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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 3, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
COMMISSION FILE NUMBER 0-17187
LOGIC DEVICES INCORPORATED
(Exact name of registrant as
specified in its charter)
CALIFORNIA 94-2893789
(State of Incorporation) (I.R.S. Employer
Identification No.)
1320 ORLEANS DRIVE, SUNNYVALE, CA 94089
(Address of principal executive offices,
including Zip Code)
(408) 542-5400
(Registrant's telephone number,
including Area Code)
Securities registered pursuant to Section 12(b) of the Act
Title of Class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) for the Act
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant on December 28, 1999 was approximately $13,773,237. On that date,
there were 6,650,488 shares of Common Stock issued and outstanding.
Documents Incorporated By Reference: Part III incorporates certain information
by reference to the registrant's definitive Proxy Statement to the registrant's
annual meeting of shareholders to be held April 4, 2000.
Page 1 of 42
Index to Exhibits Appears at Page 38
PART I
ITEM 1. BUSINESS
This item contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of factors set forth in
"Factors Affecting Future Results" and elsewhere in this Report.
GENERAL DEVELOPMENT OF THE BUSINESS
Logic Devices Incorporated (the Company) develops and markets
high-performance digital integrated circuits. The Company's circuits address
applications that require high computational speeds, high-reliability, high
levels of circuit integration (complexity), and low power consumption. The
Company's circuits are incorporated into products manufactured by original
equipment manufacturers (OEMs) and utilized to provide high-speed electronic
computation in digital signal processing (DSP), video image processing, and
telecommunications applications. The Company's product strategy is to develop
and market proprietary circuits that offer superior performance to meet specific
application requirements.
During fiscal 1999, the Company focused on improving its balance sheet
liquidity. Bank indebtedness was reduced 35%, accounts payable were reduced 55%,
current liabilities decreased 37%, and total liabilities were reduced 38%. This
was accomplished by aggressive control of expenses and by limiting capital
expenditures.
In September 1999, the Company elected to change its fiscal year to be
comprised of 52 weeks of seven days, each beginning on Monday and ending on
Sunday, and its fiscal quarters to be comprised of exactly 13 weeks. As a result
of this change, the Company's fiscal year ended on October 3, 1999 rather than
September 30, 1999. In September 1998, the Company elected to change its fiscal
year-end from December 31 to September 30, effective September 30, 1998. All
references to 1998, fiscal 1998 or fiscal period 1998 mean such nine-month
period, unless otherwise noted.
The Company's products generally address DSP requirements involving
high-performance arithmetic computational functions. During its fiscal year
ending October 3, 1999, the Company introduced one new product and discontinued
one maturing product. As of October 3, 1999, the Company offered 38 products,
which were sold to a diverse customer base. With the multiplicity of packaging
and performance options, the 38 basic products result in approximately 200
catalog items.
The Company's plug compatible products are designed to replace existing
industry standard integrated circuits, while offering superior performance,
lower power consumption, and reduced cost. The Company is focused on developing
proprietary catalog products to address specific functional application needs or
performance levels that are not otherwise commercially available. The Company
seeks to provide related groups of circuits that OEMs purchase for incorporation
into high-performance electronic systems.
The Company relies on third party silicon foundries to process silicon
wafers, each wafer having up to several hundred integrated circuits of a given
Company design, from which finished products are then assembled. The Company's
strategy is to out-source wafer processing to third party foundries to avoid the
substantial investment in capital equipment required to establish a wafer
fabrication facility. See "Business -- Background." The Company utilizes
foundries to take advantage of their processing capabilities and continues to
explore additional foundry relationships to minimize its dependence on any
single relationship.
The Company markets its products worldwide through its own direct sales
force, a network of 15 national and international independent sales
representatives, and 16 international and domestic distributors. In fiscal year
1999, approximately 36% of the Company's net revenues were derived from OEMs,
while sales through foreign and domestic distributors accounted for
approximately 64% of net revenues. Among the Company's customers are Snell and
Wilcox, Quantel, Philips, Hitachi, Ikegami, NEC, Sony, Toshiba, Honeywell, SDX
(now part of Lucent Technologies), Solectron, Acuson, Pinnacle Microsystems,
Lockheed Martin, Boeing, Hewlett Packard, and Advanced Technologies
Laboratories. Approximately 68% of the Company's net revenues were derived from
within the United States and approximately 32% were derived from foreign sales.
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The Company was incorporated under the laws of the State of California
in April 1983. The Company's initial public offering was in November 1988, at
which time the Company's shares commenced trading on the Nasdaq National Market.
The Company's principal offices are located at 1320 Orleans Drive, Sunnyvale,
California 94089, and the telephone number is (408) 542-5400.
BACKGROUND
Rapid advances in fabricating silicon-based semiconductors are driving
a global revolution in electronics. With these ongoing advances, the ability to
economically compute, communicate, and control seems to be limited only by the
creativity required to implement ever more complex electronic systems. It is now
not only possible, but also becoming increasingly more common, to implement
entire electronic systems on a single small sliver of silicon. As a result, the
challenges to the industry have increasingly turned toward innovative product
definition, timely product development, technical customer support, and heavy
capital investments in advanced semiconductor wafer fabrication facilities. The
rapid advances in chip fabrication technology have resulted in a specialization
of skills within the industry. In addition to the specialization in materials
processing skills required to fabricate semiconductor wafers, the industry
increasingly requires and values system architecture, signal processing
algorithms, and circuit design expertise as essential skills for developing
financially successful products. Opportunities have thus emerged for
semiconductor companies that focus on product definition, advanced design
techniques, and technical application support, and that rely on third parties
for wafer fabrication. The Company focuses its resources on defining and
developing high-performance integrated circuit components for growing markets,
which require demanding computational throughput.
The semiconductor industry is intensely competitive and is
characterized by rapid technological change, product obsolescence, fluctuations
in both demand and capacity, and price erosion. These factors can obsolete
processes and products currently utilized or produced by the Company. In such
cases, the Company is required to develop products utilizing new processes and
to either integrate such products into its existing foundry relationships or
establish new foundry sources.
MARKETS AND PRODUCT STRATEGIES
The Company believes it possesses advanced competencies in two areas:
DSP algorithm and architecture development and high speed, very large scale,
integrated circuit implementation.
DSP involves converting light, sound, or other naturally occurring
analog waveforms into a stream of digital values, that may then be processed,
manipulated, exchanged, or sorted by electronic systems. DSP provides many
advantages, including: the ability to process and manipulate digital data with
consistency and precision; the ability to store and recall information; and the
ability to extract information content and compress the amount of data that must
be stored, processed, or transmitted. Manipulation of video images and speech
requires signal-processing rates and precision that are not practical with
analog technology or with general-purpose (non-DSP) processors. DSP is an
increasingly important technology for many emerging product technologies.
With the increasing cost effectiveness of DSP as a result of rapid
advances in semiconductor process technology, DSP is becoming ubiquitous in our
lives. As a result, DSP has attracted the considerable attention of very large
and formidable competitors. However, these competitors, out of necessity, tend
to focus on very high volume, application specific markets, or on
general-purpose programmable DSP products that can be programmed to address a
wide variety of applications. To avoid direct competition with these formidable
competitors, the Company seeks to identify products and markets that demand
greater performance than can be accomplished with a programmable DSP and markets
for application specific functions that are small enough not to attract
significant attention from larger chip manufacturers.
High quality video image processing is one such area in which the
Company operates. Video image processing currently requires between 10 and 100
times greater computational capacity than programmable DSP processors can
deliver. Mass market video graphics and image processing products, such as 3D
personal computer graphics boards, are generally targeted at selling price
points that cannot support studio broadcast quality images. Moreover, studio
broadcast quality equipment may generally be required to process video images
many times in the composition and editing of on-air material. In contrast,
personal computer graphics screens are processed for display in real time only.
As a result, while the underlying mathematical computations for processing both
broadcast and computer images are similar, two distinct markets exist. As a
result of the very high volume potential available for a successful personal
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computer graphics chip product, many companies compete fiercely over this market
opportunity. In contrast, the broadcast industry, while it requires more robust
mathematical precision in processing images, consumes far fewer chips. Due to
its more modest market size, this market has been relatively ignored by the chip
industry. As a result, the Company has identified this area as a productive area
to apply its core strengths.
Beginning in November 1998, the Federal Communications Commission
directed that television broadcasters must begin a transition from current
analog broadcasts to high definition digital television (HDTV). All analog
broadcasts are scheduled to cease by the year 2007. In addition to providing
improved image quality as a result of increased resolution, the image aspect
ratio (width/height) will be changed from the traditional, nearly square 4 by 3
size ratio of current televisions to a wider screen 16 by 9 ratio more similar
to motion picture screens. Due to the large base of currently installed
equipment, both formats will co-exist for a number of years. In addition, due to
the initially limited availability of content in the wide format, the industry
faces the need to resize images back and forth between the two formats with
exceptionally high computational precision, so as to preserve the image quality
advantages of the newer digital format.
Many of the Company's initial DSP building block components were the
first to achieve speeds necessary to process broadcast video images in real
time. Later, the low power consumption of the Company's products allowed these
products to be offered in lower cost commercial grade packaging, as opposed to
high cost ceramic packages, which were required to dissipate the heat from
earlier high power bipolar components. As a result of these advantages, video
image processing applications have historically represented approximately 50% of
the Company's revenues.
With its significant presence in the broadcast equipment industry, the
Company and its existing customers have jointly defined a family of very high
performance digital image filtering circuits that facilitate the smoothing of
edges as video images are stretched and resized. During 1997, the Company
developed the initial members of this family and sampled them to OEMs for
incorporation into HDTV studio production systems. During fiscal 1998, many of
those OEMs completed their system level product development on this new
generation of HDTV compatible studio systems. Sales of HDTV studio equipment in
1999 have lagged behind market forecasts, however, the Company believes that its
products offer unique solutions to certain video image filtering problems
required in that equipment. As the HDTV studio equipment begins to sell in
higher volume, the Company should benefit from these increasing sales.
As a result of its initial work on digital filtering and image resizing
circuits, the Company has identified a number of secondary applications for this
product technology. Many of the current products are also applicable to, and are
expected to be incorporated into, advanced medical imaging equipment, such as
computer aided tomography (CAT) and ultrasound scanners. Military applications
include infrared, radar, and video image seekers, as well as multi-mode
displays.
Telecommunications, in all of its various forms, is the fastest growing
and largest current market for DSP chips. The Company has found that its digital
filtering components also have applications in wireless base station processing.
