SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-K
(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, 2010_____________________________
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES ______ NO ___X___
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES ______ NO ___X___
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 whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
YES ____ NO____ (The Registrant is not yet required to submit Interactive
Data)
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. __
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company
(as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ______ Accelerated filer ______
Non-accelerated filer ______ (Do not check if smaller reporting company)
Smaller reporting company ____X____.
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ____ NO__X__
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the common stock on December 1,
2010, was $1,858,554.
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 December 1, 2010: 2,589,194
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2011 Annual Meeting of Shareholders are incorporated
by reference into Part III. (With the exception of those portions which are
specifically incorporated by reference in this Form 10-K, the Proxy Statement
is not deemed to be filed or incorporated by reference as part of this
report.)
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING CAUTIONARY STATEMENT
- ------------------------------------
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Annual Report on Form 10-K may
include comments by the Company's management about future performance. These
statements which are not historical information are "forward-looking
statements" pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These, and other forward-looking statements,
are subject to business and economic risks and uncertainties that could cause
actual results to differ materially from those discussed. These risks and
uncertainties include, but are not limited to: risks associated with demand
for and market acceptance of existing and newly developed products as to which
the Company has made significant investments; general economic and industry
conditions; slower than anticipated penetration into the satellite
communications, mobile radio and commercial and defense electronics markets;
competitive products and pricing pressures; increased pricing pressure from
our customers; risks relating to governmental regulatory actions in broadcast,
communications and defense programs; as well as other risks and uncertainties,
including but not limited to those detailed from time to time in the Company's
Securities and Exchange Commission filings. These forward-looking statements
are made only as of the date hereof, and the Company undertakes no obligation
to update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise. You are encouraged to review
Microwave Filter Company's 2010 Annual Report and Form 10-K for the fiscal
year ended September 30, 2010 and other Securities and Exchange Commission
filings. Forward looking statements may be made directly in this document or
"incorporated by reference" from other documents. You can find many of these
statements by looking for words like "believes," "expects," "anticipates,"
"estimates," or similar expressions.
GENERAL DEVELOPMENT OF BUSINESS
- -------------------------------
Microwave Filter Company, Inc. (hereinafter referred to as MFC) was
incorporated in New York State on September 26, 1967. MFC is the successor of
Microwave Filter Company which was founded in April of 1967.
On July 1, 1990, MFC acquired Niagara Scientific, Inc. (hereinafter referred
to as NSI.)
MFC and its subsidiaries are sometimes referred to collectively as the
"Company."
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NARRATIVE DESCRIPTION OF BUSINESS
- ----------------------------------
Microwave Filter Company, Inc. (MFC)
Established in 1967 in East Syracuse, New York, MFC occupies a modern 40,000
square foot facility with an impressive complement of analytical and design
software, test instrumentation, prototype and manufacturing equipment to
create passive filters, components and sub systems in the frequency range of
10 MHz to 50 GHz.
MFC manufactures RF filters and related components for eliminating
interference and facilitating signal processing for such markets as Cable
Television, Broadcast, Commercial and Military Communications, Avionics,
Radar, Navigation and Defense. The Company designs waveguide, stripline/
microstrip, transmission line, miniature/subminiature and lumped constant
filters. Configurations include bandpass, highpass, lowpass, bandstop,
multiplexers, tunable notch, tunable bandpass, high power filters, amplitude
equalized, delay equalized and filter networks. The Company actively produces
over 1,700 standard products and has designed more than 5,000 custom products
for specialized applications.
The manufacturing facility includes a modern CAD system, a test department
with automated network analyzers to 50 GHz, a high capacity conveyor soldering
oven and a fully compliant finishing operation. The Company's Quality
Management System has been certified ISO 9001:2000 recognizing the Company as
a quality vendor.
Efficient computer simulation, design and analysis software enhanced by
proprietary MFC developed software, allow rapid and accurate filter
development at reasonable cost. Automated network analyzers provide rigorous
product testing and performance data storage on a serial number basis in most
cases.
A network based CAD system allows the transfer of data and programs to the
CNC turning and milling centers for fabrication of machined parts. Prototype
PC boards are similarly produced by computer controlled PC board mills.
A Grieve high capacity conveyor soldering oven is used for production of
large quantity assemblies while smaller production quantities are assembled at
hand soldering or brazing stations.
ISO 9001:2000 contract and design review procedures coupled with a QA
department that is compliant with MIL-I-45208 inspection systems and MIL-STD-
45622 calibration system standards assures process and product integrity. A
certified staff instructor regularly trains associates to MIL-STD-2000A (now
superceded by J-STD-001.)
Other in-house testing facilities include three environmental chambers
capable of testing products for temperatures of -40 to 200 degrees Celsius and
humidity up to 100 percent. Several high power amplifiers are available for
power tests up to 2500 watts at 220 MHz and 100 watts at 1,000 MHz. Facilities
are also available for salt spray, sand and dust, shock and vibration, RFI
leakage and altitude testing.
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MARKETS
- -------
Microwave Filter Company, Inc. (MFC)
- ------------------------------------
Cable Television (CATV) - The CATV marketplace is changing due to the
transition from analog to digital television. Digital Televison (DTV) is a new
type of broadcasting technology that will transform television viewing. DTV
enables broadcasters to offer television with movie-quality picture and sound.
It also offers greater multicasting and interactive capabilities. DTV is a
more flexible and spectrum efficient technology than the NTSC "analog"
broadcast system. Rather than being limited to providing one analog
programming channel, a broadcaster will be able to provide a super sharp "high
definition" (HDTV) program or multiple "standard definition" DTV programs
simultaneously using the RF spectrum more efficiently. Providing several
program streams on one broadcast channel is called "multicasting." The number
of programs a station can send on one digital channel depends on the level of
picture detail, also known as "resolution." DTV can provide interactive video
and data services that are not possible with "analog" technology. Converting
to DTV will eventually free up parts of the scarce and valuable broadcast
airwaves. Those portions of the spectrum can then be used for other important
services, such as advanced wireless and public safety services (police, fire,
rescue squads, etc.). Management continues to project a decrease in demand for
Cable TV products due to the shift from analog to digital television. Due to
the inherent nature of digital modulation versus analog modulation, fewer
filters will be required. The Company has developed filters for digital
television and there will still be requirements for analog filters for limited
applications in commercial and private cable systems. The demand for these
filters is unknown at this time but is expected to decline.
MFC serves this market principally with three product groups. One popular
area includes standard and custom filters used at the headend to process
signals and remove interference. A very popular application involves removing
or re-routing TV channels to organize programming line-ups.
A family of trap filters, "Fastrap," is used by cable operators to restrict
or permit the viewing of pay per view or other premium programming. The traps
can be ordered in small and large quantities, are 100% inspected and delivered
overnight.
Since all cable operators initially receive programming via satellite,
products from our satellite market cross over into the cable television
market. C-band satellite receive systems are prone to various types of
terrestrial interference which are curable in many cases by applying MFC
bandpass filters.
Broadcast - Due to the recent analog to digital conversion within the TV
(UHF/VHF) broadcast industry, Microwave Filter Company has experienced a
resurgence in business for both TV transmit and receive filters. Specifically,
in order to accommodate the wider digital TV signal bandwidths, customers have
been forced to replace their existing (narrower bandwidth) analog filters with
(wider bandwidth) digital filters. As a result, MFC has developed new products
(e.g.- DTV mask transmit filters) to accommodate the wider bandwidth digital
signals.
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Another result of this analog to digital conversion was the elimination of
the uppermost UHF channels (52-69) that operated between 698 - 806 MHz.
Subsequently, part of this vacated frequency band was allocated for Public
Safety communication use, while much of the remaining band has been auctioned
off for Internet Service Provider (ISP) operations (e.g. - Verizon, AT&T,
etc.) Now referred to as the "700 MHz Band" - many of these new applications
also require MFC filter products. Some of these operations actually utilize
the same channel allocations formerly used by those defunct UHF channels.
