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File Number: 0-29174
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1997
LOGITECH INTERNATIONAL S.A.
(Exact name of Registrant as specified in its charter)
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NOT APPLICABLE
(Translation of Registrant's name into English)
Canton of Vaud, Switzerland
(Jurisdiction of incorporation or organization)
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LOGITECH INTERNATIONAL S.A.
Apples, Switzerland
c/o Logitech Inc.
6505 KAISER DRIVE
Fremont, California 94555
(510) 795-8500
(Address and telephone number of principal executive offices)
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Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
[X] Form 20-F [_] Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
[_] Yes [X] NO
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b).
Not applicable
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LOGITECH INTERNATIONAL S.A.
Form 6-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Financial Information (unaudited):
Consolidated Balance Sheets at September 30, 1997 and March 31, 1997.............................. 3
Consolidated Statements of Income for the three and six months ended September 30, 1997 and 1996.. 4
Consolidated Statements of Cash Flows for the six months ended September 30, 1997 and 1996........ 5
Notes to Consolidated Financial Statements........................................................ 6
Management's Discussion and Analysis of Financial Condition and Results of Operations............... 8
Signatures.......................................................................................... 18
</TABLE>
2
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LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, March 31,
1997 1997
-------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 35,046 $ 38,504
Accounts receivable.................................................. 79,410 71,634
Inventories.......................................................... 61,184 63,377
Other current assets................................................. 10,888 9,253
-------- --------
Total current assets............................................. 186,528 182,768
Property, plant and equipment, net.................................... 31,952 32,135
Other assets.......................................................... 1,408 1,520
-------- --------
Total assets..................................................... $219,888 $216,423
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt...................................................... $ 11,268 $ 17,849
Current maturities of long-term debt................................. -- 162
Accounts payable..................................................... 40,962 44,406
Accrued liabilities.................................................. 39,362 38,690
-------- --------
Total current liabilities........................................ 91,592 101,107
Long-term debt, net of current maturities............................. 3,173 3,188
Other liabilities..................................................... 553 437
-------- --------
Total liabilities................................................ 95,318 104,732
-------- --------
Shareholders' equity:
Registered shares, par value CHF 20 - 2,101,688 authorized,
353,312 conditionally authorized, 2,001,688 issued and outstanding
at September 30 and March 31, 1997.................................. 28,738 28,738
Additional paid-in capital........................................... 75,055 73,430
Less registered shares in treasury, at cost, 98,619 at September 30,
1997 and 182,839 at March 31, 1997.................................. (9,010) (16,813)
Retained earnings.................................................... 37,506 31,730
Cumulative translation adjustment.................................... (7,719) (5,394)
-------- --------
Total shareholders' equity....................................... 124,570 111,691
-------- --------
Total liabilities and shareholders' equity....................... $219,888 $216,423
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------ -------------------------
1997 1996 1997 1996
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................. $ 99,159 $ 92,248 $ 189,317 $ 176,610
Cost of goods sold.................... 71,161 64,875 135,524 124,038
---------- -------- --------- ---------
Gross profit.......................... 27,998 27,373 53,793 52,572
Operating expenses:
Marketing and selling............... 12,527 12,802 24,588 24,800
Research and development............ 6,844 5,639 14,110 11,994
General and administrative.......... 4,916 4,766 9,721 9,705
---------- -------- --------- ---------
Operating income...................... 3,711 4,166 5,374 6,073
Interest income (expense), net........ 206 (210) 419 (503)
Other income, net..................... 348 70 1,003 1,343
---------- -------- --------- ---------
Income before income taxes............ 4,265 4,026 6,796 6,913
Provision for income taxes............ 640 605 1,021 1,051
---------- -------- --------- ---------
Net income............................ $ 3,625 $ 3,421 $ 5,775 $ 5,862
========== ======== ========= =========
Net income per share.................. $ 1.84 $ 1.94 $ 2.94 $ 3.32
Weighted average registered shares
and equivalents..................... 1,974,270 1,766,405 1,965,412 1,765,663
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 5,775 $ 5,862
Non-cash items included in net income:
Depreciation and amortization....................................... 6,536 5,591
Loss on disposal of property, plant and equipment................... 289 134
Write-down of investments........................................... 38 691
Stock compensation expense.......................................... 128 468
Deferred income taxes............................................... (1,367) (1,578)
Changes in current assets and liabilities:
Accounts receivable................................................. ( 8,031) (7,076)
Inventories......................................................... 1,001 (2,138)
Other current assets................................................ 372 (1,164)
Accounts payable.................................................... (4,404) 11,097
Accrued liabilities................................................. 1,225 6,914
-------- --------
Net cash provided by operating activities........................ 1,562 18,801
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment........................... (7,305) (6,802)
Other investing activities........................................... 31 96
-------- --------
Net cash used in investing activities............................ (7,274) (6,786)
-------- --------
Cash flows from financing activities:
Decrease in short-term debt.......................................... (6,743) (8,387)
Repayment of long-term debt.......................................... -- (1,028)
Purchase of treasury shares.......................................... -- (3,085)
Proceeds from sale of treasury shares................................ 9,300 3,197
Dividends paid....................................................... -- (1,572)
-------- --------
Net cash used in financing activities............................ (2,557) (10,875)
-------- --------
Effect of exchange rate changes on cash and cash equivalents.......... (304) (144)
-------- --------
Net increase (decrease) in cash and cash equivalents.................. (3,458) 996
Cash and cash equivalents at beginning of period...................... 38,504 28,564
-------- --------
Cash and cash equivalents at end of period............................ $ 35,046 $ 29,560
======== ========
Supplemental cash flow information:
Interest paid........................................................ $ 346 $ 1,044
Income taxes paid.................................................... $ 1,020 $ 683
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
Logitech International S.A. (the "Company") designs, manufactures and markets
Senseware peripherals, products that serve as primary physical interfaces
between users and their personal computers and other multimedia devices.