Analogous to video image processing, major industry suppliers have tended to
concentrate their efforts on the high volume, handset side of the wireless link,
while the base station side has received far less attention. Due to demands for
fewer, smaller, and less intrusive antenna sites, the digital image filtering
required in multi-channel wireless base stations is computationally intensive
and power limited. The Company believes this area is an attractive target for
its future product directions.
PRODUCTS IN DEVELOPMENT
The Company has historically experienced a correlation between its
success in introducing new products and increases in revenues. Consequently, the
Company is committed to a high level of product design and development activity,
as it considers new product development critical to its future success. During
1999, the Company developed circuits that provide color space conversion between
computer and broadcast standards, and the digital storage of video scan lines.
With the benefit of this on-going customer input resulting from its
current digital filtering products, the Company has a number of new DSP product
opportunities that it will undertake to develop in fiscal 2000. These products
generally will be utilized in conjunction with the Company's current DSP
products to further facilitate high-performance signal processing. At current
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resource levels, the Company does not expect to be able to complete all of the
new product opportunities that it has identified. The level of product
development expenditures will be dependent on the Company's success in meeting
its financial objectives.
WAFER FABRICATION TECHNOLOGY
The Company relies on third party silicon foundry suppliers to produce
processed wafers from mask patterns designed by the Company. Through these wafer
suppliers, the Company has access to advanced high-speed, high-density
complimentary metal oxide semiconductor (CMOS) process technology, without the
significant investment in capital equipment and facilities required to establish
a wafer fabrication facility. Products developed in 1999 utilize process
technology with effective channel lengths under 0.35 micron. Coupled with the
Company's structured custom design methodology and experience in high-speed
circuit design, this technology has allowed the Company to create products that
offer high computational speeds, high reliability, high levels of circuit
integration (complexity), and low power consumption.
The Company currently is dependent on Taiwan Semiconductor
Manufacturing Company as its only wafer-processing source. The earthquake in
Taiwan had a minimal impact on this source. Wafers are processed to pre-agreed
specifications to produce integrated circuits designed by the Company. There can
be no assurance that such relationship will continue to be on terms satisfactory
to the Company. In general, the Company's foundry sources do not guarantee
minimum supplies. At times, the Company's revenues have been limited by its
inability to obtain adequate quantities of processed wafers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
PRODUCTION, ASSEMBLY AND TEST
The Company's production operations consist of functional and
parametric wafer testing, package marking, hot and cold testing, final
inspection, quality inspection, and shipment. As is customary in the industry,
the Company's commercial grade plastic package devices are wafer tested and then
shipped to high-volume assembly subcontractors in the Far East for assembly.
Thereafter, the assembled devices are returned to the Company for final testing
and shipment to customers. The Company continues to test raw material through
finished product at various stages in the manufacturing process, utilizing
automated test equipment capable of volume production.
MARKETING, SALES AND CUSTOMERS
The Company markets its products worldwide to a broad range of
customers through its own sales efforts, a network of 15 national and
international independent sales representatives, and 16 electronics
distributors. The Company concentrates its direct marketing efforts on the
high-performance segments of the telecommunication, military, industrial, and
computer markets in applications where high-speed and low power consumption are
critical. Among the Company's OEM customers are Snell and Wilcox, Quantel,
Philips, Hitachi, Ikegami, NEC, Sony, Toshiba, Honeywell, SDX (now part of
Lucent Technologies), Solectron, Acuson, Pinnacle Microsystems, Lockheed Martin,
Boeing, Hewlett Packard, and Advanced Technologies Laboratories.
The Company coordinates sales from its Sunnyvale, California facility.
The Company maintains a regional sales office in Raleigh, North Carolina to
serve the East Coast and in Humble and Richardson, Texas to serve the Central
U.S., and services the West Coast from its Sunnyvale and San Diego facilities.
The Company also has a sales office in Warminster, England to support the
Company's European sales activities. The Company's sales managers direct the
activities of the independent sales representative firms and focus on major
target accounts. Sales representatives obtain orders on an agency basis and the
Company ships directly to its customers. Sales representatives receive
commissions on sales within their territories. Distributors purchase the
Company's products for resale, generally to a broad base of small to medium-size
customers. One national stocking distributor services North America. As is
customary in the industry, domestic distributors are entitled to certain price
rebates and limited stock rotation rights, for which the Company has made a
provision in its consolidated financial statements. During fiscal 1999 and 1998,
sales through both international and domestic distributors accounted for
approximately 64% and 46%, respectively, of net sales, while direct sales to
OEMs accounted for approximately 36% and 54%, respectively, of net sales.
5
In fiscal 1999, All American, a domestic distributor, accounted for
approximately 35% of net revenues. In fiscal 1998, SDX, MCM Japan, and Ambar
Cascom accounted for approximately 27%, 12%, and 12%, respectively, of net
revenues. In fiscal 1997, All American and Bell-Milgray accounted for 16% and
12%, respectively, of net revenues.
International sales are conducted by sales representatives and
distributors located in Belgium, Canada, Denmark, England, Finland, France,
Germany, Hong Kong, Israel, Italy, Japan, Korea, Netherlands, Spain, Sweden, and
Taiwan. During fiscal 1999, 1998, and 1997, the Company's export sales were
approximately 32%, 47%, and 31%, respectively, of net sales (see Note 11 in
"Notes to Consolidated Financial Statements" contained in Item 8 below). The
Company's international sales are billed in United States dollars, and
therefore, settlements are not directly subject to currency exchange
fluctuations. However, changes in the relative value of the dollar may create
pricing pressures for the Company's products. Although the Company's
international sales are subject to certain export restrictions, including the
Export Administration Amendments Act of 1985 and the regulations promulgated
thereunder, the Company has not experienced any material difficulties because of
these restrictions.
The Company's domestic distributor markets products competitive with
the Company's products. The Company's independent sales representatives and
foreign distributors also may represent competitors of the Company.
The Company warrants its products against defects in materials and
workmanship for a period of 12 months from the date of shipment. Warranty
expenses to date have been nominal.
BACKLOG
As of November 30, 1999 and 1998, the Company's backlog was
approximately $1,933,000 and $2,042,900, respectively. The Company includes in
its backlog all released purchase orders shippable within the following 18
months, including orders from distributors. The Company's backlog, although
useful for scheduling production, does not represent actual sales and should not
be used as a measure of future sales or revenues at any particular time. In
accordance with accepted industry practice, orders on the backlog are subject to
cancellation without penalty at the option of the purchaser at any time prior to
shipment. Changes in delivery schedules and price adjustments that may be passed
on to distributors and credits for returned products are not reflected. The
Company produces catalog products that may be shipped from inventory within a
short time after receipt of a purchase order. The Company's business for its
catalog products, like the businesses of many companies in the semiconductor
industry, is characterized by short-term orders and shipment schedules rather
than by volume purchase contracts. For these reasons, the Company's backlog as
of any particular date is not representative of actual sales for any succeeding
period and the Company believes that its backlog is not a good indicator of
future revenues.
RESEARCH AND DEVELOPMENT
The Company's engineering staff is involved in the design of integrated
circuits. In 1999, the Company's development efforts were focused on the
development of new digital processing circuits that address video image
processing and digital communications applications. The Company's product design
efforts are supplemented by computer aided design and simulation equipment. The
Company also has an experienced test-engineering group that works closely with
the designers to develop production test software. Research and development
expenditures were 11%, 10%, and 11% of sales in 1999, 1998, and 1997,
respectively, and historically, have been approximately 10% of net sales. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Consolidated Statements of Operations"
contained in Items 6, 7, and 8.
COMPETITION
The semiconductor industry is intensely competitive and characterized
by rapid technological change and rates of product obsolescence, price erosion,
periodic shortage of materials, variations in manufacturing yields and
efficiencies, and increasing foreign competition. The industry includes many
major domestic and international companies that have substantially greater
financial, technical, manufacturing, and marketing resources than the Company.
In addition, there are many emerging companies that are attempting to obtain a
share of the existing market. The Company faces competition from other
manufacturers of high-performance integrated circuits, many of which have
advanced technological capabilities, are currently increasing their
participation in the high-performance CMOS market, and have internal wafer
production capabilities. The ability of the Company to compete in this rapidly
6
evolving environment depends on elements both in and outside the control of the
Company. These elements include: the Company's ability to develop new products
in a timely manner; the cost effectiveness of its manufacturing; the acceptance
of new products by customers; the speed at which customers incorporate the
Company's products into their systems; the continued access to advanced
semiconductor foundries; the number and capabilities of its competitors as well
as general economic conditions. In the area of high-performance DSP circuits,
the Company competes with Altera, Analog Devices, Fairchild Semiconductor,
Genesis, Gennum, Grey Chip, Harris, Lucent Technologies, Texas Instruments, and
Xilinx, among others.
PATENTS AND COPYRIGHTS
Because of the rapidly changing technology in the semiconductor
industry, the Company relies primarily upon its design know-how, rather than
patents and copyrights, to develop and maintain its competitive position. The
Company attempts to protect its trade secrets and other proprietary information
through confidentiality agreements with employees, consultants, suppliers, and
customers, but there can be no assurance that those measures will be adequate to
protect the Company's interests. The Company is of the opinion that patent
maskwork protection is of less significance in the Company's business than
factors such as the experience and innovative skill of its personnel and the
abilities of its management. There can be no assurance that others will not
develop or patent technology similar to the Company's technology or copy or
otherwise duplicate the Company's products. The Company owns five patents
awarded by the United States Patent Office.
Since others have obtained patents covering various semiconductor
designs and processes, certain of the Company's present or future designs or
processes may be claimed to infringe upon the patents of third parties. The
Company has previously received, and may in the future receive, claims that one
or more aspects or uses of the Company's products infringe on patent or other
intellectual property rights of third parties. See Item 3 - "Legal Proceedings."
The Company does not believe that it infringes upon any known patents at this
time. If any such infringements exist or arise in the future, the Company may be
liable for damages and may, like many companies in the semiconductor industry,
find it necessary or desirable to obtain licenses relating to one or more of its
current or future products. Based on industry practice, the Company expects that
any necessary licenses or rights under patents could be obtained on conditions
that would not have a material adverse effect on the Company. There can be no
assurance, however, that licenses could in fact be obtained on commercially
reasonable terms, or at all, or that litigation would not occur. The Company's
inability to obtain such licenses or the occurrence of litigation could
adversely affect the Company.