Consequently, MFC has been able to transform existing filter product lines
into an entirely new filter line to satisfy many of these new ISP
applications, without requiring significant product modification or new
product development.
MFC also continues to serve other segments of the Broadcast industry such as
FM radio, STL (TV Studio-to-Transmitter Links) and the BAS (Broadcast
Auxiliary Service) band (formerly known as the ENG (Electronic News
Gathering) band.)
Satellite - Microwave filters and IF filters for removing interference are
provided to both commercial and home C-band TVRO antennas. A variety of
products are available that offer protection and or solutions to interference
that affects the feedhorn, downconverter, and receiver. A variety of filters
are also available for satellite services utilizing higher frequency bands
such as 12, 13 and 18 GHz. Although the current economic slowdown has impacted
sales, management expects demand for these types of filters to continue with
the proliferation of earth stations world wide and increased sources of
interference.
Mobile Radio and Data Links - MFC provides filters to a variety of mobile
radio services such as cellular telephone, two way radio and paging to
eliminate interference in transmit or receive equipment. More recently there
has been demand for filters and diplexers for broadband microwave applications
for Voice Over Internet Protocol ("VOIP") With the number of services
increasing and ISP use. The advent of license exempt applications has
increased the need for interference filtering. With the number of services
increasing and our air waves becoming more congested, filters are increasingly
important to many transmit operations.
RF and Microwave - This market encompasses both commercial and military
applications. Filters in defense applications are used for such purposes as
air to ground communications, radar and land communications. In commercial
areas, filters are used to protect such equipment as receivers, transmitters,
transceivers and any other electronics used for signal processing. In addition
to filters, this market is also served with MFC's Ferrosorb product line.
Ferrosorb is a microwave absorbing material available in sheets, loads and a
variety of other shapes. The product is used to offer protection by shielding
signals or absorbing selective bands.
In 1992, MFC's acquisition of certain assets of Chesterfield Products added
an expanded line of products to enhance the RF filter line. Many of MFC's
traditional filters are components added onto a system. Chesterfield provided
MFC with the capability to manufacture miniature and subminiature filters
which are components built into electronic systems. Another Chesterfield
capability has provided us with the resources to expand our filter design
range down to 5 KHz.
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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.
WORLD TRADE
- -----------
Management believes that world marketing is a route to substantial expansion
of sales for MFC. Significant efforts have been made over the last year to
identify key international markets and to establish distributors with
appropriate technical backgrounds to represent our products in those regions.
The Company's international sales decreased $29,405 or 5.5% to $498,169 for
the fiscal year ended September 30, 2010 when compared to international sales
of $527,574 during the fiscal year ended September 30, 2009. The decrease can
be attributed to the global economic conditions.
SUPPLIERS
- ---------
The Company depends on outside suppliers for raw materials, components and
parts, and services. Although items are generally available from a number of
suppliers, the Company purchases certain raw materials and components from a
single supplier. If such a supplier should cease to supply an item, the
Company believes that new sources could be found to provide the raw materials
and components. However, manufacturing delays and added costs could result.
The Company has not experienced significant delays of this nature in the past,
but there can be no assurance that delays in delivery due to supply shortages
will not occur in the future. Substantial periods of lead time for delivery of
certain materials are sometimes experienced by the Company, making it
necessary to inventory varied quantities of materials.
PATENTS AND LICENSES
- --------------------
The Company has no patents, trademarks, copyrights, licenses or franchises
of material importance.
SEASONAL FLUCTUATIONS
- ---------------------
There are no significant seasonal fluctuations in the Company's business.
GOVERNMENT CONTRACTS
- --------------------
The Company is not dependent in any material respect on government contracts.
SIGNIFICANT CUSTOMERS
- ---------------------
Sales to one customer represented approximately 15% of total sales during
fiscal 2010.
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EXPORT CONTROLS
- ---------------
Our products are subject to the Export Administration Regulations ("EAR")
administered by the U.S. Department of Commerce and may, in certain instances,
be subject to the International Traffic in Arms Regulations ("ITAR")
administered by the U.S. Department of State. EAR restricts the export of
defense products, technical data and defense services. We believe that we have
implemented internal export procedures and controls in order to achieve
compliance with the applicable U.S. export control regulations.
ENVIRONMENTAL REGULATION
- ------------------------
Compliance with federal, state and local requirements relating to the
discharge of substances into the environment, the disposal of hazardous waste
and other activities affecting the environment has been accomplished without
material effect on the Company's liquidity and capital resources, competitive
position or financial statements and management believes that such compliance
will not have a material effect on the Company's liquidity and capital
resources, competitive position or financial statements in the future.
BACKLOG
- -------
At September 30, 2010, the Company's total backlog of orders, which
represents firm orders from customers, was $413,159 compared to $479,861 at
September 30, 2009. The total Company backlog at September 30, 2010 is
scheduled to ship during fiscal 2011. However, backlog is not necessarily
indicative of future sales. Accordingly, the Company does not believe that its
backlog as of any particular date is representative of actual sales for any
succeeding period.
EMPLOYEES
- ---------
At September 30, 2010, the Company employed 48 full-time and 2 part-time
employees.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company maintains and expects to continue to maintain an active research
and development program. The Company believes that such a program is needed
to maintain its competitive position in existing markets and to provide
products for emerging markets. Costs in connection with research and
development were $448,901 and $437,412 for the fiscal years 2010 and 2009,
respectively. Research and development costs are charged to operations as
incurred.
COMPETITION
- -----------
The principal competitive factors facing both MFC and NSI are price,
technical performance, service and the ability to produce in quantity to
specific delivery schedules. Based on these factors, the Company believes it
competes favorably in its markets.
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AVAILABLE INFORMATION
- ---------------------
Our Internet address is www.microwavefilter.com. There we make available,
free of charge, our annual report on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K and any amendments to those reports, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports
can be accessed through the investor relations link of our Web site. The
information found on our Web site is not part of this or any other report we
file with or furnish to the SEC.
The public may read and copy any materials that we file with the SEC at the
SEC's Public Reference Room located at 450 Fifth Street NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
electronic versions of our reports on its website at www.sec.gov.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
MFC's office and manufacturing facility is located at 6743 Kinne Street,
East Syracuse, New York. This facility, which is owned by MFC, consists of
40,000 square feet of office and manufacturing space located on 3.7 acres.
ITEM 3. LEGAL PROCEEDINGS.
The State of New York Workers' Compensation Board has commenced an action
against Microwave Filter Company, Inc. to recover for an underfunded self
insured program that Microwave Filter Company, Inc. participated in. Due to
the relatively short period of time Microwave Filter Company, Inc.
participated in the program and the limited amount of potential exposure, we
do not expect the resolution of this action will have a material adverse
effect on our financial condition, results of operations or cash flows.
ITEM 4. (REMOVED AND RESERVED)
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's securities are currently quoted on The Pink OTC Markets
(www.otcmarkets.com), an electronic quotation service for securities traded
over-the-counter, and the OTCBB (www.otcbb.com).
The following table shows the high and low closing sales prices for MFC's
common stock for each full quarterly period within the two most recent fiscal
years. The information set forth was obtained from statements provided by the
NASD and the OTCBB. 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 2010 High Low
Oct. 1, 2009 to Dec. 31, 2009 $ 1.00 $ .51
Jan. 1, 2010 to Mar. 31, 2010 1.01 .70
Apr. 1, 2010 to June 30, 2010 .99 .42
July 1, 2010 to Sept. 30, 2010 .88 .42
Fiscal 2009 High Low
Oct. 1, 2008 to Dec. 31, 2008 $ .81 $ .52
Jan. 1, 2009 to Mar. 31, 2009 .79 .51
Apr. 1, 2009 to June 30, 2009 .94 .53
July 1, 2009 to Sept. 30, 2009 .94 .75
The Company had approximately 600 holders of record of its common stock at
September 30, 2010.
Payment of future dividends, if any, will be at the discretion of the Board
of Directors after taking into consideration various factors, including the
Company's financial condition, operating results and current and anticipated
cash needs.
