<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
Commission File No. 0-9877
MSI ELECTRONICS Inc.
--------------------
(Exact name of Registrant as specified in its Charter)
Delaware 11-1969354
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer Identification No.
Incorporation or Organization)
3100 47th Avenue, Long Island City, New York 11101
--------------------------------------------------
(Address of principal executive offices with Zip Code)
Registrant's telephone number, including area code 718 937-3330
------------
Title of Each Class Name of each Exchange on which registered
------------------- -----------------------------------------
None None
Securities Registered Section 12 (g) of the Act
-----------------------------------------------
Common Stock, $.03 Par Value Pursuant to Per Share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12 or 15(d) of the Securities and 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 the subject to such filling
requirements for the past 90 days. Yes [X] No [ ]
Aggregate market value of Common Stock held by non-affiliates of the Registrant
at December 20, 1998 (computed by reference to the last reported average closing
bid price for the Common Stock as reported through NASDAQ: $415,434.
Number of Shares of Common Stock outstanding at September 30, 1998 957,572 shs.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement to be filed in connection with the Registrant's 1998
Annual Meeting of Shareholders is incorporated by reference into Items 10, 11,
12 and 13 of Part II of this report, to the extent indicated therein.
<PAGE>
Part I
Item 1 - BUSINESS
MSI Electronics Inc. (the "Registrant") is a Delaware corporation
organized on September 29, 1960 under the name Microwave Instruments Inc. On
January 18, 1962, Microwave Instruments Inc. was changed to its present name,
MSI Electronics Inc. The business of the Registrant is,
a) to manufacture and sell electronic products to test and measure properties
of semiconductors;
b) to develop and sell programs for interactive media:
c) to distribute specialized electronic products manufactured by others, and
d) to develop and manufacture products for medical applications.
Products to Characterize Semiconductors
- ---------------------------------------
The instruments to characterize semiconductors are primarily used to
measure the properties of wafers for integrated circuits (ICs), transistors,
diodes and for other devices. MSI instruments are sold to manufacturers for use
in production and to industrial, governmental and university laboratories for
research and development purposes. In production, the instruments are used to
determine characteristics of semiconductor wafers that could be of use by
manufacturers to increase device yields. MSI instruments are also used for
research and development (R & D) and to measure known materials to determine
factors to improve device performance as well as yields; the semiconductor
measurement equipment also finds use in industry to measure newer materials that
would lead to devices with expanded capabilities or for devices with attributes
for high temperature, higher frequency or other operating criteria beyond those
currently available. The semiconductor equipment is sold to universities for R &
D, for teaching and for graduate thesis' activities. MSI semiconductor
measurement instruments are primarily for R & D in government laboratories.
Competition for the Registrant's semiconductor measurements products is
principally from Hewlett Packard, Keithley Instruments, Inc., Material
Development Corp. and from Solid State Measurements Corp. The sales philosophy
of the Registrant is to compete on quality, delivery and innovation, with price
a secondary factor.
Programs for Interactive Media
- ------------------------------
The Registrant has developed hardware and software products to pursue
business opportunities in the Internet, television and telephone media. The
interactive products are intended to be supported by advertisers initially and
by licensing fees to third parties. Products under development include
interactive games and for retail commerce programs for TV and for the Internet.
Efforts to market a telephone advertising system, for which the Registrant
received a patent in 1994, have not materialized in sales. The Registrant is
also promoting the sale of its interactive media products as well as products of
others.
Distributor of Specialized Electronic Components
- ------------------------------------------------
The bulk of products sold or distributed were manufactured by the
Registrant until November 1994 when the Registrant sold that portion of its
operation that manufactured semiconductor diodes and other custom assemblies.
When the manufacture of semiconductor components was discontinued, the
electronic components and allied products sold by the Registrant were purchased
from other manufacturers or suppliers. Efforts are continually being made to
expand the distributor portion of the Registrant's business by seeking suppliers
of electronic components as well as products in other fields.
Products for Medical Applications
- ---------------------------------
In line with the efforts expended by the Registrant in its search for
products aimed at the consumer marketplace, the Registrant was engaged in the
development of products for medical applications. Since the past efforts have
not materialized in marketable devices, the Registrant is considering its
alternatives, including the continued development of medical devices as well as
other products for mass market consumption.