FACTORS AFFECTING FUTURE RESULTS
Except for historical information contained herein, the discussion in
this Form 10-K report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including but not limited to, statements as to future
operating results and business plans of the Company that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include but are not limited to, general economic conditions and the cyclical
nature of the semiconductor industry, especially the markets addressed by the
Company's products such as HDTV, telecommunications, military weapons systems,
medical diagnostic imaging equipment, and general computing applications. Also
to be considered are factors such as slower than expected demand for the
Company's products, the availability of external sources of supply for critical
materials such as processed silicon wafers, the extent of utilization of
internal manufacturing capacity, fluctuation in wafer and assembly yields,
competitive factors, price erosion, the successful development and market
acceptance of new product introductions, product obsolescence, costs associated
with litigation and the impact of Year 2000 issues on the Company's operations,
and the availability of adequate capital.
7
Fluctuation in operating results
The Company's quarterly and annual results of operations are affected
by many factors that could materially and adversely impact revenues, margins,
and income from operations. These factors include, among others, demand for the
Company's products, changes in product mix, competitive pricing pressure,
fluctuations in yields, cost and availability of raw materials, delays in the
introduction or the performance of the Company's new products, market acceptance
of the Company's products, competitive product introductions, product
obsolescence, costs of litigation, and the dependence of the Company on a
limited number of key personnel. In addition to the risks inherent in the
cyclical nature of the industry, the Company frequently ships more products
during the third month of each quarter than in the first two months of the
quarter. Moreover, shipments in the third month are generally higher toward the
end of the month resulting in a concentration of sales in the latter part of the
quarter, which contributes to difficulty in predicting the Company's revenues
and results of operations.
International operations
The Company's products are comprised of materials and produced through
processes supplied by foreign companies. The Company also has many overseas
customers, whose sales are billed in U.S. dollars, and therefore, not directly
subjected to currency exchange fluctuations. However, changes in the relative
value of the U.S. dollar may change the price of the Company's products relative
to the prices of its foreign competitors. Accordingly, both the Company's
manufacturing and sales may be adversely affected by changes in the rates of
exchange between the U.S. dollar and certain foreign currencies. In addition,
the implementation of various forms of protectionist trade legislation, a change
in current tariff structures or other trade policies, changes in foreign
political or economic conditions, difficulties in collecting accounts
receivable, and changes in taxes either in the United States or in certain
foreign countries, could adversely affect the Company, its international
customers or suppliers, or advantage the Company's international competitors.
New product development risks
The Company's future success depends heavily on its ability to develop
and introduce new products that meet critical customer needs and compete
effectively on the basis of cost and performance with alternative products and
solutions. The success of new product introductions is highly dependent on the
timely completion and introduction of new product designs. The development of
new products by the Company and their design-in to customer systems can take
several years.
Dependence on limited sources of supply and assembly
The Company is dependent on subcontractors for its processed silicon
wafers and its assembly of products. There are only a limited number of such
suppliers and the Company has had difficulty obtaining adequate suppliers during
past periods of rapid industry growth. Changes in suppliers require
qualification by the Company and may result in considerable expense and delay in
shipping products.
Manufacturing and test capacity
Although fab-less, the Company has made substantial investments in
manufacturing and test equipment capacity. There can be no assurance that market
conditions will result in sufficient demand to permit the Company to fully
utilize this capacity. Also, the Company's manufacturing facilities are located
in the Silicon Valley area that is known to be at high risk for major
earthquakes. The Company could suffer either direct damages or its operations
could otherwise be disrupted as a result of a major earthquake.
Inventory risk
The Company must order wafers and packaging materials and build
inventory well in advance of product orders. Because the Company's markets are
volatile and subject to rapid fluctuations, there are risks that the Company
will forecast demand incorrectly and produce excess or insufficient inventory.
Some of the Company's products enjoy customer demand beyond the period that the
Company's wafer sources offer the process technology with which the products
were originally designed. To avoid spending limited high skill engineering
resources on continuous re-tooling of more mature products to utilize newer
process technology on some product types, the Company makes lifetime buys of its
anticipated needs, resulting in heightened risk of inventory obsolescence.
8
Liquidity
Semiconductor manufacturers generally have extraordinarily high ongoing
capital requirements. There can be no assurance that the Company can generate
sufficient cash flow from operations or be able to obtain financing from other
sources that will meet the Company's capital requirements.
Dependence on key personnel
The Company is highly dependent upon a limited number of key management
and technical personnel. The Company's future success also depends on its
ability to attract and retain additional personnel, especially highly skilled
product design engineers. There can be no assurance that the Company will be
successful in hiring and retaining such personnel, and any loss of key personnel
could have a material adverse effect on the Company.
EMPLOYEES
As of October 3, 1999, the Company had 43 full-time employees. In
addition, from time to time, the Company uses consultants and part-time
employees. The Company's ability to attract and retain qualified personnel is an
important factor in its continued success. None of the Company's employees are
represented by a collective bargaining agreement, and the Company has never
experienced any work stoppage. The Company believes that its employee relations
are good.
REGULATIONS
Federal, state, and local regulations impose various environmental
controls on the discharge of chemicals and gases in connection with the wafer
manufacturing process. Since the Company relies on third party manufacturers and
its activities do not involve utilization of hazardous substances generally
associated with semiconductor processing, the Company believes such regulations
are unlikely to have a material affect on its business or operations.
ITEM 2. PROPERTIES
The Company's executive offices, as well as its manufacturing and
principal research and design facilities, are located in approximately 21,600
square feet of space in Sunnyvale, California, pursuant to a lease expiring on
December 15, 2002. The Company maintains additional sales or field application
support offices in the metropolitan area of Raleigh, North Carolina; San Diego,
California; Humble and Richardson, Texas; and Warminster, England. The Company
currently leases these sales and field application support offices on a
month-to-month basis. The Company believes that its facilities will be adequate
to meet its reasonably foreseeable needs and, if necessary, that alternative
facilities will be available to it on acceptable terms so as to meet its
requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceedings. From
time to time, the Company receives demands from various parties asserting patent
claims. These demands are often not based on any specific knowledge of the
Company products or operations. Because of the uncertainties inherent in
litigation, the outcome of any such claim, including simply the cost of a
successful defense against such a claim, could have a material adverse impact on
the Company.
In January 1998, the Company was contacted by the attorneys
representing the estate of Mr. Jerome Lemelson, charging that the Company
infringed on certain patents registered by Mr. Lemelson. The attorneys for the
estate have not filed suit, but have urged the Company to enter into a licensing
agreement with the estate in order to avoid litigation. The Company understands
a similar demand has been made upon other manufacturers of integrated circuits.
Should the estate file suit, the Company would vigorously defend itself in this
matter. However, because of the inherent uncertainties of litigation, the
outcome of this action could be unfavorable, in which event, the Company might
be required to pay damages and other expenses, which could have a material
adverse effect on the Company's financial position and results of operations. In
addition, the Company could be required to alter certain of its production
processes or products as a result of this matter.
9
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded under the symbol "LOGC" on the
Nasdaq National Market System. The following table sets forth, for the period
indicated, the high and low closing sale prices for the Company's Common Stock,
as reported by Nasdaq during the following calendar quarters:
CALENDAR YEAR HIGH LOW
------------- ---- ---
1997
Fourth Quarter $ 4 7/16 $ 2 5/32
1998
First Quarter $ 3 1/2 $ 2 1/32
Second Quarter $ 3 3/4 $ 2 1/2
Third Quarter $ 3 1/4 $ 1 1/5
Fourth Quarter $ 1 15/16 $ 1 1/4
1999
First Quarter $ 2 31/32 $ 1 11/16
Second Quarter $ 3 15/16 $ 2 3/8
Third Quarter $ 4 13/16 $ 2 9/16
HOLDERS
As of November 30, 1999, there were approximately 3,700 holders of
record of the Company's Common Stock.
DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
incorporation, and does not anticipate that it will do so in the foreseeable
future. The Company has entered into bank credit agreements that preclude the
payment of dividends without the prior consent of the parties to such
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Financing." Regardless
of any such restrictions in its bank credit agreements, the present policy of
the Company is to retain earnings to provide funds for the expansion of its
business.
10
ITEM 6. SELECTED FINANCIAL DATA
In September 1999, the Company elected to change its fiscal year to
have 52 weeks of seven days each, beginning on Monday and ending on Sunday, with
each fiscal quarter comprised of exactly 13 weeks. As a result of this change,
the Company's fiscal year ended on October 3, 1999 rather than September 30,
1999. In September 1998, the Company elected to change its fiscal year-end from
December 31 to September 30, effective September 30, 1998.
The following table sets forth selected financial data for the Company
for the year ended October 3, 1999, the nine month fiscal period ended September
30 1998, the nine months ended September 30, 1997, and for the fiscal years
ended December 31, 1997, 1996, and 1995. This information has been derived from
the Company's audited consolidated financial statements, unless otherwise
stated. This data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included elsewhere in
this report.
(Dollars in thousands, except per share amounts)
Year Ended Nine Months Ended
October 3 September 30 Years Ended December 31,
-------------- ---------------------- ---------------------------------------
1999 1998 1997 1997 1996 1995
-------- --------- --------- --------- --------- ---------
(Unaudited)
Net revenues $ 12,922 $ 9,562 $ 9,006 $ 12,519 $ 12,525 $ 16,611
Research and
development expenses $ 1,437 $ 959 $ 1,148 $ 1,406 $ 1,450 $ 1,451
Net income (loss) $ 601 $ (6,334) $ (407) $ (399) $ 122 $ 1,384
Basic income (loss)
per common share $ 0.09 $ (1.03) $ (0.06) $ (0.07) $ 0.02 $ 0.26
Weighted average
common shares
outstanding (thousands) 6,635 6,178 6,336 6,122 6,041 5,420
Working capital $ 12,071 $ 9,630 $ 16,282 $ 15,184 $ 16,641 $ 17,148
Property and
equipment (net) $ 3,702 $ 4,935 $ 4,781 $ 5,110 $ 4,204 $ 2,410
Total assets $ 21,341 $ 23,599 $ 20,727 $ 27,493 $ 26,500 $ 23,366
Long-term liabilities $ 183 $ 392 $ 1,164 $ 1,125 $ 1,206 $ 391
Shareholders' equity $ 16,093 $ 15,143 $ 20,719 $ 20,727 $ 21,126 $ 20,711
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reported financial results may not be indicative of the financial
results of future periods. All non-historical information contained in the
following discussion constitutes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are not guarantees of future performance
and involve a number of risks and uncertainties, including but not limited to
operating results, new product introductions and sales, competitive conditions,
customer demand, capital expenditures and resources, manufacturing capacity
utilization, and intellectual property claims and defense. Factors that could
cause actual results to differ materially are included in, but not limited to,
those identified in "Factors Affecting Future Results." The Company undertakes
no obligation to publicly release the results of any revisions to these
forward-looking statements that may reflect events or circumstances after the
date of this report.