Senseware peripherals include: professional pointing devices such as 2D, 3D,
and cordless mice; trackballs and touchpads; control devices for entertainment
such as joysticks, gamepads, and 3D game controllers; and imaging devices such
as personal color scanners and digital video cameras. The Company sells its
products to both original equipment manufacturers ("OEMs") and a network of
retail distributors and retailers.
NOTE 2 -- INTERIM FINANCIAL DATA:
The accompanying consolidated financial statements should be read in
conjunction with the Company's 1997 Annual Report on Form 20-F as filed with the
Securities and Exchange Commission. In the opinion of management, the
accompanying financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. The
results of operations and cash flows for the interim periods presented are not
necessarily indicative of the results of any future period.
The Company reports quarterly results on thirteen-week periods, each ending on
a Friday. For purposes of presentation, the Company has indicated its quarterly
periods as ending on the month end.
NOTE 3 -- INITIAL PUBLIC OFFERING IN THE U.S.:
On March 27, 1997, the Company sold 200,000 registered shares from treasury in
a U.S. initial public offering in the form of 2,000,000 American Depositary
Shares ("ADS"). Total proceeds from the offering amounted to $32.0 million, or
$16 per ADS. Underwriting discounts and commissions, share issue and other
taxes and other offering expenses amounted to $5.2 million, which resulted in
net proceeds to the Company of $26.8 million. On April 25, 1997, the Company
sold an additional 30,000 registered shares from treasury under an option
granted to the underwriters to cover over-allotments. Such sale generated net
proceeds of $4.5 million.
NOTE 4 -- NET INCOME PER SHARE:
Net income per share is computed by dividing net income by the weighted
average number of outstanding registered shares and, if dilutive, weighted
average registered share equivalents. Registered share equivalents include
registered shares issuable upon the exercise of stock options (using the
treasury stock method). Pursuant to the requirements of the Securities and
Exchange Commission, treasury stock sold and registered share equivalents
relating to stock options granted during the twelve months preceding the
commencement of the U.S. public offering and through the effective date (March
27, 1997) have been included in the calculation of net income per share (using
the treasury stock method and the public offering price) as if they were
outstanding for all periods presented through December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This
statement is effective for the Company's fiscal quarter ending December 31,
1997. Under SFAS 128, primary earnings per share is recomputed and replaced by
basic earnings per share and fully diluted earnings per share is recomputed and
replaced by diluted earnings per share. SFAS 128 will require the retroactive
restatement of all previously reported amounts upon adoption. Had the Company
adopted SFAS 128 for the periods presented, basic and diluted earnings per
share for the three months ended September 30, 1997 would have been $1.93 and
$1.84, and for the three months ended September 30, 1996 would have been $2.08
and $1.94. Basic and diluted earning per share for the six months ended
September 30, 1997 would have been $3.10 and $2.94, and for the six months ended
September 30, 1996 would have been $3.57 and $3.32.
6
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NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
In December 1996, the Company was advised of the intention to begin
implementing a value added tax ("VAT") on goods manufactured in certain parts of
China since July 1995, including where the Company's operations are located, and
intended for export. The Company has not previously paid any such VAT on its
exported Chinese manufactured products. The Company is in discussion with
Chinese officials and has been assured that, not withstanding statements made by
tax authorities, the VAT would not be applied to the Company. The Company
therefore believes this matter will not have a material adverse effect on the
Company's results of operations. Were the VAT to be applied to the Company, the
Company could incur a significant charge to operations, as well as an increase
in its cost of goods sold. As a result, the Company would seek to mitigate the
future effect by reorganizing its operations in China. There can be no
assurance that any application of the VAT to the Company would not have a
material adverse effect on the Company's current or future results of
operations, or that the Company's efforts to mitigate any impact of the VAT
would be successful.