Sales of Product Lines
- ----------------------
The amount of sales to unaffiliated customers and the profits or losses
of the Registrant's product lines for the fiscal 1998 are set forth in the
Schedule of Industry Segments of Business on Page F-11appended. Sales were
-1-
<PAGE>
conducted under the supervision of the principal operating officer who monitored
the activities of the two subsidiaries, one independent domestic sales
representative and four independent foreign sales representatives.
In Fiscal 1998, one sale was greater than 5% of the Registrant's total
sales to any customers. The Registrant believes that sales to U.S. governmental
agencies are not subject to renegotiation as a result of the commercial
exemption provisions of the Renegotiation Act.
Backlog
- -------
As of November 30, 1998, the Registrant had no backlog of orders.
Research and Development Expenses
- ---------------------------------
All costs and expenses for research and development are charged to
earnings in the year disbursed. The table below sets forth the amount spent by
the Registrant during the last two fiscal years on research and development
leading to new products.
Year Ended Persons Engaged on a
Sept. 30, Amount Spent Full Time* Basis
--------- ------------ -----------------
1998 $ 137,964 2
1997 145,087 2
* or equivalent inasmuch as there are both part-time and full-time employees so
engaged.
Employees
- ---------
As of September 30, 1998, the Registrant had five full time and one
part time employees and one outside consultant. One executive and three full
time employees perform technical, administrative and marketing functions and one
part time employee handles the office and assists in administrative functions.
The Registrant has never entered into a collective bargaining agreement with any
union, has never had a work stoppage and considers its relations with its
employees to be satisfactory. The Registrant believes it is in compliance with
all civil rights statutes and with applicable laws regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment.
Item 2 - Properties
The Registrant had its lease extended for an additional year to expire
October 31, 1999 for its occupancy of 1650 sq. ft. premises, 1350 sq. ft. of
factory and 300 sq. ft. of office, in a building located at 31-00 47th Avenue,
Long Island City, New York. The rental is $20,004.04 per annum. The Registrant
rents 180 sq. ft. of office space located at 122 East 42nd Street, New York, NY
at $1,669.69 per month on a month to month basis and 480 sq. ft. of office space
at 89b, London Road in East Grinstead, England at $776 per month on a month to
month basis.
Item 3 - Legal Proceedings
There are no legal proceedings or threatened proceedings against the
Registrant.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the shareholders during the fourth
quarter of the Fiscal Year ended September 30, 1998 through the solicitation of
proxies or otherwise.
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) The Common Stock of the Company now trades on the OTC Bulletin Board
under the symbol MSIE. On January 20, 1994, the shares of the Registrant were
delisted from the NASDAQ SmallCap Market due to the failure to meet the bid
price requirement as set forth in the NASDAQ By-Laws.
-2-
<PAGE>
(b) The following table sets forth the quarterly high and low bid prices
for the Registrant's Common Stock, $.03 par value per share for the year ended
September 30, 1998 as reported by NASDAQ. These quotations reflect inter-dealer
prices, without mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Fiscal Year Ended September 30,
1998 1997
High Low High Low
---- --- ---- ---
First Quarter $ .70 $ .68 $ .84 $.625
Second Quarter .70 .68 .67 .65
Third Quarter .73 .70 .68 .64
Fourth Quarter .88 .74 .64 .625
(c) Approximate Number of Holders of Common Stock
As of September 30, 1998, there were approximately 251 holders of
record of the Registrant's Common Stock, $.03 par value per share.
(d) Dividends
There are no contractual restrictions on the present or future ability
of the Registrant to pay cash dividends. The Registrant has no present
intentions to pay cash dividends in the foreseeable future.
Item 6 - Selected Financial Data
The selected financial data required by this Item 6 are set forth at
the pages indicated in Item 14(a)(1) below.
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 645,275 $ 687,438 $ 668,613 $ 74 9,916 $1,104,130
Net Loss (264,928) (270,730) (249,413) (201,807) (129,922)
Net Loss Per share (.28) (.26) (.26) (.21) (.13)
Total Assets $1,713,368 $1,941,838 $2,234,903 $2,548,634 $2,683,007
</TABLE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
The net sales of the Registrant for the fiscal years ended September
30, 1998, 1997 and 1996 were $645,275, $687,438 and $668,813 respectively. The
decrease of $42,163 or 6.1% was due to the decrease in sales of the instrument
product line. The increase of $18,625 or 2.8% for the fiscal year 1997 from 1996
was due to the increase in sales of the instrument product line.