OVERVIEW
Historically, the Company has been one of the smallest publicly traded
semiconductor manufacturers. Following its formation, the Company initially
developed plug-compatible second source products that were form, fit, and
function compatible with products offered by other manufacturers. Beginning in
1996, the Company began identifying unique, proprietary products driven by its
existing customer base. While this transition to proprietary products required
the Company to access advanced design automation tools and to sharply increase
the number of people involved in product development, it enables the Company to
limit its distribution channels and the costs of those channels, and to compete
in markets with pricing and delivery demands that are not as highly competitive
as the markets for second source products.
The Company focus on proprietary products continues. The Company
introduced a number of such products in 1997, following its transition to that
focus. In fiscal 1998, the Company developed newer products that were
designed-in (incorporated) into end system level products in the HDTV market. In
fiscal 1999, the Company increased its efforts to develop chips for use in
wireless digital communications. The Company presently derives its revenues
primarily from the sale of semiconductor chips that perform high-speed DSP in
video image filtering and digital communications applications.
The Company's continued and increased focus on proprietary products had
a dramatic impact on the Company's financial results in fiscal 1998, when the
Company recorded significant write-downs of inventory and long-lived assets and
incurred severance costs as it recognized the obsolescence of its more mature,
second source products. In fiscal 1999, the Company recognized fewer revenues
from the HDTV market than it anticipated because the ramp up in high definition
broadcasting was slower than independent market research had suggested would
occur. In addition, sales of the Company's existing products were adversely
impacted as broadcasters delayed planned incremental upgrades of facilities that
would have become obsolete as a result of the transition to television
broadcasting from analog to digital. The Company believes that the transition to
digital broadcasting will expand opportunities in the future for its newer
products that facilitate the processing of studio quality broadcast images.
Notwithstanding the impact of the transition in the broadcasting
industry, the Company enjoyed improvements in balance sheet liquidity, reduced
indebtedness, and greatly improved cash flow. This improved financial
performance resulted from the Company's fiscal 1998 restructuring and from its
aggressive expense controls and capital expenditure limitations in 1999.
The Company's financial reporting is affected by fiscal year changes
made in fiscal 1999 and 1998. In 1999, the Company elected to change its fiscal
year from a date-certain September 30 year-end to a fiscal year comprised of 52
weeks, each comprised of seven days, beginning Monday and ending on Sunday. This
change resulted in the Company's 1999 fiscal year ending on October 3, 1999
rather than on September 30. The Company's 1999 fiscal year is therefore
comprised of 368 days, instead of 365. In 1998, the Company changed its fiscal
year-end to September 30 from December 31. As a result, the Company reported
financial results for a nine-month period in 1998, rather than a 12-month
period. Unless otherwise noted, all references to 1998, fiscal period 1998 or
fiscal 1998 mean such nine-month period.
12
RESULTS OF OPERATIONS
Fiscal Year Ended October 3, 1999 compared to the Nine-Month Fiscal Period Ended
September 30, 1998
Net revenues for the fiscal year ended October 3, 1999 were
$12,921,600, up 35 percent from the $9,562,700 recorded in the nine-month fiscal
period ended September 30, 1998. The increase is due to the three additional
months in the full 12-month fiscal year in 1999.
Cost of revenues decreased from $7,252,100 in the nine-month period
ended September 30, 1998 to $6,533,400 in the fiscal year ended October 3, 1999.
The gross margin increased from a loss of $(1,861,800) for the nine-month period
in 1998 to $6,388,100 in 1999, due to the decrease in cost of goods sold in
fiscal 1999 and a restructuring charge in fiscal 1998. Gross margin as a
percentage of sales increased from (19) percent in fiscal 1998 to 49 percent in
fiscal 1999. This increase in gross profit dollars and in gross profit margin on
revenue from product sales in fiscal 1999 was due to improved margins and lower
costs resulting from the restructuring actions the Company took at the end of
fiscal 1998, and from the effect of inventory write downs adversely impacting
margins and costs in fiscal 1998.
Research and development expenses were $1,437,400 in the fiscal year
ended October 3, 1999 compared to $959,500 in the nine-month fiscal period ended
September 30, 1998. Research and development expenses as a percentage of net
revenues increased from 10 percent in fiscal 1998 to 11 percent in fiscal 1999.
Research and development expenses increased in fiscal 1999 compared to fiscal
1998 as a result of increased engineering staffing and the three-month longer
duration of fiscal 1999.
Selling, general and administrative expenses increased 20 percent from
$3,154,700 in the nine-month fiscal period ended September 30, 1998 to
$3,799,400 in the fiscal year ended October 3, 1999. As a percentage of net
revenues, selling, general and administrative expenses decreased from 33 percent
in fiscal 1998 to 29 percent in fiscal 1999, due to the Company's increased
efforts to control costs.
For the fiscal year ended October 3, 1999, operating income increased
to $1,151,400 from a loss of $(5,976,000) for the nine-month fiscal period ended
September 30, 1998, due to the above-mentioned factors. As a percentage of net
revenues, operating income increased from (62) percent in fiscal 1998 to 9
percent in fiscal 1999.
Interest expense increased from $434,400 in fiscal 1998 to $571,600 for
fiscal 1999, as a result of higher interest rates, created when the Company's
lender increased its "prime rates" from which the Company's interest rates are
derived, bank fees associated with the Company's credit facility that has been
replaced and with the establishment of the Company's new credit facility, and an
additional three months contained in the full 12-month fiscal year in 1999.
As a result of the foregoing, net earnings increased from a loss of
$(6,333,700) for the nine-month fiscal period ended September 30, 1998 to
$600,600 for the fiscal year ended October 3, 1999.
Nine-Month Fiscal Period Ended September 30, 1998 compared to the Nine-Month
Period Ended September 30, 1997
Net revenues for the nine-month fiscal period ended September 30, 1998
were $9,562,700, up six percent from the $9,006,400 recorded in the nine-month
period ended September 30, 1997.
13
Cost of revenues increased from $5,730,000 in the nine-month period
ended September 30, 1997 to $7,252,100 in the nine-month fiscal period ended
September 30, 1998. Gross profit decreased from $3,276,400 for the nine-month
period in 1997 to $(1,861,800) in fiscal 1998, due to this increase in cost of
goods sold and due to the recording of certain one time charges associated with
the Company's business plan reorganization. Gross profit margin as a
percentage of sales decreased from 37% for the nine-month period in 1997 to
negative 19 percent in fiscal 1998. This decrease in gross profit dollars and
decrease in gross profit margin on revenue from product sales was due to
the increase in cost of goods sold as well as higher inventory write downs in
the 1998 period.
Research and development expenses were $959,500 in the nine-month
fiscal period ended September 30, 1998 versus $1,147,700 in the nine-month
period ended September 30, 1997. Research and development expenses as a
percentage of net revenues decreased from 13% for the nine-month period in 1997
to 10% in fiscal 1998. Research and development expenses decreased in fiscal
1998 compared to the 1997 period as a result of fewer mature product re-tooling
charges for the period.
Selling, general and administrative expenses increased 21% from
$2,613,100 in the nine-month period ended September 30, 1997 to $3,154,700 in
the nine-month fiscal period ended September 30, 1998. As a percentage of net
revenues, selling, general and administrative expenses increased from 29% for
the nine-month period in 1997 to 33% in fiscal 1998.
For the nine-month fiscal period ended September 30, 1998, the
operating loss increased 1724% to $(5,976,000) from $(406,600) for the nine
month period ended September 30, 1997, due to the above-mentioned factors. As a
percentage of net revenues, operating income decreased from negative 5% for the
nine-month period in 1997 to negative 62% in fiscal 1998.
Interest expense increased from $188,900 for the nine-month period in
1997 to $434,400 in fiscal 1998, as the Company's borrowing increased from
$3,275,000 at September 30, 1997 to $5,350,000 at September 30, 1998.
As a result of the foregoing, the net loss increased from a loss of
$406,600 for the nine-month period ended September 30, 1997 to a loss of
$6,333,700 for the nine-month fiscal period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three fiscal periods ended October 3, 1999, September 30, 1998,
and December 31, 1997, the Company's cash flow (after-tax net income (loss) plus
non-cash items) has significantly exceeded its net earnings, due to significant
non-cash charges for restructuring, depreciation, and inventory write-downs.
This cash flow ($2,526,600 in fiscal 1999, $(467,300) in fiscal 1998, and
$1,104,600 in fiscal 1997) and bank borrowings, as well as a private sale of
Common Stock for an aggregate consideration of $750,000 in September 30, 1998,
have served as the primary source of financing for the Company's working capital
needs and for capital expenditures during these fiscal periods.
During fiscal 1999, the Company's after-tax net cash flow (net earnings
of $600,600 plus non-cash items of $1,926,000) along with a decrease in
inventories of $697,300, was offset by growth in accounts receivable of
$260,000. These items, along with other net cash flow items from operations,
produced a total of $2,050,900 in net cash from operating activities. Capital
expenditures and increases to other assets used $141,500 in cash. Bank borrowing
and loans from two principal shareholders provided $943,300 in cash, and
repayment of long-term capital lease obligations and bank borrowings used
$3,106,900 in cash. The Company collected a $307,500 note receivable in May
1999. Net of such amounts resulted in an increase in cash and cash equivalents
of $94,800 for the 1999 period.
14
During fiscal 1998, the Company's after-tax net cash flow (net loss of
$6,333,700 plus non-cash items of $5,866,400) along with increases in
inventories of $436,500, decreases in accounts receivables of $2,228,400, and
other net cash flow items from operations, used a total of $1,682,500 for
operating activities. Capital expenditures and increases to other assets used
$293,500 in cash. Bank borrowing provided $2,325,000 in cash, and repayment of
long-term capital lease obligations and bank borrowings used $1,044,000 in cash.
The Company also raised $750,000 in additional equity in September 1998. Net of
such amounts resulted in an increase in cash and cash equivalents of $55,000 for
the 1998 period.
During 1997, the Company's after-tax cash earnings (net loss of
$398,600 plus non-cash items of $1,503,200) along with a decrease in inventories
of $1,529,800, were offset by growth in accounts receivable of $2,179,300. These
items, along with other net cash flow items from operations, provided a total
of $292,800 in net cash from operating activities. Capital equipment
expenditures and increases to other assets used $1,740,100 in cash. Bank
borrowing provided $2,325,000 in cash, and repayment of long-term capital lease
obligations and bank borrowings used $1,460,700 in cash. Net of such amounts
resulted in a decrease in cash and cash equivalents of $583,000 for the 1997
period.