The Company is involved in various legal actions and claims. In the opinion
of management, the future settlements of such actions and claims will not have a
material adverse effect on the Company's financial position or results of
operations.
7
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LOGITECH INTERNATIONAL S.A.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's net sales are primarily derived from sales of two product lines,
control devices and imaging solutions, and to a lesser extent from the sale of
other products. Control devices include mice, trackballs, six degrees of
freedom ("6DOF") controllers, touchpads, joysticks, gamepads, 3D game
controllers and remote controls. In fiscal 1998 to date and in fiscal 1997, net
sales of control devices accounted for a substantial majority of the Company's
total net sales. Imaging solutions include color personal scanners and color
digital video cameras. Other products include partner products, as well as
product lines that are being phased out for strategic purposes.
The following tables set forth net sales for each of the Company's product
lines and net sales for each product line as a percentage of total net sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Control devices......... $88,481 $77,084 $168,510 $142,497
Imaging solutions....... 9,379 13,896 19,019 32,845
Other................... 1,299 1,268 1,788 1,268
------- ------- -------- --------
Total net sales.......... $99,159 $92,248 $189,317 $176,610
======= ======= ======== ========
Net sales:
Control devices......... 89% 84% 89% 81%
Imaging solutions....... 10% 15% 10% 19%
Other................... 1% 1% 1% 1%
------- ------- -------- --------
Total net sales.......... 100% 100% 100% 100%
======= ======= ======== ========
</TABLE>
INITIAL PUBLIC OFFERING IN THE U.S.
On March 27, 1997, the Company sold 200,000 registered shares from treasury in
a U.S. initial public offering in the form of 2,000,000 American Depositary
Shares ("ADS"), with net proceeds to the Company of $26.8 million. On April
25, 1997, the Company sold an additional 30,000 shares from treasury under an
option granted to the underwriters to cover over-allotments, generating net
proceeds of $4.5 million.
8
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial statement
amounts as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................ 71.8% 70.3% 71.6% 70.2%
----- ----- ----- -----
Gross profit...................... 28.2% 29.7% 28.4% 29.8%
Operating expenses:
Marketing and selling............ 12.6% 13.9% 13.0% 14.0%
Research and development......... 6.9% 6.1% 7.5% 6.8%
General and administrative....... 5.0% 5.2% 5.1% 5.5%
----- ----- ----- -----
Operating income.................. 3.7% 4.5% 2.8% 3.4%
Interest income (expense), net.... .2% (.2)% .2% (.3)%
Other income, net................. .4% .1% .6% .8%
----- ----- ----- -----
Income before income taxes........ 4.3% 4.4% 3.6% 3.9%
Provision for income taxes........ .6% .7% .5% .6%
----- ----- ----- -----
Net income........................ 3.7% 3.7% 3.1% 3.3%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales
Net sales for the three months ended September 30, 1997 increased 7%. This
increase was due to continued strong sales of control devices, which grew by 15%
compared to the prior year. Control device sales into the OEM market increased
during the quarter, reflecting growth in the PC market and increased demand for
the Company's products from the majority of the leading PC makers. In addition,
the Company introduced a major new mice product offering in September, featuring
a wheel button and a more comfortable shape on selected models.
Imaging solution sales, primarily scanners, were well below the comparable
quarter from last year. Extremely aggressive price competition continues to
characterize the scanner market. Also, unit volumes were adversely impacted by
the product transition to a new and upgraded range of sheetfed scanners in
September, which was only partially mitigated by the introduction late in the
quarter of the Company's first flatbed scanner offering, addressing this more
rapidly growing form factor. The combination of lower prices and slightly
reduced volumes caused scanner revenue to decrease by over 30%. The Company
expects this business to continue to be characterized by very aggressive price
competition and an unsettled environment for the next several quarters.
Gross Profit
Gross profit consists of net sales, less cost of goods sold which consists of
materials, direct labor and related overhead costs, costs of manufacturing
facilities, costs of purchasing finished products from outside suppliers,
distribution costs and inventory write-offs. Gross profit increased 2% to $28
million, or 28.2% of net sales.
Gross profit as a percent of net sales declined slightly compared to the prior
year. This decrease resulted from the combination of three factors; a
significant reduction in scanner gross margins, the higher proportion of lower
margin OEM sales, and the strengthening of the U.S. dollar. Despite these
factors, the Company was able to maintain overall gross profit at the current
level due to continuing success in achieving cost reductions in a number of
areas, most notably in its high volume manufacturing operation in Suzhou, China.