The cost of sales for the years ended September 30, 1998, 1997 and 1996
were $461,593, $532,392 and $483,830 respectively. Costs as expressed as a
percentage of sales for the respective years were 71.5%, 77.5% and 72.3%. The
decrease of $70,799 or 13.3% for the fiscal year 1998 over 1997 was due to the
decrease in sales and a decrease in factory overhead. The increase of $48,562 or
10.0% for the fiscal 1997 over 1996 was due to the increase in sales and the
increased cost of manufacturing.
Selling and administrative expenses were $483,571 for the fiscal year
ended September 30, 1998, $513,175 for the 1997 fiscal year and $507,726 for the
fiscal 1996 period. The decrease of $29,604 or 5.8% was due to a decrease in
sales. The increase of $5,449 from fiscal 1997 over fiscal 1996 was due to an
increase in sales.
Investment and other income for the fiscal years ended September 30,
1998 was $40,775, $101,572 for the fiscal year 1997and $96,348 for fiscal year
1996. The decrease of $54,797 was due to the decrease in the value of marketable
securities and the decrease in investment income due to a decrease in the
availability of investment funds. The increase of $5,224 for fiscal 1997 from
fiscal 1996 was due to a net increase in the value of marketable securities
offset by a decrease in the availability of investment funds.
-3-
<PAGE>
Income taxes was $11,814 for the fiscal year ended September 30, 1998,
$14,173 for fiscal 1997 and $23,018 for fiscal 1996. The decrease in taxes of
$2,359 in 1998 from 1997 and the decrease in taxes of $8,845 in 1997 and 1996
were due principally to a decrease in taxes paid by the Company's foreign
subsidiary.
The net loss for fiscal years ended September 30, 1998, 1997 and 1996
were $264,928, $270,730, 249,413 respectively. The decrease in the loss in
fiscal 1998 over 1997 was due to a decrease in the cost of goods sold offset by
the decrease in investment and other income. The increase in the loss in fiscal
1997 over 1996 was due to the increased cost of manufacturing, selling and
administrative expenses.
For the first quarter fiscal 1999 or the three month period ended
December 31, 1998, sales are estimated to decrease 33% from sales for the
comparable period ended December 31, 1997. For the full fiscal year ended
September 30, 1999, sales are estimated to decrease by 25% as compared to the
current fiscal year ended September 30, 1998.
The Company has completed an assessment of the impact of the year 2000
issue. The Company will not have to replace any portions of its hardware or
software so that its computer controlled systems will function properly with
respect to dates in the year 2000 and thereafter.
The Company has no material relationship with any of their customers,
vendors and suppliers so that there would be no material effect on the Company's
business, results of operations or financial conditions if they do not timely
become year 2000 compliant.
Liquidity and Capital Resources
- -------------------------------
Of its total assets at September 30, 1998, the Registrant had 83.6% or
an aggregate of $1,432,604 in cash and cash equivalents including certificates
of deposits, money market funds and marketable securities. The major application
of the Registrant's liquid position is to finance the sale of its product line,
the inventory of goods purchased for resale and to fund the development of new
hardware and software products for sale to consumer and industrial markets. It
is anticipated that the expenses for product development, testing and marketing
will be financed in the foreseeable future from cash and liquid investments on
hand but should there be requirements for additional cash, the Registrant may
seek other sources of financing. There can be no assurance that funds will be
available on terms acceptable to the Registrant should additional financing be
required. Should funds not be available, there could be a limitation on the
purchase of electronic components for resale as well as new product development
which would adversely affect the Registrant.
Item 8 - Financial Statements and Supplementary Data
The financial statements as of September 30, 1998 and for previous
years are submitted on Pages F-1 thru F-13 in the section appended to this
report.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No Form 8-K has been filed within the 24 months prior to the date of
the most recent financial statements reporting a change of accountants and/or
reporting disagreements on any matter of accounting principle or financial
statement disclosure.