The Company has addressed its requirements for working capital by
reducing expenditures, accelerating accounts receivable collections, and by
shifting its focus to higher margin products. The Company believes that these
actions combined with anticipated after-tax cash earnings, and reductions in the
levels of inventories as well as the financing available under its existing bank
lines of credit, will be sufficient to support its working capital and capital
expenditure requirements for the next 12 months.
Working Capital
The Company's investment in inventories and accounts receivable has
been significant and will continue to be significant in the future. Over prior
periods, the Company, as a nature of its business, has maintained high levels of
inventories and accounts receivable in order to be responsive to its customer
base. As it continues to shift from more competitive second source products to
proprietary sole source products, the Company believes it will be able to
streamline its inventories. It also intends to shorten its accounts receivable
collection cycle by re-focusing on direct sales to customers rather than through
distribution channels.
The Company relies on third party suppliers for its raw materials,
particularly its processed wafers, for which there is currently one supplier,
and as a result, maintains substantial inventory levels to protect against
disruption in supplies. In the past, the Company has experienced disruptions in
obtaining wafers from its suppliers. As the Company continues to shift towards
higher margin proprietary products, it expects to be able to reduce inventory
levels by streamlining its product offerings.
The Company's accounts receivable level is generally correlated to the
Company's previous quarter revenue level. Because of customer order scheduling,
up to 80% of the quarterly revenues are often shipped in the last month of the
quarter. Therefore, a large portion of the quarterly shipments reflected in
quarter-end accounts receivable are not yet due per the Company's net 30-day
terms. This, combined with the fact that the Company's distributors (which made
up 64% of the Company's 1999 revenues) often pay beyond the Company's terms,
often results in quarter-end accounts receivable balances being at their highest
point for the period. The Company expects to be able to reduce accounts
receivable levels through its shift in sales focus toward direct customer sales
rather than the past broad channel management sales activities it has required
to support its second source products.
Although current levels of inventory impact the Company's liquidity,
the Company believes that these items are a cost of doing business as a fab-less
operation. The Company continues to evaluate alternative suppliers to diversify
its risk of supply disruption. However, this requires a significant investment
in product development to tool with new suppliers. Such efforts compete for the
Company's limited product development resources. The Company seeks to achieve
on-going reductions in inventory. However, it cannot guarantee that such
reductions will be achieved within a precise period of time due to both its
15
current high rate of introductions of new products into the inventory pool and
its inability to control customer order schedules.
Financing
On July 27, 1999, the Company replaced its previous revolving line of
credit with two new lines of credit from Silicon Valley Bank, with an aggregate
availability of up to $4,000,000. A domestic line of credit bears interest at
the bank's prime rate (8.25% at October 3, 1999) plus 0.50%, which is 50 basis
points less than the rate borne under the Company's previous facility. The line
of credit requires the Company to maintain a minimum quick ratio of not less
than 0.80 to 1.00 for the final quarter of fiscal 1999 and a ratio of 1.00 to
1.00 for the quarter ended December 31, 1999 and thereafter, and profitability
on a quarterly basis. Borrowings under the domestic line are subject to the
limits of eligible domestic accounts receivable, and is secured by all of the
assets of the Company. The second line of credit bears interest at the bank's
prime rate plus 0.25%, and is secured by certain of the Company's inventory,
accounts receivable, and related proceeds, and is guaranteed in part by a
federal agency. This facility has other terms similar to the Company's first
line of credit facility. Both credit facilities mature July 26, 2000. On October
3, 1999, the Company had an aggregate of $3,490,000 outstanding under these
facilities.
Under the terms of its line of credit facilities, the Company is
precluded from paying any dividends without the consent of the parties to such
agreements, even if the Company is in compliance with all of the financial
covenants. Regardless of any such restrictions in its bank loan agreements, the
Company does not intend to pay cash dividends in the near future and anticipates
reinvesting its cash flow in operations.
On February 15, 1995, the non-employee directors of the Company were
granted warrants to purchase an aggregate of 220,000 shares of Common Stock. The
grants were ratified by shareholders of the Company at the Company's 1996 annual
meeting of shareholders held June 13, 1996. The warrants currently have an
exercise price of $1.46875 per share and expire on February 15, 2000. Of these
warrants, 120,000 were exercised in 1996, at the original exercise price of
$2.5625, by two of the non-employee directors through loans made to them from
the Company. The loans matured July 1998 and accrued interest at the reference
rate plus 2.00%. The non-employee director loans were extended for a one-year
period ending July 1999. As part of the loan extension agreement, the terms of
the loans were changed to increase the interest rate by 2.00% and to require the
lenders to sell their shares consistent with existing market conditions and
repay their loans at any time when the offer price for the underlying shares
reached $3.25. These loans were repaid in June 1999.
On September 30, 1998, the Company sold 510,638 newly issued shares of
Common Stock for $1.46875 per share or $750,000 in the aggregate in equal
amounts to William J. Volz, President and a director of the Company, and BRT
Partnership. BRT Partnership is a partnership, whose sole partners are 25
individual trusts, commonly known as the Bea Ritch Trusts, the beneficiaries of
which are family members of Burton W. Kanter, a director of the Company, though
Mr. Kanter is not a beneficiary. The per share sale price equals the closing
price for the Company's Common Stock on September 17, 1998, the date on which
the parties entered into an agreement to effect such sale. The Company agreed to
register these shares upon request of the purchasers.
As discussed in the Company's Form 10-Q for the quarter ended March 31,
1999, the Company borrowed, in addition to its bank borrowings, an aggregate
principal amount of $250,000 on February 24, 1999. The loans are unsecured and
bear interest to maturity at the rate which is the reference rate or equivalent
rate of interest quoted, published, or announced by Sanwa Bank, plus 2.00%. The
loans had an original maturity of March 31, 1999, but the holders of the loans
successively extended the maturity dates through November 30, 1999 and December
31, 1999. The loan extended through November 30, 1999, for $150,000, was paid on
that date. The loan extended through December 31, 1999, for $100,000, was paid
on December 28, 1999.
16
While the Company will continue to evaluate debt and equity financing
opportunities, it believes its financing arrangements and cash flow generated
from operations provide an adequate base of liquidity to fund operations and
meet the capital needs to support the Company's operations.
YEAR 2000 COMPLIANCE
The year 2000 creates the potential for date-related data to cause
computer processing errors or system shut-downs because computer-controlled
systems have historically used two rather than four digits to define years. For
example, computer programs that contain time data sensitive software may
recognize a date using two digits of "00" as the year 1900 rather than the year
2000. The miscalculations and systems failures that may be caused by such date
misrecognition could disrupt the operations of the Company. Since the risk
relates to computer-controlled systems, the Year 2000 issue affects computer
software, computer hardware, and any other equipment with embedded technology
that involves date sensitive functions. The Company has determined to assess the
scope of its Year 2000 problems, to remediate the problem, and to plan for the
contingency of remediation failure separately for each of its internal computer
software programs, its computer hardware, its machinery that includes embedded
computer technology, its suppliers, and its products.
As a result of its assessment, the Company has determined that none of
its products have date sensitive functions and, accordingly, that no products
will require modification or replacement.
The Company believes that it has identified all of its computer
software programs, computer hardware, and machinery with imbedded computer
technology. This assessment was eased by the small amount of computers and other
machinery that the Company possesses relative to the size of its operations,
since production and assembly of its products is outsourced.
The Company also believes it has determined the extent to which its
customers and suppliers may be impacted by Year 2000 computer processing
problems. This assessment was slower than the Company's other Year 2000
assessment efforts since it necessarily involves obtaining information from
third parties, and the Company's suppliers are foreign operations which may have
local customs or attitudes regarding disclosure that differ from those in the
United States. Because the Company relies on third parties to manufacture its
chips and assemble its products, the Company's production may be slowed or other
of its operations may be adversely impacted by the Year 2000 problems of its
suppliers. However, the Company has received written assurances from all of its
critical suppliers, including the silicon foundry supplying the Company with
silicon wafers, that they are Year 2000 compliant. The Company does not believe
it has any technological interfaces with customers that will be affected by the
Year 2000 issue.
The Company completed remediation of its computer hardware, internal
computer software programs, and equipment with imbedded technology in March
1998. Through December 28, 1999, the Company has spent approximately $50,000
modifying or replacing its internal computer software programs, its computer
hardware, and machinery with embedded computer technology, primarily to upgrade
software and to modify maintenance agreements. Since it believes remediation of
such systems has been completed, the Company does not expect to expend any
material amounts on such remediation in the future. However, if the Company has
failed to properly assess any of the Year 2000 problems or failed to fully
remedy any identified Year 2000 problems of its computer hardware, computer
software programs, or machinery with embedded technology, the Company may be
forced to spend more than anticipated on such remediation in the future.
Until we are comfortably past the Year 2000 New Year, the Company will
not be able to reasonably estimate any further costs of eliminating problems
caused by the Year 2000 problems of its suppliers, whether by investing in new
technology or software to interface with these parties or by finding alternative
sources of supply. On June 1, 1999, the Company began to shift production away
17
from suppliers that had not demonstrated Year 2000 compliance to the Company's
satisfaction, to the Company's current suppliers that are Year 2000 compliant.
If such current suppliers are unable to satisfy increased production burdens,
the Company expects to engage new suppliers that are Year 2000 compliant. There
can be no assurance that the Company will be able to shift additional production
to any of its current suppliers or to new suppliers without additional costs or
at all. Shifts to new suppliers typically require capital outlays and increased
time requirements for production, either of which may adversely affect the
results of operations of the Company.
Inasmuch as the Company has already begun its Year 2000 fiscal year,
many of its internal systems have already begun to operate on Year 2000 dates.