9
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Marketing and Selling
Marketing and selling expense consists of personnel and related overhead
costs, corporate and product marketing, promotions, advertising, trade shows,
customer and technical support and facilities costs. This expense was
relatively flat compared to the prior year, declining by roughly 2%. Despite
the slight decrease, which was caused primarily by a decline in sales expense,
the Company continued to invest in a new visual marketing strategy that includes
a refreshed logo, new packaging, an updated web site and other associated
marketing materials. The Company's strategy in this area is to continue to
build brand equity thereby protecting one of its key corporate assets.
Research and Development
Research and development expense consists of personnel and related overhead
costs, contractors and outside consultants, supplies and materials, equipment
depreciation and facilities costs. Research and development expense increased
21% to $6.8 million, or 6.9% of net sales. The vast majority of this increase
was in the control device area. This reflects the Company's ongoing commitment
to invest in developing future generations of products in this core business.
General and Administrative
General and administrative expense consists of personnel and related overhead
and facilities costs for the finance, information systems, executive, human
resources and legal functions. General and administrative expense increased by
3% to $4.9 million. As a percentage of net sales, general and administrative
costs decreased from 5.2% to 5%, reflecting the Company's continued efforts to
control these costs.
Interest Income (Expense)
Interest income for the most recent quarter was $0.2 million, compared to
expense of $0.2 million in the prior year. The improvement was the result of a
reduction in bank borrowings and an increase in interest bearing cash and cash
equivalents made possible by the proceeds from the Company's U.S. initial public
offering and cash flow from operations.
Provision for Income Taxes
The provision for income taxes consists of income and withholding taxes. The
amount recorded in each period reflects management's best estimate of the
effective tax rate for the fiscal year. Estimates are based on factors such as
management's expectations as to payments of withholding taxes on amounts
repatriated through dividends, the jurisdictions in which taxable income is
generated, changes in local tax laws and changes in valuation allowances based
upon the likelihood of recognizing deferred tax assets. The provision for
income taxes for the three months ended September 30, 1997 was virtually
unchanged compared to the prior year at 0.6 million, representing a 15.0%
effective tax rate in both periods.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Sales
Net sales for the six months ended September 30, 1997 increased 7%. This
increase was due to continued strong sales of control devices, which grew by 18%
compared to the prior year. Control device sales into the OEM market increased
substantially during the period, reflecting growth in the PC market and
increased demand for the Company's products from the majority of the leading PC
makers.
Imaging solution sales, primarily scanners, were well below the comparable
period from last year. Extremely aggressive price competition has caused a
significant deterioration in scanner prices. In addition, the move away from
handheld scanners negatively impacted the comparison with the prior year. The
combination of lower sheetfed prices, slightly reduced unit volumes, as the
channel was cleared in anticipation of the introduction of new models, and lower
handheld sales caused scanner revenue to decrease by over 40%. The Company
expects this business to continue to be characterized by very aggressive price
competition and an unsettled environment for the next several quarters.
10
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Gross Profit
Gross profit increased 2% to $54 million, or 28.4% of net sales. Gross profit
as a percent of net sales declined slightly compared to the prior year. This
decrease resulted from the combination of three factors; a significant reduction
in scanner gross margins, the higher proportion of lower margin OEM sales, and
the strengthening of the U.S. dollar. Despite these factors, the Company was
able to maintain overall gross profit at the current level due to continuing
success in achieving cost reductions in a number of areas, most notably in its
high volume manufacturing operation in Suzhou, China.
Marketing and Selling
Marketing and selling expense was relatively flat compared to the prior year,
declining by less than 1%. Despite the slight decrease, which was caused
primarily by a reduction in selling expense, the Company has invested in a new
visual marketing strategy that includes a refreshed logo, new packaging, an
updated web site and other associated marketing materials. The Company's
strategy in this area is to continue to build brand equity thereby protecting
one of its key corporate assets.
Research and Development
Research and development expense increased 18% to $14.1 million, or 7.5% of
net sales. The vast majority of this increase was in the control device area.
This reflects the Company's ongoing commitment to invest in developing future
generations of products in this core business.
General and Administrative
General and administrative expense remained flat at $9.7 million, reflecting
the Company's commitment to control overhead costs during a period of modest
revenue growth.
Interest Income (Expense)
Interest income was $0.4 million, compared to expense of $0.5 million in the
prior year. The improvement was the result of a reduction in bank borrowings
and an increase in interest bearing cash and cash equivalents made possible by
cash flow from operations and the proceeds from the Company's U.S. initial
public offering.
Other Income (Expense)
Other income decreased from $1.3 million in the prior year to $1.0 million.
This decline was primarily due to lower foreign exchange gains.
