U.S. Securities and Exchange Commission Washington, D.C. 20549 CONFORMED Form 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission File Number 0-15545 Logitek, Incorporated (Name of small business issuer in its charter) New York No. 11-2203507 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Christopher St., Ronkonkoma, N.Y. 11779 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, including area code 516-467-4200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ X ] Issuer's revenues for its most recent fiscal year: $4,815,518 The aggregate market value of voting common stock held by non-affiliates, computed based upon the average of the closing bid and asked prices on August 18, 1998 was $2,537,144. As of August 18,1998, there were 3,382,859 shares of common stock outstanding (of which 1,884,882 shares were held by non-affiliates). Documents Incorporated by Reference: 1998 Proxy Statement LOGITEK, INC. FORM 10-KSB - Year Ended June 30, 1998 TABLE OF CONTENTS PART I Page Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7. Financial Statements and Supplementary Data 10 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 10 PART III Item 9. Directors and Executive Officers of the Registrant 11 Item 10.Executive Compensation 11 Item 11.Security Ownership of Certain Beneficial Owners and Management 11 Item 12.Certain Relationships and Related Transactions 11 Item 13.Exhibits and Reports on Form 8-K 11 Signature Page 12 Report of Independent Certified Public Accountants 13 Financial Statements 14 Notes to Financial Statements 17 PART I ITEM 1. BUSINESS General Logitek, Inc. (the "Company"), a New York corporation, organized in 1969, is engaged in the design, development and production of electronic monitors and controls which include electronic time delays, flashers, and voltage, frequency, phase and power monitors and switch mode power supplies. Power monitors are generally used to continuously and automatically monitor the characteristics of electrical power systems for conformance to design limits in order to insure proper and safe operation of equipment which utilize the monitored power. These devices provide for timed control of system shutdown and transfer in addition to visual fault annunciation. Although the Company manufactures products "built to specifications" most of its sales are for its standard products. The Company developed and manufactures a line of time delay relays designed to cause a system to perform or not to perform a specific function for, during or after a precise interval of time. The time delay relay is used in those instances, among others, where a system must be turned on for a specific period of time after application of power and then shut down; where it is necessary to operate a system for an interval of time after the complete loss of power; or to regulate the precise time interval between various functions. Among its practical applications, time delay relays are used in navigation systems of missiles and in radar equipment as well as to sequence aircraft functions. When the navigation system in a missile or projectile determines that the missile or projectile is off course, a signal may be applied to a time delay relay. If the missile returns to course prior to the expiration of the preset time delay, the signal is removed and the timer does not operate. If the missile remains off course for a period of time greater than the preset interval of the time delay relay, the time delay relay will activate causing the missile to self destruct. Some elements of certain types of radar equipment can be damaged if high voltage is applied prior to sufficient warm-up time. These elements can be protected by the use of time delay relays which provide an automatic time delay between the application of warm-up voltage and high voltage. These devices may also be used to sequence the time interval between the ejection of external fuel pods on fighter aircraft. The relays vary in price from approximately $100 to $700 depending on the type of function and complexity required; however, most time delay relays sell for $150 to $300. The Company has also developed and produces solid state flashers designed to cause an alternating electrical impulse. The flasher may be used to cause aircraft position lights to flash on and off as well as to sense and indicate a malfunction in certain systems by causing a warning light to flash/or activate an alarm device. The flasher varies in price from $100 to $500 depending on the type of function and complexity required with most types of flashers selling in the $125 to $225 range. The Company has also designed and markets equipment to monitor the characteristics of the phase, voltage and frequency elements of electric power. These devices are connected to electric power lines to monitor each of the aforesaid input elements for deviation from acceptable limits and can find application in most electrical systems, machinery and equipment where power source performance is questionable and/or where equipment damage may result from inadequate or improper power. The acceptable limits of deviation of each element are pre-determined and built into the monitor. The Company has also developed and manufactures power monitors used to sense all three