To date, there has been no incidence of Year 2000 errors or shutdowns. The
Company has backlog from its customers, and purchase commitments with its
suppliers that extend well into Year 2000. The systems that track and control
these activities have handled Year 2000 dates without incident.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts all of its transactions, including those with
foreign suppliers and customers, in U.S. dollars. It is therefore not directly
subject to the risks of foreign currency fluctuations and does not hedge or
otherwise deal in currency instruments in an attempt to minimize such risks. Of
course, demand from foreign customers and the ability or willingness of foreign
suppliers to perform their obligations to the Company may be affected by the
relative change in value of such customer or supplier's domestic currency to the
value of the U.S. dollar. Furthermore, changes in the relative value of the U.S.
dollar may change the price of the Company's prices relative to the prices of
its foreign competitors. The Company also does not hold any market risk
sensitive instruments that are not considered cash under generally accepted
accounting principles. The Company's credit facilities bear interest at rates
determined from the prime rate of the Company's lender; therefore, changes in
interest rates affect the amount of interest that the Company is required to pay
thereunder.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS: Page
Report of Independent Certified Public Accountants......................................20
Consolidated Balance Sheets, October 3, 1999 and September 30, 1998.....................21
Consolidated Statements of Operations, year ended
October 3, 1999, nine months ended September 30, 1998,
and year ended December 31, 1997.....................................................22
Consolidated Statements of Shareholders' Equity,
year ended October 3, 1999, nine months ended September 30, 1998,
and year ended December 31, 1997.....................................................23
Consolidated Statements of Cash Flows, year ended October 3, 1999, nine months
ended September 30, 1998,
and year ended December 31, 1997.....................................................24
Notes to Consolidated Financial Statements..............................................25
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts.........................................36
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Logic Devices Incorporated
We have audited the accompanying consolidated balance sheets of Logic Devices
Incorporated as of October 3, 1999 and September 30, 1998, the related
consolidated statements of operations, shareholders' equity, and cash flows, and
the consolidated financial statement schedule for the year ended October 3, 1999
and for the nine months ended September 30, 1998. These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits. The consolidated financial
statements and schedule of Logic Devices Incorporated as of December 31, 1997
and for the year then ended, were audited by Meredith, Cardozo, Lanz & Chiu LLP,
whose practice has been combined with our Firm and whose report dated March 2,
1998 expressed an unqualified opinion on these statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to obtain
reasonable assurance about whether the consolidated financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements
and schedule. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Logic
Devices Incorporated as of October 3, 1999 and September 30, 1998, and the
results of its operations and its cash flows for the year ended October 3, 1999
and for the nine months ended September 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion the consolidated financial
statement schedule presents fairly, in all material respects, the information
set forth therein.
/s/ BDO Seidman, LLP
- ----------------------
BDO Seidman, LLP
San Jose, California
November 30, 1999
20
LOGIC DEVICES INCORPORATED
CONSOLIDATED BALANCE SHEETS
October 3, September 30,
1999 1998
- --------------------------------------------------------------------------------------------------------------
Assets (Note 6)
Current
Cash and cash equivalents $ 237,700 $ 142,900
Accounts receivable, net of allowance for doubtful
accounts of $253,500 and $169,500 respectively
(Notes 11 and 12) 4,813,400 4,553,400
Inventories (Notes 1, 2, 3 and 12) 11,838,300 12,535,600
Prepaid expenses and other assets 178,900 372,100
Income taxes receivable (Note 7) 68,000 90,000
------------- -------------
Total current assets 17,136,300 17,694,000
Property and equipment, net (Notes 4 and 9) 3,702,000 4,935,500
Other assets (Note 8) 502,400 969,400
------------- -------------
$ 21,340,700 $ 23,598,900
============= =============
Liabilities and shareholders' equity
Current
Bank borrowings (Note 6) $ 3,490,000 $ 5,350,000
Accounts payable 718,200 1,585,400
Accrued expenses (Note 2) 388,700 565,700
Notes payable, related party (Note 5) 250,000 -
Current portion, capital lease obligations (Notes 4 and 9) 218,300 562,400
------------- -------------
Total current liabilities 5,065,200 8,063,500
Capital lease obligations, less current portion (Notes 4 and 9) 182,600 392,100
------------- -------------
Total liabilities 5,247,800 8,455,600
------------- -------------
Commitments and contingencies (Notes 8 and 9)
Shareholders' equity (Notes 5 and 10)
Preferred stock, no par value; 1,000,000 shares
authorized; 5,000 designated as Series A;
0 shares issued and outstanding - -
Common stock, no par value; 10,000,000 shares
authorized; 6,650,488 and 6,632,388 shares
issued and outstanding 18,133,400 18,091,900
Common stock subscribed - (307,500)
Accumulated deficit (2,040,500) (2,641,100)
------------- -------------
Total shareholders' equity 16,092,900 15,143,300
------------- -------------
$ 21,340,700 $ 23,598,900
============= =============
See accompanying notes to consolidated financial statements.
21
LOGIC DEVICES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
Year Ended Ended Year Ended
October 3, September 30, December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net revenues (Note 11) $ 12,921,600 $ 9,562,700 $ 12,518,500
Cost of revenues (Notes 1, 2, and 8) 6,533,400 7,252,100 7,933,100
Inventory write-down (Note 2) - 4,172,400 -
---------------- ---------------- ----------------
Gross margin 6,388,200 (1,861,800) 4,585,400
---------------- ---------------- ----------------
Operating expenses:
Research and development 1,437,400 959,500 1,405,600
Selling, general and administrative 3,799,400 3,154,700 3,507,500
---------------- ---------------- ----------------
Total operating expenses 5,236,800 4,114,200 4,913,100
---------------- ---------------- ----------------
Income (loss) from operations 1,151,400 (5,976,000) (327,700)
---------------- ---------------- ----------------
Other (income) expense:
Interest expense 571,600 434,400 439,700
Interest income (400) (100) (4,900)
Interest income on shareholder notes - (50,700) -
Other (40,400) 18,800 (12,200)
---------------- ---------------- ----------------
Total other expense 530,800 402,400 422,600
---------------- ---------------- ----------------
Income (loss) before provision for
income taxes 620,600 (6,378,400) (750,300)
Provision (benefit) for income taxes (Note 7) 20,000 (44,700) (351,700)
---------------- ---------------- ----------------
Net income (loss) $ 600,600 $ (6,333,700) $ (398,600)
================ ================ ================
Basic and diluted income (loss) per share $ 0.09 $ (1.03) $ (0.07)
================ ================ ================
Weighted average common
shares outstanding 6,635,427 6,178,458 6,121,750
================ ================ ================
See accompanying notes to consolidated financial statements.
22
LOGIC DEVICES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Common Earnings
----------------------------- Stock (Accumulated
Shares Amount Subscribed Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 6,121,750 $ 17,341,900 $ (307,500) $ 4,091,200 $ 21,125,600
Net loss - - - (398,600) (398,600)
------------ ------------- ------------- ---------------- -------------
Balances, December 31, 1997 6,121,750 17,341,900 (307,500) 3,692,600 20,727,000
Sales of common stock (Note 5) 510,638 750,000 - - 750,000
Net loss - - - (6,333,700) (6,333,700)
------------ ------------- ------------- ---------------- -------------
Balances, September 30, 1998 6,632,388 18,091,900 (307,500) (2,641,100) 15,143,300
Issuance of common stock on
exercise of stock options (Note 10) 18,100 41,500 - - 41,500
Proceeds from common stock
subscribed (Note 5) - - 307,500 - 307,500
Net income - - - 600,600 600,600
------------ ------------- ------------- ---------------- -------------
Balances, October 3, 1999 6,650,488 $ 18,133,400 $ - $ (2,040,500) $ 16,092,900
============ ============= ============= ================ =============
See accompanying notes to consolidated financial statements.
23
LOGIC DEVICES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 13)
Nine Months
Year Ended Ended Year Ended
October 3, September 30, December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 600,600 $ (6,333,700) $ (398,600)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,842,000 1,494,100 1,438,400
Gain on disposal of capital equipment - (2,500) -
Allowance for doubtful accounts 84,000 - (234,200)
Deferred income taxes - 202,400 299,000
Inventory write-down - 4,172,400 -
Changes in assets and liabilities:
Accounts receivable (344,000) 2,228,400 (2,179,300)
Inventories 697,300 (4,608,900) 1,529,800
Prepaid expenses and other assets 193,200 39,900 (281,400)
Income taxes receivable 22,000 432,000 267,800
Accounts payable (867,200) 574,000 (63,200)
Accrued expenses (177,000) 119,400 (85,500)
---------------- --------------- ---------------
Net cash provided by (used in) operating activities 2,050,900 (1,682,500) 292,800
---------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures (430,200) (924,800) (1,522,700)
Proceeds from sale of capital equipment - 2,500 -
Other assets 288,700 628,800 (217,400)
---------------- --------------- ---------------
Net cash used in investing activities (141,500) (293,500) (1,740,100)
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 41,500 750,000 -
Receipt of common stock subscription receivable 307,500 - -
Proceeds from bank borrowings 693,300 2,325,000 2,325,000
Repayments of bank borrowings (2,553,300) (500,000) (800,000)
Proceeds from notes payable, related party 250,000 - -
Payments of capital lease obligations (553,600) (544,000) (660,700)
---------------- --------------- ---------------
Net cash (used in) provided by financing activities (1,814,600) 2,031,000 864,300
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 94,800 55,000 (583,000)
Cash and cash equivalents, beginning of period 142,900 87,900 670,900
---------------- --------------- ---------------
Cash and cash equivalents, end of period $ 237,700 $ 142,900 $ 87,900
================ =============== ===============
See accompanying notes to consolidated financial statements.
24
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
The Company
Logic Devices Incorporated (the Company) develops and markets
high-performance integrated circuits. The Company's products include high
speed digital signal processing chips that are used in digital
communications, broadcast and medical imaging processing applications,
instrumentation, and smart weapons systems.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
Change in Fiscal Year
In 1998, the Company changed its reporting period from a calendar year
ending December 31 to a fiscal year ending September 30.
Effective September 16, 1999, the Company adopted a fiscal year consisting
of 52 weeks of seven days, ending on Sundays. As a result of this change,
the Company's current fiscal year ended on October 3, 1999.
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,
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.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value (Notes 2, 3 and 12).
Property and Equipment
Property and equipment are stated at cost. Depreciation on equipment is
calculated on the straight-line method over the estimated useful lives of
the assets, generally three to seven years. Leasehold improvements and
assets held under capital lease are amortized on a straight-line basis over
the shorter of the lease terms or the estimated lives of the assets.
Certain tooling costs are capitalized by the Company and are amortized on a
straight-line basis over the shorter of the related product life cycle or
five years.
25
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Costs in Excess of Fair Value of Net Assets Acquired
The Company amortizes costs in excess of the fair value of net assets
acquired on a straight-line basis, over ten years.
Capitalized Software Costs
Internal test computer software development costs incurred subsequent to
the determination of its technical feasibility are capitalized. The
capitalized software costs are amortized on a straight-line basis over the
shorter of the related expected product life cycle or five years.
Revenue Recognition
Revenue is generally recognized upon shipment of product. Sales to
distributors are made pursuant to agreements that provide the distributors
certain rights of return and price protection on unsold merchandise.
Revenues from such sales are recognized upon shipment, with a provision for
estimated returns and allowances recorded at that time.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising costs were
insignificant in 1999, 1998 and 1997.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax liabilities or assets at the end of each
period are determined using the tax rate expected to be in effect when
taxes are actually paid or recovered. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share, which was effective December 28, 1997.