Part III
Item 10 - Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the
Registrant is set forth on Page 2 of the 1998 Proxy Statement which is
incorporated herein by reference.
Item 11 - Executive Compensation
Information regarding executive compensation is set forth on Page 3 of
the 1998 Proxy Statement which is incorporated herein by reference.
-4-
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is set forth on Page 4 of the 1998 Proxy Statement which is
incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
set forth on Page 3 of the 1998 Proxy Statement which is incorporated herein by
reference.
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
Page
----
a) 1. Financial Statements
1. Report of Independent Certified Public Accountants F-1
2. Consolidated Balance Sheet as of September 30, 1998and 1997 F-2
3. Consolidated Statement of Income for the fiscal years ended
September 30, 1998, 1997 and 1996 F-3
4. Consolidated Statement of Retained Earnings at September 30, 1998, 1997 and 1996 F-4
5. Consolidated Statement of Changes in Financial Position for the fiscal years ended
September 30, 1998, 1997 and 1996 F-5
6. Notes to Consolidated Financial Statements F-6 to F-11
2. Financial Statement Schedules
Marketable Securities for the years ended September 30, 1998, 1997 and 1996 F-12
Property Plant and Equipment for the years ended September 30, 1998, 1997 and 1996 F-13
Accumulated Depreciation of Property, Plant and Equipment for the years ended
September 30, 1998, 1997 and 1996 F-14
Supplementary Income Statement Information for the years ended Sept. 30, 1998,
1997 and 1996. F-15
Industry Segments of Business for the years ended September 30, 1998, 1997 and 1996 F-16
Financial Highlights for the Years ended September 30, 1998, 1997 and 1996 F-17
Other schedules are omitted because they are not required or are not material or the required
information is included in the notes to financial statements.
</TABLE>
3. Exhibits
3a. Certificate of incorporation of the Registrant (filed September
19, 1960) previously filed as Exhibit 4(a) to the Registrant's
Form S-1 Registrant Statement No. 2-18113, which became effective
on August 30, 1961 (thereafter the "Registrant Statement") is
incorporated by reference.
3b. Certificate of Amendment to Certificate of Incorporation of
Registrant (filed March 3, 1961) previously filed as Exhibit 4(b)
to the Registration Statement is incorporated herein by reference.
3c. Certificate of Amendment to Certificate of Incorporation of
Registrant (filed April 19, 1961) previously filed as Exhibit
4 (c) to the Registration Statement is incorporated herein by
reference.
-5-
<PAGE>
3d. Certificate of Amendment to Certificate of Incorporation of
Registrant (filed January 18, 1962), previously filed as Exhibit
3(d) to the Registrant's Form 10 Registration Statement No.
0-9877, which became effective on October 6, 1981 (hereinafter the
"Form 10 Registration Statement") is incorporated herein by
reference.
3e. By-laws of Registrant previously filed as Exhibit 4(d) to the
Registration Statement is incorporated herein by reference.
3f. Certificate of Amendment to Certificate of Incorporation of
Registrant filed February 24, 1984 is incorporated herein by
reference.
4. Specimen of Common Stock of the Registrant previously filed as Exhibit
5 to the Registration Statement incorporated herein by reference
10a. Profit Sharing Plan of Registrant adopted October 1, 1973 previously
filed as Exhibit 10a to the Registration Statement is incorporated
herein by reference.
10a(1) Restated Profit Sharing Plan of Registrant adopted October 1, 1982
previously filed as Exhibit 10(a)1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1983 is incorporated
herein by reference.
10b. Deferred Compensation Plan of Registrant adopted December 10, 1979,
previously filed as Exhibit 10 to the Form 10 Registration Statement is
incorporated herein by reference.
10b(1) Amendment to the Deferred Compensation Plan of the Registrant
previously filed as Exhibit 10b(1) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1989 is incorporated
herein by reference.
10c. Pension Plan of Registrant dated October 1, 1982 previously filed as
Exhibit 10c to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1983 is incorporated herein by
reference
22 Subsidiaries of Registrant herewith
(b) Reports of Form 8-K
There were no reports on Form 8-K filed during the last quarter of
the fiscal year ended September 30, 1998.
Exhibit 22 Subsidiaries of MSI Electronics Inc.
