10-K 1 msi10k01.txt MSI20001 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, 2000 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 Incorporation or Organization) Identification Number) 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 filing requirements for the past 90 days. Yes [x] No [ ] Aggregate market value of Common Stock held by non-affiliates of the Registrant at September 30, 2000 (computed by reference to the last reported average closing bid price for the Common Stock as reported through NASDAQ: $358,729). Number of Shares of Common Stock outstanding at September 30, 2000: 952,572 shs. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement to be filed in connection with the Registrant's 2000 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. 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 the properties of semiconductors; b) to develop and sell products and services in interactive media; c) to distribute specialized electronic products manufactured by others. Products to Characterize Semiconductors MSI Instruments are used by manufacturers of integrated circuits, transistors, diodes and other semiconductor components to measure the electrical properties of wafers used in these devices. MSI instruments are used by industrial, governmental, and university laboratories for research and development and are also used in industrial production environments. The instruments are used in research and development to measure known materials to improve both device performance and manufacturing yields as well as in research on new or innovative materials to develop devices with expanded or entirely new capabilities. Competition for the Registrant's semiconductor measurements products comes primarily from Hewlett-Packard, Keithley Instruments, Inc., Materials Development Corp., and Solid State Measurements Corp. The Registrant competes on quality, innovation and delivery. Products and Services in Interactive Media The Registrant has developed hardware and software products for the Internet, television broadcast and telephone systems. The Registrant has licensed its 1994 patent on telephone advertising and will receive royalties on it in the upcoming year. The Registrant has focused its efforts on large scale database-driven interactive products that can be licensed to other companies as well as exploited by the Registrant. Distributor of Specialized Electronic Components The Registrant sells electronic components and allied products that it purchases from other manufacturers and suppliers. The Registrant is continually seeking to increase this portion of the business by seeking suppliers of new components and products as well as additional customers. Products for Medical Applications The Registrant is no longer developing products aimed at consumers for this market. Sales of Product Lines The amount of sales to unaffiliated customers and the profits or losses of the Registrant's product lines for fiscal 2000 are set forth in the Schedule of Industry Segments of Business on Page F-10 appended. Sales were 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. Backlog As of November 30, 2000 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 Amount Spent Persons Engaged on Sept 30 Full Time* Basis 2000 $110,769 2 1999 $157,214 2 1998 $137,964 2

* or equivalent inasmuch as there are both part-time and full-time employees so engaged. Employees As of September 30, 2000, the Registrant had three full time and two part time employees. The full time employees perform technical, administrative and marketing functions and the part time employees perform administrative and manufacturing 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, 2001 for its occupancy of 1650 sq. ft. premises, 1350 sq. ft. of factory and 300 sq. ft. of office, in a building located at 3100 47th Avenue, Long Island City, New York. The rental is 420,000.00 per annum. The Registrant rents 180 sq. ft. of office space located at 122 East 42nd Street, New York, NY at $1,600.00 per month on a month to month basis and 480 sq. ft. of office space at 89b. London Road in East Grinstead, England at $9,600 per annum. 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, 2000 through the solicitation of proxies or otherwise. Part II Item 5 - Markets 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 MSIEE. 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. (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, 1999 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, ---------------------- 2000 1999 --------- ---------- High Low High Low ---------------------- ~~First Quarter $.75 $.63 $.75 $.65 Second Quarter 2.00 .50 .75 .65 Third Quarter 1.15 .50 .90 .65 Fourth Quarter --- --- .63 .50~~

(c) Approximate Number of Holders of Common Stock As of September 30, 2000, there were approximately 257 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. For the Years Ended September 30, --------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------------- Net Sales $ 437,779 $ 611,558 $ 645,275 $ 687,438 $ 668,613 Net Loss (332,711) (235,081) (264,928) (270,730) (249,413) Net Loss Per Share (.35) (.25) (.28) (.26) (.26) Total Assets $1,011,283 $1,492,244 $1,713,368 $1,941,838 $2,234,903

