UNITED STATES 						SECURITIES AND EXCHANGE COMMISSION 							 Washington, D.C. 20549 									 FORM 10-Q Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1999 Commission file number 0-10976 						 MICROWAVE FILTER COMPANY, INC. 		 (Exact name of registrant as specified in its charter.) 			 New York 16-0928443 (State of Incorporation) (I.R.S. Employer Identification Number) 6743 Kinne Street, East Syracuse, N.Y. 13057 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (315) 438-4700 	Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 						 YES ( x ) NO ( ) 	Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common Stock, $.10 Par Value - 3,267,723 shares as of June 30, 1999. PART I. - FINANCIAL INFORMATION MICROWAVE FILTER COMPANY, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (Amounts in thousands) JUNE 30, 1999 SEPTEMBER 30, 1998 [S] [C] [C] Assets Current Assets: Cash and cash equivalents $ 1,104 $ 1,221 Accounts receivable-trade,net 526 652 Federal and state income tax recoverable 0 56 Inventories 1,310 1,328 Deferred tax asset - current 116 175 Prepaid expenses and other current assets 49 53 -------- -------- Total current assets 3,105 3,485 Property,plant and equipment,net 1,456 1,574 -------- -------- Total assets $ 4,561 $ 5,059 ======== ======== Liabilities And Stockholders' Equity Current liabilities: Current portion of long term debt $ 0 $ 45 Accounts payable 209 356 Customer deposits 97 111 Accrued federal and state income taxes 23 0 Accrued payroll and related expenses 105 101 Accrued compensated absences 253 225 Other current liabilities 55 81 -------- -------- Total current liabilities 742 919 Deferred tax liability - noncurrent 51 51 Deferred compensation and other liabilities 8 12 -------- -------- Total liabilities 801 982 -------- -------- Stockholders' Equity: Common stock,$.10 par value 431 429 Additional paid-in capital 3,234 3,223 Retained earnings 1,087 1,147 -------- -------- 4,752 4,799 Common stock in treasury, at cost (992) (722) -------- -------- Total stockholders' equity 3,760 4,077 -------- -------- Total liabilities and stockholders' equity $ 4,561 $ 5,059 ======== ======== [FN] See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Amounts in thousands, except per share data) Three months ended Nine months ended June 30 June 30 1999 1998 1999 1998 [S] [C] [C] [C] [C] Net sales $1,645 $1,640 $5,037 $5,215 Cost of goods sold 982 1,025 3,061 3,244 ------- ------- ------- ------- Gross profit 663 615 1,976 1,971 Selling, general and administrative expenses 618 708 1,852 1,966 ------- ------- ------- ------- Income (loss) from operations 45 (93) 124 5 Other income (expense) 9 11 36 41 ------- ------- ------- ------- Income (loss) before income taxes 54 (82) 160 46 Provision (benefit) for income taxes 19 (28) 55 16 ------- ------- ------- ------- NET INCOME (LOSS) $ 35 $(54) $105 $30 ======= ======= ======= ======= Earnings (loss) per share $0.01 $(0.01) $0.03 $0.01 ======= ======= ======= ======= [FN] See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Amounts in thousands) Three months ended Nine months ended June 30 June 30 1999 1998 1999 1998 [S] [C] [C] [C] [C] Cash flows from operating activities: Net income $ 35 $ (54) $ 105 $ 30 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78 81 227 238 Stock Compensation 7 0 13 4 Change in assets and liabilities: (Increase) decrease in: Accounts receivable 279 169 125 (7) Inventories 0 (51) 19 (198) Prepaid expenses & other assets 144 34 119 9 Increase (decrease) in: Accounts payable & accrued expenses (126) 25 (132) 57 Deferred compensation & other liabilities (2) 45 (5) 42 ------- ------- -------- ------- Net cash provided by operating activities 415 249 471 175 ------- ------- -------- ------- Cash flows from investing activities: Capital expenditures (45) (24) (108) (184) Cash flows from financing activities: Principal payments on long-term debt (15) (14) (45) (42) Purchase of treasury stock (7) 0 (270) 0 Cash dividend paid 0 0 (165) (177) ------- ------- ------- ------- Net cash used in financing activities (22) (14) (480) (219) Increase (decrease) in cash and cash equivalents 348 211 (117) (228) Cash and cash equivalents at beginning of period 756 995 1,221 1,434 ------- ------- ------- ------- Cash and cash equivalents at end of period $1,104 $1,206 $1,104 $1,206 ======= ======= ======= ======= [FN] See Accompanying Notes to Consolidated Financial Statements MICROWAVE FILTER COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 Note 1. Summary of Significant Accounting Policies