The following table sets forth information pertaining to the
Registrant's subsidiaries and includes the jurisdiction of incorporation, the
percentage of voting securities of such subsidiaries owned by the Registrant and
the method of financial reporting.
<TABLE>
<CAPTION>
State or Country of Percentage of Voting Consolidated Financial
Name Incorporation Securities Owned Statements
---- ------------- ---------------- ----------
<S> <C> <C> <C>
Elyon Electronics Ltd. England 100% Yes
Xadax Inc. New York 100% Yes
</TABLE>
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: December 29, 1998
MSI ELECTRONICS Inc.
By: /s/ Albert Lederman
Albert Lederman
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on December 28, 1998.
Signature Title
/s/ Albert Lederman President and Director,
------------------- Chief Executive and Chief
Albert Lederman Financial Officer
/s/ Theodore R. Bashkow Secretary and Director
-----------------------
Theodore R. Bashkow
/s/ Robert W. Keene Director
-------------------
Robert W. Keene
-7-
<PAGE>
ANNUAL REPORT ON FORM 10-K
--------------------------
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
------------------------------------------
FINANCIAL STATEMENTS
--------------------
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
--------------------------------------------------------------
CERTAIN EXHIBITS
----------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
LONG ISLAND CITY, NEW YORK
--------------------------
<PAGE>
FORM 10-K - ITEM 14(a)(1) AND (2)
---------------------------------
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
SEPTEMBER 30, 1998
------------------
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
--------------------------------------------------------------
The following consolidated financial statements of MSI Electronics Inc. and
Subsidiaries are included in Item 8:
Page No.
Consolidated Balance Sheets
September 30, 1998 and 1997 F-2
Consolidated Statements of Income
For the years ended September 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity
For the years ended September 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
For the years ended September 30, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
The following consolidated financial statement schedule, of MSI Electronics
Inc. and Subsidiaries are included in Item 14(d):
Financial Highlights
For the years ended September 30, 1998, 1997, 1996,
1995 and 1994 F-12
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.
<PAGE>
[Weissman and Rudnitsky Letterhead]
MSI ELECTRONICS INC.
Long Island City, New York
To the Board of Directors and Shareholders:
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated balance sheet of MSI
ELECTRONICS INC. and its subsidiaries as of September 30, 1998, 1997 and the
related consolidated statements of income, shareholders' equity, and cash flows
for the three years in the period ended September 30, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MSI ELECTRONICS INC.
and its subsidiaries as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Weissman and Rudnitsky
--------------------------------
WEISSMAN AND RUDNITSKY, CPA'S
New York, New York
December 11, 1998
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 1998 AND 1997
---------------------------
<TABLE>
<CAPTION>
ASSETS
------
1998 1997
---------- ----------
<S> <C> <C>
Current assets
Cash $ 325,065 $ 289,493
Temporary cash investments 751,769 939,594
Receivables 96,148 103,909
Inventories 105,231 60,194
Marketable securities 355,770 446,621
Prepaid expenses 45,212 58,470
---------- ----------
Total current assets 1,679,195 1,898,281
Property, plant and equipment 33,607 42,991
Other assets 566 566
---------- ----------
Total assets $1,713,368 $1,941,838
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable $ 162,014 $ 126,504
Taxes payable 5,610 19,842
---------- ----------
Total current liabilities 167,624 146,346
---------- ----------
Shareholders' equity
Common stock - par value $.03
Authorized - 5,000,000 shares
Issued - 1,418,448 shares 42,554 42,554
Capital in excess of par value 420,201 420,201
Retained earnings 1,753,271 2,018,199
Currency translation adjustments 32,621 12,964
---------- ----------
2,248,647 2,493,918
Less treasury stock at cost:
460,876 shares in 1998 and 454,250 in 1997 702,903 698,426
---------- ----------
Total shareholders' equity 1,545,744 1,795,492
---------- ----------
Total liabilities and shareholders' equity $1,713,368 $1,941,838
========== ==========
</TABLE>
See accompanying notes
F-2
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 645,275 $ 687,438 $ 668,813
Cost of goods sold 461,593 532,392 483,830