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, 2000, 1999, and 1998 were, and $437,739 $611,558, and $645,275 respectively. The decrease of $173,819 or 28.2% for the fiscal year 2000 over 1999 was due to a decrease in sales of the semiconductor product line and a decrease in the sales of the instrument product line. The decrease of $33,717 or 5.2% for the fiscal year 1999 over 1998 was due to a decrease in sales of the semiconductor product line offset by an increase in the sales of the instrument product line. The cost of sales for the years ended September 30, 2000, 1999, and 1998 were $371,717, $435,504, and $461,593 respectively. Costs expressed as a percentage of sales for the respective years were 84.9%, 71.2% and 71.5%. The increase of $63,787 or 14.73% for the fiscal year 2000 over 1999 was due to the decrease in sales and an increase in research and development expenditures. The decrease of $26,089 or 5.65% for the fiscal year 1999 over 1998 was due to a decrease in sales. Selling and administrative expenses were $432.732 for the fiscal year ended September 30, 2000, $480,617 for the fiscal 1999 year and $483,571 for the fiscal 1998 period. The decrease of 447,885 or 10.0% for the fiscal year 2000 over 1999 and the decrease of $2,954, or 0.6% for the fiscal year 1999 over 1998 were due to a decrease in sales. Investment and other income for the fiscal years ended September 30, 2000 was $43,649, $73,225, for fiscal year 1999 and $46,775 for fiscal year 1998. The decrease of $29,576 for fiscal 2000 over fiscal 1999 was due to a 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 $26,450 for fiscal 1999 from fiscal 1998 was due to a net increase in value of marketable securities offset by a decrease in investment income due to a decrease in the availability of investment funds. Income tax was $9,650 for the fiscal year ended September 30, 2000, $3,743 for fiscal 1999 and $11,814 for fiscal 1998. The increase in taxes of $5,907 in 2000 from 1999 and the decrease in taxes of $8,071 in 1999 from 1998 were principally due to taxes paid by the Company's foreign subsidiary. The net loss for fiscal years ended September 30,2000, 1999 and 1998 were $332,711, $235,081, and $264,928 respectively. The decrease in the loss in fiscal 1999 over 1998 was due primarily to the increase in investment and other income. The increase in the loss in fiscal 2000 over 1999 was due the decrease in the sales and by the decrease in investment and other income. For the first quarter fiscal 2000 or the three month period ended December 31, 2000, sales are estimated to decrease by 10% from sales for the comparable period ended December 31, 1999. For the full fiscal year ended September 30, 2001, sales are estimated to increase by 10% as compared to the fiscal year ended September 30,2000. Liquidity and Capital Resources Of its total assets at September 30, 2000 the Registrant had 82.2% or an aggregate of $831,690 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 fund the development of hardware and software products for sale to consumer and industrial markets and to finance the sale of the products developed. 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 increased demands for cash, the Registrant may seek other sources of financing, including public offerings. If additional financing is required, there can be no assurance that funds will be available on terms acceptable to the Registrant. Should funds not be available, new product development would be delayed which could have an adverse affect on the Registrant. The Registrant does not intend to become an investment company as defined in the Investment Companies Act of 1940. sales. Item 8 - Financial Statements and Supplementary Data The financial statements as of September 30, 2000 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 2000 Proxy Statement which is incorporated herein by reference. Item 11 - Executive Compensation Information regarding executive compensation is set forth on Page 3 of the 2000 Proxy Statement which is incorporated herein by reference. 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 2000 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 2000 Proxy Statement which is incorporated herein by reference. Part IV Item 14 - Exhibits. Financial Statement Schedules and Reports on Form 8-K a) 1. Financial Statements Page 1. Report of Independent Certified Public Accountants F-1 2. Consolidated Balance Sheet as of September 30, 2000 and 1999 F-2 3. Consolidated Statement of Income for the fiscal years ended September 30, 2000, 1999 and 1998 F-3 4. Consolidated Statement of Retained Earnings at September 30, 2000, 1999 and 1998 F-4 5. Consolidated Statement of Changes in Financial Position for the fiscal years ended September 30, 2000, 1999 and 1998 F-5 6. Notes to Consolidated Financial Statements F-6 to F-12 7. Financial Highlights for the years ended September 30, 2000, 1999 and 1998 F-13 Financial schedules are omitted because they are not required or are not material or the required information is included in the notes to financial statements. 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 Registration Statement No. 2-18113, which became effective on August 30, 1961 (thereafter the "Registration 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. 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, 2000. 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. Name State or Country Percentage of Consolidated of Incorporation Voting Securities Financial Owned Statements -------- ---------------- ----------------- ---------------- Elyon England 100% Yes Electronics Ltd. Xadax Inc. New York 100% Yes