The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ended September 30, 1999. MICROWAVE FILTER COMPANY, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1999 Net sales for the nine months ended June 30, 1999 equaled $5,036,854, a decrease of $177,844 or 3.4% when compared to net sales of $5,214,698 for the nine months ended June 30, 1998. Net sales for the three months ended June 30, 1999 equaled $1,645,222, an increase of $5,823 or 0.4% when compared to net sales of $1,639,399 for the three months ended June 30, 1998. Microwave Filter Company, Inc. (MFC) sales for the nine months ended June 30, 1999 equaled $4,648,885, a decrease of $486,885 or 9.5% when compared to net sales of $5,135,770 for the nine months ended June 30, 1998. MFC sales for the three months ended June 30, 1999 equaled $1,567,493 for the three months ended June 30, 1999, a decrease of $55,317 or 3.4% when compared to net sales of $1,622,810 for the three months ended June 30, 1998. Niagara Scientific, Inc. (NSI) sales for the nine months ended June 30, 1999 equaled $387,969, an increase of $309,041 or 391% when compared to net sales of $78,928 for the nine months ended June 30, 1998. NSI sales for the three months ended June 30, 1999 equaled $77,729, an increase of $61,140 or 369% when compared to net sales of $16,589 for the three months ended June 30, 1998. The decrease in MFC sales can primarily be attributed to the decrease in the sales of the Company's RF/Microwave products to OEMs (Original Equipment Manufacturers), due to the completion of OEM contracts during fiscal 1998 and the decrease in the sales of MFC's BTV products, which include wireless cable products, primarily due to market conditions. Gross profit for the nine months ended June 30, 1999 equaled $1,976,071, an increase of $5,494 or 0.3% when compared to gross profit of $1,970,577 for the nine months ended June 30, 1998. Gross profit for the three months ended June 30, 1999 equaled $662,659, an increase of $47,864 or 7.8% when compared to gross profit of $614,795 for the three months ended June 30, 1998. The dollar increases in gross profit can primarily be attributed to the improvements in gross profit as a percentage of sales when compared to the same periods last year. As a percentage of sales, gross profit equaled 39.2% for the nine months ended June 30, 1999 compared to 37.8% for the nine months ended June 30, 1998. As a percentage of sales, gross profit equaled 40.3% for the three months ended June 30, 1999 compared to 37.5% for the three months ended June 30, 1998. The increases in gross profit as a percentage of sales can primarily be attributed to lower manufacturing (excess scrap and rework) costs associated with new product development during fiscal 1999 when compared to the same periods last year. Selling, general and administrative (SG&A) expenses for the nine months ended June 30, 1999 equaled $1,851,656, a decrease of $113,880 or 5.8% when compared to SG&A expenses of $1,965,536 for the nine months ended June 30, 1998. SG&A expenses for the three months ended June 30, 1999 equaled $618,211, a decrease of $90,107 or 12.7% when compared to SG&A expenses of $708,318 for the three months ended June 30, 1998. The decreases can primarily be attributed to decreases in advertising expense and sales commissions expense when compared to the same periods last year. Income from operations for the nine months ended June 30, 1999 equaled $124,415, an increase of $119,374 when compared to income from operations of $5,041 for the nine months ended June 30, 1998. The increase can primarily be attributed to the improvements in gross profit as a percentage of sales and the reduction in SG&A expenses when compared to the same periods last year. On an industry segment basis, MFC reported income from operations of $261,919 and NSI reported an operating loss of $137,504 for the nine months ended June 30, 1999. NSI's operating loss can primarily be attributed to low sales volume plus the absorption of fixed overhead expenses. Cash and cash equivalents decreased $117,463 to $1,103,645 at June 30, 1999 when compared to $1,221,108 at September 30, 1998. The decrease was a result of $470,893 in net cash provided by operating activities, $108,413 in net cash used for capital expenditures and $479,943 in net cash used in financing activities ($44,851 used for principal payments on long-term debt, $164,643 used for a cash dividend paid and $270,449 used to purchase treasury stock). The Company's Board of Directors has authorized the repurchase of up to 500,000 shares of the Company's