Conforming to SFAS No. 128, the Company changed its method of computing
earnings per share and restated all prior periods included in the
consolidated financial statements. Under SFAS No. 128, the dilutive effect
of stock options is excluded from the calculation of basic earnings per
share. The impact of SFAS No. 128 was not significant for the prior years.
For the year ended October 3, 1999, the nine months ended September 30,
1998 and the year ended December 31, 1997, options to purchase 1,011,400,
818,000 and 261,000 shares of common stock, respectively, were excluded
from the computation of diluted earnings per share since their effect would
be antidilutive.
Fair Value of Financial Instruments
In estimating its fair value disclosures for financial instruments, the
Company used the following methods and assumptions:
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheet for cash
and cash equivalents approximates fair value.
26
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-term Debt
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
Long-term Debt
The fair value of long-term debt is estimated based on current interest
rates available to the Company for debt instruments with similar terms
and remaining maturities.
As of October 3, 1999 and September 30, 1998, the fair values of the
Company's financial instruments approximate their historical carrying
amounts.
Long-Lived Assets
The Company periodically reviews its long-lived assets and certain
identifiable intangibles for impairment. When events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company writes the asset down to its net realizable value.
In 1998, the Company reviewed certain long-term prepaid expenses and other
assets, and determined that their value had been impaired as a result of
outside industry factors. Accordingly, in 1998, the Company took a charge
to earnings, included in the cost of revenues, for $693,600.
Adoption of New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged assets or liabilities that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain and loss is
recognized in income in the period of change. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133, which amends
SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material
impact on the Company's results of operations, financial position or cash
flows.
2. BUSINESS LINE RESTRUCTURING
In September 1998, in connection with management's plan (the Plan) to
pursue a proprietary product strategy in the High Definition Television
(HDTV) market, reduce costs, and improve operating efficiencies, the
Company recorded a write-down of inventory for $4,172,400, and accrued
severance costs of $123,700, which are included in cost of revenues in the
consolidated financial statements. The principal actions in the Plan
involve the shift of the Company's product lines from "plug-compatible"
integrated circuits to HDTV, the changing from an indirect (distributor
channel) sales force to a direct marketing sales force, and consolidation
of support infrastructure.
27
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
A summary of inventories follows:
October 3, September 30,
1999 1998
----------------- -----------------
Raw materials $ 3,618,800 $ 2,599,900
Work-in-process 4,908,800 5,373,600
Finished goods 3,310,700 4,562,100
----------------- -----------------
$ 11,838,300 $ 12,535,600
================= =================
4. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
October 3, September 30,
1999 1998
----------------- -----------------
Equipment $ 5,699,600 $ 9,851,300
Tooling costs 5,206,600 6,116,000
Leasehold improvements 225,200 225,200
----------------- -----------------
11,131,400 16,192,500
Less accumulated depreciation and amortization 7,429,400 11,257,000
------------------ -----------------
$ 3,702,000 $ 4,935,500
================= ================
Equipment under capital lease obligations aggregated $1,669,200 and
$2,003,200 as of October 3, 1999 and September 30, 1998, with related
accumulated amortization of $708,900 and $986,700, respectively.
5. RELATED PARTY TRANSACTIONS
During 1999, the Company received funds pursuant to two notes payable from
principal shareholders aggregating $250,000. The notes bear interest at the
bank's prime rate (8.25% at October 3, 1999) plus 2% and are due November
30, 1999 and December 31, 1999. The note due November 30, 1999, for
$150,000, was paid on that date. The note due on December 31, 1999, was
paid on December 28, 1999.
During 1998, the Company sold a total of 510,638 shares of common stock to
the President of the Company and a partnership consisting of trusts,
beneficiaries of which are family members of one of the Company's
directors, but not the director himself, for an aggregate price of
$750,000.
In 1995, the Company granted 220,000 warrants to three non-employee
directors to purchase the Company's common stock. In 1996, 120,000 of these
warrants were exercised at the original exercise price of $2.5625 via the
issuance of two promissory notes originally maturing July 24, 1998, and
bearing interest at a reference rate plus 2%. These notes were included in
common stock subscribed in the accompanying consolidated financial
statements.
28
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There was no warrant activity during 1999, 1998, and 1997. The remaining
warrants for 100,000 shares are currently exercisable at $1.48675 and
expire February 15, 2000.
On September 30, 1998, the two notes were renegotiated to mature on the
earlier of July 24, 1999 or upon sale of the shares purchased with the
notes. As of June 4, 1999, these notes and all accrued interest were paid
in full.
6. BANK BORROWINGS
The Company has two revolving lines of credit, aggregating $4,000,000, with
a bank, which expire on July 26, 2000, bear interest at the bank's prime
rate (8.25% at October 3, 1999) plus 0.5% and 0.25%, and are secured by
certain assets of the Company. The lines of credit require the Company to
maintain a minimum quick ratio and profitability over a specified interval
of time. As of October 3, 1999, the Company was in compliance with these
covenants.
7. PROVISION FOR INCOME TAXES
The provision for income taxes for the fiscal year ended October 3, 1999,
the nine months ended September 30, 1998, and the year ended December 31,
1997, comprise:
Current Deferred Total
----------------- ----------------- -----------------
1999
Federal $ 18,000 $ - $ 18,000
State 2,000 - 2,000
----------------- ----------------- -----------------
$ 20,000 $ - $ 20,000
================= ================= =================
Current Deferred Total
----------------- ----------------- -----------------
1998
Federal $ (240,900) $ 91,600 $ (149,300)
State (6,200) 110,800 104,600
----------------- ----------------- -----------------
$ (247,100) $ 202,400 $ (44,700)
================= ================= =================
Current Deferred Total
----------------- ----------------- -----------------
1997
Federal $ (650,700) $ 317,400 $ (333,300)
State - (18,400) (18,400)
----------------- ----------------- -----------------
$ (650,700) $ 299,000 $ (351,700)
================= ================= ================
Deferred income tax (benefits) expenses result from timing differences in
the recognition of certain expenses and income items for tax and financial
reporting purposes, as follows:
29
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 1998 1997
----------------- ----------------- -----------------
Distributor sales $ 43,200 $ 177,300 $ (160,100)
Capitalized inventory 74,600 44,200 146,400
Reserves not currently deductible (83,300) (87,300) 160,200
Depreciation (80,700) (417,900) 108,400
Capitalized software (59,200) 48,900 44,100
Loss carryforward 168,800 (2,070,700) -
Valuation allowance (63,400) 2,507,900 -
----------------- ----------------- -----------------
$ - $ 202,400 $ 299,000
================= ================= =================
The following summarizes the difference between the income tax (benefit)
expense and the amount computed by applying the Federal income tax rate of
34% in 1999, 1998, and 1997, to income (loss) before taxes:
1999 1998 1997
----------------- ----------------- -----------------
Federal income tax at statutory rate $ 211,000 $ (2,168,600) $ (255,100)
Utilization of tax credits - - (81,300)
State income taxes, net of federal
tax benefit 36,200 (389,000) (45,800)
Other, net - 5,000 30,500
Valuation allowance (227,200) 2,507,900 -
----------------- ----------------- -----------------
$ 20,000 $ (44,700) $ (351,700)
================= ================= =================
Deferred tax assets comprise the following:
October 3, September 30, December 31,
1999 1998 1997
----------------- ----------------- -----------------
Distributor sales $ 20,000 $ 63,200 $ 240,500
Capitalized inventory costs 229,200 303,800 348,000
Reserves not currently deductible 439,100 355,800 268,500
Depreciation (97,300) (178,000) (595,900)
Capitalized software costs (48,400) (107,600) (58,700)
Loss carryforward 1,901,900 2,070,700 -
----------------- ----------------- -----------------
2,444,500 2,507,900 202,400
Valuation allowance (2,444,500) (2,507,900) -
----------------- ----------------- -----------------
Net deferred tax asset $ - $ - $ 202,400
================ ================= =================
The valuation allowance decreased $63,400 from 1998 to 1999. This was a
result of a general reduction of reserves and net operating loss carryovers
as reflected in the tax return.
30
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of October 3, 1999, the Company has a net operating loss carryforward
available for federal tax of $5,002,600 and state tax of $3,448,600, which
expire through 2019.
8. OTHER ASSETS
A summary of other assets follows:
October 3, September 30,
1999 1998
----------------- -----------------
Capitalized software, net of accumulated amortization
of $2,070,500 and $1,922,900, respectively $ 272,000 $ 419,600
Intangible assets, net of accumulated amortization
of $137,800 and $107,100, respectively 171,700 202,300
Deposits 58,700 347,500
----------------- -----------------
$ 502,400 $ 969,400
================= =================
In December 1995, the Company entered into a foundry capacity agreement
(the Agreement) with Zentrium Mikroelecktronik Drespin (ZMD), a German
limited liability company, to secure a long-term volume source of wafer
production. Under the terms of the Agreement, the Company secured a
non-cancelable purchase commitment for one year's production capacity of
certain of its product with ZMD, at predetermined prices. The Agreement
required a $792,000 prepayment for the year's purchases, and was renewable
annually upon satisfaction of various provisions. In 1998, the Company
extended its foundry capacity agreement with ZMD through March 1999. On
September 30, 1998, the Company took a charge to earnings (Note 2) of
$315,600 for the amount of the ZMD prepayment that would not be realized as
a result of the Company's restructuring. As of October 3, 1999, the Company
had a prepaid with ZMD in the amount of $44,000.
9. COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases. The facility leases require the Company to pay certain maintenance
and operating expenses, such as taxes, insurance, and utilities. Rent
expense related to these operating leases was $1,293,500, $1,049,500, and
$1,163,100, for the fiscal year ended October 3, 1999, the nine months
ended September 30, 1998, and the year ended December 31, 1997,
respectively.