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, 2000 MSI ELECTRONICS Inc. By: /s/ Matthew Lederman -------------------- Matthew 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 29, 1999. Signature Title --------- ----- /s/ Mattthew Lederman President and Director ------------------- Chief Executive and Chief Matthew Lederman Financial Officer /s/ Theodore R. Bashkow Secretary and Director ----------------------- Theodore R. Bashkow /s/ Robert W. Keene ----------------------- Director Robert W. Keene 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 ENDING SEPTEMBER 30, 2000 MSI ELECTRONICS INC. AND SUBSIDIARIES LONG ISLAND CITY, NEW YORK FORM 10-K - ITEM 14(a)(1) AND (2) MSI ELECTRONICS INC. AND SUBSIDIARIES SEPTEMBER 30, 2000 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, 2000 and 1999 F-2 Consolidated Statements of Income For the years ending September 30, 2000, 1999 and 1998 F-3 Consolidated Statements of Shareholders' Equity For the years ending September 30, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows For the years ending September 30, 2000, 1999 and 1998 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 ending September 30, 2000, 1999, 1998, 1997 and 1996 F-13 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. 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, 2000, 1999 and the related consolidated statements of income, shareholders' equity, and cash flows for the three years in the period ending September 30, 2000. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 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. WEISSMAN AND RUDNITSKY, CPA'S New York, New York November 29, 2000 MSI ELECTRONICS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2000 AND 1999

LIABILITIES AND SHAREHOLDERS' EQUITY

See accompanying notes F-2 MSI ELECTRONICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDING SEPTEMBER 30, 2000, 1999 AND 1998

See accompanying notes F-3 MSI ELECTRONICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes F-4 MSI ELECTRONICS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDING SEPTEMBER 30, 2000, 1999 AND 1998

See accompanying notes F-5 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 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. See accompanying notes F-6 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 1. Organization and Summary of Significant Accounting Policies (Continued): (f) Income Taxes: The Company provides for income taxes on pretax accounting income at rates in effect under existing tax law. At September 30, 2000, the Company had net operating loss carryforwards of approximately $1,783,000 for Federal income tax reporting purposes, which expire in the years 2008 to 2015. The ultimate realization of the tax benefits from the net operating loss carryforwards is dependent upon future taxable earnings of the Company. 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, Current: 2000 1999 1998 -------- -------- -------- Federal $ 0 $ 0 $ 0 State and local 4,260 4,496 6,597 Foreign 5,390 (753) 5,217 -------- -------- --------- Total $9,650 $3,743 $11,814 ======== ======== =========

(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 2000, 1999 and 1998, research and development costs aggregated $110,769, $157,214, and $137,964, respectively. F-7 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 1. Organization and Summary of Significant Accounting Policies (Continued): (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 ending September 30, 2000, 1999 and 1998, basic earnings (loss) per share is computed based on weighted average common shares outstanding of 952,832, 957,572 and 959,511, 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, 2000 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. 2. Temporary Cash Investments: Temporary cash investments consisted of the following: September 30, 2000 1999 -------- -------- ~~Certificates of Deposit $202,646 $318,721 ======== ========~~

F-8 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 3.Receivables: September 30, 2000 1999 -------- -------- ~~Receivables consists of: Trade receivables: $116,057 $177,943 ======== ========~~

