 when
compared to SG&A expenses of $2,472,765 during the fiscal year ended September
30, 1997. As a percentage of sales, SG&A expenses equalled 39.5% during the
fiscal year ended September 30, 1998 when compared to 40% during the fiscal
year ended September 30, 1997. Increases were realized primarily in research
and development expenses, advertising and promotional expenses and sales
commissions expense during fiscal 1998.
14
<PAGE>
Income from operations decreased $26,446 to a loss from operations of $16,264
during the fiscal year ended September 30, 1998 when compared to income from
operations of $10,182 during the fiscal year ended September 30, 1997 primarily
due to the higher SG&A expenses this year when compared to last year.
On an industry segment basis, MFC's income from operations increased $180,028
to $480,051 for the fiscal year ended September 30, 1998 when compared to
income from operations of $300,023 for the fiscal year ended September 30,
1997. The increase can primarily be attributed to the increase in MFC sales.
NSI recorded a loss from operations of $419,778 for the fiscal year ended
September 30, 1998 compared to a loss from operations of $183,675 for the
fiscal year ended September 30, 1997. NSI's loss can primarily be attributed
to low sales volume, increases in research and development and advertising and
promotional expenses, and the absorption of fixed overhead expenses during
fiscal 1998. Corporate expenses decreased $29,629 to $76,537 for the fiscal
year ended September 30, 1998 when compared to $106,166 for the fiscal year
ended September 30, 1997. The decrease can be attributed to a decrease in
legal expenses during fiscal 1998 when compared to fiscal 1997.
Other income decreased $354,751 during the fiscal year ended September 30,
1998 when compared to the fiscal year ended September 30, 1997 primarily due to
the receipt of life insurance death benefits of $350,000, as a result of the
death of a former officer, during fiscal 1997.
The Company's effective income tax rate equalled 4.0% during fiscal 1998
primarily due to the low levels of pre-tax income.
Fiscal 1997 compared to Fiscal 1996
Consolidated net sales for the fiscal year ended September 30, 1997 equalled
$6,175,425, a decrease of $1,357,285 or 18% when compared to consolidated net
sales of $7,532,710 during the fiscal year ended September 30, 1996.
Microwave Filter Company, Inc. (MFC) sales decreased $1,335,644 or 19.3% to
$5,587,862 during the fiscal year ended September 30, 1997 when compared to
sales of $6,923,506 during the fiscal year ended September 30, 1996.
15
<PAGE>
MFC's Cable TV product sales decreased $359,164 or 9.1% to $3,592,190 during
the fiscal year ended September 30, 1997 when compared to sales of $3,951,534
during the fiscal year ended September 30, 1996. The decrease in sales can
primarily be attributed to market conditions. Competition in the form of Direct
Broadcast Satellite (DBS) has enjoyed rapid growth at the expense of the Cable
TV industry and this has impacted our sales. DBS offers more channels and high
quality digital reception. However, DBS cannot offer local stations and is
strictly a one-way service. In the next few years, Cable TV operators will
begin to offer additional two-way services such as telephony and high speed
internet access which will be beyond the technical capabilities of DBS, so
Cable TV will regain some lost market share. Standards and technology are
being developed by Cable TV operators for the implementation of these new
services and once decisions are complete, additional investment in equipment
to build up physical plant will be made and should again positively impact our
sales to this market. MFC has also experienced stiffer competition from other
suppliers. Management has been working diligently to recapture any lost
business and to increase market share through more competitive pricing and an
increased marketing effort.
MFC's Broadcast TV product sales, which includes Wireless Cable products,
decreased $692,019 or 38.7% to $1,095,620 during the fiscal year ended
September 30, 1997 when compared to sales of $1,787,639 during the fiscal year
ended September 30, 1996. The decrease in sales can also be attributed
primarily to market conditions. Demand in the Multichannel Multipoint
Distribution Service (MMDS) has been low. Wireless cable system operators
continue to wait for the successful testing and installation of digital
compression technology. Digital compression technology will provide Wireless
Cable with the ability to offer more channels. Wireless Cable is also a
technology that shows promise in offering two-way data services such as
internet access. The industry continues to remain optimistic about its future.
MFC's RF/Microwave product sales decreased $332,989 or 31% to $740,662 during
the fiscal year ended September 30, 1997 when compared to sales of $1,073,651
during the fiscal year ended September 30, 1996. The decrease in sales can
primarily be attributed to the completion of a large order during the fiscal
year ended September 30, 1996.
Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, sales for the
fiscal year ended September 30, 1997 were essentially identical to the same
period last year. Net sales were $587,563 for the twelve months ended September
30, 1997, a decrease of $21,641 or 3.6%, when compared to net sales of $609,204
during the twelve months ended September 30, 1996.
Gross profit decreased $728,672 or 22.7% to $2,482,947 during the fiscal year
ended September 30, 1997 when compared to gross profit of $3,211,619 during the
fiscal year ended September 30, 1996. The decrease in gross profit during
fiscal 1997 when compared to fiscal 1996 can primarily be attributed to the
decrease in sales. As a percentage of sales, gross profit decreased to 40.2%
during the fiscal year ended September 30, 1997 when compared to 42.6% during
the fiscal year ended September 30, 1996. The decrease in gross profit as a
percentage of sales during fiscal 1997 when compared to fiscal 1996 can
primarily be attributed to higher manufacturing overhead costs per sales
dollar due to the significant decline in sales during fiscal 1997 when
compared to fiscal 1996.
16
<PAGE>
Selling, general and administrative (SG&A) expenses decreased $87,927 or 3.4%
to $2,472,765 during the fiscal year ended September 30, 1997 when compared to
SG&A expenses of $2,560,692 during the fiscal year ended September 30, 1996.
As a percentage of sales, SG&A expenses increased to 40% during the fiscal year
ended September 30, 1997 when compared to 34% during the fiscal year ended
September 30, 1996, primarily due to the decrease in sales during fiscal 1997.
Decreases were realized in salary and salary related expenses, amortization
expense, bad debt expense, sales commissions and legal costs while increased
costs were experienced in promotional and advertising expenses.
Income from operations decreased $640,745 to $10,182 during the fiscal year
ended September 30, 1997 when compared to income from operations of $650,927
during the fiscal year ended September 30, 1996 primarily due to the decrease
in sales.
Other income increased $414,029 during the fiscal year ended September 30,
1997 when compared to the fiscal year ended September 30, 1996 primarily due to
the receipt of life insurance death benefits of $350,000 as a result of the
death of a former officer.
The Company's effective income tax rate decreased to 4.1% during fiscal 1997
primarily due to the lower levels of pre-tax income, the tax-free receipt of
life insurance death benefits and a research and experimentation tax credit.
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
1998 1997 1996
Cash & cash equivalents $1,221,108 $1,434,473 $1,280,999
Working capital $2,566,238 $2,745,211 $2,579,910
Current ratio 3.79 to 1 4.20 to 1 3.07 to 1
Long-term debt $ 0 $46,065 $102,774
Cash and cash equivalents decreased $213,365 to $1,221,108 at September 30,
1998 when compared to $1,434,473 at September 30, 1997. The decrease was a
result of $450,331 in net cash provided by operating activities, $345,321 in
net cash used for capital expenditures and $318,375 in net cash used in
financing activities.
The Company's Board of Directors has authorized the repurchase of up to
500,000 shares of the Company's outstanding common stock. The repurchases
will be made from time to time on the open market at prevailing market
prices or in negotiated transactions off the market. As of September 30,
1998, 80,000 shares had been repurchased using existing cash balances.
Management believes the common stock repurchase program, given the
Company's present cash position as well as the current market price of
the stock, reflects its belief in the fundamental strength of the business
and also reflects its commitment to enhancing shareholder value.
At September 30, 1998, the Company had unused aggregate lines of credit
totaling $600,000. Of these lines, $100,000 is for the purchase of equipment
and is collateralized by equipment and $500,000 is for working capital and is
collateralized by accounts receivable, inventories and equipment. The equipment
line of credit provides for interest at the bank's base rate plus one half
percent (1/2%). The working capital line of credit provides for interest at the
bank's base rate plus one quarter percent (1/4%).
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.
17
<PAGE>
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
computer chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations which
could disrupt the Company's normal business activities.
The Company has conducted a full inventory of its computer systems to identify
the programs and systems that could be affected by the year 2000 problem. The
Company is in the process of evaluating and testing those programs and
systems. Although no assurance can be given, the Company believes all
critical software utilized by the Company is presently year 2000 compliant.
The total cost to the Company of its own Year 2000 assessment, compliance and
verification activities has not been and, based on its evaluation to date, is
not anticipated to be material to the Company's financial position or results
of operations in any given year.