--------- --------- ---------
Gross profit 183,682 155,046 184,983
Selling and administrative expenses 483,571 513,175 507,726
--------- --------- ---------
Net loss before investment and other (299,889) (358,129) (322,743)
income and taxes
Investment and other income 46,775 101,572 96,348
--------- --------- ---------
Net loss before income taxes (253,114) (256,557) (226,395)
Provision for income taxes 11,814 14,173 23,018
--------- --------- ---------
Net loss $(264,928) $(270,730) $(249,413)
========= ========= =========
Loss per share (Note 1 (h)) $( .28) $( .28) $( .26)
========= ========= =========
</TABLE>
See accompanying notes
F-3
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Common Treasury Capital in Retained Currency Total
------ -------- ---------- -------- -------- -----
Stock Stock Excess of Earnings Translation
----- ----- --------- -------- -----------
Par Value Adjustments
--------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $ 42,554 $ (685,723) $ 420,201 $2,538,342 $ 8,243 $2,323,617
Purchase of 4,262 shares ( 3,363) ( 3,363)
Net loss for year (249,413) (249,413)
Currency translation adjustment ( 4,141) ( 4,141)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996 $ 42,554 $ (689,086) $ 420,201 $2,288,929 $ 4,102 $2,066,700
Purchase of 9,750 shares ( 9,340) ( 9,340)
Net loss for year (270,730) (270,730)
Currency translation adjustment 8,862 8,862
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997 $ 42,554 $ (698,426) $ 420,201 $2,018,199 $ 12,964 $1,795,492
Purchase 6,626 shares ( 4,477) ( 4,477)
Net loss for year (264,928) (264,928)
Currency translation adjustment 19,657 19,657
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 $ 42,554 $ (702,903) $ 420,201 $1,753,271 $ 32,621 $1,545,744
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes
F-4
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
-----------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss $ (264,928) $ (270,730) $ (249,413)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 16,006 11,620 11,430
Unrealized loss (Gain) on marketable securities 37,241 (16,980) 215
Loss on sale of marketable securities 5,631 4,337 0
Changes in assets and liabilities:
Decrease in receivables 7,761 84,317 137,300
(Increase) decrease in inventories (45,037) 18,768 2,230
(Increase) decrease in prepaid expenses 13,260 (10,119) 22,413
Increase (decrease) in accounts payable 35,510 (28,114) (54,951)
Increase (decrease) in taxes payable (14,232) 6,257 (1,863)
----------- ----------- -----------
Total adjustments 56,140 70,086 116,774
----------- ----------- -----------
Net cash (used) by operating activities (208,788) (200,644) (132,639)
----------- ----------- -----------
Investing activities:
Purchases of property, plant and equipment (6,622) (26,754) (7,399)
Purchase of marketable securities (238,161) (123,350) (56,358)
Proceeds from sale of marketable securities 286,138 136,491 0
----------- ----------- -----------
Net cash provided (used) by investing activities 41,355 (13,613) (63,757)
----------- ----------- -----------
Financing activities:
Purchase of treasury stock (4,477) (9,340) (3,363)
----------- ----------- -----------
Net cash (used) by financing activities (4,477) (9,340) (3,363)
----------- ----------- -----------
Effect of exchange rate changes on cash 19,657 8,862 (4,141)
----------- ----------- -----------
Net (decrease) in cash and cash equivalents (152,253) (214,735) (203,900)
Cash and cash equivalents at beginning of year 1,229,087 1,443,822 1,647,722
----------- ----------- -----------
Cash and cash equivalents at September 30, $ 1,076,834 $ 1,229,087 $ 1,443,822
=========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
1. Organization and Summary of Significant Accounting Policies:
(a) Organization:
The Company is a Delaware corporation organized on September 29, 1960.
The Company sells electronic instruments designed to measure
semiconductor properties, semiconductors, and electronic components.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company, Elyon Electronics Limited, a United Kingdom subsidiary, and
XADAX Inc., both wholly-owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) 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 and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(d) Translation of Foreign Currencies:
The accounts of the Company's foreign subsidiary have been translated
to U.S. Dollars as follows: at rates prevailing during the year for
sales and expenses (except depreciation); at year-end rates for
monetary assets and liabilities; and at historical rates for
inventories, plant and equipment and related accumulated depreciation.
