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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
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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Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
AMERICAN DEPOSITARY SHARES NASDAQ NATIONAL MARKET
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
The number of outstanding shares of each of the issuer's classes of capital or
common stock as of March 31, 1998 was 2,001,688 registered shares.
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.
[X] Yes [_] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
[_] Item 17 [X] ITEM 18
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TABLE OF CONTENTS
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Part I Page
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Item 1. Description of Business.............................................................. 3
Item 2. Description of Property.............................................................. 16
Item 3. Legal Proceedings.................................................................... 16
Item 4. Control of Registrant................................................................ 18
Item 5. Nature of Trading Market............................................................. 19
Item 6. Exchange Controls and Other Limitations Affecting Security Holders................... 20
Item 7. Taxation............................................................................. 20
Item 8. Selected Financial Data.............................................................. 22
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
Item 10. Directors and Officers of Registrant................................................. 31
Item 11. Compensation of Directors and Officers............................................... 33
Item 12. Options to Purchase Securities from Registrant or Subsidiaries....................... 33
Item 13. Interest of Management in Certain Transactions....................................... 33
Part II
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Item 14. Description of Securities to be Registered............................................. 33
Part III
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Item 15. Defaults Upon Senior Securities........................................................ 33
Item 16. Changes in Securities and Changes in Security for Registered Securities................ 33
Part IV
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Item 17. Financial Statements................................................................... 33
Item 18. Financial Statements................................................................... 33
Item 19. Financial Statements and Exhibits...................................................... 34
Signatures....................................................................................... 35
Consolidated Financial Statements................................................................ F-1
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In this document, unless otherwise indicated, references to the "Company" or
"Logitech" are to Logitech International S.A., its consolidated subsidiaries and
predecessor entities.
(C) 1998 Logitech. All rights reserved. Logitech, the Logitech logo, and the
Logitech products referred to herein are either the trademarks or the registered
trademarks of Logitech. All other trademarks are property of their respective
owners.
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ITEM 1. DESCRIPTION OF BUSINESS
The following discussion 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. Predictions of future events are inherently
uncertain. Actual events could differ materially from those predicted in the
forward looking statements as a result of the risks set forth in the following
discussion, including the subsection "Additional Risk Factors That Could Affect
Operating Results" in this Item 1 and in Item 9 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
OVERVIEW
Logitech is a leader in the design, manufacture and marketing of a variety of
computer interface devices. These include input and pointing devices such as
2D, 3D and cordless mice, trackballs, touchpads and keyboards; control devices
for entertainment such as joysticks, gamepads and 3D game controllers; and
imaging devices such as color digital video cameras.
Over the past 17 years, Logitech has provided consumers with a natural and
intuitive bridge between the sensory rich analog world and the digital realm of
the personal computer ("PC"). The Company's products provide user-centric
solutions that are comfortable, easy to install and easy to use, and are
combined with integrated software for seamless compatibility. The Company's
products are designed as an extension of a computer user's natural senses,
appealing to the way people want to work, communicate and play, and allowing
users to customize and personalize their computing environment for a more
natural man-machine interface.
The Company was founded in Switzerland in 1981 and operated through a variety
of related corporate entities until 1988. At that time, in connection with the
Company's initial public offering in Switzerland, it was reorganized as a Swiss
holding company, Logitech International S.A. The Company's operational
headquarters are located in Fremont, California, with engineering centers in
Fremont, Romanel-sur-Morges, Switzerland and Taiwan. Manufacturing operations
are located in China and Taiwan with distribution facilities in the United
States, Europe and Asia.
RECENT DEVELOPMENTS
In December 1997, the Company sold its scanner product line to Storm
Technology, Inc. ("Storm"). The Company decided to dispose of its scanner
product line because of fundamental changes in the scanner market. The market
had evolved from one driven by new technology and innovation, where Logitech was
a leader, to one driven by cost, with prices dropping steeply. In addition,
unit growth has been dominated by flatbed scanners, where Logitech was a new
entrant in the market, rather than by color sheetfed scanners where Logitech was
the leader. This transaction will allow Logitech to focus on its control device
product line and pursue new opportunities in emerging areas such as digital
video cameras.
On March 27, 1997, the Company consummated a public offering in the U.S. of
200,000 registered shares, represented by 2,000,000 American Depositary Shares
("ADSs"). Each ADS represents one-tenth of one registered share and is issued
pursuant to that certain Deposit Agreement dated March 27, 1997 (the "Deposit
Agreement") between the Company, The Bank of New York as Depositary (the
"Depositary"), and the registered and beneficial owners from time to time of
ADSs issued thereunder. On April 25, 1997, the Company sold an additional 30,000
registered shares pursuant to an option granted to the underwriters in the
offering to cover over-allotments.
INDUSTRY BACKGROUND
One of the primary challenges facing the PC industry has been to bridge the
digital world of computing and the analog world of computer users by creating a
natural man-machine interface. The growth in processing power, communications
bandwidth and digital content have created compelling reasons to purchase home
PCs. However, this brings new challenges as users struggle to effectively
input, access and control the many forms of digital data in a simple and
intuitive manner. Despite advances in design and function, setting up and using
a PC often requires users to adapt their natural way of thinking and working to
fit the computer. For example, when attaching new devices to a PC, the user is
confronted with a limited number of ports, the need to ensure hardware and
software
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compatibility, and ultimately a workspace cluttered with wires and cords. This
contrasts with the setup and use of more widespread consumer electronics devices
which have gradually adapted to become more user-friendly. The Company believes
that as computer usage continues to become more widespread, trends established
in the consumer electronics market, such as brand identity, affordability, ease-
of-use and installation, as well as visual appeal, are rapidly becoming
important components in home computer purchase decisions.