Provision for Income Taxes
The provision for income taxes for the six months ended September 30, 1997 was
down slightly to $1.0 million compared to 1.1 million in the prior year. The
effective tax rate was 15.0% compared to 15.2% last year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash and cash equivalents of $35
million. The Company also had credit lines with several European and Asian
banks totaling $47.9 million as of that date. As is common for business in
European countries, the Company's credit lines are uncommitted and unsecured.
Despite the lack of formal commitments from its banks, the Company believes that
these lines of credit will continue to be made available because of its long-
standing relationships with these banks. As of September 30, 1997, there was
$34.4 million available under these facilities.
The Company's operating activities generated cash of $1.6 million for the six
months ended September 30, 1997, primarily from net income adjusted for
depreciation, partially offset by an increase in the Company's working capital
requirements. Operating activities generated cash of $18.8 million for the six
months ended September 30, 1996, primarily from net income adjusted for
depreciation and reduced working capital requirements.
The Company's investing activities used cash of $7.3 million and $6.8 million
for the six months ended September 30, 1997, and September 30, 1996, primarily
for capital expenditures.
11
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Net cash used in financing activities for the six months ended September 30,
1997 was $2.6 million. This amount reflects cash proceeds of $4.5 million
received in April 1997 from the sale of additional registered shares under an
option granted to the underwriters of the initial public offering in the U.S. to
cover over-allotments. These cash proceeds, along with part of the $26.8 million
received in March 1997 from the U.S. initial public offering, were used to pay
down short-term debt by $12.9 million in the six months ended September 30,
1997. The Company had additional proceeds of $4.8 million from the sale of
treasury shares. In addition, the Company borrowed $6.2 million from its credit
lines for capital improvements in China and for other short-term working capital
needs.
The net cash of $10.9 million used in financing activities for the six months
ended September 30, 1996 represents principally the pay down of short-term debt
and the repayment of long-term debt, and to a lesser extent, the payment of
dividends. Although the company paid dividends of $1.6 million in 1996, the
board of directors subsequently announced its intention not to recommend any
payment of cash dividends in the future in order to retain future earnings for
use in the operation and expansion of the Company's business.
The Company believes that it will continue to make capital expenditures in the
future to support ongoing and expanded operations and that such expenditures may
be substantial. The Company believes that its cash and cash equivalents, cash
from operations, and available borrowings under its bank lines of credit will be
sufficient to fund capital expenditures and working capital needs for the
foreseeable future.
CERTAIN FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 6-K may contain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those
predicted in the forward-looking statements. Any forward-looking statements in
this document are intended to be subject to the safe harbor protection provided
by Sections 27A and 21E. Those statements relate to a number of factors,
including i) price competition, ii) an unsettled environment in the scanner
market, iii) the Company's brand strategy, iv) the Company's research and
development strategy, v) bank credit line availability, vi) cash liquidity
availability, and vii) the outcome of contingencies.
In addition to the other factors identified in this report, the following risk
factors could materially and adversely affect the Company's future operating
results and could cause actual events to differ materially from those predicted
in the Company's forward looking statements.
Potential Fluctuations in Future Operating Results; Seasonality
The Company's operating results in the past have varied significantly
from quarter to quarter and these fluctuations are expected to continue in the
future. Future quarterly operating results may vary significantly due to a
number of factors, including: the volume and timing of orders received during
the quarter; the maturation of product lines; the timing of new product
introductions by the Company and its competitors and their acceptance by the
market; the impact of competition on the Company's average selling prices and
operating expenses; the availability and pricing of components for the Company's
products; inventory levels at the Company or in the distribution channels;
changes in laws or regulations; changes in product or distribution channel mix;
price protection charges; product returns from customers; deferrals of customer
orders in anticipation of new products or otherwise; changes in technologies and
their acceptance by the market; fluctuations in exchange rates; changes in the
Company's strategy; changes in personnel; the performance of the Company's
suppliers and third-party product manufacturers; the availability of key
components; and general economic conditions. Many of these factors are beyond
the Company's control. In addition, due to the short product life cycles
inherent in the Company's markets, the Company's failure to introduce new,
competitive products consistently and in a timely manner would adversely affect
results of operations for one or more product cycles.
The volume and timing of orders received during a quarter are difficult to
forecast. Customers generally order on an as-needed basis. Accordingly, the
Company has operated with a relatively small backlog, and net sales in any
quarter depend primarily on orders booked and shipped in that quarter. In spite
of the difficulty in forecasting sales in advance of a quarter and the
relatively small backlog at any given time, the Company generally must plan
production, order components, and enter into development, sales and marketing,
and other operating commitments well before each quarter begins. This is
particularly acute because substantially all of the Company's products are
12
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manufactured in Asia, and the Company relies on suppliers who are located in
many other parts of the world. Consequently, any shortfall in net sales in a
given quarter may negatively impact the Company's results of operations
due to an inability to adjust expenses during such quarter. Excess inventory may
negatively impact cash flows and result in charges associated with inventory
write-offs. The Company's product design, manufacturing, distribution and
selling cycles are long, relative to the product life cycle, and the available
information on sales-through by the channel is incomplete and not necessarily
indicative of the current status of inventory levels in the channel. As a
result, the Company might need to write off inventory in excess of reserves.