(e) Depreciation:
The Company's policy is to depreciate its fixed assets over the useful
lives of 3 to 7 years.
Expenditures for maintenance, repairs and betterments which did not
materially prolong the normal useful life of the assets are charged to
operations as incurred.
(f) Income Taxes:
The Company provides for income taxes on pretax accounting income at
rates in effect under existing tax law.
At September 30, 1998, the Company had net operating loss carryforwards
of approximately $1,198,000 for Federal income tax reporting purposes,
which expire in the years 2008 to 2013. The ultimate realization of the
tax benefits from the net operating loss carryforwards is dependent
upon future taxable earnings of the Company.
F-6
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
1. Organization and Summary of Significant Accounting Policies
(Continued):
The foreign subsidiary has recorded provision for income taxes at
applicable foreign tax rates.
The provision for income taxes consisted of:
YEARS ENDED SEPTEMBER 30,
-------------------------
1998 1997 1996
------- ------- --------
Federal $ 0 $ 0 $ 0
State and local 6,597 7,210 8,157
Foreign 5,217 6,963 14,861
------- ------- --------
Total $11,814 $14,173 $ 23,018
======= ======= ========
(g) Temporary Cash Investments:
The Company has a cash management program which provides for the
investment of excess cash balances in short term money market
instruments. For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
(h) Research and Development Costs:
Research and development expenditures are charged to operations as
incurred. During 1998, 1997 and 1996, research and development costs
aggregated $137,964, $145,087 and 111,134.
(i) Basic Earnings per Share:
Basic earnings per share are computed by dividing earnings available to
common stockholders by the weighted average number of common shares
outstanding during the period. The Company has only one class of stock
and all earnings (losses) are available to common stockholders. For the
fiscal years ended September 30, 1998, 1997 and 1996, basic earnings
(loss) per share is computed based on weighted average common shares
outstanding of 959,511, 966,421 and 975,568 respectively.
(j) Stock Options:
In June 1993, the Board of Directors of the Company granted a stock
option to a key employee to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $1.344 per share. After
five years of the date of the grant no options were exercised. As of
September 30, 1998 there are no options outstanding.
(k) Marketable Securities:
Marketable securities consist of mutual funds and common stock.
Marketable securities are stated at market value. All marketable
securities are defined as trading securities under the provision of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115) and
unrealized gains and losses are reflected in earnings. Market value is
determined by the most recently traded price of the security at the
balance sheet date. Net realized gains or losses are determined on the
FIFO cost method.
F-7
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARES
------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
2. Temporary Cash Investments:
Temporary cash investments consisted of the following:
September 30,
---------------------------
1998 1997
-------- --------
Certificates of Deposit $751,769 $939,594
======== ========
3. Receivables:
On October 31, 1994, the company sold the fixed assets and inventory of
its domestic diode business to API Inc. for $200,000. Monthly payments
are received from API Inc., based on their sales of these products.
1998 1997
-------- --------
Receivables consists of:
Trade receivables: $96,148 $100,346
Due from API Inc. 0 3,563
------- --------
$96,148 $103,909
======= ========
4. Inventories:
Inventories were taken by physical count and are valued at the lower of
cost (first-in, first-out method), or market and consisted of the
following:
September 30,
----------------------------
1998 1997
-------- --------
Finished goods $102,374 $ 55,051
Work in progress 0 0
Raw materials 2,857 5,143
-------- --------
Total $105,231 $ 60,194
======== ========
5. Marketable Securities:
Marketable securities are defined as trading securities under the
provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115). Unrealized losses were $37,241 and 11,360 for the years
1998 and 1997 respectively.
F-8
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
6. Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Major categories
are as follows:
September 30,
---------------------------
1998 1997
-------- -------
Patents $ 3,592 $ 3,592
Machinery and equipment 41,616 40,524
Office furniture and equipment 101,181 95,651
Sales equipment 37,031 37,031
-------- -------
183,420 176,798
Less accumulated depreciation 149,813 133,807
-------- -------
Total $ 33,607 $42,991
======== =======
7. Retirement Plans:
For the year ending September 30, 1993, the Company implemented a 401K
plan for all eligible employees, in which the Company may elect to
match employees' contributions up to a maximum of $500 per employee.