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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
September 30
2010 2009 2008 2007 2006
Net Sales $ 4,691,522 $ 4,610,313 $ 5,231,125 $ 4,634,233 $ 4,536,715
Net Income (Loss) $ 146,291 $ 81,507 $ 39,516 $ (292,993) $ (411,349)
Total Assets $ 2,963,224 $ 2,833,345 $ 2,816,736 $ 2,826,042 $ 3,126,373
Long Term Debt $ 0 $ 0 $ 0 $ 0 $ 0
Basic Earnings (Loss)
Per Share $ .06 $ .03 $ .01 $ (.10) $ (.14)
Diluted Earnings (Loss)
Per Share $ .06 $ .03 $ .01 $ (.10) $ (.13)
Shares Used In Computing Net
Earnings (Loss) Per Share:
Basic 2,592,723 2,612,152 2,894,214 2,889,660 2,905,355
Diluted 2,592,723 2,612,152 2,967,274 3,038,098 3,043,903
Cash ($) Dividends Paid Per
Share $ .00 $ .00 $ .00 $ .00 $ .10
Net income (loss) as a percentage of: 2010 2009 2008 2007 2006
Net Sales.......................... 3.1% 1.8% 0.7% (6.3%) (9.1%)
Assets .......................... 4.9% 2.9% 1.4% (10.4%) (13.2%)
Equity............................. 6.0% 3.6% 1.7% (12.6%) (15.7%)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Microwave Filter Company, Inc. (MFC) operates primarily in the United States
and principally in one industry. The Company extends credit to business
customers, including original equipment manufacturers (OEMs), distributors and
other end users, based upon ongoing credit evaluations. Microwave Filter
Company, Inc. designs, develops, manufactures and sells electronic filters,
both for radio and microwave frequencies, to help process signal distribution
and to prevent unwanted signals from disrupting transmit or receive
operations. Markets served include cable television, television and radio
broadcast, satellite broadcast, mobile radio and 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 processors of food and other commodity products with a
need to reduce labor cost with a modest investment and quick payback. For the
last three years, NSI's sales have consisted of spare parts orders.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the Company's net sales by major product
group for each of the fiscal years in the two year period ended September 30,
2010.
Product group (in thousands) Fiscal 2010 Fiscal 2009
Microwave Filter:
Satellite $1,547 $1,559
Cable TV 1,470 1,561
RF/Microwave 1,440 1,296
Broadcast TV 228 184
Niagara Scientific 6 10
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Total $4,691 $4,610
====== ======
Sales backlog at 9/30 $ 413 $ 480
====== ======
Fiscal 2010 compared to fiscal 2009
Consolidated net sales for the fiscal year ended September 30, 2010 equaled
$4,691,522, an increase of $81,209 or 1.8%, when compared to consolidated net
sales of $4,610,313 during the fiscal year ended September 30, 2009.
MFC's Satellite product sales decreased $12,698 or 0.8% to $1,547,037 during
the fiscal year ended September 30, 2010 when compared to sales of $1,559,735
during the fiscal year ended September 30, 2009. The decrease can be
attributed to a decrease in demand for filters which suppress strong out-of-
band interference caused by military and civilian radar systems and other
sources. Although the current economic slowdown has impacted sales, management
expects demand for these types of filters to continue with the proliferation
of earth stations world wide and increased sources of interference.
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MFC's Cable TV product sales decreased $90,850 or 5.8% to $1,470,202 during
the fiscal year ended September 30, 2010 when compared to Cable TV product
sales of $1,561,052 during the fiscal year ended September 30, 2009. The
decrease can primarily be attributed to the shift from analog to digital
television and the current economic slowdown. Digital Televison (DTV) is a new
type of broadcasting modulation that will transform television viewing. DTV
enables broadcasters and cable operators to offer television with movie-
quality picture and sound (HDTV). It also offers greater multicasting and
interactive capabilities. DTV is a more flexible and efficient technology than
the NTSC "analog" modulation system. Rather than being limited to providing
one analog programming channel, a broadcaster or cable operator will be able
to provide a super sharp "high definition" (HDTV) program or multiple
"standard definition" DTV programs simultaneously using the RF spectrum more
efficiently. Providing several program streams on one cable or broadcast
channel is called "multicasting." The number of programs a station can send on
one digital channel depends on the level of picture detail, also known as
"resolution." DTV can provide interactive video and data services that are not
possible with "analog" technology. Converting to DTV will eventually free up
parts of the scarce and valuable broadcast airwaves. Those portions of the
spectrum can then be used for other important services, such as advanced
wireless and public safety services (police, fire, rescue squads, etc.). Due
to the inherent nature of digital modulation versus analog modulation, fewer
filters will be required. The Company has developed filters for digital
television and there will still be requirements for analog filters for limited
applications in commercial and private cable systems. The demand for these
filters is unknown at this time but is expected to decline.
MFC's RF/Microwave product sales increased $144,187 or 11.1% to $1,440,021
during the fiscal year ended September 30, 2010 when compared to sales of
$1,295,834 during the fiscal year ended September 30, 2009. The Company's
RF/Microwave products are primarily sold to original equipment manufacturers
(OEMs) that serve the mobile radio and commercial and defense electronics
markets. Typical customers include the U.S. Government, General Dynamics,
Motorola, Rockwell Collins, Lockheed Martin, Northrup Gruman and Raytheon. The
Company continues to invest in production engineering and infrastructure
development to penetrate OEM market segments as they become popular. MFC is
concentrating its technical resources and product development efforts toward
potential high volume customers as part of a concentrated effort to provide
substantial long-term growth.
MFC's Broadcast TV product sales increased $43,895 or 23.9% to $227,819 for
the fiscal year ended September 30, 2010 when compared to sales of $183,924
for the fiscal year ended September 30, 2009. These products are primarily
sold to system integrators for rural communities.
At September 30, 2010, the Company's total backlog of orders, which
represents firm orders from customers, equaled $413,159 compared to $479,861
at September 30, 2009. The total Company backlog at September 30, 2010 is
scheduled to ship during fiscal 2011. However, backlog is not necessarily
indicative of future sales. Accordingly, the Company does not believe that its
backlog as of any particular date is representative of actual sales for any
succeeding period.
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Gross profit increased $64,281 or 3.9% to $1,695,109 during the fiscal year
ended September 30, 2010 when compared to gross profit of $1,630,828 during
the fiscal year ended September 30, 2009. As a percentage of sales, gross
profit increased to 36.1% during the fiscal year ended September 30, 2010
compared to 35.4% during the fiscal year ended September 30, 2009. The
increases in gross profit can primarily be attributed to the higher sales
volume this year resulting in a higher base to absorb fixed expenses.
Selling, general and administrative (SG&A) expenses decreased $10,531 or
0.7% to $1,555,408 during the fiscal year ended September 30, 2010 when
compared to SG&A expenses of $1,565,939 during the fiscal year ended September
30, 2009. As a percentage of sales, SG&A expenses decreased to 33.2% during
fiscal 2010 compared to 34.0% during fiscal 2009 primarily due to the higher
sales volume this year compared to last year.
Income from operations equaled $139,701 for the fiscal year ended September
30, 2010 compared to income from operations of $64,889 during the fiscal year
ended September 30, 2009. The improvement can primarily be attributed to the
higher sales volume this year when compared to last year.
Other income decreased $10,293 to $6,850 for the fiscal year ended September
30, 2010 when compared to other income of $17,143 for the fiscal year ended
September 30, 2009. Other income is primarily interest income earned on
invested cash balances. The decrease in other income can primarily be
attributed to lower market interest rates this year when compared to the same
period last year. Other income may fluctuate based on market interest rates
and levels of invested cash balances.
The Company recorded a provision for income taxes of $260 for the fiscal
year ended September 30, 2010 compared to a provision for income taxes of $525
for the fiscal year ended September 30, 2009. As required by FASB ASC 740
(Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the
Company has evaluated the positive and negative evidence bearing upon the
realization of its deferred tax assets. The Company has determined that, at
this time, it is more likely than not that the Company will not realize all of
the benefits of federal and state deferred tax assets, and, as a result, a
valuation allowance was established.