Progressively more powerful microprocessors and increased computer memory have
greatly expanded the capabilities of the PC platform, allowing for the
development of increasingly dynamic and complex applications. The PC has evolved
from a productivity tool for word processing and data analysis to an affordable
multimedia appliance capable of creating and manipulating vast amounts of data,
including graphics, sound and full motion video. PC users today can play games
in three dimensions, create virtual worlds, edit and improve their home videos
and push the limits of their imaginations without ever writing a line of code.
As the power and flexibility of the PC has evolved, so has the ability to
communicate among PCs. Powerful PCs, capable of connecting their users to a wide
variety of digital information via the Internet, are commonplace in many
households. At the same time, the definition of the PC is changing as devices
with integrated television and communications capabilities are blurring the line
between computer and consumer appliance. This convergence of technologies is
also expanding the functionality of common appliances, from the television to
the telephone, creating compelling reasons for individuals to purchase and
upgrade home computers.
The growth in processing power, communications bandwidth and digital content
have created new challenges as users struggle to effectively input, access and
control the many forms of digital data in a simple and intuitive manner. As a
result, despite the myriad of technological advances in computing over the past
20 years, the personal computer continues to be limited by one of its most
fundamental problems, the lack of intuitive interaction between man and machine.
THE LOGITECH SOLUTION
Logitech provides consumers with a natural and intuitive bridge between the
sensory rich analog world and the digital realm of the PC. The Company's human
interface products provide user-centric solutions that are comfortable, easy to
install and easy to use, and are combined with integrated software for seamless
compatibility. The Company's products are often the most frequent point of
physical interaction between consumers and their appliances. As such, the
richness of the man-machine interface experience is an important element of
overall user satisfaction. The Company's products are designed to be an
extension of a computer user's natural senses, appealing to the way people want
to work, communicate and play, and allowing users to customize and personalize
their computing environment for a more natural interface between man and
machine.
Over the past 17 years, the Company has established itself as a leading
designer, manufacturer and marketer of computer control devices. Building on
this leadership position, the Company capitalized on the growth in personal
computing by expanding its product lines. The Company offers a wide range of
control devices, from cordless mice to 3D game controllers to remote controls.
The Company's imaging solutions include color digital cameras. The Company has
continually focused on the improvement and refinement of its products to enable
the expansion of PC functions, broadening the bridge between human analog inputs
and the digital realm of the computer.
Logitech's human interface devices have long been at the forefront of
technological innovation. In control devices, the Company pioneered optical
sensing technology with the opto-mechanical mouse in 1982 and cordless
connectivity with the cordless mouse in 1984. The Company is one of only a few
manufacturers of optical trackballs in the world. In imaging solutions, the
Company was among the first to market the digital still camera in 1991, the
full-color handheld scanner in 1992 and the personal color sheetfed scanner in
1995. In addition, recognizing the limitations of many connectivity methods, the
Company has continually embraced new connectivity standards, particularly those
that contribute to increased ease of use for users. For example, Logitech was
early to recognize the importance of the Universal Serial Bus ("USB"),
demonstrating the first working USB device at Comdex in Fall 1995, and continues
to devote significant product development resources to the migration of its
product offerings to the USB standard.
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The Company believes the following to be among its key competitive strengths:
* Substantial Technical Expertise. The Company has accumulated significant
expertise in the key engineering disciplines that underlie its products. For
instance, Logitech's engineers have continuously enhanced motion-encoding
technology for control devices over several distinct generations. Many of
these technologies have applications across multiple product offerings,
allowing the Company to leverage its accumulated technology investment.
* Retail Brand and Distribution. The Company believes the Logitech brand name
and product designs are recognized worldwide as symbols of product quality,
innovative design and price performance. Furthermore, the Company believes
that in the consumer market, brand identity and brand awareness are important
components of the purchase decision. Logitech's strong brand has enabled it
to build an extensive retail distribution network and obtain critical shelf
space. The Company believes that as the PC market becomes more competitive,
access to shelf space will increasingly become a competitive factor.
* Volume Manufacturing Capability. The Company believes its established
manufacturing capabilities are a significant competitive advantage. The
Company has been building its Far East manufacturing presence for more than
ten years and its ISO 9000-certified manufacturing facilities are currently
producing over 35 million units per year. As a result, Logitech has been able
to maintain strict quality process controls and has realized significant cost
efficiencies. Manufacturing expertise extends beyond production to include
logistical support, just-in-time supply and process engineering.
* Strong OEM Relationships. The Company has long-established relationships with
large original equipment manufacturer ("OEM") customers and currently sells
to 18 of the 20 largest PC manufacturers in the world. Logitech is often the
primary supplier for these products and its engineering and design staff
works collaboratively with OEM customers on the design of future products.
The Company believes its OEM relationships provide it with valuable insight
into the future of the computer marketplace and technological trends.
* Industrial Design Excellence. The Company believes that its ability to
produce world-class, user-centric, industrial designs through the integration
of in-house and external design resources sets it apart from its competitors.
The Company has received many awards for product design and innovation,
including a winner in quality for Germany's ComputerBild magazine, the
Hanover Seal of Quality for Design Excellence award in 1998 in Germany,
Certificate of Merit in Consumer Product Design from the Federation of Hong
Kong Industries, awards from the Premio Sman show in Italy.