of the aforesaid power elements. In the event that any element is not within pre-determined specifications, the monitor shuts down the system, transfers to another system and/or operates an alarm. The Company also manufactures each of the aforesaid types of monitors with time delay features. These types of monitors allow a deviation beyond specified limits for a specified pre-set period before initiating appropriate action. The internal time delay thereby prevents unnecessary system response. In the event the system is activated, the element must return to normal limits for a minimum pre- set period before the power will resume normal flow. This equipment is presently in use in auxiliary generating systems in planes and ships to prevent damage to the equipment operated by such systems. Phase, voltage and frequency sensors vary in price from $300 to $900 and the power monitors from $900 to $7,000 depending on the type of function and complexity required. The Company has designed and markets switch mode power supplies for military, industrial and commercial applications. These power supplies are used to convert AC voltage to DC voltage or to convert DC voltage to a different level of DC voltage for use by various types of electronic equipment. Power supplies vary in price from $400 to $3,000 depending on the function, complexity and power levels involved. The Company markets 13 basic models within this product line and approximately 424 different sub-models. In addition, the Company will modify these power supplies to customer specification for an additional cost. The components of the Company's products include integrated circuits,transistors,diodes, relays, resistors, capacitors and metal casings which are purchased from a variety of readily available sources on an as needed basis. The Company has not experienced delays in obtaining any required materials. The widest application of the Company's products is in systems such as aircraft and space vehicles, aboard ships, vehicular mobile communications,radar systems,and data processing and telecommunication systems. The Company's products are sold to major system manufacturers and to the United States Government. Customers include General Dynamics Falstrom, Boeing, Lockheed, McDonnel Douglas, E- Systems, Westinghouse and Hughes Aircraft. In terms of competition in the product line of power moniotors, to the best of the Company's knowledge there are companies similar to Logitek and the Company is aware of four or five of these companies. In the product line of power supplies there are many competitors in the broad scope, but in Logitek's niche market the field is significantly narrowed. Logitek has a trademark on its name but does not have any patents. The Company's backlog as of June 30, 1998 was approximately $ 2,192,000 as compared to $2,500,000 as of June 30 1997. Sales made directly to government agencies are effected primarily through competitive bidding and to a lesser extent are a result of negotiated contracts. Other sales arise principally through personal solicitations by the Company's personnel and also through independent sales representatives who are compensated solely on a commission basis. During the year ended June 30,1998 sales to major customers were as follows: Boeing Aircraft 22%, various agencies of the U.S. Government 16%, Falstrom 8% and various affiliates of the Loral group 7%. During the year ended June 30,1997 sales to major customers were as follows: Boeing Aircraft 14%, various agencies of the U.S. Government 21% and various agencies of the Loral group 22%. It should be noted that each of these major customers is comprised of a group of separate and distinct business units that make up the total sales. While it is possible one or more of the Company's major customers might someday choose another vendor, the Company feels this is highly unlikely. However, should all the major customers leave, the impact on the financial statements would be a decrease in sales of approximately 53%. All government contracts or subcontracts are subject to cancellation by the government or it's subcontractor at or for the convenience of the government. In the event of contract termination, the Company would ordinarily be entitled to recover payment for its costs and a reasonable pro rata share of profit based on work completed prior to termination. Current research is focused on the continuous upgrading of current products, development of new switch mode power supplies and a high density power supply. During the two fiscal years ended June 30, 1998 and 1997, the Company expensed approximately $246,000 and $221,000, respectively, on research and development. As of June 30, 1998 the Company had approximately 50 employees,of which one was a part time employee. The following table sets forth the approximate percentage each of the Company's product lines contributed to total sales for the periods indicated: BREAKDOWN OF GROSS SALES For the years ended June 30, 1998 1997 % % Time delay relays 13.1 14.1 Flashers 1.5 4.8 Power supplies 27.5 24.8 Voltage, frequency and phase sensor relays and power monitors 51.8 55.0 Contract manufacturing & Other 6.1 1.3 Company Totals 100.0 100.0 ITEM 2. PROPERTIES The Company's executive offices and production facilities are