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, 2000 1999 ------- ------- Finished goods $41,150 $84,125 Work in progress 1,876 0 Raw materials 4,689 3,108 ------- ------- Total $47,715 $87,233 ======= =======

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 gains and (losses) were $(1,021) and $4,819 for the years 2000 and 1999 respectively. F-9 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 6. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Major categories are as follows: September 30, 2000 1999 ------- ------- Patents $ 3,592 $ 3,592 Machinery and equipment 43,327 42,538 Office furniture and equipment 102,102 101,312 Sales equipment 17,528 37,031 ------- ------- 166,549 184,473 Less accumulated depreciation 161,858 164,032 ------- ------- Total $4,691 $20,441 ======= =======

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, 2000, 1999 and 1998, contributions were $0, $0, and $0 respectively. 8. Industry Segment Information: Net Sales Operating Identi- Capital Depreciation Income fiable Expendi- & Amortization Assets tures ----------- ---------- --------- --------- -------------- 2000 ---- Semiconductors and Electronic Components $322,688 $21,691 $28,960 $0 $1,095 Instruments 115,051 (388,401) 20,192 0 1,074 General 0 0 962,131 1,580 9,068 --------- ---------- ------------ -------- --------------- Total $437,739 $(366,710) $1,011,283 $1,580 $11,237 ========= ========== ============ ======== ===============

F-10 NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 8. Industry Segment Information (continued): Net Sales Operating Identi- Capital Depreciation Income fiable Expendi- & Amortization Assets tures --------- --------- ------- -------- -------------- 1999 ---- Semiconductors and Electronic Components $390,465 $(20,268) $68,478 $0 $2,938 Instruments 221,093 (284,295) 21,267 922 3,811 General 0 0 1,402,499 131 7,470 -------- ---------- ---------- --------- -------------- Total $611,558 $(304,563) $1,492,244 $1,053 $14,219 ======== ========== ========== ========= ============== 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 ========= ========== ========== ========= ===============

Export Sales: Sales to foreign customers amounted to $47,010 in fiscal 2000, $119,904 in fiscal 1999, and $30,028 in fiscal 1998. Major Customers: No customer accounted for more than 10% of net instrument sales or net semiconductor sales in fiscal 2000, 1999, 1998. F-11 MSI ELECTRONICS INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, 1999 AND 1998 Geographic Information - Sales: Years ended September 30, United States Foreign Total -------------- ----------- ---------- 2000 $68,041 $369,698 $437,739 1999 $101,189 $510,369 $611,558 1998 $156,076 $489,199 $645,275

9. Statements of Cash Flows: For the years ended September 30, 2000 1999 1998 -------- -------- ------- ~~The company paid: Income taxes $6,589 $6,637 $7,939 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 $2,540 in 2000 and $18,721 in 1999 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 2000 and 1999 were $45,562, and $37,372, 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: 2000 $20,556

F-12 MSI ELECTRONICS INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, 1998, 1997, AND 1996 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Net sales $ 437,739 $ 611,558 $ 645,275 $ 687,438 $ 668,613 (Loss)before taxes (323,061) (231,338) (253,114) (256,557) (226,395) Net(loss) (332,711) (235,081) (264,928) (270,730) (249,413) Net (loss) per share (1) (.35) (.25) (.28) (.28) (.26) Total assets 1,011,283 1,492,244 1,713,368 1,941,838 2,234,903 Current assets 1,006,026 1,471,237 1,679,195 1,898,281 2,206,480 Current liabil- ities 90,297 193,511 167,624 146,346 168,203 Shareholders' equity 920,986 1,298,733 1,545,744 1,795,492 2,066,700 Number of shares out- standing (1) 952,832 957,572 959,511 966,421 975,568 Shareholders' equity per share (1) .97 1.36 1.61 1.86 2.19

(1) Based upon weighted average number of shares outstanding. F-13

MSI ELECTRONICS INC 10-K