* Global Resources. Logitech is an internationally-minded company capable of
drawing upon the strengths of its various cultures and locations. With
centers in Europe, the United States and Asia, the Company has access to
leading technology, markets, personnel and ideas from around the world. The
Company believes that by fostering a strong international culture, it will be
able to capitalize on the emergence of a worldwide PC marketplace by meeting
the needs of customers in many countries.
BUSINESS STRATEGY
Logitech's objective is to become the leading provider of human interface
devices in the growing mass consumer market. As computing, communications and
consumer electronics continue to create new product categories, the Company
intends to provide affordable, user-friendly interface solutions, supplying
consumers with maximum comfort and control. Logitech intends to meet these
objectives by capitalizing on its technological innovations, brand image,
customer relationships and manufacturing capabilities.
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The Company's strategy includes the following key elements:
Develop Products for Mass Consumer Markets
The home PC market is one of the fastest growing segments in the mass PC
market. In addition to an increase in the number of home computers, Logitech
also foresees an increase in the number of add-on devices per PC. The Company is
focusing its development efforts on home PC users in order to address the widest
possible market and will use its established brand recognition to optimize user-
centric design, retail and OEM distribution channels, and volume manufacturing
capabilities for increased market penetration.
Enhance and Leverage the Logitech Brand
The use of Logitech-branded devices on millions of desktops worldwide
reinforces familiarity and brand recognition with consumers. Over the past year,
the Company has invested significant time and resources in defining its brand
personality by initiating a strong emphasis on brand marketing, establishing and
staffing product marketing initiatives, and developing a cohesive retail
packaging system. In addition, recognizing the central role of its logo in
creating visual brand awareness, Logitech introduced an updated version of its
logo during this same period. The Company plans to continue to invest in and
protect its brand identity while expanding brand awareness. The Company enjoys a
strong and growing brand presence in more than 15,000 retail outlets located in
over 100 countries.
Leverage OEM Relationships
Logitech's OEM business is the foundation of the company's success. The close
relationship between the Company and its OEM customers results in early insight
into emerging industry trends. Logitech's OEM customer base includes most of the
world's largest PC manufacturers. The Company excels in high-volume
manufacturing with tight quality control, worldwide distribution and logistics,
and the ability to leverage its infrastructure under changing demand conditions.
Continue Technological Innovation
Logitech will continue to devote considerable resources, both internally and
through partnerships, to maintain its track record for technological innovation,
focusing on developments that will make the interface more productive, natural
and enjoyable.
Examples of this include devices which provide for enhanced realism by
incorporating force feedback or 3D. In April 1998, the Company purchased a 10%
interest in Immersion Corporation in force feedback technology. Further, in June
1998, the Company purchased a 49% interest in Space Control GmbH, with an
option, under certain conditions, to acquire the remaining shares. Logitech
believes that Space Control, GmbH has leading technology in 3D control devices.
Logitech also continues to pursue and further develop other technologies to
enhance the consumer appeal of its product offerings, including radio frequency
cordless devices which allow for more freedom and flexibility, and optical
rather than mechanical sensing for low maintenance and greater precision.
More broadly, Logitech believes that the USB (Universal Serial Bus) interface
standard, which has now become enabled via the release of Windows 98, will
change the way new devices interface with PCs. USB is designed to enable true
"plug-and-play" attachment for up to 127 devices per PC via this port. The
Company has made, and continues to make, a major commitment to developing
products that conform to the USB standard; in fact, Logitech was the first
company in the world to develop a working USB product.
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PRODUCTS
Logitech's product lines include control devices and imaging solutions. These
human interface devices are designed as integrated hardware and software
solutions to provide a seamless interface between man and machine.
Approximately 90% of the Company's net sales for fiscal 1998 were derived from
the sale of control devices. Control devices are expected to continue to account
for the majority of net sales for the foreseeable future. The Company's imaging
solutions include color digital video cameras and, until December 1997, color
personal scanners. 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 may be less predictable or
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.
The Company's products include:
Control Devices
From its roots in computer mice, the Company's control devices have expanded
to include a wide range of products such as trackballs and touchpads, joysticks,
3D controllers for both professional and entertainment and keyboards. During
calendar year 1997 the Company shipped its one hundred and fifty millionth
mouse. The Company's control device product families are summarized below.
* Mice. Logitech offers many varieties of mice, sold through both OEM and
retail channels. For example, the MouseMan+ Wheel Mouse retail mouse is
designed with curves, slopes and buttons to better fit the user's hand and
features three finger-operated buttons, including a middle wheel for easy
scrolling and zooming, plus a thumb button. The MouseMan Cordless
incorporates a radio link to transmit data to the host computer. All retail
models are bundled with MouseWare software, enabling users to program mouse
buttons for specific tasks and to personalize other mouse operations. In
addition to retail mouse models, the Company also sells mice, such as the S34
mouse, designed specifically for OEM customers.
* Trackballs. Logitech's trackballs are designed as standalone retail products
and as components intended to be integrated by OEMs into notebook computers
or desktop keyboards. The Company's retail trackballs are available in a
variety of form factors with mechanical or optical sensors and corded or
cordless versions. For example, the TrackMan Marble family incorporates a
patented optical sensing technology for reliable operation without having to
regularly clean grease or dust buildups. The TrackMan Live! is a cordless,
radio controlled handheld trackball device engineered for computer-based
presentations.
* 6DOF Controller. The Company's line of Magellan 6DOF controllers is used
primarily for three-dimensional computer-aided design applications and
permits rotation around any of three axes for six degrees of freedom. In
addition, with the increased processing power of today's PCs, a number of
game developers are developing games which require up to six degrees of
freedom to play. The Company has extended the functionality of its Magellan
6DOF controller to accommodate these new game applications as well as
emerging Internet applications.