14
<page>
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
2010 2009
Cash & cash equivalents $1,466,719 $1,476,318
Working capital $1,981,150 $1,882,933
Current ratio 4.68 to 1 4.41 to 1
Long-term debt $ 0 $ 0
Cash and cash equivalents decreased $9,599 to $1,466,719 at September 30,
2010 when compared to $1,476,318 at September 30, 2009. The decrease was a
result of $136,683 in net cash provided by operating activities, $144,875 in
net cash used for capital expenditures and $1,407 in net cash used to purchase
treasury stock.
The net increase of $175,961 in accounts receivable at September 30, 2010,
when compared to September 30, 2009, can be attributable to the higher
shipments during the quarter ended September 30, 2010 when compared to the
quarter ended September 30, 2009. Sales for the quarter ended September 30,
2010 equaled $1,433,608 compared to sales of $1,115,994 for the quarter ended
September 30, 2009.
The decrease of $68,588 in inventory at September 30, 2010, when compared to
September 30, 2009, can be attributable to the higher shipments during the
quarter ended September 30, 2010.
The decrease of $33,455 in accrued compensated absences at September 30,
2010, when compared to September 30, 2009, can be attributed to vacation days
used during the fiscal year ended September 30, 2010.
At September 30, 2010, the Company had unused aggregate lines of credit
totaling $750,000 collateralized by all inventory, equipment and accounts
receivable.
Management believes that its working capital requirements for the
foreseeable future will be met by its existing cash balances, future cash
flows from operations and its current credit arrangements.
Off-Balance Sheet Arrangements
At September 30, 2010 and 2009, the Company did not have any unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which might have been
established for the purpose of facilitating off-balance sheet arrangements.
15
<page>
Critical Accounting Policies
The Company's consolidated financial statements are based on the application
of accounting principles generally accepted in the United States of America
(GAAP). GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on
the assets, liabilities, revenue and expense amounts reported. The Company
believes its use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently applied. Valuations based on estimates are reviewed
for reasonableness and adequacy on a consistent basis throughout the
Company. Primary areas where financial information of the Company is subject
to the use of estimates, assumptions and the application of judgment include
revenues, receivables, inventories, and taxes.
Revenues from product sales are recorded as the products are shipped and
title and risk of loss have passed to the customer, provided that no
significant vendor or post-contract support obligations remain and the
collection of the related receivable is probable. Billings in advance of the
Company's performance of such work are reflected as customer deposits in the
accompanying consolidated balance sheet.
Allowances for doubtful accounts are based on estimates of losses related to
customer receivable balances. The establishment of reserves requires the use
of judgment and assumptions regarding the potential for losses on receivable
balances.
The Company's inventories are valued at the lower of cost or market. The
Company uses certain estimates and judgments and considers several factors
including product demand and changes in technology to provide for excess and
obsolescence reserves to properly value inventory.
The Company established a warranty reserve which provides for the estimated
cost of product returns based upon historical experience and any known
conditions or circumstances. Our warranty obligation is affected by product
that does not meet specifications and performance requirements and any related
costs of addressing such matters.
The Company has deferred tax assets that are reviewed for recoverability and
valued accordingly. These assets are evaluated by using estimates of future
taxable income streams and the impact of tax planning strategies. Valuations
related to tax accruals and assets can be impacted by changes to tax codes,
changes in statutory tax rates and the Company's future taxable income levels.
The Company has provided a full valuation allowance against its deferred tax
assets.
16
<page>
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In October 2009, the FASB issued Accounting Standards Update ("ASU") No.
2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements ("ASU
2009-13"), which amends ASC Topic 605, Revenue Recognition. ASU 2009-13
revises the current accounting treatment to specifically address how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. This guidance is applicable to revenue
arrangements entered into or materially modified during the first fiscal year
that begins after June 15, 2010. The guidance may be applied either
prospectively from the beginning of the fiscal year for new or materially
modified arrangements or retrospectively. The Company does not anticipate the
adoption of this guidance to have a material impact on the financial
statements.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue
Arrangements That Include Software Elements ("ASU 2009-14"), which amends ASC
Topic 985, Software. ASU 2009-14 amends the ASC to change the accounting
model for revenue arrangements that include both tangible products and
software elements, such that tangible products containing both software and
non-software components that function together to deliver the tangible
product's essential functionality are no longer within the scope of software
revenue guidance. The changes to the ASC as a result of this update are
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company
does not anticipate the adoption of this guidance to have a material impact on
the financial statements.
In December 2009, the FASB issued ASU 2009-17, which amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No.
46(R), to require a comprehensive qualitative analysis be performed to
determine whether a holder of variable interests in a variable interest entity
also has a controlling financial interest in that entity. In addition, the
amendments require the same type of analysis be applied to entities that were
previously designated as qualified special-purpose entities. This guidance is
effective as of the start of the first annual reporting period beginning after
November 15, 2009, for interim periods within the first annual reporting
period, and for all subsequent annual and interim reporting periods. The
Company does not anticipate the adoption of this guidance to have a material
impact on the financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements
and Disclosures ("ASU 2010-06"), which amends ASC Topic 820, Fair Value
Measurements and Disclosures, adding new requirements for disclosures for
Levels 1 and 2, separate disclosures of purchases, sales, issuances, and
settlements relating to Level 3 measurements and clarification of existing
fair value disclosures. ASU 2010-06 is effective for interim and annual
periods beginning after December 15, 2009, except for the requirement to
provide Level 3 activity of purchases, sales, issuances, and settlements on a
gross basis, which will be effective for fiscal years beginning after December
15, 2010; although, early adoption is permitted. The Company does not
anticipate the adoption of this guidance to have a material impact on the
financial statements.
17
<page>
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events -
Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-09")
that amends ASC Subtopic 855-10, Subsequent Events - Overall. ASU 2010-09
requires an SEC filer to evaluate subsequent events through the date that the
financial statements are issued but removed the requirement to disclose this
date in the notes to the entity's financial statements. The amendments are
effective upon issuance of the final update and accordingly, the Company has
adopted the provisions of ASU 2010-09. The Company does not anticipate the
adoption of this guidance to have a material impact on the financial
statements.
In March 2010, the FASB issued ASU No. 2010-11, Derivatives and Hedging
("ASU 2010-11"): Scope Exception Related to Credit Derivatives. ASU 2010-11
improves disclosures originally under SFAS No. 161. ASU 2010-11 is effective
for interim and annual periods beginning after June 15, 2010. The Company
does not anticipate the adoption of this guidance to have a material impact on
the financial statements.
In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue
Recognition ("ASU 2010-17") to (i) limit the scope of this ASU to research or
development arrangements and (ii) require that guidance in this ASU be met for
an entity to apply the milestone method (record the milestone payment in its
entirety in the period received). However, the FASB clarified that, even if
the requirements in ASU 2010-17 are met, entities would not be precluded from
making an accounting policy election to apply another appropriate accounting
policy that results in the deferral of some portion of the arrangement
consideration. ASU 2010-17 will apply to milestones in both single-
deliverable and multiple-deliverable arrangements involving research or
development transactions. ASU 2010-17 will be effective for fiscal years (and
interim periods within those fiscal years) beginning on or after June 15,
2010; although, early adoption is permitted. Entities can apply this guidance
prospectively to milestones achieved after adoption; however, retrospective
application to all prior periods is also permitted. The Company is currently
evaluating the impact, if any, that adoption of ASU 2010-17 will have on its
financial statements.