The Company's retail sales are seasonal. Net sales are typically higher during
the Company's third fiscal quarter, due primarily to the increased demand for
the Company's products during the year-end holiday buying season, and to a
lesser extent in the fourth fiscal quarter. Net sales in the first and second
quarters can vary significantly as a result of new product introductions and
other factors.
As a result, the Company believes that quarter-to-quarter comparisons of its
results of operations should not be relied upon as indications of future
performance. In addition, due to the foregoing factors, it is possible that in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Company's ADSs and registered shares would likely be materially and
adversely affected. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by technology companies
participating in rapidly evolving markets. There can be no assurance that the
Company will be successful in addressing these concerns.
Concentration of Operations in China and Taiwan
Substantially all of the Company's manufacturing operations are located in
Suzhou, China and Hsinchu, Taiwan. These operations could be severely impacted
by national or regional political instability in China, including instability
which may occur in connection with a change in leadership in China, by evolving
interpretation and enforcement of legal standards, by strains on Chinese
transportation, communications, trade and other infrastructures related to the
rapid industrialization of an agrarian economy, by conflicts, embargoes,
increased tensions or escalation of hostilities between China and Taiwan, and by
other trade customs and practices that are dissimilar to those in the United
States. Interpretation and enforcement of China's laws and regulations continues
to evolve and the Company expects that differences in interpretation and
enforcement will continue in the foreseeable future. In addition, the Company's
Chinese employees in Suzhou are subject to a number of government regulations
regarding employment practices and customs that are fundamentally different in
certain respects from those in the United States and Europe. The Suzhou facility
is managed by several key Taiwanese expatriate employees of the Company. The
loss of such employees, either voluntarily or because of a deterioration in
relations between China and Taiwan, may have a material adverse effect on the
Company's Suzhou manufacturing operations.
In December 1996, the Company was advised of the intention to begin
implementing a value added tax ("VAT") on goods manufactured in certain parts of
China since July 1995, including where the Company's operations are located, and
intended for export. The Company has not previously paid any such VAT on its
exported Chinese manufactured products. The Company is in discussion with
Chinese officials and has been assured that, notwithstanding statements made by
tax authorities, the VAT would not be applied to the Company. The Company
therefore believes this matter will not have a material adverse effect on the
Company's results of operations. Were the VAT to be applied to the Company, the
Company could incur a significant charge to operations, as well as an increase
in its cost of goods sold. As a result, the Company would seek to mitigate the
future effect by reorganizing its operations in China. There can be no assurance
that any application of the VAT to the Company would not have a material adverse
effect on the Company's current or future results of operations, or that the
Company's efforts to mitigate any impact of the VAT would be successful.
Risk of Margin Declines
The Company's gross margins are affected by a number of factors, including the
mix between retail and OEM sales, product mix, product obsolescence, price and
cost reductions. The Company believes that gross margins are likely to decline
due to continued price pressures and a decline in the rate of cost reductions in
the Company's manufacturing operations.
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Risks Associated with International Operations; Currency Fluctuations
Logitech transacts a substantial portion of its business outside the United
States. There are certain risks inherent to doing business in international
markets, including tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, problems in collecting
accounts receivable, longer accounts receivable payment cycles, political
instability, expropriation, nationalization and other political risks, foreign
exchange controls, technology export and import restrictions or prohibitions,
delays from customs brokers or government agencies, seasonal reductions in
business activity, subjection to multiple taxation regimes and potentially
adverse tax consequences, any of which could adversely impact the success of the
Company's international operations and, in turn, have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company publishes its consolidated financial statements in U.S. dollars,
however, a portion of the Company's revenues and expenses are denominated in
currencies other than the U.S. dollar. The functional currencies for the
Company's operations are primarily the U.S. dollar, and to a lesser extent, the
Dutch guilder, Swiss franc, Taiwanese dollar and Japanese yen. Certain of the
Company's operations record revenues in one currency while incurring costs in
different currencies. This currency imbalance has, and may continue to, result
in foreign currency transaction gains and losses. Further, the Company is
subject to risks of currency exchange to the extent of currency fluctuations
between the U.S. dollar and other currencies in which the Company transacts its
business. Currently, the Company does not actively hedge against exchange rate
fluctuations, although it may elect to do so in the future. Accordingly, changes
in exchange rates may have a material adverse effect on the Company's net sales,
cost of goods sold, gross margin and net income.