* Touchpads. Logitech's touchpads are designed to be integrated by OEMs into
notebook computers and desktop keyboards. The Company's touchpad incorporates
proprietary technology that allows the user to control the cursor through
finger movement on the touchpad and the replication of mouse button functions
with the use of an additional finger.
* Joysticks. Logitech offers WingMan, WingMan Extreme and WingMan Extreme
Digital joysticks for air combat, adventure, flight simulator, racing and
other games. Each has a distinctive industrial design with a sculpted grip to
fit the user's hand. In May, the Company announced WingMan Force joystick, a
next generation game controller scheduled for shipment in the fall of 1998.
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* 3D Game Controllers. The Company's CyberMan 2 product offers revolutionary
navigation and precision in 3D game environments. Using technology originally
developed to manipulate robots during NASA space missions, CyberMan 2
provides freedom of control in any direction, responding to smooth, natural
movement of the right hand and fingertip commands on the left.
* Gamepads. Logitech gamepads are designed with features similar to those used
with dedicated game platforms, and are primarily for use with sport and
fighting style games such as NHL Hockey and Mortal Combat. The gamepads are
designed to be comfortable for extended play periods.
* Keyboards. The Company's Cordless Desktop combines a cordless keyboard with a
three button cordless MouseMan Pro. Recently, two corded keyboards the Deluxe
104 and the Internet Keyboard were added to the Company's family of elegantly
designed retail keyboards. Additional models will be released before year-
end.
Imaging Solutions
The Company's imaging solution products currently consist of color digital video
cameras. Specifically, the product that is shipping is a digital video camera
for Silicon Graphics, Inc., for bundling with Silicon Graphics "Indy"
workstation. This camera enables video conferencing, videomail and still
photography. The Company continues to invest in imaging solutions.
TECHNOLOGY
Logitech products are sophisticated systems that combine multiple engineering
disciplines--mechanical, optical, electrical, software--and incorporate both
cognitive and physiological elements in user-centric industrial designs. These
systems share common design elements, including: sensors to detect and encode
motion, images, sound or other analog data into electrical signals; custom
ASICs; microcontrollers to convert and process signals received from the sensor;
a communications subsystem to exchange signals with an attached computer; and a
suite of driver, utility and user interface software modules. The Company
believes these software modules complete a seamless user-centric solution for
information input, access and control. Logitech's products incorporate the
following principal technologies:
* Sensors and Encoders. The Company's sensors and encoders transform analog
motion and images into electrical signals. For example, Logitech's patented
TrackMan Marble product utilizes an optical trackball sensor, greatly
improving trackball accuracy and durability. Trackball motion results in a
shift in the speckled pattern imprinted on the ball, which is detected by an
optical sensing system. Similarly, Logitech's digital cameras utilize optical
sensors to detect colors, shapes and other image attributes and convert these
attributes into electrical signals. Through a variety of sophisticated
sensing and encoding techniques, Logitech has been able to reduce the number
of circuits required in its mouse products, thereby lowering product
manufacturing costs and improving reliability.
* Signal Processing Algorithms. Logitech engineers employ sophisticated signal
processing algorithms across many product lines to compute spatial
displacements, enhance color image quality and compress or format data for
transmission. For example, in the Company's color video cameras, signal
processing algorithms are used for color extraction, image enhancement and
data compression.
* Application Specific Integrated Circuit Design. The Company has developed in-
house expertise in the design and testing of custom integrated circuits. In
particular, Logitech has dedicated design professionals skilled in the
development of mixed mode analog and digital circuits on one or multiple
chips. For example, Logitech's touchpad pointing device senses changes in
electrical capacitance, which is processed in both analog and digital forms
on a single custom ASIC. Similarly, custom circuits in the Company's video
camera are used to enhance video images. The Company owns a library of ASIC
designs, which can be adapted for use in multiple products.
* Power Management. The Company's products utilize advanced power management
including techniques pioneered by Swiss watch manufacturers. Cables connected
to separate power supplies are inconvenient in the case of desktop products
such as pointing devices, and impossible in the case of cordless devices such
as remote controls. Consequently, the Company believes low power consumption
is an essential product attribute for the
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consumer marketplace. In addition, with up to 127 devices potentially drawing
power from a single USB port, the Company believes its power management
expertise will be particularly important for the next generation of USB
products.
* Radio Frequency Design. The Company has been at the forefront in the
development and supply of low band-width, low power radio frequency ("RF")
technology for use over short distances. The Company is focusing its current
cordless development efforts primarily on RF devices, but has also developed
infrared products. As the functionality of the PC converges with televisions,
VCRs and other consumer devices, Logitech believes consumers will demand the
ability to control their PC from a distance. Logitech's remote controls
enable consumers to control PCs equipped with TV tuners, CD-ROM drives,
answering machines and other consumer features. The Company has also
developed a protocol which will allow multiple cordless devices to be used
interchangeably.
* Software Design. The Company believes that software plays an important role
in enhancing the functionality of its products. Accordingly, Logitech has
consistently emphasized the design and integration of user-friendly software
applications across its control device and imaging solution product lines.
Moreover, the Company has realized cost reductions in the hardware component
of certain products by improving the corresponding software. Currently, the
Company is designing and developing software for future USB and RF products.
RESEARCH AND DEVELOPMENT
The Company believes that continued investment in product research and
development is critical to its continued success. The Company's international
structure provides certain advantages and synergies to its overall product
development efforts. Logitech's product research and development activities are
conducted at three engineering centers located in Fremont, California, Romanel-
sur-Morges, Switzerland and Hsinchu, Taiwan. As of March 31, 1998, the Company
employed a total of 201 employees in research and development.