A summary of future minimum lease payments under capitalized leases,
together with the present value of such minimum lease payments and future
minimum payments required under non-cancelable operating leases with terms
in excess of one year, follows:
31
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capitalized Operating
Leases Leases
----------------- -----------------
Fiscal years ended:
October 1, 2000 $ 251,100 $ 544,000
September 30, 2001 130,900 372,100
September 29, 2002 48,800 369,900
September 28, 2003 12,500 63,400
----------------- -----------------
Future minimum lease payments 443,300 $ 1,349,400
=================
Less amounts representing interest (9.5% to 15.8%) 42,400
-----------------
Present value of future minimum lease payments 400,900
Less current portion 218,300
-----------------
$ 182,600
=================
10. SHAREHOLDERS' EQUITY
Stock Option Plan
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company
to provide pro forma information regarding net income (loss) and earnings
(loss) per share as if compensation cost for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates the fair value of stock
options at the grant date by using the Black-Scholes option pricing-model,
with the following assumptions used for grants in 1999, 1998, and 1997,
respectively: dividend yield of 0; expected volatility of 91, 111, and 139
percent; risk-free interest rates of 6.2, 4.4, and 8.5 percent; and
expected lives of four years for all plan options.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been adjusted to the pro
forma amounts indicated below:
1999 1998 1997
----------------- ----------------- -----------------
Net income (loss)
As reported $ 600,600 $ (6,333,700) $ (398,600)
================ ================= =================
Pro forma $ 283,300 $ (6,639,900) $ (507,000)
================ ================= =================
Basic and diluted earnings (loss)
per share
As reported $ 0.09 $ (1.03) $ (0.07)
================ ================= =================
Pro forma $ 0.04 $ (1.07) $ (0.08)
================ ================= =================
32
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plan as of October 3,
1999, September 30, 1998, and December 31, 1997, and changes during the
fiscal periods then ended, is presented in the following table:
Options Outstanding
--------------------------------------------------------------------------------------------
October 3, 1999 September 30, 1998 December 31, 1997
-------------------------- --------------------------- --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
----------- ----------- ----------- ----------- ----------- -----------
Beginning 818,000 $ 3.015 261,000 $ 3.402 94,000 $ 7.963
Granted 251,000 $ 3.191 629,000 $ 2.934 203,000 $ 2.125
Exercised (18,100) $ 2.290 - - - -
Forfeited (39,500) $ 2.984 (72,000) $ 3.706 (36,000) $ 8.000
----------- ----------- -----------
Ending 1,011,400 $ 3.071 818,000 $ 3.015 261,000 $ 3.402
=========== =========== =========== =========== =========== ===========
Exercisable at
year-end: 722,900 175,400 104,700
=========== =========== ===========
Weighted average
fair value of
options granted
during the period: $ 3.191 $ 2.934 $ 2.125
=========== =========== ===========
The following table summarizes information about stock options outstanding
as of October 3, 1999:
Options Outstanding
---------------------------------------------
Wtd. Avg.
Range of Number Remaining Wtd. Avg.
Exercise Outstanding Contractual Exercise
Prices at 10/03/99 Life Price
-------- ------------ ------------ ----------
$2.000 - 4.000 970,900 8.8 years $ 2.873
$4.001 - 6.000 2,000 0.6 years $ 4.250
$6.001 - 8.000 38,500 6.3 years $ 8.000
------------
1,011,400 $ 3.071
============ ==========
Options Exercisable
-------------------------------
Range of Number Wtd. Avg.
Exercise Exercisable Exercise
Prices at 10/03/99 Price
-------- ------------ ----------
$2.000 - 4.000 682,400 $ 2.790
$4.001 - 6.000 2,000 $ 4.250
$6.001 - 8.000 38,500 $ 8.000
------------
722,900 $ 3.071
============ ==========
11. MAJOR CUSTOMERS, MAJOR SUPPLIERS AND EXPORT SALES
Major Customers and Suppliers
For the fiscal year ended October 3, 1999, one customer accounted for
approximately 35% of net revenues, with accounts receivable of $1,820,500
as of October 3, 1999. For the nine months ended September 30, 1998, three
customers accounted for approximately 27%, 12%, and 12%, respectively, of
net revenues, with accounts receivable of $434,600, $51,300, and $55,700 as
of September 30, 1998, respectively. In 1997, two customers accounted for
approximately 16% and 12%, respectively, of net revenues, with accounts
receivable of $1,267,600 and $631,700, respectively.
The Company had no suppliers that comprised 10% or more of its purchases in
fiscal 1999, 1998, and 1997.
33
LOGIC DEVICES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Export Sales
The Company had the following export sales:
1999 1998 1997
----------- ----------- -----------
Western Europe $ 3,204,600 $ 3,542,200 $ 3,077,000
Far East 857,000 734,700 717,000
Other 96,400 226,800 80,300
----------- ----------- -----------
$ 4,158,600 $ 4,503,700 $ 3,874,300
=========== =========== ===========
12. USE OF ESTIMATES AND CONCENTRATION OF CREDIT RISKS
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles, which require the use of
management estimates. These estimates are impacted, in part, by the
following risks and uncertainties:
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high quality financial institutions, and, by policy,
limits the amounts of credit exposure to any one financial institution.
A significant portion of the Company's accounts receivable have
historically been derived from one major class of customer (distributors)
with the remainder being spread across many other customers in various
electronic industries. The Company believes any risk of accounting loss is
significantly reduced due to (1) the provision being made at the date of
sale for returns and allowances, and (2) the diversity of its products,
end-customers, and geographic sales areas. The Company performs credit
evaluations of its customers' financial condition whenever necessary. The
Company generally does not require cash collateral or other security to
support customer receivables.
The Company produces inventory based on orders received and forecasted
demand. The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile and
subject to rapid technology and price changes, there is a risk that the
Company will forecast incorrectly and produce excess or insufficient
inventories of particular products. This inventory risk is heightened
because many of the Company's customers place orders with short lead times.
Demand will differ from forecasts and such differences may have a material
effect on actual operations.
13. STATEMENTS OF CASH FLOWS
The Company paid $557,600, $402,400, and $411,700 for interest in the
fiscal year ended October 3, 1999, the nine months ended September 30,
1998, and the year ended December 31, 1997, respectively. The Company did
not make any income tax payments during 1999, 1998, and 1997.
Noncash investing and financing activities for the fiscal years ended
September 30, 1998 and December 31, 1997, consisted of the acquisition of
$134,700 and $675,800, respectively, of equipment under capital leases.
There were no noncash investing and financing activities during fiscal
1999.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(1) The Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements appear at pages 20 to 34 of
this report; see Index to Consolidated Financial Statements at
page 19 of this report.
(2) The Consolidated Financial Statement Schedule appears on page
36 of this report; see Index to Consolidated Financial
Statements Schedule at page 19 of this report.
(3) The Index to Exhibits appears at page 38 of this report.
(b) Reports on Form 8-K: During the last quarter of fiscal 1999, the
Company filed a Form 8-K for the change in fiscal year-end from a
year ending with a date-certain September 30 to a year comprised of
52 weeks of seven days, each beginning on Monday and ending on
Sunday, effective for its fiscal year 1999.
35
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged
at to costs Charged Balance
beginning and to other at end of
Description of period expenses accounts Deductions period
- ----------- ---------- ----------- --------- ---------- -----------
1999
Allowance for:
Doubtful accounts $ 169,500 $ 84,000 $ - $ - $ 253,500
Inventory reserve $ 590,500 $ 1,194,200 $ - $ - $ 1,784,200
Sales returns $ 149,100 $ - $ - $ 99,100 $ 50,000
1998
Allowance for:
Doubtful accounts $ 169,500 $ - $ - $ - $ 169,500
Inventory reserve $ 500,000 $ 90,000 $ - $ - $ 590,500
Sales returns $ 200,500 $ 234,000 $ - $ 285,400 $ 149,100
1997
Allowance for:
Doubtful accounts $ 403,700 $ 950,000 $ - $ 715,800 $ 169,500
Inventory reserve $ 575,000 $ 1,224,000 $ - $ 1,299,000 $ 500,000
Sales returns $ 200,500 $ 80,000 $ - $ 80,000 $ 200,500
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LOGIC DEVICES INCORPORATED
Date: December 28, 1999 By: /s/ William J. Volz
--------------------------------
William J. Volz, President and
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William J. Volz President December 28, 1999
- -------------------------- (Principal Executive
William J. Volz Officer)
/s/ Kimiko Lauris Chief Financial Officer December 28, 1999
- -------------------------- (Principal Financial and
Kimiko Lauris Accounting Officer)
/s/ Howard L. Farkas Chairman of the Board December 28, 1999
- -------------------------- of Directors
Howard L. Farkas
/s/ Burton W. Kanter Director December 28, 1999
- --------------------------
Burton W. Kanter
/s/ Albert Morrison, Jr. Director December 28, 1999
- --------------------------
Albert Morrison, Jr.
/s/ Bruce B. Lusignan Director December 28, 1999
- --------------------------
Bruce B. Lusignan
/s/ Frederic J. Harris Director December 28, 1999
- --------------------------
Frederic J. Harris
37
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation, as amended. [3.1] (1)
3.2 Bylaws, as amended. [3.2] (1)
10.1 Form of Warrant to purchase an aggregate of 220,000 shares of Common
Stock. [10.23] (2)
10.2 Real Estate lease regarding Registrant's Sunnyvale
facilities. [10.1] (3)
10.3 Assignment of Warrant to purchase an aggregate of 100,000 shares of
Common Stock. [10.11] (3)
10.4 Logic Devices Incorporated 1996 Stock Incentive Plan. [99.1] (4)
10.5 Logic Devices Incorporated 1998 Director Stock Incentive
Plan. [10.1] (5)
10.6 Stock Purchase Agreement dated as of September 17, 1998 between
William J. Volz, BRT Partnership and Registrant. [10.18] (6)
10.7 Registration Rights Agreement dated September 30, 1998 between
William J. Volz, BRT Partnership and Registrant. [10.19] (6)
10.8 Note payable to William J. Volz. [10.1] (7)
10.9 Note payable to The Holding Company [10.2] (7)
10.10 Extension to Notes payable (exhibits 10.8 and 10.9) [10.3] (7)
10.11 Extension to Notes payable (exhibits 10.8 and 10.9) [10.1] (8)
10.12 Extension to Note payable (exhibit 10.9).
10.13 Extension to Note payable (exhibit 10.8).
23.1 Consent letter of BDO Seidman, LLP and Meredith, Cardozo,
Lanz & Chiu LLP.
27.1 Financial Data Schedule.
- ----------
[ ] Exhibits so marked have been previously filed with the
Securities and Exchange Commission (SEC) as exhibits to the
filings shown below under the exhibit numbers indicated following
the respective document description and are incorporated herein by
reference.
(1) Registration Statement on Form S-18, as filed with the SEC on August 23,
1988 [Registration No. 33-23763-LA].
(2) Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, as filed with the SEC on
April 12, 1996.
(3) Registration Statement of Form S-3, as filed with the SEC on November 21,
1996 [Registration No. 333-16591].
(4) Registration Statement on Form S-8, as
filed with the SEC on August 17, 1997 [Registration No. 333-32819].
(5) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
filed with the SEC on August 14, 1998.
(6) Annual Report on Form 10-K for the transition period from January 1, 1998
to September 30, 1998, as filed with the SEC on January 13, 1999.
(7) Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, as
filed with the SEC on April 30, 1999.
(8) Quarterly Report on Form 10-K for the quarter ended June 30, 1999, as
filed with the SEC on August 11, 1999.
38