18
<page>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Annual Report on Form 10-K may
include comments by the Company's management about future performance. These
statements which are not historical information are "forward-looking
statements" pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These, and other forward-looking statements,
are subject to business and economic risks and uncertainties that could cause
actual results to differ materially from those discussed. These risks and
uncertainties include, but are not limited to: risks associated with demand
for and market acceptance of existing and newly developed products as to which
the Company has made significant investments; general economic and industry
conditions; slower than anticipated penetration into the satellite
communications, mobile radio and commercial and defense electronics markets;
competitive products and pricing pressures; increased pricing pressure from
our customers; risks relating to governmental regulatory actions in broadcast,
communications and defense programs; as well as other risks and uncertainties,
including but not limited to those detailed from time to time in the Company's
Securities and Exchange Commission filings. These forward-looking statements
are made only as of the date hereof, and the Company undertakes no obligation
to update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise. You are encouraged to review
Microwave Filter Company's 2010 Annual Report and Form 10-K for the fiscal
year ended September 30, 2010 and other Securities and Exchange Commission
filings. Forward looking statements may be made directly in this document or
"incorporated by reference" from other documents. You can find many of these
statements by looking for words like "believes," "expects," "anticipates,"
"estimates," or similar expressions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company has limited exposure to market risk as the Company has no long
term debt as of September 30, 2010. The Company's available line of credit is
based on a factor of the prime rate; however, there are no outstanding
borrowings under the line of credit. The Company does not trade in derivative
financial instruments. Investments generally consist of commercial paper,
government backed obligations and other guaranteed commercial debt that have
an original maturity of more than three months and a remaining maturity of
less than one year. Investments are carried at cost which approximates market.
The Company's policy is to hold investments until maturity. The Company's
practice is to invest cash with financial institutions that have acceptable
credit ratings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Financial Statement Schedule called for by this
item are submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<page>
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-
15(f) and 15d-15(f) under the exchange act.
Under the supervision and with the participation of the Company's
management, including our principal executive officer and principal financial
officer, the Company conducted an evaluation of its internal control over
financial reporting based on criteria established in the framework in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, the
Company's management concluded and certifies that its internal control over
financial reporting was effective as of September 30, 2010.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Our report was not subject to attestation by our registered public accounting
firm pursuant to rules of the SEC that permit the Company to provide only
management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
20
<page>
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 12/1/10 Class
ROBERT R. ANDREWS Mr. Andrews is the President and 1,214 *
(a)(b)(c)(d) Principal shareholder of Morse
Age 69 Manufacturing Co., Inc., East
Director since 1992 Syracuse, N.Y. which produces
specialized material handling
equipment and has served in that
capacity since prior to 1985. He
received a B.A degree from
Arkansas University and has
served as Vice President and a
director of the Manufacturers'
Association of Central New York,
President of the Citizens
Foundation, a Trustee of Dewitt
Community Church, director of the
Salvation Army and Chairman of
the Business and Industry
Council of Onondaga Community
College. Mr. Andrews was elected
Chairman of the Board of Directors
of Microwave Filter Company, Inc. on
November 17, 2004.
TRUDI B. ARTINI Mrs. Artini is an independent 32,435 1.1%
(a)(b) investor in MFC and various other
Age 88 business enterprises in Syracuse,
Director since 1974 New York.
SIDNEY CHONG Mr. Chong is a corporate 335 *
(a)(b)(c) accountant for Carrols Corp. in
Age 69 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 12/1/10 Class
CARL F. FAHRENKRUG PE Mr. Fahrenkrug was appointed 72,298 2.5%
(a) President and Chief Executive
Age 68 Officer of MFC on October 7,
Director since 1984 1992. He has also served as
President and Chief Executive
Officer of NSI since prior to
1986. He served as Vice
President of Engineering at
Microwave Systems, Inc.,
Syracuse, N.Y. from 1972-1976.
Mr. Fahrenkrug has a B.S. and
M.S. in Engineering and an MBA
from Syracuse University.
DANIEL GALBALLY Mr. Galbally is an accountant 0
(b)(c)(d) for Nucor Steel Auburn, Inc.
Age 63 in Auburn, New York. Prior to
Director since 1995 joining Nucor Steel Auburn, he
was the controller of Diamond Card
Exchange, Inc. in Syracuse, New
York. He was the controller of
Evaporated Metal Films (EMF) in
Ithaca, N.Y. Before joining EMF,
he worked as controller and acting
vice president of finance at
Philips Display Components Co.
He has a bachelor's degree in
accounting and an MBA from
Syracuse University.
PERRY A. HARVEY Mr. Harvey is a consultant in global 0
(a)(d) strategic business planning and
Age 58 productivity and process improvement.
Director since 2007 He holds a Master of Science in
Metallurgical Engineering and a
Metallurgical Engineering Degree from
the University of Wisconsin. He served
as President of ESCO Turbine Technologies
Group (TTG), Syracuse, New York from
2000-2007. He has served as a board member
and president of the Investment Casting
Institute and a board member of the
Manufacturers of Central New York and
the Foundry Educational Foundation Board.
22
<page>
Common Shares
Actually or Percent
Beneficially of
Director Principal occupation Owned 12/1/10 Class
RICHARD L. JONES Mr. Jones was appointed a Director 0
Age 62 of Microwave Filter Company, Inc. on
Director since 2004 September 7, 2004. Mr. Jones has
served as a Vice President and the
Chief Financial Officer of Microwave
Filter Company, Inc. since October 7,
1992. He has a Bachelor of Science
degree in accounting from Syracuse
University.
JOHN J. KENNEDY Mr. Kennedy is the Senior Partner and 500 *
(a)(b)(d) Co-founder of Hawthorne Consulting
Age 61 Group, LLC, a continuous improvement
Director since 2009 consulting firm dedicated to the
education and training of business
owners, managers and their employees
in the concepts of the Toyota Production
System. Prior to that, Mr. Kennedy was
a senior consultant with Seven Pines
Consulting Group/Rutherford Associates.
He has also held various management
positions with Orion Bus Industries Ltd,
General Motors Corp. and the Miller
Brewing Company. He holds an MBA from
Syracuse University and a BS degree
from the University of Pennsylvania.
FRANK S. MARKOVICH Mr. Markovich is a consultant in 4,340 *
(c)(d) the manufacturing operations
Age 66 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.
23
<page>
(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 111,122
shares or approximately 4% of the outstanding common shares of the Company.
The Board of Directors of Microwave Filter Company, Inc. has determined that
Mr. Chong and Mr. Galbally, both members of the Audit Committee, are "audit
committee financial experts" as defined by the SEC's regulations.
IDENTIFICATION OF EXECUTIVE OFFICERS
Name Age Position
Carl F. Fahrenkrug, Sr 68 President and Chief Executive Officer
Richard L. Jones 62 Vice President, Chief Financial
Officer and Corporate Secretary
Paul W. Mears 51 Vice President of Engineering
Carl F. Fahrenkrug, Jr 42 Vice President of Manufacturing and Systems
All of the officers serve at the pleasure of the Board of Directors.
Carl F. Fahrenkrug, Sr 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.
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.
Carl F, Fahrenkrug, Jr joined MFC in 1989 as an engineering intern. In 1992,
he became a full time employee when he began his duties as an electrical
engineer. On April 8, 2009, he was appointed Vice President.
The Company has adopted a Code of Ethics and Business Conduct for all of our
employees and directors, including our Chief Executive Officer and Chief
Financial Officer. A copy of our Code of Ethics and Business Conduct is
available free of charge on our Company web site at www.microwavefilter.com.
24
<page>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth for the fiscal years ended September 30, 2010
and 2009, 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 2010 171,176 -
President and CEO 2009 106,632 -
PROFIT SHARING
- --------------
MFC has a profit sharing plan for all employees over the age of 21 with one
year of service. Annual contributions are determined by the Board of Directors
and are made from current or accumulated net income. Allocation of
contributions to plan participants are based upon annual compensation.
Participants vest on the basis of 20% after 3 years of service, 40% at 4
years, 60% at 5 years, 80% at 6 years and 100% at 7 years.
MFC also has a voluntary 401-K plan. Eligibility is the same as the Profit
Sharing Plan. Contributions to the 401-K plan were matched at a rate of 100%
of an employee's first 6% of contributions during fiscal 2010. The maximum
corporate match was 6% of an employee's compensation during fiscal 2010.