The company is presently surveying all major vendors and large customers to
assess their state of readiness in addressing the year 2000 problem. 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 and
adversely affect the business of the Company. 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.
The Company has and will continue to devote the resources necessary to address
any year 2000 issues. The Company's contingency plan is to replace or repair
systems which fail unexpectedly after January 1, 2000. The Company estimates
that the costs associated with its "year 2000" contingency, if required, to be
less than $75,000.
18
<PAGE>
ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY
- ---------------------------------------------------
The Financial Accounting Standards Board ("FASB") has issued several new
pronouncements that are not yet adopted by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components. The components of comprehensive income refer to revenues,
expenses, gains and losses that are excluded from net income under current
accounting standards. SFAS 130 requires that all items that are recognized
under accounting standards as components of comprehensive income be reported
in a financial statement displayed in equal prominence with other financial
statements; the total of other comprehensive income for a period is required
to be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. It will be
effective for the Company for the first quarter of fiscal year ending
September 30, 1999. SFAS 130 is not currently anticipated to have a
significant impact on the Company's consolidated financial statements based on
the current financial structure and operations of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
public enterprises are to report information about segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for the Company for
the first quarter of fiscal year ending September 30, 1999. The Company does
not expect SFAS 131 to have a material effect on its reported results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Any statements contained in this report which are not historical facts are
forward looking statements; and, many important factors could cause actual
results to differ materially from those in the forward looking statements. Such
factors include, but are not limited to, changes (legislative, regulatory and
otherwise) in the MMDS, LPTV or Cable industry, demand for the Company's
products (both domestically and internationally), the development of
competitive products, competitive pricing, market acceptance of new product
introductions, technological changes, general economic conditions, litigation
and other factors, risks and uncertainties which may be identified in the
Company's Securities and Exchange Commission filings.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Financial Statement Schedules called for by this
item are submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
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 11/23/98 Class
TRUDI B. ARTINI Mrs. Artini is an independent 108,815 3.3%
(a)(b)(d) investor in MFC and various other
Age 76 business enterprises in Syracuse,
Director since 1974 New York.
DAVID B. ROBINSON MD Dr. Robinson is Emeritus Professor 116,332 3.5%
(a)(b)(d) of Psychiatry at the Health Science
Age 74 Center, State University of New York
Director since 1977 at Syracuse. He was a faculty member
from 1958 until his retirement in
1985 and served as Acting Chairman
of the Dept. of Psychiatry for six
of those years. Since 1989, he has
served as a Skaneateles Town
Councilman and in 1980 was a
founding Board Member of the
Skaneateles Festival of Chamber
Music.
LOUIS MISENTI President and Principal 387,362 11.7%
Age 71 shareholder of SCI Corp.,
Director since 1976 Syracuse, New York since 1984.
SCI manufactures polishing
compounds for the automobile and
silverware industries. Mr.
Misenti is also the managing
partner of Northern Pines Golf
Course, Cicero, New York which was
founded in 1970. He was elected
Chairman of the Board of
Directors of MFC on March 27,
1993.
CARL F. FAHRENKRUG PE Mr. Fahrenkrug was appointed 384,566 11.6%
(a)(d) President and Chief Executive
Age 56 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.
20
<PAGE>
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 11/23/98 Class
MILO PETERSON Mr. Peterson has served as 168,570 5.1%
(a)(d) Executive Vice President and
Age 58 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 Corporate
Secretary of MFC on March 27,
1993.
FRANK S. MARKOVICH Mr. Markovich is a consultant in 4,508 *
(c)(d) the manufacturing operations
Age 53 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.
ROBERT R. ANDREWS Mr. Andrews is the President and 1,214 *
(a)(c) Principal shareholder of Morse
Age 57 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.
SIDNEY CHONG Mr. Chong is Manager of Corporate 10,632 *
(a)(b)(c) Accounting for Carrols Corp. in
Age 57 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.
21
<PAGE>
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 11/23/98 Class
Daniel Galbally Mr. Galbally is an accountant 1,489 *
(b)(c) for Auburn Steel Company, Inc.
Age 51 in Auburn, New York. Prior to
Director since 1995 joining Auburn Steel, 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.
(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 1,216,898
shares or approximately 37% of the outstanding common shares of the Company.