Intense Competition; Pricing Pressure
The Company's business is characterized by intense competition, a trend of
declining average selling prices and performance enhancements of competing
products. The Company expects that competition will continue to be intense and
may increase from current or future competitors. In sales of control devices,
the Company competes primarily with Alps, Kensington/Advanced Gravis, KYE/Mouse
Systems, Microsoft, Mitsumi, Primax and Synaptics. In sales of imaging
solutions, competitors include Connectix, Hewlett-Packard, Microtek, Mustek,
Philips, Plustek, Sharp, Storm Technology, Umax and Visioneer.
Many of the Company's current and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger customer bases,
than the Company. In this regard, Microsoft is the Company's chief competitor in
the market for control devices. Microsoft is also a leading producer of
operating systems and applications with which the Company's control devices are
designed to operate. As a result of its position, Microsoft may be able to make
improvements in the functionality of its control devices to correspond with
ongoing modifications and enhancements to its operating systems and software
applications in advance of the Company. In certain instances, this ability may
provide Microsoft with significant lead time advantages for product development.
In addition, Microsoft may be able to offer pricing advantages on bundled
hardware and software products that the Company is not able to offer. Certain of
the Company's competitors may also have patents or intellectual property rights
which provide them with an advantage. As a result, these competitors may be able
to respond more effectively to new or emerging technologies and changes in
customer requirements. Consequently, the Company expects to continue to
experience increased competition and significant price reductions, which could
result in decreased gross margin, loss of market share and lack of acceptance of
the Company's products. In the event of significant price competition in the
market for the Company's products, the Company would be required to decrease
costs at least proportionately to any price decreases in order to maintain its
existing margin levels and would be at a significant disadvantage compared to
competitors with substantially greater resources, which could more readily
withstand an extended period of downward pricing pressure. There can be no
assurance that the Company will be able to compete successfully in the future or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
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Rapid Technological Change
The market for the Company's products is characterized by rapidly changing
technology and frequent new product introductions. The Company's success will
depend to a substantial degree on its ability to develop and introduce in a
timely manner new products and enhancements that meet changing customer
requirements and emerging industry standards. The development of new,
technologically-advanced products and enhancements is a complex and uncertain
process requiring high levels of innovation as well as the anticipation of
technology and market trends. There can be no assurance that the Company will be
able to identify, develop, manufacture, market, sell, or support new products
and enhancements successfully, that new products or enhancements will achieve
market acceptance, or that the Company will be able to respond effectively to
technology changes, emerging industry standards or product announcements by
competitors. New product announcements by the Company could cause its customers
to defer purchases of existing products or cause distributors to request price
protection credits or stock rotations. Any of these events could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Control Devices; New Product Lines
Approximately 89% of the Company's net sales for the six months ended
September 30, 1997 were derived from the sale of mice, trackballs, entertainment
and other control devices. Control devices are expected to continue to account
for the substantial majority of net sales for the foreseeable future. To date,
sales of the Company's imaging solution products have been relatively limited
and have not yet achieved significant market acceptance. Many of the announced
competitors for one or more of these products have stronger brand names, more
extensive retail channel coverage, deeper consumer knowledge and experience, and
greater resources. Net sales and gross margins of the Company's imaging solution
products are less predictable and less favorable than its experience with
control devices. In addition, the Company has limited experience in the design,
development, manufacture, marketing, and support of these products. These
products are based on different technologies and additional manufacturing
processes, and there can be no assurance that the Company will be successful in
this new market.
Reliance on Suppliers
Certain key components used in the manufacture of the Company's products, as
well as certain products, are currently purchased by the Company from single or
limited sources that specialize in such components or products. At present,
single-sourced components include certain of the Company's application specific
integrated circuits ("ASICs"), certain other integrated circuits and components,
and balls used in certain of the Company's trackballs. The Company generally
does not have long-term agreements with its single or limited sources of supply.
Lead times for materials and components ordered by the Company or its contract
manufacturers can vary significantly and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. From time
to time the Company has experienced supply shortages and fluctuation in
component prices. Shortages or interruptions in the supply of components or
subcontracted products, or the inability of the Company to procure these
components or products from alternate sources at acceptable prices in a timely
manner, could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Dependence on Key Personnel
The Company's success depends to a significant degree on the continued
contributions of the Company's management and other key design, development,
manufacturing, marketing and sales personnel. The loss of any of such personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. Certain of the Company's senior management
and other key personnel have recently joined the Company. The Company's success
will depend in part on successful assimilation of these and other new employees.