MFC's contributions to the plans for the years ended September 30, 2010 and
2009 amounted to $101,049 and $90,164, respectively.
COMPENSATION OF DIRECTORS
- -------------------------
Non-officer directors currently receive fees of $300.00 per board and
committee meetings. MFC also reimburses directors for reasonable expenses
incurred in attending meetings. The Chairman of the Board receives $500.00 per
board and committee meetings. Officer members receive no compensation for
their attendance at meetings.
25
<page>
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required by this Item is contained in the Company's proxy
statement filed with respect to the 2011 Annual Meeting of Shareholders and is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is contained in the Company's proxy
statement filed with respect to the 2011 Annual Meeting of Shareholders and is
incorporated by reference herein.
26
<page>
PART IV
ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(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) Exhibits:
Reference is made to the List of Exhibits submitted as a separate
section of this report.
27
<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 20, 2010
Pursuant to the requirements Of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
|S| Robert R. Andrews |S| Carl F. Fahrenkrug
- ------------------------ --------------------------
Robert R. Andrews Carl F. Fahrenkrug
(Director) (Director)
|S| Daniel Galbally |S| Richard L. Jones
- ------------------------ -----------------------
Daniel Galbally Richard L. Jones
(Director) (Director)
|S| Sidney Chong
- --------------------
Sidney Chong
(Director)
Dated: December 20, 2010
28
<page>
ANNUAL REPORT ON FORM 10-K
MICROWAVE FILTER COMPANY, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEM 8, ITEM 15(a)(1) and (2)
CONSOLIDATED FINANCIAL STATEMENTS: Page
Report of Independent Registered Public Accounting Firm..........30
Consolidated Balance Sheets as of September 30, 2010 and 2009....31
Consolidated Statements of Operations for the Years
Ended September 30, 2010 and 2009 ............................32
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2010 and 2009 ............................33
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2010 and 2009 ............................34
Notes to Consolidated Financial Statements.......................35-43
SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 2010 and 2009:
II-Valuation and Qualifying Accounts.............................45
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.
29
<page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Microwave Filter Company, Inc.
We have audited the accompanying consolidated balance sheets of Microwave
Filter Company, Inc. and Subsidiary as of September 30, 2010 and 2009, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended September 30, 2010.
Microwave Filter Company, Inc.'s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Microwave
Filter Company, Inc. as of September 30, 2010 and 2009, and the results of its
operations and its cash flows for each of the years in the two-year period
ended September 30, 2010 in conformity with accounting principles generally
accepted in the United States of America.
/s/ EFP Rotenberg, LLP
EFP Rotenberg, LLP
Rochester, New York
December 20, 2010
30
<page>
Microwave Filter Company and Subsidiaries
Consolidated Balance Sheets
September 30,
Assets 2010 2009
- ------ ---- ----
Current assets:
Cash and cash equivalents $1,466,719 $1,476,318
Accounts receivable-trade, net of allowance for
doubtful accounts of $18,000 and $18,000 423,666 247,705
Inventories 536,004 604,592
Prepaid expenses and other current assets 92,417 106,979
--------- ---------
Total current assets 2,518,806 2,435,594
Property, plant and equipment, net 444,418 397,751
--------- ----------
Total Assets $2,963,224 $2,833,345
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 161,676 $ 144,485
Customer deposits 39,618 33,026
Accrued federal and state income taxes 2,544 1,700
Accrued payroll and related expenses 52,932 60,568
Accrued compensated absences 245,055 278,510
Other current liabilities 35,831 34,372
--------- ---------
Total current liabilities 537,656 552,661
--------- ---------
Total liabilities 537,656 552,661
--------- ---------
Commitments (Note 6)
Stockholders' equity:
Common stock, $.10 par value. Authorized 5,000,000 shares
Issued 4,324,140 in 2010 and 2009, Outstanding
2,591,486 in 2010 and 2,593,253 in 2009 432,414 432,414
Additional paid-in capital 3,248,706 3,248,706
Retained earnings 430,504 284,213
Common stock in treasury, at cost, 1,732,654
shares in 2010 and 1,730,887 shares in 2009 (1,686,056) (1,684,649)
--------- ---------
Total stockholders' equity 2,425,568 2,280,684
--------- ---------
Total Liabilities and Stockholders' Equity $2,963,224 $2,833,345
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
<page>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Operations
For the Years Ended September 30,
2010 2009
---- ----
Net sales $4,691,522 $4,610,313
Cost of goods sold 2,996,413 2,979,485
--------- ---------
Gross profit 1,695,109 1,630,828
Selling, general
and administrative expenses 1,555,408 1,565,939
--------- ---------
Income from operations 139,701 64,889
Non-operating Income
Interest income 5,158 15,171
Miscellaneous 1,692 1,972
------- -------
Income before income taxes 146,551 82,032
Provision for income taxes 260 525
-------- ---------
NET INCOME $146,291 $81,507
======== =========
Per share data:
Basic and Diluted Earnings
Per Common Share $0.06 $0.03
========= =========
Shares used in computing net
earnings per common share:
Basic and diluted 2,592,723 2,612,152
The accompanying notes are an integral part of the consolidated financial
statements.
32
<page>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended September 30, 2010 and 2009
-----------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amt Capital Earnings Shares Amt Equity
------ --- ------- -------- ------ --- ------
Balance
September 30, 2008 4,324,140 $432,414 $3,248,706 $202,706 1,431,682 ($1,529,159) $2,354,667
Net income 81,507 81,507
Purchase of treasury stock 299,205 (155,490) (155,490)
--------- --------- ---------- -------- ------- --------- ---------
Balance
September 30, 2009 4,324,140 432,414 3,248,706 284,213 1,730,887 (1,684,649) 2,280,684
Net income 146,291 146,291
Purchase of treasury stock 1,767 (1,407) (1,407)
--------- --------- ---------- -------- ------- --------- ---------
Balance
September 30, 2010 4,324,140 $432,414 $3,248,706 $430,504 1,732,654 ($1,686,056) $2,425,568
========= ======== ========== ======== ========= ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
33
<page>
Microwave Filter Company and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
For the Years Ended September 30,
---------------------------------
2010 2009
---- ----
Cash flows from operating activities:
Net income $146,291 $81,507
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 98,208 82,626
Provision for doubtful accounts 0 4,968
Inventory obsolescence provision 2,274 (3,136)
Changes in assets and liabilities:
Accounts receivable-trade (175,961) 53,403
Federal and state income taxes 844 525
Inventories 66,314 (1,047)
Other assets 14,562 (7,253)
Accounts payable and customer deposits 23,783 3,970
Accrued payroll, compensated absences and
related expenses (41,091) 82,424
Other current liabilities 1,459 3,673
-------- -------
Net cash provided by (used in)
operating activities 136,683 301,660
-------- -------
Cash flows from investing activities:
Capital expenditures (144,875) (87,123)
-------- --------
Net cash (used in) provided by
investing activities (144,875) (87,123)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (1,407) (155,490)
-------- --------
Net cash (used in) provided by
financing activities (1,407) (155,490)
-------- --------
Net increase (decrease)
in cash and cash equivalents (9,599) 59,047
Cash and cash equivalents at
beginning of year 1,476,318 1,417,271
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,466,719 $1,476,318
========== ==========
Supplemental disclosures of cash flows:
Cash paid during the year for :
Interest $0 $0
Income taxes $0 $0
The accompanying notes are an integral part of the consolidated financial
statements.
34
<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 one industry. The Company extends credit to business customers
based upon ongoing credit evaluations. Microwave Filter Company, Inc. (MFC)
designs, develops, manufactures and sells electronic filters, both for radio
and microwave frequencies, to help process signal distribution and to prevent
unwanted signals from disrupting transmit or receive operations. Markets
served include cable television, television and radio broadcast, satellite
broadcast, mobile radio, commercial communications and defense electronics.
Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, custom designs case
packing machines to automatically pack products into shipping cases. Customers
are processors of food and other commodity products with a need to reduce
labor cost with a modest investment and quick payback. For the last three
years, NSI's sales have consisted of spare parts orders.
b. Basis of Consolidation
The consolidated financial statements include the accounts of Microwave
Filter Company, Inc. (MFC) and its wholly-owned subsidiaries, Niagara
Scientific, Inc. (NSI) and Microwave Filter International, LTD. (MFI)
(dormant); located in Syracuse, New York. All significant intercompany
balances and transactions have been eliminated in consolidation.
c. Revenue Recognition
The Company recognizes revenue at the time products are shipped to customers
and title and risk of loss have passed to the customer. The Company is not
required to install any of its products. Payments received from customers in
advance of products shipped are recorded as customer advance payments until
earned.
d. Cash and Cash Equivalents
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company's
cash is held at federally insured institutions and balances may periodically
exceed insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk with
respect to cash. The Company also routinely assesses the financial strength
of its customers and, as a consequence, believes that its trade accounts
receivable credit risk exposure is limited.
35
<page>
e. Investments
Investments generally consist of commercial paper, government backed
obligations and other guaranteed commercial debt that have an original
maturity of more than three months and a remaining maturity of less than one
year. Investments are carried at cost which approximates market. The Company's
policy is to hold investments until maturity. The Company's practice is to
invest cash with financial institutions that have acceptable credit ratings.
f. Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company reviews its allowance for doubtful accounts
monthly. Past due balances over 90 days are reviewed individually for
collectibility. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit
exposure related to its customers.
g. Inventories and Reserve for Obsolescence
Inventories are stated at the lower of cost determined on the first-in,
first-out method or market.
The Company records a reserve for obsolete or excess inventory. The Company
considers inventory quantities greater than a one-year supply based on current
year activity as well as any additional specifically identified inventory to
be excess. The Company also provides for the total value of inventories that
are determined to be obsolete based on criteria such as customer demand and
changing technologies.
h. Research and Development
Costs in connection with research and development, which amount to $448,901
and $437,412 for the fiscal years 2010 and 2009, respectively, are charged to
operations as incurred.
i. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets. Buildings and building improvements are depreciated over an
estimated service life of 20 to 30 years. Machinery and equipment are
depreciated over an estimated useful life of 3 to 10 years. Office equipment
and fixtures are depreciated over an estimated useful life of 3 to 10 years.
At the time of sale or retirement, the cost and accumulated depreciation are
removed from the respective accounts and the resulting gain or loss is
recognized in income.
36
<page>
j. Income Taxes
The Company accounts for income taxes under FASB ASC 740-10 (Prior
Authoritative Literature: Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes). Deferred tax assets and liabilities are
based on the difference between the financial statement and tax basis of
assets and liabilities as measured by the enacted tax rates which are
anticipated to be in effect when these differences reverse. The deferred tax
provision is the result of the net change in the deferred tax assets and
liabilities. A valuation allowance is established when it is necessary to
reduce deferred tax assets to amounts expected to be realized. The Company has
provided a full valuation allowance against its deferred tax assets.
The Company adopted FASB ASC 740-10 (Prior Authoritative Literature: FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109 (FIN 48) as of October 1, 2007. FASB
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized
in an entity's financial statements and prescribes a recognition threshold
and measurement attributes for financial statement disclosure of tax position
taken or expected to be taken on a tax return. Additionally, it provides
guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. No adjustments were required
upon adoption.
K. Earnings Per Share
The Company presents basic earnings per share ("EPS"), computed based on the
weighted average number of common shares outstanding for the period, and when
applicable diluted EPS, which gives the effect to all dilutive potential
shares outstanding (i.e. options) during the period after restatement for any
stock dividends. Income used in the EPS calculation is net income for each
year.
l. Fair Value of Financial Instruments
The carrying values of the Company cash and cash equivalents, accounts
receivable and accounts payable approximate fair value because of the short
maturity of those instruments.
The Company currently does not trade in or utilize derivative financial
instruments.
m. Miscellaneous Non-operating Income
Miscellaneous non-operating income generally consists of sales of scrap
material, stock transfer fees, the forfeiture of non-refundable deposits and
other incidental items.
n. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
37
<page>
o. Warranty Costs
The Company established a warranty reserve which provides for the estimated
cost of product returns based upon historical experience and any known
conditions or circumstances. Our warranty obligation is affected by product
that does not meet specifications and performance requirements and any related
costs of addressing such matters. Warranty costs were approximately $8,000 and
$4,000 for the fiscal years ended September 30, 2010 and 2009, respectively.
p. Impairment of Long-Lived Assets
The carrying values of long-lived assets other than goodwill are generally
evaluated for impairment only if events or changes in facts and circumstances
indicate that carrying values may not be recoverable. Any impairment
determined would be recorded in the current period and would be measured by
comparing the fair value of the related asset to its carrying value. Fair
value is generally determined by identifying estimated undiscounted cash flows
to be generated by those assets. No impairments have been recorded for the
fiscal years ended September 30, 2010 and 2009.
q. New Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update ("ASU") No.
2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements ("ASU
2009-13"), which amends ASC Topic 605, Revenue Recognition. ASU 2009-13
revises the current accounting treatment to specifically address how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. This guidance is applicable to revenue
arrangements entered into or materially modified during the first fiscal year
that begins after June 15, 2010. The guidance may be applied either
prospectively from the beginning of the fiscal year for new or materially
modified arrangements or retrospectively. The Company does not anticipate the
adoption of this guidance to have a material impact on the financial
statements.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue
Arrangements That Include Software Elements ("ASU 2009-14"), which amends ASC
Topic 985, Software. ASU 2009-14 amends the ASC to change the accounting
model for revenue arrangements that include both tangible products and
software elements, such that tangible products containing both software and
non-software components that function together to deliver the tangible
product's essential functionality are no longer within the scope of software
revenue guidance. The changes to the ASC as a result of this update are
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company
does not anticipate the adoption of this guidance to have a material impact on
the financial statements.
In December 2009, the FASB issued ASU 2009-17, which amends the FASB ASC for
the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No.
46(R), to require a comprehensive qualitative analysis be performed to
determine whether a holder of variable interests in a variable interest entity
also has a controlling financial interest in that entity. In addition, the
amendments require the same type of analysis be applied to entities that were
previously designated as qualified special-purpose entities. This guidance is
effective as of the start of the first annual reporting period beginning after
November 15, 2009, for interim periods within the first annual reporting
period, and for all subsequent annual and interim reporting periods. The
Company does not anticipate the adoption of this guidance to have a material
impact on the financial statements.
38
<page>
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements
and Disclosures ("ASU 2010-06"), which amends ASC Topic 820, Fair Value
Measurements and Disclosures, adding new requirements for disclosures for
Levels 1 and 2, separate disclosures of purchases, sales, issuances, and
settlements relating to Level 3 measurements and clarification of existing
fair value disclosures. ASU 2010-06 is effective for interim and annual
periods beginning after December 15, 2009, except for the requirement to
provide Level 3 activity of purchases, sales, issuances, and settlements on a
gross basis, which will be effective for fiscal years beginning after December
15, 2010; although, early adoption is permitted. The Company does not
anticipate the adoption of this guidance to have a material impact on the
financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events -
Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-09")
that amends ASC Subtopic 855-10, Subsequent Events - Overall. ASU 2010-09
requires an SEC filer to evaluate subsequent events through the date that the
financial statements are issued but removed the requirement to disclose this
date in the notes to the entity's financial statements. The amendments are
effective upon issuance of the final update and accordingly, the Company has
adopted the provisions of ASU 2010-09. The Company does not anticipate the
adoption of this guidance to have a material impact on the financial
statements.
In March 2010, the FASB issued ASU No. 2010-11, Derivatives and Hedging
("ASU 2010-11"): Scope Exception Related to Credit Derivatives. ASU 2010-11
improves disclosures originally under SFAS No. 161. ASU 2010-11 is effective
for interim and annual periods beginning after June 15, 2010. The Company
does not anticipate the adoption of this guidance to have a material impact on
the financial statements.