The location of the Company's Fremont facilities allows the Company access to
Silicon Valley's talent pool, particularly important in the development of
software and imaging technologies. In addition, this location in the midst of
the world's leading technology market enables the Company to compile market
intelligence to define and position products and develop key strategic
alliances.
Logitech's Swiss engineering center provides the Company with advanced power
management, sensing, encoding and RF expertise. In addition, the Swiss center is
a convenient point for gaining access to leading European technologies. Logitech
has been successful in recruiting and retaining top engineering graduates from
leading Swiss universities because it is one of the few computer technology
companies in Switzerland. It has also been able to obtain Swiss government
grants for certain research and development projects.
Through its facilities in Taiwan, the Company has established access to key
Asian markets, engineering resources and high-tech manufacturing. Taiwan is a
world leader in the manufacture of semiconductors, notebook computers, scanners,
monitors and related products, and possesses a concentration of firms that
specialize in advanced plastic injection molding and tooling. Moreover, Logitech
expects the common language of Taiwan and China to facilitate the transfers of
products from its launch site in Taiwan to its high volume manufacturing site in
China.
The Company is continually developing new products and enhancements to
existing products. Across all product lines, the Company is devoting significant
research and development resources to extending its cordless and USB
capabilities. Within the control device product line, development efforts are
directed at enhancements in the functionality of such products, including an
integrated roller mechanism for use with Office 97 and Windows 98, 3D mice and
6DOF game controllers. In the imaging solution product line, the Company is
currently working on a second generation version of its digital camera with USB
connectivity to capitalize on both OEM and retail opportunities created by the
convergence of computing and communications. 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. Failure by the Company to anticipate or respond adequately to
changing market conditions, or significant delays in product
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development or introduction, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's research and development expenses for fiscal years 1998, 1997
and 1996 were $27.8 million, $26.5 million, and $20.7 million. The Company
expects to continue to devote significant resources to research and development
to sustain its competitive position.
MARKETING, SALES AND DISTRIBUTION
The primary end-user markets for Logitech mice, trackballs and other pointing
devices are consumer, small office and home office ("SoHo"), and, through its
OEM customers, corporate. The primary end-user market for Logitech entertainment
devices, such as joysticks and gamepads, is consumers. The Company expects the
primary end-user markets for its digital video cameras to develop initially
among SoHo users and corporate buyers and eventually among consumers. Logitech's
primary end-user markets are in North America, Europe and Asia. However, it also
markets its products in Australia, Latin America and other regions.
Logitech builds awareness of its products and brand through targeted
advertising, public relations efforts, in-store promotions and merchandising, a
World Wide Web site and other efforts. It also develops knowledge of its end-
users through customer feedback and market research, including focus groups,
product registrations, end-user questionnaires, multi-client surveys and other
techniques. Manufacturers of PCs and other products also receive customer
feedback and perform end-user market research, which sometimes result in
specific requests to the Company for specific products, features or
enhancements.
Logitech sells through many distribution channels, including OEMs,
distributors and regional and national retail chains. In addition, the Company
supports retail channels with distribution centers located in the United States,
Europe and Asia. These centers perform final configuration of products and
product localization with local language manuals, packaging, software diskettes
and power plugs. Substantially all of the Company's products are manufactured at
its facilities in China and Taiwan. As a result, a significant portion of its
inventory may, at any point in time, be in transit to distribution centers.
Products sold to OEMs are generally re-sold to end-users bundled with new PCs.
Products sold through retail channels typically are re-sold to end-users who
already own PCs. Consequently, retail channel sales are more dependent on the
size of the installed base of PCs and to seasonal retail demand trends than to
shipments of new PCs.
Logitech sells to large OEM customers through a direct sales force and
supports small OEM customers through distributors. Of the 20 largest PC
manufacturers worldwide according to IDC, 18 are Logitech customers. These OEMs
include:
Acer Technologies, Inc. Legend Computer
Apple Computer, Inc. Micron Computers, Inc.
AST Research, Inc. NEC Corporation
Compaq Computer Corp. Packard-Bell
Dell Computer Corp. Samsung Electronics Company, Ltd.
Digital Equipment Corporation Siemens Nixdorf Information
Fujitsu ICL, Inc. Systems, Inc.
Hewlett-Packard Co. Toshiba Corp.
International Business Machines Corp. TRIGem Computer, Inc.
Vobis Microcomputer AG
In retail channels, Logitech's direct sales force sells to distributors and
resellers. Its distributor customers typically resell products to retailers and
small OEMs with which Logitech does not have a direct relationship. These
distributors in the U.S. include Ingram Micro Inc., Merisel, Inc. and Tech Data
Corporation, and in Europe include Computer 2000 and Ingram Micro.
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Logitech also sells to major retail chains, where it typically enjoys access
to significant shelf space. These chains in the U.S. include Best Buy Co., Inc.,
Wal-Mart Stores, Inc., Office Depot, Inc. and CompUSA, Inc. and in Europe
include Carrefour, Vobis and Dixons Stores Group PLC. No customer accounts for
more than 10% of the Company's net sales.
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. In addition, due to its sales to
large OEMs, distributors and high volume resellers, the Company maintains
individually significant receivable balances with large customers. As of March
31, 1998, two customers represented 5.5% and 5.7% of total accounts receivable.
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.
The Company maintains sales offices or sales representatives in 17 countries,
and throughout the United States.