Assimilation and retention of personnel may be made more difficult by the fact
that the Company's management and other key personnel are dispersed throughout
various locations worldwide, thus requiring the coordination of
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oganizations separated by geography and time zone and the integration of
personnel with disparate business backgrounds, cultures and languages. In
addition, the Company believes that its future success will depend on its
ability to attract and retain highly skilled managerial, engineering,
operations, marketing and sales personnel, competition for which is intense.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel, and the failure to attract and retain key personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Distribution
The Company sells its products through a domestic and international network
of distributors, resellers and OEM customers, and the Company's success is
dependent on the continued viability and financial stability of its customer
base. The OEM, distribution and reseller industries have been historically
characterized by rapid change, including periods of widespread financial
difficulties and consolidations, and the emergence of alternative distribution
channels. The Company's distributor and reseller customers generally offer
products of several different companies, including products competitive with the
Company's products. Accordingly, there is a risk that these distributors and
resellers may give higher priority, including greater retail shelf space, to
products of other suppliers, and may reduce their efforts in selling the
Company's products. The loss of one or more of the Company's OEM customers,
distributors or major resellers could have a material adverse effect on the
Company's business, financial condition and results of operations.
Due to its sales to large OEMs, distributors and high volume resellers, the
Company maintains individually significant receivable balances with large
customers. The Company seeks to control its credit risk through ongoing credit
evaluation of its customers' financial condition and by purchasing credit
insurance on European retail accounts receivable balances, but generally does
not require any collateral from its customers. If any of the Company's major
customers were to default in the payment of its receivables owed to the Company,
the Company's operating results could be materially adversely affected.
Product Return Risks
Like other manufacturers of consumer products, the Company is exposed to
the risk of product returns, either through the exercise by customers of
contractual return rights or as a result of the Company's assistance in
balancing inventories. In addition the Company offers price protection to its
distributors and retailers. A portion of the Company's net sales may result in
increased inventory at its distributors and resellers. As a result, historical
net sales may not be indicative of future net sales. Overstocking by Logitech's
distributors and retailers may lead to higher than normal returns. The short
product life cycles of certain of the Company's products and the difficulty in
predicting future sales increase the risk that new product introductions, price
reductions or other factors affecting the computer industry would result in
significant product returns. Although Logitech believes that it has provided
adequate allowances for projected returns, from time to time it has experienced
return levels in excess of its accruals and no assurance can be given that such
accruals will be sufficient for actual returns in future periods. In addition,
there can be no assurance that the accruals for price protection will be
sufficient, or that any future price changes will not have a material adverse
effect on the Company's results of operations.
Fluctuations in Effective Tax Rates; Potential Tax Increases
The Company operates in multiple jurisdictions and its profits are taxed
pursuant to the tax laws of such jurisdictions. The Company's effective tax rate
may be affected by changes in or interpretations of tax laws in any given
jurisdiction, utilization of net operating losses and tax credit carry forwards,
changes in transfer pricing that impact the recognition of net sales and
allocation of expenses in the Company's various subsidiaries, and changes in
management's assessment of matters such as the realizability of deferred tax
assets. In the past, the Company has experienced substantial fluctuation in its
effective income tax rate. The Company's effective income tax rates reflect a
variety of factors that may not be present in the future. As a result, the
Company's effective income tax rate may increase in future periods.
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Outcome of Legal Proceedings
Logitech Inc., the Company's U.S. subsidiary, is a defendant in certain
lawsuits alleging the plaintiff suffers from symptoms generally known as
repetitive stress injury, allegedly incurred while using mice sold by Logitech
Inc. Logitech Inc. has denied these claims and intends to defend the suits
vigorously. These suits are similar to those filed against other major suppliers
of PCs and add-on devices. Ultimate resolution of the various suits against
Logitech Inc. may depend on results in other suits of this nature. Should these
claims be successful, the claims could have a material adverse impact upon the
financial position and results of operations of the Company.
Pending and future litigation involving the Company, whether as plaintiff
or defendant, regardless of outcome, may result in substantial costs and
expenses to the Company and significant diversion of effort by the Company's
technical and management personnel. In addition, there can be no assurance that
litigation, either instituted by or against the Company, will not be necessary
to resolve issues that may arise from time to time in the future. Furthermore,
there can be no assurance that the Company's efforts to protect its intellectual
property through litigation will prevent duplication of the Company's technology
or products. Any such litigation could have a material adverse effect upon the
Company's business, financial condition or results of operations.
For discussions identifying other factors that could cause actual results to
differ from those anticipated in the forward-looking statements, see
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Form 20-F for the year
ended March 31, 1997. The Company cautions that the foregoing list of risk
factors is not exhaustive.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Logitech International S.A.
By: /s/ Daniel Borel
_____________________________
Daniel Borel
Chief Executive Officer
By: /s/ Barry Zwarenstein
_____________________________
Barry Zwarenstein
Chief Finance Officer,
Chief Accounting Officer,
and U.S. Representative
November 14, 1997
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