IDENTIFICATION OF EXECUTIVE OFFICERS
Name Age Position
Carl F. Fahrenkrug 56 President and Chief Executive Officer
Richard L. Jones 50 Vice President and Chief Financial
Officer
Milo J. Peterson 58 Corporate Secretary
Paul W. Mears 39 Vice President of Engineering
Terry C. Owens 44 Vice President of Sales
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 Corporate Secretary of MFC on March 27, 1993.
Mr. Peterson has served as Executive Vice President and Corporate Secretary of
NSI. Since January 1, 1992, he has also served as Production Consultant to the
President. Prior to January 1, 1992, he served as Executive Vice President of
NSI.
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.
Terry C. Owens began his association with MFC in 1982 as an Associate Chief
Engineer. He served as a Project Engineer with Anaren Microwave from 1988
until 1992 when he began employment with Laser Precision Corp., in Utica,
New York, as a Product Specialist. He returned to MFC as Sales Manager,
Assistant Marketing Manager in February of 1995 and in April 1998, was
appointed Vice President of Sales.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended September 30, 1998,
1997 and 1996, 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 1998 110,966 -
President and CEO 1997 117,882 -
1996 104,229 10,000
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 are currently matched at a rate
of 50% of employee contributions limited to 3.0% of compensation.
MFC's contributions to the plans for the years ended September 30, 1998, 1997
and 1996 amounted to $78,211, $68,139 and $81,470, 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. There were no stock options or stock appreciation rights
granted or outstanding at September 30, 1998.
23
<PAGE>
COMPENSATION OF DIRECTORS
- -------------------------
Non-officer directors received fees of $400.00 per board meeting and $300.00
per committee meeting, with the exception of the executive committee which
received $400.00 per committee meeting, during fiscal 1998. MFC also
reimburses directors for reasonable expenses incurred in attending meetings.
The Chairman of the Board and Officer members receive no compensation for
their attendance at meetings. During fiscal 1998, the Company paid Louis S.
Misenti $16,500 in compensation (part of which was taken in stock) for his
services as Chairman of the Board of Directors of Microwave Filter Company,
Inc. In addition, the Company paid Louis S. Misenti $30,600 during fiscal
1998 for consulting services. Outside directors have the option of receiving
their compensation for meetings in the form of restricted shares of the
Company's common stock. For this purpose, shares are valued at 85% of the
mean between the bid and ask price of the stock at the beginning of each
quarter.
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 November 23, 1998.
% of
Outstanding
Number of Shares
Common
Name of Beneficial Owner Address Beneficially Owned _____Stock_____
Frederick A. Dix & 209 Watson Rd. 244,007 7.4%
Marjorie Dix N. Syracuse, NY 13212
Carl F. Fahrenkrug & Indian Hill Rd. 384,566 11.6%
Rita Fahrenkrug Manlius, NY 13104
Louis S. Misenti 140 Clearview Rd. 387,362 11.7%
Dewitt, NY 13214
Milo J. Peterson 218 Gulf Road 168,570 5.1%
Camillus, NY 13031
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. Financial Statements and Schedules:
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:
There are no reports on Form 8-K for the three months ended
September 30, 1998.
(C) Exhibits:
Reference is made to the List of Exhibits submitted as a separate
section of this report.