Net sales in fiscal 1998 in Europe, the Far East and North America were $145.1
million, $70.4 million and $174.8 million. Net sales in fiscal 1997 in Europe,
the Far East and North America were $151.6 million, $64.1 million and $197.9
million. Net sales in fiscal 1996 in Europe, the Far East and North America were
$129.9 million, $60.0 million and $165.1 million.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company maintains customer service and technical support operations in the
United States, Europe, Asia and Australia. Customer service and technical
personnel provide support services to retail purchasers of products via
telephone and facsimile. The Company also maintains customer service through its
World Wide Web and CompuServe sites. These sites are designed to expedite
overall response time while minimizing the resources required for effective
customer support. In general, OEMs provide customer service and technical
support for their products, including components purchased from suppliers such
as Logitech.
The Company provides a one to three year warranty on its branded retail
products. As is typical in the PC industry, the Company frequently grants
customers limited rights of return with respect to retail purchase or unsold
inventories in exchange for new purchases, as well as price protection. There
can be no assurance that allowances will be sufficient or that any future
returns or price changes will not have a material adverse effect on operating
results. The short product life cycles of the Company's products and the
difficulty in predicting future sales increase the risk that new product
introductions, price reductions by the Company or its competitors or other
factors affecting the PC industry could result in significant product returns.
MANUFACTURING
The Company's manufacturing operations consist principally of final assembly
and testing. In fiscal 1995, the Company underwent a major restructuring in its
manufacturing operations to reduce per unit production costs and significantly
increase output capacities. Logitech's high-volume manufacturing is now located
in Suzhou, China, where labor and overhead costs are significantly lower than in
North America, Europe and Taiwan. When the Company moved its volume
manufacturing from Taiwan to Suzhou, it also encouraged its Taiwanese suppliers
to establish a manufacturing presence in the proximity of the Suzhou facility,
helping to ensure consistent and reliable supply of quality components. The
Suzhou facility was designed to allow significant production growth as well as
flexibility in responding to changing demands for the Company's products. The
Company continues to focus on improving the efficiency at the Suzhou facility,
including a more efficient reconfiguration of the floor plan, the introduction
of a "just-in-time" inventory control system and the implementation of total
quality management and total employee involvement programs.
New product launches, value-added manufacturing, process engineering,
commodities management, logistics, quality assurance and operations management
are centralized in Hsinchu, Taiwan. Components are manufactured to the Company's
specifications by vendors in Asia, the United States and Europe. Logitech also
utilizes subcontractors to supplement internal capacity and to reduce volatility
in production volumes. In addition, certain
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products, including keyboards and joysticks, are manufactured by third-party
suppliers to the Company's specifications. In such cases, the Company performs
final testing and product quality assurance prior to shipment. Retail product
localization with local language manuals, packaging, software diskettes and
power plugs is performed at distribution centers in the United States, Europe
and Asia.
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 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.
EMPLOYEES
As of March 31, 1998, Logitech had a total of 2,669 permanent and temporary
employees, of whom 201 were in research and development, 1,905 were in
manufacturing and distribution, 257 were in marketing, sales and support, and
306 were in administration. Of the total number of employees, 344 were in North
America, 206 were in Europe and 2,119 were in Asia. None of the Company's U.S.
employees is represented by a labor union or subject to a collective bargaining
agreement. Certain foreign countries, such as China, provide by law for employee
rights which include requirements similar to collective bargaining agreements.
The Company believes that its employee relations are good.
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,
including Guerrino De Luca, the Company's President and Chief Executive Officer,
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 organizations
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 whom 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.
COMPETITION
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. Logitech believes that the
principal competitive factors include the price, performance, user-centric
design, ease-of-use, quality and timeliness of products, as well as the
responsiveness, capacity, technical abilities, established customer
relationships, retail shelf space, advertising and promotion programs, and
brands of manufacturers.
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 3Com, Connectix,
Creative Labs, Intel, Panasonic, Philips, and Sharp.
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
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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.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
In addition to the other factors identified in this Annual Report on Form 20-
F, including the risks set forth in the above discussion and in Item 9 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, 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 forwarding looking statements
relating to its business.
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
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.
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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.
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.
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. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and "Description of
Business--Customer Service and Technical Support".
PROPRIETARY RIGHTS
The Company's future success depends in part on its proprietary technology,
technical know-how and other intellectual property. The Company relies on a
combination of patent, trade secret, copyright, trademark and other intellectual
property laws, and confidentiality procedures and contractual provisions such as
nondisclosure agreements and licenses, to protect its intellectual property.
The Company holds various United States patents, together with corresponding
patents from other countries relating to certain of the same inventions. The
Company also has various United States patent applications pending, together
with corresponding applications from other countries relating to certain of the
same inventions. Despite these patents and patent applications, there can be no
assurance that any patent owned by the Company will not be invalidated, deemed
unenforceable, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company, or that any of the Company's
pending or future patent applications will be
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issued with claims of the scope sought by the Company. In addition, there can be
no assurance that other intellectual property laws, or the Company's
confidentiality procedures and contractual provisions, will adequately protect
the Company's intellectual property. There can also be no assurance that the
Company's competitors will not independently develop similar technology,
duplicate the Company's products, or design around the Company's patents or
other intellectual property rights. In addition, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Any of these events could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Legal Proceedings."
The Company also relies on certain technologies that it obtains from others.
The Company may find it necessary or desirable in the future to obtain licenses
or other rights relating to one or more of its products or to current or future
technologies. There is no assurance that such licenses or other rights will be
available on commercially reasonable terms, or at all.
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.
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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
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.