located in a one story free standing building comprising approximately 20,000 square feet, such building is owned by the Company. The building is located on approximately one and one-half acres of land in Ronkonkoma, New York. The property is subject to a mortgage held by the New York Job Development Authority ("JDA"), payable in monthly installments as of June 30, 1998 of approximately $2,656, including interest at 8.25% through June 2004 and a subordinate mortgage to Long Island Development Corp., payable in monthly installments of $4,427 including interest at 14.296% through June 2004. As of June 30, 1998 the JDA mortgage had a balance of $135,632 and the subordinate mortgage had a balance of $208,253. Located at the Company's facilities are testing apparatus, machinery and equipment including oscilloscopes, differential voltmeters,spray painting equipment, production electrical test fixtures,auto test and manufacturing equipment, environmental and vibration test equipment and other items. Certain of this equipment is pledged as collateral for three leases payable in monthly installments of $1,123,$573 and $ 1,118 through June 2001, March 2002 and February 2003,. In addition, the Company has given a security interest to a lender covering all fixed assets, accounts receivable and inventory on $47,000 of debt with monthly payments of $5,750, plus interest at prime plus 2% as of June 30, 1998. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.01 par value (the "Common Stock"), was traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "LGTK" until May, 1992. The Common Stock was delisted when NASDAQ increased its minimum capital, surplus and stock price requirements and the Company was unable to meet such requirements. The Common Stock currently trades in the over-the- counter market. The table which appears below sets forth the quarterly range of high ask and low bid prices for the Common Stock for the periods indicated, as reported by The National Quotation Bureau, Inc. The figures shown represent "inter-dealer" prices without adjustment for markups, markdowns or commissions and may not necessarily represent actual transactions. On August 18, 1998 the closing bid and asked prices for the Common Stock were $.69 and $.81 per share, respectively. As of August 18, 1998 there were 3,382,859 shares of Common Stock outstanding and approximately 120 record holders of Common Stock, which includes stock being held by brokers in street name. The Company has never paid cash dividends on its Common Stock and does not intend to do so for the foreseeable future. It is anticipated that earnings, if any, will be retained to finance the Company's growth. Future payments of cash dividends, if any, will be determined by the Board of Directors based upon circumstances then existing, including contractual restrictions, financial condition, capital requirements and business outlook of the Company. Quarter Ended Ask Price - High Bid Price - Low September 30, 1996 7/8 1/2 December 31, 1996 7/8 1/2 March 31, 1997 25/32 9/16 June 30, 1997 15/16 9/16 September 30, 1997 27/32 21/32 December 31, 1997 29/32 5/8 March 31, 1998 27/32 17/32 June 30 , 1998 31 /32 5/8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company reported a net profit after tax of $400,790 for the year ended June 30,1998 compared to a $324,566 profit for the year ended June 30, 1997. Results of Operations Comparison of Fiscal Years Ended June 30, 1998 and 1997 Sales for fiscal 1998 were $4,815,518 compared to $4,157,472 for the prior year, or a 16% increase of $658,046. The increase was due primarily to additional sales as a result of new product lines. The Company has also begun to utilize fully automated test and automatic assembly equipment and has redesigned certain of its products to take advantage of the more cost effective surface mount manufacturing technologies. Gross profit margins were 40.8 % and 38.7% for the twelve month periods ended June 30, 1998 and 1997. This reflects the Company's committment to manufacturing its products in a more efficient manner, as well as close cost containment. Operating expenses for fiscal 1998 were approximately $1,329,000 compared to $1,188,000 or a increase of $141,000. Of this increase,research and development expenses accounted for approximately $25,000. This increase reflects the Company's ongoing design efforts including upgrading existing designs and completing design of certain unfinished models of the standard power supply products. These efforts also include modifications in order to improve manufacturing efficiency. Additional efforts are contemplated to continue design of the MC series high density power supply. The remaining $ 116,000 consists of numerous overhead items, but primarily a $61,000 increase in sales expenses. Of this amount, sales commissions were $16,000 and advertising was $45,000. Interest expense decreased approximately 3% due to decreased borrowing levels. During the past twelve month period the Company has reduced total debt by $168,153. The Company will now be required to service its two mortgages on the building and a term loan with a balance of $47,000 as of June 30, 1998 (see Note 7 ). In June 1995 and October 1995 the Company decided to borrow $ 65,000 and $47,500 in order