401K Plan:
For the years ended September 30, 1998, 1997 and 1996, contributions
were $0, $0, and $0 respectively.
F-9
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
8. Industry Segment Information:
<TABLE>
<CAPTION>
Depreciation
------------
Operating Identifiable Capital &
--------- ------------ ------- -
Net Sales Income Assets Expenditures Amortization
--------- ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1998
----
Semiconductors
and Electronic
Components $459,170 $ 7,910 $ 80,977 $ 5,336 $ 1,004
Instruments 186,105 (307,799) 31,015 1,092 3,317
General 0 0 1,601,376 194 11,685
-------- ---------- ---------- ------- --------
Total $645,275 $ (299,889) $1,713,368 $ 6,622 $ 16,006
======== ========== ========== ======= ========
1997
----
Semiconductors
and Electronic
Components $439,518 $ 26,973 $ 42,338 $ 322 $ 1,690
Instruments 247,920 (385,102) 26,842 1,737 5,857
General 0 0 1,872,658 24,695 4,073
-------- ---------- ---------- ------- --------
Total $687,438 $ (358,129) $1,941,838 $26,754 $ 11,620
======== ========== ========== ======= ========
1996
----
Semiconductors
and Electronic
Components $442,280 $ 45,093 $ 50,376 $ 0 $ 450
Instruments 226,533 (367,836) 37,662 7,399 5,720
General 0 0 2,146,865 0 5,260
-------- ---------- ---------- -------- --------
Total $668,813 $ (322,743) $2,234,903 $ 7,399 $ 11,430
======== ========== ========== ======== ========
Export Sales:
Sales to foreign customers amounted to $30,028 in fiscal 1998, $91,947 in fiscal 1997, and $98,132 in
fiscal 1996.
Major Customers:
Sales to major customers that exceeded 10% of the Company's sales were as follows:
Semiconductors 1998 1997 1996
-------------- ------- ------- -------
Company A 0 0 0
Company B 0 0 0
No customer accounted for more than 10% of net instrument sales in fiscal 1998, 1997 or 1996.
</TABLE>
F-10
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------
8. Industry Segment Information (continued):
Geographic Information - Sales:
Years ended September 30, United States Foreign Total
------------------------- ------------- ------- -----
1998 $156,076 $489,199 $645,275
1997 151,712 535,726 687,438
1996 132,033 536,780 668,813
9. Statements of Cash Flows:
For the years ended September 30, 1998 1997 1996
------ ------ ------
The company paid:
Income taxes $7,939 $ 9,339 $22,342
Interest 0 0 0
10. Contingencies and Commitments:
Significant concentrations of credit risk:
The company has cash and temporary cash investments deposits at banks
of 75,406 in 1998 and in 1997 $163,592 in excess of what would be
covered by the Federal Deposit Insurance Company.
Lease:
The Company has various leases for equipment and buildings which are
classified as operating leases. Total rent expense for all operating
leases for 1998 and 1997 were $42,369 and $41,007, respectively.
Future minimum lease payments under the noncancelable operating leases
with initial or remaining terms for one year or more are as follows:
Year ending September 30:
1999 $20,004
F-11
<PAGE>
MSI ELECTRONICS INC. AND SUBSIDIARIES
-------------------------------------
FINANCIAL HIGHLIGHTS
--------------------
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996, 1995 AND 1994
-----------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 645,275 $ 687,438 $ 668,613 $ 749,916 $ 1,104,130
(Loss) before taxes (253,114) (256,557) (226,395) (178,538) (112,075)
Net (loss) (264,928) (270,730) (249,413) (201,807) (129,922)
Net (loss) per share (1) ( .28) ( .28) ( .26) ( .21) ( .13)
Total assets 1,713,368 1,941,838 2,234,903 2,548,634 2,683,007
Current assets 1,679,195 1,898,281 2,206,480 2,516,180 2,637,987
Current liabilities 167,624 146,346 168,203 255,017 156,370
Shareholders' equity 1,545,744 1,795,492 2,066,700 2,323,617 2,524,422
Number of shares outstanding (1) 959,511 966,421 975,568 978,210 978,210
Shareholders' equity per share (1) 1.61 1.86 2.19 2.38 2.58
</TABLE>
(1) Based upon weighted average number of shares outstanding.
F-12