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ITEM 2. DESCRIPTION OF PROPERTY
Logitech's operational headquarters are located in Fremont, California in a
leased building comprising approximately 95,612 square feet. This facility is
also occupied by Logitech's Americas Area headquarters, including research and
development, product marketing, sales management, technical support and
administration. The Company's Fremont lease expires in March 2006.
Logitech's Europe Area headquarters are in Romanel-sur-Morges, Switzerland.
This Company-owned facility comprises 28,590 square feet and includes research
and development, product marketing, sales management, technical support,
administration and certain Logitech group activities such as finance.
Logitech's Asia Area headquarters are in a Company-owned 111,977 square foot
facility in Hsinchu, Taiwan, and includes mechanical engineering, new product
launches, value-added manufacturing, process engineering, commodities
management, logistics, quality assurance, marketing, sales and administration.
The Hsinchu facility also serves as a distribution center for the Company.
Logitech's high volume manufacturing is located in a Company-owned 253,716
square foot building in Suzhou, China.
Logitech has major distribution centers in Union City, California, Nijmegen,
the Netherlands and Hsinchu, Taiwan. The Union City facility is 86,496 square
feet and is being leased by the Company until September 2000. The distribution
center in Nijmegen is comprised of approximately 7,147 square feet and is
subject to a lease due to expire in July 2000. The Company believes that its
current facilities will be adequate for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Logitech Inc. 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.
In December 1997, Logitech Inc. filed suit against KYE Systems Corp., KYE
International Corp. and Mouse Systems Corp. in the United States Court, Eastern
District of Texas, Texarkana Division, seeking damages and equitable relief
based on allegations of patent infringement. In February 1998, Mouse Systems
Corporation filed suit against Logitech Inc. in the United States District Court
for the Northern District of California, seeking damages and equitable relief
also based on allegations of patent infringement. Logitech Inc. believes that
Mouse Systems Corporation's lawsuit is without merit and intends to defend it
vigorously. However, there can be no assurances that this defense will be
successful, or that any judgment in this lawsuit would not have a material
adverse impact on the Company's business, financial condition and result of
operations.
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.
There has been substantial litigation in the technology industry regarding
rights to intellectual property, and the Company is subject to the risk of
claims against it for alleged infringement of the intellectual property rights
of others. In addition, the existence of any such claim by a third party may not
become known to the Company until well after it has committed significant
resources to the development of a potentially infringing product. From time to
time, the Company has received claims that it has infringed third parties'
intellectual property rights, and there is no assurance that third parties will
not claim infringement by the Company in the future. Any such claims, with or
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without merit, could be time-consuming, result in costly litigation, cause
product shipment delays, or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that such royalty or licensing agreements, if required, will be
available on terms acceptable to the Company, or at all.
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ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's registered shares as of June 1,
1998 by (i) each shareholder known by the Company to be the beneficial owner of
more than ten percent of the Company's registered shares and (ii) all executive
officers and directors as a group. To the knowledge of the Company, it is not
directly or indirectly owned or controlled by any corporation or by any foreign
government.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) PERCENTAGE(2)
- ------------------------ --------------- -------------
<S> <C> <C>
Daniel Borel(3) 240,605 12.5%
Pierluigi Zappacosta 205,782 10.7%
All directors and executive officers as a group (9 persons) 457,467 23.7%
</TABLE>
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. All information with respect to the beneficial ownership of any
principal shareholder has been furnished by such shareholder and, unless
otherwise indicated below, the persons named in the table have sole voting
and sole investment power with respect to all shares shown as beneficially
owned, subject to community property laws where applicable. Registered
shares subject to options or warrants that are currently exercisable or
exercisable within 60 days after June 1, 1998 are deemed to be issued and to
be beneficially owned by the person holding such options or warrants for the
purpose of computing the percentage ownership of such person but are not
treated as issued for the purpose of computing the percentage ownership of
any other person.
(2) Percentage ownership is calculated based on 1,929,213 registered shares
issued and outstanding, which excludes 72,475 registered shares held in
treasury.
(3) Includes 119,100 registered shares registered in the name of Sylviane Borel
(Mr. Borel's wife), and 3,000 registered shares registered in the name of
Mr. Borel's children. Mr. Borel disclaims beneficial ownership of the
registered shares registered in the name of his wife.
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ITEM 5. NATURE OF TRADING MARKET
REGISTERED SHARES
The Company's registered shares are listed and principally traded on the Swiss
Exchange, where the prices are expressed in Swiss francs. The table below
presents, for the periods indicated, (i) the high and low closing sales prices
quoted in Swiss francs for the registered shares on the Swiss Exchange, and (ii)
the U.S. dollar equivalent based on the Noon Buying Rate on the last trading day
of the periods presented. The "Noon Buying Rate" is the rate in New York City
for cable transfers in selected currencies as certified for customs purposes by
the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
PRICE PER REGISTERED SHARE
------------------------------------------------
HIGH LOW HIGH LOW
------------ --------- ------- ---------
CHF CHF $ $
<S> <C> <C> <C> <C>
Fiscal 1995:
First quarter.................................. 220.0 140.0 165.10 105.07
Second quarter................................. 151.0 100.0 117.37 77.73
Third quarter.................................. 110.0 80.0 83.97 61.07
Fourth quarter................................. 104.0 81.0 91.79 71.49
Fiscal 1996:
First quarter.................................. 86.0 73.0 74.69 63.40
Second quarter................................. 136.0 83.0 117.65 71.80
Third quarter.................................. 128.0 111.0 110.92 96.19
Fourth quarter................................. 145.0 104.0 121.88 87.42
Fiscal 1997:
First quarter.................................. 160.0 133.0 127.95 106.36
Second quarter................................. 159.0 126.0 126.64 100.36
Third quarter.................................. 194.5 129.0 145.26 96.34
Fourth quarter................................. 299.0 190.5 207.92 132.48
Fiscal 1998:
First quarter.................................. 276.0 241.0 188.78 164.84
Second quarter................................. 270.0 208.3 186.52 143.89
Third quarter.................................. 270.0 223.0 184.68 152.53
Fourth quarter................................. 243.0 205.5 159.63 134.99
</TABLE>
The Swiss Exchange is a private organization comprised of 53 members. As of
December 31, 1997, 215 Swiss companies and 212 foreign companies were listed on
the Swiss Exchange. Securities traded on the Swiss Exchange include Swiss and
foreign bonds, equities, investment funds, rights and warrants.