to pay off its remaining equipment leases and to purchase additional new equipment as part of its plan to streamline its operations and to make more of the manufacturing an automatic process rather than labor intensive. Both of these loans were paid off in the year ended June 30, 1998. Legal expenses of $29,000 for the twelve month period ended June 30, 1998 were for normal ongoing legal matters, compared to $47,000 for the year ended June 30, 1997. The Company has made a settlement on a trademark infringement suit. The settlement is for $105,000 of which $55,000 was collected in the year ended June 30,1996 and the remaining $50,000 was collected during the year ended June 30,1997. The Company's effective tax rate of 30.3% differs from the statutory tax rate of 34% due principally to the impact of a deferred tax , utilization of federal tax credits and a state income tax provision. Liquidity and Capital Resources Total borrowings were $488,358 and $605,680, at June 30, 1998 and 1997, respectively, which represent decreases of $168,153, or 28%, and $123,284 or 17%, for the latest two twelve month periods. As of June 30, 1998 the Company has decreased total debt, accounts payable and accrued expenses by approximately $102,000 . As of June 30,1997 the Company had decreased total debt, accounts payable and accrued expenses by $211,000. During this two year period the Company has built its cash reserves to approximately $430,000 as of June 30, 1998. During the year ended June 30,1998, the Company increased its cash by about $36,000 through its operating activities primarily from its net income and depreciation.The Company used its cash to purchase equipment of $41,000 and paid down debt by approximately $168,000. The Company is not aware of any committments or contingencies that are likely to have a material impact on the financial statements. Due to the Company's current cash resources of $430,000 and its continued profitability the Company does not anticipate a need for additional outside financing. Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define a specific year. Absent corrective actions, a computer program that has date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions to various activities and operations. The Company has performed an assessment of major information technology systems and expects that all necessary replacements will be completed in a timely manner to ensure that systems are Year 2000 compliant. The Company believes the cost of administering its year 2000 compliance plan will not have a material adverse impact on future earnings. Directors Fees The Board of Directors meets annually as well as on an interim basis as the need arises. All Directors, with the exception of Mr. Herbert Fischer are paid $ 150 per meeting for their services. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements and notes thereto, are included in this Report on Form 10-KSB as follows: Index Item Page Number Report of Independent Certified Public Accountants 13 Balance Sheets as of June 30, 1998 and 1997 14 Statements of Income for the Years Ended June 30, 1998 and 1997 15 Statements of Stockholders' Equity for the Years 16 Ended June 30,1998 and 1997 Statement of Cash Flows for the Years 17 Ended June 30,1998 and 1997 Notes to Financial Statements 18 ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the Company's 1998 Proxy statement. ITEM 10. EXECUTIVE COMPENSATION Incorporated by reference to the Company's 1998 Proxy statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Company's 1998 Proxy statement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Company's 1998 Proxy statement. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. LOGITEK, INC. By: /s/Herbert L. Fischer Herbert L. Fischer President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Herbert L. Fischer Herbert L. Fischer President and Principal Executive Officer REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Logitek,Inc. We have audited the accompanying balance sheets of Logitek, Inc. as of June 30, 1998 and 1997,and the related statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide 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 Logitek, Inc. as of June 30, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Marcum & Kliegman LLP Woodbury, New York September 4,1998 LOGITEK, INC. BALANCE SHEETS June 30, ASSETS 1998 1997 Current Assets: Cash and cash equivalents $429,713 $393,797 Accounts receivable 676,704 422,549 Inventories 1,061,103 1,046,082 Prepaid expenses and other current assets 15,332 34,292 Due from officer 0 30,500 Total Current Assets 2,182,852 1,927,220 Property, Plant, and Equipment, net 680,134 668,861 Deferred income taxes,state 7,000 0 Goodwill 34,441 34,441 Other Assets 48,695 36,323 TOTAL ASSETS $2,953,122 $2,666,845 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $90,525 $145,182 Capitalized lease obligation, current 22,123 11,783 Accounts payable 324,736 385,882 Accrued expenses and taxes 194,398 154,507 Total Current Liabilities 631,782 697,354 Capitalized lease obligation, less current portion 75,350 50,119 Long-term debt, net of current portion 300,360 398,596 Deferred income taxes payable 52,000 15,380 TOTAL LIABILITIES 1,059,492 1,161,449 COMMITMENTS STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized 10,000,000 shares; issued 3,600,000 shares, of which 217,141 and 187,941 shares are held in treasury,respectively 36,000 36,000 Capital in excess of par value 280,355 280,355 Retained earnings 1,597,483 1,196,693 1,913,838 1,513,048 Less: Treasury Stock at cost 20,208 7,652 Total Stockholders' Equity 1,893,630 1,505,396 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,953,122 $2,666,845 The accompanying notes are an integral part of the financial statements. LOGITEK, INC. STATEMENTS OF INCOME For the Years Ended June 30, 1998 1997 Net sales $4,815,518 $4,157,472 Cost of goods sold 2,852,002 2,549,797 Gross profit 1,963,516 1,607,675 Operating expenses: Selling 352,567 291,034 General and administrative 730,726 675,343 Research and development 245,912 221,180 Total operating expenses 1,329,205 1,187,557 Income from operations 634,311 420,118 Other income (expense): Interest expense (78,882) (81,300) Interest income 19,361 10,748 Other income 0 50,000 Total other expense (59,521) (20,552) Income before income taxes 574,790 399,566 Income tax expense 174,000 75,000 Net income $400,790 $324,566 Per Share Amounts: Basic earnings per share $.12 $.10 Diluted earnings per common share $.11 $.09 The accompanying notes are an integral part of the financial statements. LOGITEK INC. Statements of Stockholders' Equity For the Years Ended June 30,1998 and 1997 Common Stock Capital in Retained Treasury Shares Amount Excess of Par Earnings Stock Total Balance at 3,424,000 $36,000 $280,355 $872,127 $(5,500) $1,182,982 July 1,1996 Net earnings 324,566 324,566 Purchase of Treasury Stock (11,941) (2,152) (2,152) Balance at 3,412,059 $36,000 $280,355 $1,196,693 $(7,652) $1,505,396 June 30,1997 Net earnings 400,790 400,790 Purchase of Treasury Stock (29,200) (12,556) (12,556) Balance at 3,382,859 $36,000 $280,355 $1,597,483 $(20,208) $1,893,630 June 30,1998 The accompanying notes are an integral part of the financial statements LOGITEK, INC. STATEMENTS OF CASH FLOWS For the Years Ended June 30, 1998 1997 Cash Flows from Operating Activities: Net income $400,790 $324,566 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 80,978 91,441 (Increase) decrease in operating assets: Accounts receivable (254,155) (93,748) Inventories (15,021) 28,008) Prepaid expenses and other current assets 18,960 (351) Other assets (12,372) (3,212) Increase (decrease) in operating liabilities: Accounts payable (61,146) (78,007) Accrued expenses and taxes 70,391 (12,054) Deferred income taxes payable 29,620 9,000 Total adjustments (142,745) (114,939) Net cash provided by operating activities 258,045 209,627 Cash Flows from Investing Activities Purchases of property,plant and equipment (41,420) (39,373) Net cash used in investing activities (41,420) (39,373) Cash Flows from Financing Activities: Repayment of long-term debt (168,153) (148,284) Proceeds from long-term debt 0 25,000 Purchase of treasury stock (12,556) (2,152) Net cash used in financing activities (180,709) (125,436) Net increase in cash and equivalents 35,916 44,818 Cash and cash equivalents, beginning of year 393,797 348,979 Cash and cash equivalents, end of year $429,713 $393,797 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the years for: Interest $68,966 $72,400 Income taxes $174,000 $75,000 Noncash Investing and Financing Activities During the year ended June 30,1998, a lease payable of $50,831 was incurred when the Company purchased equipment. During the year ended June 30, 1998 an advance to the Company president was written off against a bonus payable to him which was accrued for at June 30, 1998. During the year ended June 30, 1997 a lease payable of $23,695 was incurred when the Company purchased equipment. The accompanying notes are an integral part of the financial statements LOGITEK, INC. Notes to Financial Statements NOTE 1 - Description of Business and Summary of Significant Accounting Policies: Description of business: Logitek, Inc. ("the Company") is engaged in the design, development and production of electronic power monitoring equipment and electronic power supplies. The Company sells its products and provides services to domestic customers, and to a lesser extent to international customers, and to the United States government. Accounts Receivable Accounts receivable have been adjusted for all known uncollectible accounts. An allowance for doubtful accounts is not provided since, in the opinion of management, all accounts recorded on the books are deemed collectible. Revenue recognition: The Company recognizes sales when merchandise is shipped. For contracts subject to Department of Defense regulations, the Company recognizes revenue when the earnings process is deemed completed. Inventories: Inventories are carried at the lower of cost (based on a moving average) or market. Property,plant and equipment and depreciation: Property, plant and equipment is recorded at cost. Expenditures for major renewals and betterments to property and equipment are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. When assets are retired or otherwise disposed of, their cost and related accumulated depreciation are eliminated from the accounts. Any resulting gain or loss is reflected in income. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are as follows: Buildings and improvements 15 to 31.5 years Machinery and equipment 5 to 7 years Furniture and fixtures 5 to 7 years Automobiles 5 years Goodwill: Goodwill that arose from a 1969 acquisition, is being reviewed by management as to its continuing value. The Company believes its value has diminished in recent years and is contemplating writing this off to earnings in the near term. LOGITEK,INC. Notes to Financial Statements Note 1-Description of Business and Summary of Significant Accounting Policies Income Taxes: Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.Tax credits are accounted for on the flow-through method. Research and development costs: Research and development costs are expensed as incurred. Cash and cash equivalents: The Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents. At June 30, 1998 and June 30, 1997 the Company has cash deposits in banks in excess of the maximum amount insured by the Federal Deposit Insurance Corp. Net earnings per common share: In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which establishes standards for computing and presenting earnings per share. The new standard replaces the presentation of primary earnings per share prescribed by Accounting Principles Board Opinion No. 15 "Earnings per Share" ("APB 15"), with a presentation of basic earnings per share and also requires dual presentation of basic and diluted earnings per share on the face of the statement of operations for all entities with complex capital structures. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed similarly to fully diluted earnings per share pursuant to APB 15. The Company adopted SFAS 128 in the fourth quarter of fiscal 1998 and has restated the prior period in its financial statements. Basic earnings per share are based on the weighted-average number of shares of common stock outstanding, which were 3,407,192 at June 30,1998 and 3,423,730 at June 30,1997. Diluted earnings per share are based on the weighted-average number of shares of common stock adjusted for the effects of assumed exercise of options under the treasury stock method, LOGITEK,INC. Notes to Financial Statements Note 1-Description of Business and Summary of Significant Accounting Policies Net earnings per share-continued which were as follows: 3,595,166 at June 30,1998 and 3,676,394 at June 30,1997. The following is a reconciliation of the earnings per share calculations for the years ended June 30, 1998 and 1997: 1998 1997 Basic Earning per share computation Numerator $400,790 $324,566 Denominator: Common shares outstanding 3,407,192 3,423,730 Basic earnings per share $ .12 $ .10 Diluted earnings per share computation Numerator $400,790 $324,566 Denominator: Common shares outstanding 3,407,192 3,423,730 Options 187,974 252,664 Total shares 3,595,166 3,676,394 Diluted earnings per share $ .11 $ .09 Use of Estimates in the Financial Statements 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 liablilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Advertising Costs Advertising costs are expensed as incurred. Fair Value of Financial Instruments The Company's financial instruments include cash, accounts receivable and accounts payable.Due to the short-term nature of these instruments, the fair value of these instruments approximate their recorded value. The Company has long term debt which it believes is stated at estimated fair market value. LOGITEK ,INC. Notes to Financial Statements Note 1-Description of Business and Summary of Significant Accounting Policies Stock- Based Compensation In October 1995, Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 123"Accounting for Stock Based Compensation"("SFAS No.123"). SFAS No. 123 requires compensation expense to be recorded (i)using the new fair value method or (ii)using existing accounting rules prescribed by Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees"("APB 25") and related interpretations with pro forma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company intends to continue to account for its stock based compensation plans in accordance with the provision of APB 25.Had the Company elected to recognize compensation costs based on the fair value of the options at the date of grant as prescribed by SFAS No. 123,there would be no material effect from that recognized under APB 25 for the years ended June 30,1998 and 1997. Recently Issued Statements of Financial Accounting Standards In June 1997, the Financial Accounting Standards Board issued two new disclosure standards. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 130") establishes standards for reporting and display of comprehensive income. Among other disclosures, SFAS 130 requires that all items that are required to be recognized as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") establishes standards for the way that public enterprises report information about operating segments. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS 131 requires separate disclosures for different operating segments. Both of these new standards are effective for financial statements for periods beginning after December 15,1997 and require comparative information for earlier years to be restated. The Company does not expect that adoption of these standards will significantly impact its financial statements. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") which standardizes the disclosure requirements for pensions and other postretirement benefits. The adoption of SFAS 132 is not expected to significantly impact the Company's financial statements. LOGITEK, INC. Notes to Financial Statements NOTE 2 - Inventories Inventories consist of the following: June 30, 1998 1997 Raw materials $547,117 $505,280 Work-in-process 347,760 326,954 Finished goods 166,226 213,848 Total $1,061,103 $1,046,082 Note 3 - Property, Plant and Equipment Property,plant and equipment consists of the following: June 30, 1998 1997 Land $78,000 $78,000 Buildings and improvements 802,850 802,850 Machinery and equipment 1,243,153 1,150,902 Furniture and fixtures 142,876 142,876 Automobiles 68,988 68,988 Total 2,335,867 2,243,616 Less: Accumulated Depreciation (1,655,733) (1,574,755) Property Plant and Equipment, Net 680,134 668,861 (a) Depreciation expense charged to operations was $80,978 and $91,441 for the years ended June 30, 1998 and June 30,1997,respectively. (b) The cost of equipment under a capital lease and accumulated depreciation on these assets was $122,646 and $25,930,respectively,at June 30,1998, $72,646 and $11,994 respectively at June 30,1997. NOTE 4-Related Party Transactions The Company had an uncollateralized loan receivable from its president and principal shareholder. The loan balance of $30,500 of June 30,1997 was paid in full during June 1998. NOTE 5-Other Assets Included in Other Assets is $39,390 and $36,024 of restricted cash as of June 30, 1998 and 1997, respectively, which is held as collateral for the mortgage payable to Long Island Development Corp. (See Note 7). LOGITEK, INC. Notes to Financial Statements NOTE 6 - Leases Capitalized lease obligation During the years ended June 30,1998 and June 30,1997 the Company obtained equipment under capital leases expiring in February 2003 and March 2002 respectively. The assets and liabilities under capital leases are recorded at the lower of the present values of the minimum lease payments or the fair values of the assets. The assets are included in property and equipment and are depreciated over their estimated useful lives. As of June 30, 1998,future minimum lease payments under all capital leases are: Year ending Amount June 30, 1999 $ 22,123 2000 25,339 2001 26,770 2002 16,751 2003 6,490 Total capitalized lease payments 97,473 Less: current portion 22,123 Total capitalized lease payments,net of current portion $ 75,350 Operating leases The Company leases certain equipment to support its manufacturing and test capabilities and certain office equipment. Such leases expire through June 2000. Rent expense for the years ended June 30, 1998 and 1997 was $5,252 and $5,252 respectively. Future minimum rental payments under noncancelable operating leases as of June 30,1998 are as follows: Year Ending June 30, Amount 1999 $5,252 2000 3,532 Total $8,784 LOGITEK,INC. Notes to Financial Statements NOTE 7 - Long-Term Debt Long-term debt consists of the following: June 30, 1998 1997 Mortgage payable to NY Job Development Authority (JDA) in monthly installments of $2,656 including interest (8.25% at June 30, 1998 and 1997) through June 2004, collateralized by restricted cash, building and improvements with a net book value of approximately $406,822 (a) $135,632 $ 154,340 Mortgage payable to Long Island Development Corp. (LIDC) in monthly installments of $4,427, including interest at 14.296% through June 2004, subordinate to the JDA mortgage, collateralized by restricted cash, land, building and improvements with a net book value of $406,822 (b) 208,253 229,340 Notes payable to a bank in monthly installments in the aggregate amount of $3,125 plus interest at 1.5% above prime through October 1998, collateralized by a secondary lien on all assets of the Company (d) 0 44,098 Term loan payable to bank (c) 47,000 116,000 Total debt 390,885 543,778 Less: Current Portion (90,525) (145,182) Total Long term debt $300,360 $398,596 (a) Interest rate varies in response to market conditions. This mortgage is guaranteed by the U.S. Small Business Administration. The loan contains restrictive convenants including default if the Company defaults on any superior debt. (b) This mortgage is personally guaranteed by the Company's president and principal stockholder.The mortgage contains restrictive covenants which include, among others,limiting property, plant and equipment additions in each year, obtaining written consent of the lender prior to incurring additional financing obligations and prior to transferring ownership of common stock belonging to the Company's president and principal stockholder. The mortgage is subordinated to the JDA mortgage. (c) The term loan payable to bank requires monthly principal payments of $5,750 plus interest at 2% above the bank's prime rate ( 8.25% at June 30, 1998) through March 1999. The note is collateralized by accounts receivable, inventory and certain machinery and equipment. (d) Interest rate varies in response to market conditions. LOGITEK,INC. Notes to Financial Statements Note 7-Long Term Debt -Continued Aggregate long-term debt maturities for the five fiscal years subsequent to June 