25
<PAGE>
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 18, 1998
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| Louis S. Misenti |S| Carl F. Fahrenkrug
- ------------------------ --------------------------
Louis S. Misenti Carl F. Fahrenkrug
(Director) (Director)
|S| Milo J. Peterson |S| Robert R. Andrews
- ------------------------ -----------------------
Milo J. Peterson Robert R. Andrews
(Director) (Director)
|S| Sidney Chong
- --------------------
Sidney Chong
(Director)
Dated: December 18, 1998
26
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
MICROWAVE FILTER COMPANY, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 8, ITEM 14(a)(1) and (2)
CONSOLIDATED FINANCIAL STATEMENTS: Page
Independent Auditors' Report.....................................28
Consolidated Balance Sheets as of September 30, 1998 and 1997....29
Consolidated Statements of Operations for the Years
Ended September 30, 1998, 1997 and 1996 .......................30
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1998, 1997 and 1996 .......................31
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1998, 1997 and 1996 .......................32
Notes to Consolidated Financial Statements.......................33-39
SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996:
Independent Auditors' Report on Schedules........................41
II-Valuation and Qualifying Accounts.............................42
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.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Microwave Filter Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Microwave
Filter Company, Inc. and Subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Syracuse, New York
November 20, 1998
28
<PAGE>
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
September 30
Assets 1998 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $1,221,108 $1,434,473
Accounts receivable-trade, net of allowance for
doubtful accounts of $53,000 and $58,000 651,751 544,590
Federal and state income tax recoverable 55,813 0
Inventories 1,328,386 1,261,942
Deferred tax asset - current 174,835 258,647
Prepaid expenses and other current assets 53,286 104,280
--------- ---------
Total current assets 3,485,179 3,603,932
Property, plant and equipment, net 1,573,956 1,561,920
Deferred tax asset - noncurrent 0 7,629
--------- ---------
Total Assets $5,059,135 $5,173,481
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long term debt $44,851 $55,620
Accounts payable 355,435 320,166
Customer deposits 111,306 50,036
Accrued federal and state income taxes 0 30,108
Accrued payroll and related expenses 101,332 102,591
Accrued compensated absences 224,775 222,492
Other current liabilities 81,242 77,708
--------- ---------
Total current liabilities 918,941 858,721
Long term debt, less current portion 0 46,065
Deferred tax liability - noncurrent 51,388 0
Deferred compensation and other liabilities 11,994 17,966
--------- ---------
Total liabilities 982,323 922,752
--------- ---------
Commitments
Stockholders' equity:
Common stock, $.10 par value. Authorized 5,000,000 shares
Issued 4,294,733 in 1998 and 4,275,259 in 1997 429,473 427,526
Additional paid-in capital 3,222,613 3,206,360
Retained earnings 1,146,516 1,254,570
Common stock in treasury, at cost,
810,203 shares in 1998 and 730,202 shares in 1997 (721,790) (637,727)
--------- ---------
Total stockholders' equity 4,076,812 4,250,729
--------- ---------
Total Liabilities and Stockholders' Equity $5,059,135 $5,173,481
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Operations
For the Years Ended September 30
1998 1997 1996
---- ---- ----
Net sales $6,989,106 $6,175,425 $7,532,710
Cost of goods sold 4,243,948 3,692,478 4,321,091
--------- --------- ---------
Gross profit 2,745,158 2,482,947 3,211,619
Selling, general
and administrative expenses 2,761,422 2,472,765 2,560,692
--------- --------- ---------
Income (loss) from operations (16,264) 10,182 650,927
Non-operating Income (Expense)
Interest income 56,869 49,954 44,292
Interest expense (5,838) (9,529) (29,143)
Miscellaneous 37,567 52,924 14,171
Life insurance death
benefits 0 350,000 0
--------- --------- ---------
Income before income taxes 72,334 453,531 680,247
Provision for income taxes 2,910 18,759 175,952
--------- --------- ---------
NET INCOME $69,424 $434,772 $504,295
========= ========= =========
Earnings Per Share $.02 $0.12 $0.14
========= ========= =========
Weighted average number of common
shares outstanding 3,535,522 3,548,240 3,525,362
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended September 30, 1998, 1997 and 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amt Capital Earnings Shares Amt Equity
------ --- ------- -------- ------ --- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1995 4,003,733 $400,373 $2,880,992 $939,377 680,301 ($637,105) $3,583,637
Net income 504,295 504,295
Stock issued to employees
and officers 37,161 3,716 35,700 39,416
Stock issued to directors 16,342 1,635 18,132 19,767
Purchase of treasury stock 452 (622) (622)
Cash dividend paid
($.05 per share) (168,195) (168,195)
5% stock dividend 202,210 20,221 257,817 (278,038) 34,015
--------- -------- ---------- -------- ------- ---------- ----------
Balance,
September 30, 1996 4,259,446 425,945 3,192,641 997,439 714,768 (637,727) 3,978,298
Net income 434,772 434,772
Stock issued to directors 15,813 1,581 13,719 15,300
Donated capital 15,434
Cash dividend paid
($.05 per share) (177,641) (177,641)
--------- -------- ---------- -------- ------- ---------- ----------
Balance,
September 30, 1997 4,275,259 427,526 3,206,360 1,254,570 730,202 (637,727) 4,250,729
Net income 69,424 69,424
Stock issued to directors 19,474 1,947 16,253 18,200