In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue
Recognition ("ASU 2010-17") to (i) limit the scope of this ASU to research or
development arrangements and (ii) require that guidance in this ASU be met for
an entity to apply the milestone method (record the milestone payment in its
entirety in the period received). However, the FASB clarified that, even if
the requirements in ASU 2010-17 are met, entities would not be precluded from
making an accounting policy election to apply another appropriate accounting
policy that results in the deferral of some portion of the arrangement
consideration. ASU 2010-17 will apply to milestones in both single-
deliverable and multiple-deliverable arrangements involving research or
development transactions. ASU 2010-17 will be effective for fiscal years (and
interim periods within those fiscal years) beginning on or after June 15,
2010; although, early adoption is permitted. Entities can apply this guidance
prospectively to milestones achieved after adoption; however, retrospective
application to all prior periods is also permitted. The Company is currently
evaluating the impact, if any, that adoption of ASU 2010-17 will have on its
financial statements.
39
<page>
2. INVENTORIES
Inventories net of provision for obsolescence consisted of the following:
September 30,
2010 2009
---- ----
Raw materials and stock parts $414,331 $500,353
Work-in-process 25,740 24,439
Finished goods 95,933 79,800
-------- --------
$536,004 $604,592
======== ========
The Company's reserve for obsolescence equaled $403,595 at September 30,
2010 and $401,321 at September 30, 2009.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30,
2010 2009
---- ----
Land $143,000 $143,000
Building and improvements 1,818,633 1,818,633
Machinery and equipment 3,150,555 3,048,112
Office equipment and fixtures 1,727,587 1,685,156
--------- ---------
6,839,775 6,694,901
Less: Accumulated depreciation 6,395,357 6,297,150
--------- ---------
$444,418 $397,751
========= =========
4. CREDIT FACILITIES
The Company has unused aggregate lines of credit totaling $750,000
collateralized by inventory, equipment and accounts receivable.
5. PROFIT SHARING AND 401-K PLANS
The Company maintains both a non-contributory profit sharing plan and a
contributory 401-K plan for all employees over the age of 21 with one year of
service. Annual contributions to the profit sharing plan are determined by
the Board of Directors and are made from current or accumulated earnings,
while contributions to the 401-K plan were matched at a rate of 100% of an
employee's first 6% of contributions during fiscal 2010. The maximum corporate
match was 6% of an employee's compensation during fiscal 2010.
The Company's matching contributions to the 401-K plan for the years ended
September 30, 2010 and 2009 were $101,049 and $90,164, respectively.
Additionally, the Company may make discretionary contributions to the non-
contributory profit sharing plan. These contributions were $0 in 2010 and
2009.
40
<page>
6. OBLIGATIONS UNDER OPERATING LEASES
The Company leases equipment under operating lease agreements expiring at
various dates through September 30, 2014. Rental expense under these leases
for the years ended September 30, 2010 and 2009 amounted to $8,940 and
$10,640, respectively.
Minimum rental commitments at September 30, 2010 for these leases are:
Year Ended Lease
September 30, Payments
------------- --------
2011 8,496
2012 8,496
2013 8,496
2014 1,368
-------
$26,856
=======
7. INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended September 30,
2010 2009
Currently payable:
Federal $29,599 $194
State 260 525
Deferred (credit) (29,599) (184)
------- -----
$260 $525
======= =====
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
Year ended September 30,
______2010______ ______2009______
Amount % Amount %
Statutory tax rate $49,827 34.0% $27,891 34.0%
Surtax exemption
State income tax net of:
Federal benefit 172 0.1% 347 1.2%
Research and experimentation
tax credits (29,179) (19.9%) (28,432)(101.9%)
Valuation allowance (20,560) (14.0%) 541 1.9%
Federal AMT rate
differential 0 0.0% 0 0.0%
Other 178 0.6%
------ ---- ------ ----
$260 0.1% $525 1.3%
====== ==== ====== ====
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<page>
The temporary differences which give rise to deferred tax assets and
(liabilities) at September 30 are as follows:
2010 2009
---- ----
Inventory $143,816 $143,316
Accrued warranty 4,250 4,250
Accrued vacation 96,454 85,080
Accounts receivable 6,043 6,043
Valuation allowance (250,563) (238,689)
------- -------
Net deferred tax assets
(liabilities) - current $0 $0
------- -------
Accelerated depreciation $9,949 $30,602
Research and experimentation
tax credit carry forward 191,219 191,219
AMT credit carry forward 39,399 39,399
NOL carry forward 78,577 99,397
Valuation allowance (319,144) (360,617)
------- -------
Net deferred tax assets
(liabilities) - noncurrent $0 $0
------- -------
Net deferred tax assets $0 $0
======== =======
As required by FASB ASC 740 (Prior Authoritative Literature: SFAS 109,
Accounting for Income Taxes) the Company has evaluated the positive and
negative evidence bearing upon the realization of its deferred tax assets. The
Company has determined that, at this time, it is more likely than not that the
Company will not realize all of the benefits of federal and state deferred tax
assets, and, as a result, a valuation allowance was established. The research
and experimentation tax credit carry forwards and NOL carry forwards expire in
2029. At September 30, 2010, the Company's federal AMT credit can be carried
forward indefinitely.
8. INDUSTRY SEGMENT DATA
The Company's primary business segment involves the operations of Microwave
Filter Company, Inc. (MFC) which designs, develops, manufactures and sells
electronic filters, both for radio and microwave frequencies, to help process
signal distribution and to prevent unwanted signals from disrupting transmit
or receive operations.
9. SIGNIFICANT CUSTOMERS
Sales to one customer represented approximately 15% of total sales during
fiscal 2010.
42
<page>
10. LEGAL MATTERS
The State of New York Workers' Compensation Board has commenced an action
against Microwave Filter Company, Inc. to recover for an underfunded self
insured program that Microwave Filter Company, Inc. participated in. Due to
the relatively short period of time Microwave Filter Company, Inc.
participated in the program and the limited amount of potential exposure, we
do not expect the resolution of this action will have a material adverse
effect on our financial condition, results of operations or cash flows.
11. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth certain unaudited quarterly financial
information For the years ended September 30, 2010 and 2009:
2010 Quarter Ended
-----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
---------- ---------- ---------- ----------
Net sales $1,135,058 $1,093,697 $1,029,159 $1,433,608
Cost of sales $ 714,459 $ 731,550 $ 695,020 $ 855,384
Net income (loss) $ 14,084 $ (19,228) $ (49,037) $ 200,472
Earnings (loss)
per common share: $ 0.01 $ (0.01) $ (0.02) $ 0.08
2009 Quarter Ended
-----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
---------- ---------- ---------- ----------
Net sales $1,249,703 $1,223,401 $1,021,215 $1,115,994
Cost of sales $ 820,695 $ 807,708 $ 635,060 $ 716,022
Net income (loss) $ (7,593) $ 37,138 $ 35,346 $ 16,616
Earnings (loss)
per common share: $ (.00) $ .01 $ .01 $ .01
43
<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.
31.1 Section 13a-14(a)/15d-14(a) Certification of Carl F. Fahrenkrug
31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones
32.1 Section 1350 Certification of Carl F. Fahrenkrug
32.2 Section 1350 Certification of Richard L. Jones
* Previously filed
44
<page>
Microwave Filter Company and Subsidiaries
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
SEPTEMBER 30, 2010 and 2009
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- --------- ----------------------- ---------- ----------
Year ended September 30, 2010
Allowance for doubtful accounts $17,773 $0 $0 $0 $17,773
Inventory valuation reserves 401,321 2,274 0 0 403,595
-------- ------- ------ ------- --------
$419,094 $2,274 $0 $0 $421,368
======== ======= ====== ======= ========
Year ended September 30, 2009
Allowance for doubtful accounts $12,000 $4,968 $805 $0 $17,773
Inventory valuation reserves 404,457 0 3,136 401,321
-------- ------- ------ ------- --------
$416,457 $4,968 $805 $3,136 $419,094
======== ======= ====== ======= ========
45
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