30, 1998 are: Year Ending June 30, Amount 1999 $90,525 2000 48,991 2001 55,163 2002 62,134 2003 70,011 Thereafter 64,061 Total $390,885 Note 8 - Retirement Plans The Company has a defined contribution plan for all eligible employees under Internal Revenue Code Section 401(k). The plan states that the Company will provide a matching contribution of up to 25% of the first 3% of a participant's compensation as well as a discretionary payment. The Company has recorded expense associated with the plan of $41,500 and $30,000 for the years ended June 30, 1998 and 1997, respectively. The Company has an Employee Stock Ownership Plan("ESOP") for the benefit of certain employees. As of June 30,1998 all shares in the ESOP have been earned and assigned to the respective employee's accounts. There is no expense associated with this plan for the years ended June 30, 1998 and 1997. Note 9 - Income Taxes The provision for income taxes is as follows: Year Ended June 30, 1998 1997 Deferred : Federal $21,000 $ 9,000 : State 0 0 Current : Federal 144,000 65,000 : State 9,000 1,000 $174,000 $ 75,000 Deferred income taxes result from temporary differences in the recognition of expenses for income tax and financial reporting purposes. Such differences result principally from the use for income tax purposes of accelerated depreciation. LOGITEK,INC. Notes to Financial Statements Note 9-Income Taxes-Continued The Company recognizes deferred tax assets or liabilities for the future tax consequences of events that have been recognized in its financial statements or tax returns. Accordingly, the Company has recorded a net deferred tax liability for the increase in income taxes payable in future years related to accumulated depreciation and inventory reserve. The net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax (assets) liabilities: 1998 1997 Federal $ 52,000 $ 15,380 New York State (7,000) 0 Net deferred tax liability $ 45,000 $ 15,380 Income taxes were different from the amount computed by applying the federal statutory tax rate to income before income taxes due to the following: 1998 1997 Statutory rate 34.0 34.0 State income taxes(net of federal benefit) 1.1 3.0 Income tax credits (5.8) (20.5) Net change in items giving rise to deferred taxes .7 2.3 Effective rate 30.0 18.8 Note 10 - Stock Options The following options were granted, under a nonqualified stock option plan, during the years ended June 30, 1998 and June 30,1997. All options as of June 30, 1998 were exercisable for a total exercise price of $236,780. SHARES RANGE OF EXERCISE PRICE Balance June 30,1996 396,000 $.25 Granted June 30,1997 10,000 $.50 Balance June 30,1997 406,000 Granted June 30,1998 225,000 $.70-$.81 Expired June 30,1998 (125,000) $.25 Balance June 30,1998 506,000 LOGITEK, INC. Notes to Financial Statements Note 10 Stock Options -Continued The exercise price of the options were set at fair market value on the date of grant. As of the balance sheet date no options have been exercised. All of the options, with the exception of a 250,000 share option held by a major shareholder, are exercisable no sooner than over five years, due to an annual limit of 20%. These remaining options are held by various employees and members of the board of directors. Note 11 - Major Customers During the year ended June 30,1998 the Company sold a substantial portion of its merchandise to four customers. Net sales to these customers were approximately $1,079,000(22%),$789,000 (16%) $368,000(8%) and 337,000(7%) . At June 30,1998 amounts due from these customers and included in accounts receivable were $63,825,$129,450, $0 and $20,856,respectively. During the year ended June 30,1997, the Company sold a substantial portion of its merchandise to three customers. Net sales to these customers accounted for $575,000 (14%),$868,000 (21%) and $ 933,000 (22%) At June 30, 1997 amounts due from these customers were $37,809,$59,545 and $110,769, respectively. Note 12 - Treasury Stock During the years ended June 30,1998 and 1997 the Company acquired 11,941 and 29,200 shares of treasury stock for $2,152 and $12,556,respectively. The treasury stock was recorded at cost. Auditors Marcum & Kliegman LLP Certified Public Accountants & Consultants 130 Crossways Park Drive Woodbury , N.Y. 11797 Transfer Agent Continental Stock Transfer & Trust Co. 2 Broadway New York, N.Y. 10004 Form 10-KSB or additional information about the Company Stockholders and others interested in obtaining additional information about the Company may do so by writing or calling Logitek, Inc., 101 Christopher Street., Ronkonkoma, N.Y. 11779,(516) 467-4200. The Form 10-KSB Annual Report will be furnished without charge. Affirmative Action Policy It is the policy of Logitek, Inc. that all employees will be judged on the basis of qualifications and ability, without regard to age, sex, race, creed, color or national origin, in all personnel actions. No employee or applicant for employment will receive discriminatory treatment because of physical or mental handicap in regard to any position for which the employee or applicant is qualified. Annual Stockholders' Meeting The annual meeting of stockholders will be held at offices of Logitek, Inc., 101 Christopher Street., Ronkonkoma, N.Y. 11779 on November 23, 1998 at 6:00 P.M.