Purchase of treasury stock 80,000 (84,063) (84,063)
Donated capital 1
Cash dividend paid
($.05 per share) (177,478) (177,478)
---------- --------- ---------- ---------- ------- ---------- ----------
Balance
September 30, 1998 4,294,733 $429,473 $3,222,613 $1,146,516 810,203 ($721,790) $4,076,812
========== ======== ========== ========== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
For the Years Ended September 30
--------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $69,424 $434,772 $504,295
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 333,285 302,087 333,105
Amortization of intangible assets 0 0 63,772
Inventory obsolescence provision 0 19,763 48,744
Bad debt provision 0 2,775 53,011
Stock compensation 18,200 15,300 59,183
Deferred income taxes 142,829 (67,841) (95,748)
Changes in assets and liabilities:
Accounts receivable-trade, net (107,161) 176,490 102,294
Federal and state income taxes (85,921) (259,508) 246,808
Inventories (66,444) 217,273 420,788
Other assets 50,994 (38,327) 17,249
Accounts payable and customer deposits 96,539 (103,815) (121,265)
Accrued payroll, compensated absences and
related expenses 1,024 (444) 51,068
Other current liabilities 3,534 (27,528) (26,980)
Deferred compensation (5,972) (5,406) (4,894)
--------- -------- --------
Net cash provided by operating activities 450,331 665,591 1,651,430
--------- --------- --------
Cash flows from investing activities:
Capital expenditures (345,321) (280,717) (291,633)
-------- -------- -------
Net cash used in investing activities (345,321) (280,717) (291,633)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt (56,834) (53,759) (430,657)
Purchase of treasury stock (84,063) 0 (622)
Cash dividend paid (177,478) (177,641) (168,195)
-------- -------- --------
Net cash used in financing activities (318,375) (231,400) (599,474)
-------- -------- --------
Net increase (decrease)
in cash and cash equivalents (213,365) 153,474 760,323
Cash and cash equivalents at beginning of year 1,434,473 1,280,999 520,676
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,221,108 $1,434,473 $1,280,999
========== ========= =========
Supplemental disclosures of cash flows:
Cash paid during the year for (approximately):
Interest $7,000 $10,000 $29,000
Income taxes $27,000 $346,000 $32,000
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
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 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); located
in Syracuse, New York. All significant intercompany balances and transactions
have been eliminated in consolidation.
c. Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. The carrying value at
September 30, 1998 and September 30, 1997 approximates fair value. Substantially
all cash balances were invested at one financial institution at September 30,
1998 and 1997.
d. Inventories
Inventories are stated at the lower of cost determined on the first-in, first-
out method or market.
e. Research and Development
Costs in connection with research and development, which amount to $490,153,
$337,250 and $359,934 for the fiscal years 1998, 1997 and 1996, respectively,
are charged to operations as incurred.
f. 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. 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.
g. 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.
33
<PAGE>
h. Earnings Per Share
In the first quarter of fiscal 1998, the Company adopted Statement of
Accounting Standards ("SFAS") No. 128, Earnings per Share. This standard
requires presentation of basic earnings per share ("EPS"), computed based on
the weighted average number of common shares outstanding for the period, and
diluted EPS, which gives the effect to all dilutive potential shares
outstanding (i.e. options) during the period after restatement for any stock
dividends. The Company had no dilutive potential common shares outstanding for
the years ended September 30, 1998, 1997 or 1996. Income used in the EPS
calculation is net income for each year.
i. 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.
2. INVENTORIES
Inventories net of provision for obsolescence
consisted of the following: September 30
1998 1997
---- ----
Raw materials and stock parts $950,170 $832,125
Work-in-process 233,000 185,291
Finished goods 145,216 244,526
-------- ---------
$1,328,386 $1,261,942
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30
1998 1997
---- ----
Land $143,000 $143,000
Building and improvements 1,786,951 1,740,124
Machinery and equipment 2,466,457 2,243,956
Office equipment and fixtures 1,302,020 1,226,026
Other 46,753 93,507
--------- ---------
5,745,181 5,446,613
Less: Accumulated depreciation 4,171,225 3,884,693
--------- ---------
$1,573,956 $1,561,920
========== ==========
34
<PAGE>
4. LONG-TERM DEBT
Long-term debt consisted of the following: September 30
1998 1997
Capitalized lease obligation $44,851 $101,685
Less: current portion 44,851 55,620
------- -------
$ 0 $ 46,065
======= =======
The capitalized lease obligation represents the Company's obligation
to the Onondaga County Industrial Agency (OCIDA) which financed the purchase
of the Company's primary manufacturing facility. The facility serves as
collateral for the debt. The Company financed its purchase of the facility
through an Industrial Development Revenue Bond issued by OCIDA and purchased
by a bank. The Company has guaranteed the payment on the bonds to the bank on
behalf of OCIDA. Payments are due quarterly, through April 1999, in an amount
which would fully amortize the unpaid principal of the bonds. The interest
rate is adjusted quarterly and is equal to 2.5% plus 65% of the thirteen week
average rate of interest for Treasury Bills (5.60% and 5.60% at September 30,
1998 and 1997, respectively).
