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 December 31, 2001 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 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 - 2,904,781 shares as of December 31, 2001. PART I. - FINANCIAL INFORMATION MICROWAVE FILTER COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) December 31, 2001 SEPTEMBER 30, 2001 (Unaudited) Assets Current Assets: Cash and cash equivalents $ 1,441 $ 373 Investments 390 900 Accounts receivable-trade, net 926 600 Inventories 1,054 884 Deferred tax asset - current 165 165 Prepaid expenses and other current assets 122 87 -------- -------- Total current assets 4,098 3,009 Property, plant and equipment, net 1,224 1,261 -------- -------- Total assets $ 5,322 $ 4,270 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 359 $ 192 Customer deposits 231 23 Accrued federal and state income taxes 256 61 Accrued payroll and related expenses 159 109 Accrued compensated absences 285 265 Other current liabilities 107 71 -------- -------- Total current liabilities 1,397 721 Deferred tax liability - noncurrent 19 19 -------- -------- Total liabilities 1,416 740 -------- -------- Stockholders' Equity: Common stock,$.10 par value 432 432 Additional paid-in capital 3,240 3,240 Retained earnings 1,740 1,364 -------- -------- 5,412 5,036 Common stock in treasury, at cost (1,506) (1,506) -------- -------- Total stockholders' equity 3,906 3,530 -------- -------- Total liabilities and stockholders' equity $ 5,322 $ 4,270 ======== ======== <FN> See Accompanying Notes to Condensed Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (Unaudited) (Amounts in thousands, except per share data) Three months ended December 31 2001 2000 Net sales $2,390 $1,929 Cost of goods sold 1,220 1,251 ------- ------- Gross profit 1,170 678 Selling, general and administrative expenses 610 583 ------- ------- Income from operations 560 95 Other income (net), principally interest 13 25 ------- ------- Income before income taxes 573 120 Provision for income taxes 198 41 ------- ------- NET INCOME $375 $79 ======= ======= Basic earnings per share $0.13 $0.03 ======= ======= Weighted average number of common shares outstanding 2,905 3,064 ======= ======= <FN> See Accompanying Notes to Condensed Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (Unaudited) (Amounts in thousands) Three months ended December 31 2001 2000 Cash flows from operating activities: Net income $ 375 $ 79 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 65 71 Change in assets and liabilities: (Increase) decrease in: Accounts receivable (326) 129 Inventories (170) (3) Prepaid expenses & other assets (35) (53) Increase (decrease) in: Accounts payable & accrued expenses 677 (85) ------- ------- Net cash provided by operating activities 586 138 ------- ------- Cash flows from investing activities: Investments 510 (18) Capital expenditures (28) (93) ------- ------- Net cash provided by investing activities 482 (111) Cash flows from financing activities: Purchase of treasury stock 0 (327) ------- ------- Net cash (used in) financing activities 0 (327) Increase (decrease) in cash and cash equivalents 1,068 (300) Cash and cash equivalents at beginning of period 373 625 ------- ------- Cash and cash equivalents at end of period $1,441 $ 325 ======= ======= <FN> See Accompanying Notes to Condensed Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 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 three month period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ended September 30, 2002. 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, 2001. Note 2. Industry Segment Data The Company's primary business segments involve (1) operations of Microwave Filter Company, Inc. (MFC) which manufactures 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 segment is as follows: Three months ended (thousands of dollars) December 31, 2001 2000 Net Sales (Unaffiliated): MFC $2,369 $1,653 NSI 21 276 ------ ------ Total $2,390 $1,929 ====== ====== Operating profit (loss): (a) MFC $614 $147 NSI (54) (52) ------ ------ Total $560 $95 ====== ====== Identifiable assets: (b) MFC $3,944 $4,096 NSI 436 389 ------ ------ Subtotal 4,380 4,485 Corporate Assets - Cash And Cash Equivalents 942 325 ------ ------ Total $5,322 $4,810 ====== ====== (a) Operating profit (loss) is total revenue less operating expenses. In computing operating profit, none of the following items have been added or deducted: interest 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. Inventories Inventories net of provision for obsolescence consisted of the following: (thousands of dollars) December 31, 2001 September 30, 2001 Raw materials and stock parts $659 $702 Work-in-process 324 106 Finished goods 71 76 ------ ---- $1,054 $884 ====== ==== The Company's provision for obsolescence equaled $297,634 at December 31, 2001 and September 30, 2001. Note 4. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective July 1, 2001 and October 1, 2002, respectively, for the Corporation. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This has no material impact on the financial statements of the Company. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Company believes SFAS 142 will not have a material impact on its financial statements. In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for long-lived assets to be held and used and for assets to be disposed of through sale or other means. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS 144 to have a material impact on its financial statements. 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 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. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 vs. THREE MONTHS ENDED DECEMBER 31, 2000. Net sales for the three months ended December 31, 2001 equaled $2,390,460, an increase of $460,842 or 23.9% when compared to net sales of $1,929,618 for the three months ended December 31, 2000. MFC sales for the three months ended December 31, 2001 equaled $2,369,728, an increase of $716,245 or 43.3% when compared to sales of $1,653,483 for the three months ended December 31, 2000. The increase in MFC sales can primarily be attributed to an increase in the sales of the company's standard cable/satellite TV products, which management attributes to an increase in demand for the company's filters which suppress strong out-of-band interference caused by military and civilian radar systems. This increase in demand can primarily be attributed to the increased security measures being taken as a result of the September 11th terrorist attacks. The Company is uncertain how long this demand will continue and what levels it will reach. Investment has been made to increase manufacturing capacity in these product areas. There can be no assurance that the Company's sales levels or growth will remain at, reach or exceed historical levels in any future period. Due to current economic conditions, MFC has experienced declines in sales in some product markets. MFC's RF/Microwave product sales were down $54,369 or 19.9% to $218,927 when compared to sales of $273,296 for the three months ended December 31, 2000. MFC's Broadcast TV/Wireless product sales were down $100,640 or 40% to $151,049 when compared to $251,689 for the three months ended December 31, 2000. MFC's sales order backlog was also down at December 31, 2001 when compared to September 30, 2001. 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. MFC's sales order backlog equaled $294,080 at December 31, 2001 compared to $465,881 at September 30, 2001. Approximately 85% of MFC's sales order backlog at December 31, 2001 is scheduled to ship by September 30, 2002. 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. NSI sales for the three months ended December 31, 2001 equaled $20,732, a decrease of $255,403 or 92.5% when compared to sales of $276,135 for the three months ended December 31, 2000. Sales of NSI related equipment, on a quarter to quarter basis, can be impacted by the timing of the shipment of the custom designed equipment and the customer's scheduled delivery dates. At December 31, 2001, NSI's backlog increased $589,049 to $589,552 when compared to $503 at September 30, 2001. NSI's total backlog is scheduled to ship by September 30, 2002. Net income for the three months ended December 31, 2001 equaled $375,492, an increase of $296,917 or 378% when compared to net income of $78,575 for the three months ended December 31, 2000. The increase in net income can primarily be attributed to the increase in sales. Gross profit for the three months ended December 31, 2001 equaled $1,170,091, an increase of $491,673 or 72.5% when compared to gross profit of $678,418 for the three months ended December 31, 2000. As a percentage of sales, gross profit equaled 48.9% for the three months ended December 31, 2001 compared to 35.2% for the three months ended December 31, 2000. The dollar increase in gross profit can be attributed to both the improvement in gross profit as a percentage of sales and the increased sales volume. The improvement in gross profit as a percentage of sales, when compared to the same period last year, can primarily be attributed to product sales mix, operational efficiencies and significant economies of scale due to the higher production volume. Selling, general and administrative (SGA) expenses for the three months ended December 31, 2001 equaled $609,673, an increase of $26,422 or 4.5% when compared to SG&A expenses of $583,251 for the three months ended December 31, 2000. SGA expenses decreased to 25.5% of sales for the three months ended December 31, 2001 when compared to 30.2% of sales for the three months ended December 31, 2000, primarily due to the increase in sales this year when compared to the same period last year. LIQUIDITY and CAPITAL RESOURCES Cash and cash equivalents increased $1,067,638 to $1,440,780 at December 31, 2001 when compared to $373,142 at September 30, 2001. The increase was a result of $585,565 in net cash provided by operating activities and $482,073 in net cash provided by investing activities. The increase of $325,852 in accounts receivable at December 31, 2001 when compared to September 30, 2001 is attributable to increased shipments during the quarter ended December 31, 2001 when compared to the quarter ended September 30, 2001. The increase of $169,849 in inventories at December 31, 2001 when compared to September 30, 2001 can primarily be attributable to the increase in the sales order backlog at December 31, 2001. The increase in accounts payable of $166,545 at December 31, 2001 when compared to September 30, 2001 can primarily be attributed to the increase in purchases as a result of the increase in the sales order backlog. The increase of $207,913 in customer deposits at December 31, 2001 when compared to September 30, 2001 can primarily be attributable to the increase in the sales order backlog. The increase in accrued federal and state income taxes payable of $195,399 at December 31, 2001 when compared to September 30, 2001 can primarily be attributed to the increase in income. Cash provided by investing activities during the three months ended December 31, 2001 consisted of funds provided by the sale of investments ($510,008) and funds used for capital expenditures ($27,935). At December 31, 2001, 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. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective July 1, 2001 and October 1, 2002, respectively, for the Corporation. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This has no material impact on the financial statements of the Company. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Company believes SFAS 142 will not have a material impact on its financial statements. In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for long-lived assets to be held and used and for assets to be disposed of through sale or other means. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS 144 to have a material impact on its financial statements. 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, therefore, 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is unaware of any material threatened or pending litigation against the Company. 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 during this reporting period. Item 6. Exhibits and 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. February 13, 2002 Carl F. Fahrenkrug (Date) -------------------------- Carl F. Fahrenkrug Chief Executive Officer February 13, 2002 Richard L. Jones (Date) -------------------------- Richard L. Jones Chief Financial Officer