outstanding common stock. The repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. As of June 30, 1999, 312,380 shares were repurchased using existing cash balances. Management believes the common stock repurchase program, given the Company's present cash position as well as the current market price of the stock, reflects its belief in the fundamental strength of the business and also its commitment to enhancing shareholder value. At June 30, 1999, the Company had aggregate lines of credit totaling $600,000. Of these lines, $100,000 is for the purchase of equipment and is collateralized by equipment and $500,000 is for working capital and is collateralized by accounts receivable, inventories and equipment. The equipment line of credit provides for interest at the bank's base rate plus one half percent (1/2%). The working capital line of credit provides for interest at the bank's base rate plus one quarter percent (1/4%). Management believes that its working capital requirements for the foreseeable future will be met by its existing cash balances, future cash flows from operations and its current credit arrangements. YEAR 2000 READINESS DISCLOSURE The YEAR 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded computer chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations which could disrupt the Company's normal business activities. The Company has conducted a full inventory of its computer systems to identify the programs and systems that could be affected by the year 2000 problem. The Company has evaluated and tested all critical programs and systems. Although no assurance can be given, the Company believes all critical software utilized by the Company is presently year 2000 compliant. The total cost to the Company of its own year 2000 assessment, compliance and verification activities has not been material to the Company's financial position or results of operations in any given year. The Company is presently surveying all major vendors and large customers to assess their state of readiness in addressing the year 2000 problem. The Company depends on outside suppliers for raw materials, components and parts, and services. Although items are generally available from a number of suppliers, the Company purchases raw materials and components from a single supplier. If such a supplier should cease to supply an item, the Company believes that new sources could be found to provide the raw materials and components. However, manufacturing delays and added costs could result and adversely affect the business of the Company. The Company has not experienced significant delays of this nature in the past, but there can be no assurances that delays due to supply shortages will not occur in the future. The Company has and will continue to devote the resources necessary to address any year 2000 issue. The Company's contingency plan is to replace or repair systems which fail unexpectedly after January 1, 2000. The Company estimates that the costs associated with its year 2000 contingency, if required, to be less than $75,000. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Any statements contained in this report which are not historical facts are forward looking statements; and, therefore, many important factors could cause actual results to differ materially from those in the forward looking statements. Such factors include, but are not limited to, changes (legislative, regulatory and otherwise) in the MMDS, LPTV or Cable industry, demand for the Company's products (both domestically and internationally), the development of competitive products, competitive pricing, market acceptance of new product introductions, technological changes, general economic conditions, litigation and other factors, risks and uncertainties which may be identified in the Company's Securities and Exchange Commission filings. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is unaware of any material threatened or pending litigation against the Company. Item 2. Changes in Securities None during this reporting period. Item 3. Defaults Upon Senior Securities The Company has no senior securities. Item 4. Submission of Matters to a Vote of Security Holders None during this reporting period. Item 6. Exhibits and Reports on Form 8-K None. Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROWAVE FILTER COMPANY, INC. August 10, 1999 Carl F. Fahrenkrug (Date) -------------------------- Carl F. Fahrenkrug Chief Executive Officer August 10, 1999 Richard L. Jones (Date) -------------------------- Richard L. Jones Chief Financial Officer