The following is a schedule of remaining principal requirements on long-term
debt:
Year Ended Principal
September 30 Payments
------------ ---------
1999 $44,851
=======
The terms of the agreement contains certain covenants which limit both
capital expenditures and the ability to obtain additional bank debt. In
addition, the maintenance of certain financial ratios including current ratio
and debt to net worth, as defined, are also required by the agreement.
5. CREDIT FACILITIES
The Company has unused aggregate lines of credit totaling $600,000. Of these
lines, $100,000 is for the purchase of equipment and is collateralized by
equipment and $500,000 is for working capital and is collateralized by
accounts receivable, inventories and equipment. The equipment line of credit
provides for interest at the bank's base rate plus one half percent (1/2%). The
working capital line of credit provides for interest at the bank's base rate
plus one quarter percent (1/4%).
6. 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
35
<PAGE>
determined by the Board of Directors and are made from current or accumulated
earnings, while contributions to the 401-K plan are currently matched at a rate
of 50% of employee contributions limited to 3.0% of compensation.
The Company's matching contributions to the 401-K plan for the years ended
September 30, 1998, 1997 and 1996 were $58,211, $48,139 and $31,470 ,
respectively. Additionally, the Company may make discretionary contributions
to the non-contributory profit sharing plan. These contributions were $20,000,
$20,000 and $50,000 in 1998, 1997 and 1996, respectively.
7. OBLIGATIONS UNDER OPERATING LEASES
The Company leases a motor vehicle and equipment under operating lease
agreements expiring at various dates through September 30, 2003. Rental
expense under these leases for the years ended September 30, 1998, 1997 and
1996 amounted to $97,256, $97,948 and $97,739, respectively.
Minimum rental commitments at September 30, 1998 for these leases are:
Year Ended Principal
September 30 Payments
------------ --------
1999 $65,746
2000 64,780
2001 105,258
2002 9,923
2003 6,615
--------
$252,322
========
8. INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended September 30
1998 1997 1996
Currently payable (recoverable):
Federal ($142,019) $78,600 $250,700
State 2,100 8,000 21,000
Deferred (credit) 142,829 (67,841) (95,748)
------- ------- -------
$2,910 $18,759 $175,952
======= ======= ========
36
<PAGE>
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
Year ended September 30
______1998______ ______1997______ ______1996______
Amount % Amount % Amount %
Statutory tax rate $24,593 34.0% $154,201 34.0% $231,284 34.0%
Surtax exemption (11,510) (15.9%) 0 0 0 0
State income tax net of:
Federal benefit 1,722 2.4% 5,280 1.2% 13,860 2.0%
Foreign sales corp
benefit (2,792) (3.9%) (6,841) (1.5%) (6,854) (1.0%)
Research and experimentation
tax credits (8,057) (11.1%) (14,014) (3.1%) (54,344) (8.0%)
Life insurance death
benefits 0 0 (119,000) (26.2%) 0 0
Other (1,046) (1.5%) (867) (0.3%) (7,994) (1.1%)
-------- ------ ------- ------ -------- ------
$2,910 4.0% $18,759 4.1% $175,952 25.9%
======== ====== ======== ====== ========= ======
The temporary differences which give rise to deferred tax assets and
liabilities at September 30 are as follows:
1998 1997
---- ----
Inventory $116,079 $189,201
Accrued vacation 62,912 56,954
Other (12,213) (1,522)
Research and experimentation
tax credit carry forward 8,057 14,014
-------- --------
Net deferred tax assets - current $174,835 $258,647
======== ========
Accelerated depreciation ($101,232) ($47,104)
AMT credit carry forward 65,315 49,433
Other (15,471) 5,300
-------- --------
Net deferred tax assets (liabilities)
- noncurrent ($51,388) $7,629
======= =======
Based on the Company's history of taxable earnings and its expectations for
the future, management has determined that operating income will more likely
than not be sufficient to recognize its deferred tax assets. At September 30,
1998, the Company's federal AMT credit can be carried forward indefinitely.
37
<PAGE>
9. 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)
1998 1997 1996
Net Sales (Unaffiliated):
MFC $6,778 $5,588 $6,924
NSI 211 587 609
Total $6,989 $6,175 $7,533
Operating Profit (Loss): (a)
MFC $480 $300 $987
NSI (420) (184) (222)
Corporate (76) (106) (114)
Total ($16) $10 $651
Identifiable Assets: (b)
MFC $3,559 $3,618 $3,812
NSI 279 121 317
Subtotal 3,838 3,739 4,129
Corporate Assets-Cash and
Cash Equivalents 1,221 1,434 1,281
Total $5,059 $5,173 $5,410
Depreciation & Amortization Expense:
MFC $304 $281 $275
NSI 29 21 122
Total $333 $302 $397
Capital Expenditures:
MFC $284 $280 $291
NSI 61 1 1
$345 $281 $292
Significant Export Sales:
MFC $546 $602 $558
Sales to Significant Customers:
MFC:
Motorola Government Systems $707
38
<PAGE>
(a) Operating profit (loss) is total revenue less operating expenses. In
computing operating profit, none of the following items have been added or
deducted: general corporate expenses, 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.
10. 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. There were no stock options or stock appreciation rights
granted or outstanding at September 30, 1998.
11. LEGAL MATTERS
There are currently no material pending legal proceedings against the
Company or its subsidiaries.
12. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal 1997, the Company received life insurance
death benefits of $350,000 as a result of the death of a former officer.
In the fourth quarter of fiscal 1996, management revised certain inventory
reserve estimates which resulted in approximately $150,000 of pre-tax income.
39
<PAGE>
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.
10.5 Application by Debtor in Possession for Authority to Sell General *
Intangible Assets and Order (MFC's acquisition of CT-1000 System).
10.6 Stock Purchase Agreement dated February 8, 1993 between Glyn and *
Emily Bostick and MFC.
* Previously filed
40
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Microwave Filter Company, Inc.
Our audits of the consolidated financial statements referred to in our report
dated November 20, 1998 included in this 1998 Annual Report on Form 10-K of
Microwave Filter Company, Inc. and Subsidiaries also included an audit of the
financial statement schedule listed in ITEM 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Syracuse, New York
November 20, 1998
41
<PAGE>
Microwave Filter Company and Subsidiaries
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
SEPTEMBER 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions End of Period
- ----------- --------- ----------------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1998
Allowance for doubtful accounts $57,905 $5,283 $52,622
Inventory valuation reserves 613,813 241,179 $372,634
-------- -------- ------- ------- --------
$671,718 $0 $0 $246,462 $425,256
======== ======== ======= ======== ========
Year ended September 30, 1997
Allowance for doubtful accounts $75,000 $2,775 $19,870 $57,905
Inventory valuation reserves 594,050 19,763 0 613,813
-------- -------- ------- ------- --------
$669,050 $22,538 $0 $19,870 $671,718
======== ======== ======= ======= ========
Year ended September 30, 1996
Allowance for doubtful accounts $50,000 $53,011 $28,011 $75,000
Inventory valuation reserves 545,306 48,744 0 594,050
-------- -------- ------- ------- --------
$595,306 $101,755 $0 $28,011 $669,050
======== ======== ======= ======= ========
</TABLE>
42
<PAGE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the financial statements for Microwave Filter Company, Inc.
filed with Form 10-K for the twelve months ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> $1,221,108
<SECURITIES> 0
<RECEIVABLES> 651,751
<ALLOWANCES> 52,622
<INVENTORY> 1,328,386
<CURRENT-ASSETS> 3,485,179
<PP&E> 5,745,181
<DEPRECIATION> 4,171,225
<TOTAL-ASSETS> 5,059,135
<CURRENT-LIABILITIES> 918,941
<BONDS> 0
<COMMON> 429,473
0
0
<OTHER-SE> 3,647,339
<TOTAL-LIABILITY-AND-EQUITY> 5,059,135
<SALES> 6,989,106
<TOTAL-REVENUES> 6,989,106
<CGS> 4,243,948
<TOTAL-COSTS> 7,005,370
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,838
<INCOME-PRETAX> 72,334
<INCOME-TAX> 2,910
<INCOME-CONTINUING> 69,424
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,424
<EPS-PRIMARY> $0.02
<EPS-DILUTED> $0.02
</TABLE>