The Swiss Exchange is an order-driven exchange system. Transactions on the
Swiss Exchange are transmitted electronically via a high-speed computer
processing center. Trading is divided into three separate phases: pre-opening,
opening and continuous trading. During the pre-opening phase, the system is
available for entries into the order book, inquiries and reporting off-exchange
transactions, which are subject to additional regulations. During the opening
phase, the system fixes the opening price for the particular security. During
the continuous trading phase orders are matched. The Swiss Exchange interrupts,
for limited periods, trading in a security that is subject to significant price
fluctuation during a particular trading period.
AMERICAN DEPOSITARY SHARES
On March 27, 1997, the Company consummated a public offering in the U.S. of
200,000 registered shares, represented by 2,000,000 ADSs. On April 25, 1997, the
Company sold an additional 30,000 registered shares, represented by 300,000 ADSs
pursuant to an option granted to the underwriters in the offering to cover over-
allotments. Each ADS represents one-tenth of one registered share. As of June
1, 1998, there were approximately
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2,001,688 registered shares issued and outstanding held by 2,056 holders of
record. According to the records of the Bank of New York (the Depositary), as of
June 1, 1998, there were approximately 989,600 ADSs issued and outstanding under
the Deposit Agreement.
The ADSs are traded on the Nasdaq National Market. The table below presents
the high and low closing sales prices for ADSs on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----------- -----------
<S> <C> <C>
Fiscal 1997:
Fourth quarter (March 27 to March 31)............................ $16.25 $16.19
Fiscal 1998:
First quarter................................................... $19.00 $16.38
Second quarter................................................ $18.88 $14.00
Third quarter................................................. $18.75 $15.00
Fourth quarter................................................. $16.75 $13.38
</TABLE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
As a Swiss corporation, the Company will be subject to certain requirements
not generally applicable to corporations organized in United States
jurisdictions. Among other things, the issuance of capital stock by the Company
generally must be submitted for approval at a general meeting of shareholders.
In addition, the issuance of capital stock is generally subject to shareholder
preemptive rights, except to the extent that such preemptive rights have been
excluded or limited by the shareholders.
U.S. securities laws may restrict the ability of U.S. persons who hold ADSs to
participate in certain rights offerings or share or warrant dividend
alternatives which the Company may undertake in the future in the event the
Company is unable or chooses not to register such securities under the U.S.
securities laws and is unable to rely on an exemption from registration under
such laws. While the Company is not currently planning any such transaction, the
Company may take such actions in the future and there can be no assurance that
it will be feasible to include U.S. persons in any such transaction. If the
Company issues any such securities in the future, such securities may be issued
to the Depositary, which may sell such securities for the benefit of the holders
of the ADSs. There can be no assurance as to the value, if any, the Depositary
would receive upon the sale of such securities.
DIVIDEND POLICY
Under Swiss law, a corporation pays dividends upon a vote of its shareholders.
This vote typically follows the recommendation of the corporation's board of
directors. Although the Company has paid dividends in the past, its board of
directors has announced its intention not to recommend to shareholders any
payment of cash dividends in the future in order to retain any future earnings
for use in the operation and expansion of the Company's business.
ITEM 7. TAXATION
The following is a summary of certain Swiss tax matters that may be relevant
with respect to the acquisition, ownership and disposition of registered shares
or ADSs (which are evidenced by ADRs).
This summary addresses laws in Switzerland as in effect on the date hereof, as
well as the 1951 Convention between the United States of America and the Swiss
Confederation for the Avoidance of Double Taxation with Respect to Taxes on
Income (the "Treaty"), both of which are subject to change (or changes in
interpretation), possibly with retroactive effect.
For purposes of the Treaty and the Internal Revenue Code of 1986, as amended
(the "Code"), United States Holders of ADSs are treated as the owners of the
registered shares corresponding to such ADSs. Accordingly, the Swiss tax
consequences discussed below also generally apply to United States holders of
registered shares.
20
<PAGE>
SWISS TAXATION
Gain on Sale
Under present Swiss law, a holder of registered shares or ADSs who (i) is a
non-resident of Switzerland, (ii) during the taxable year has not engaged in a
trade or business through a permanent establishment within Switzerland and (iii)
is not subject to taxation by Switzerland for any other reason will be exempted
from any Swiss federal, cantonal or municipal income or other tax on gains
realized during the year on the sale of registered shares or ADSs.
Stamp, Issue and Other Taxes
Switzerland generally does not impose stamp, registration or similar taxes on
the sale of registered shares or ADSs by a holder thereof unless such sale or
transfer occurs through or with a Swiss securities dealer (as defined in the
Swiss Stamp Duty Law).
Withholding Tax
Under present Swiss law, any dividends paid in respect of registered shares
will be subject to the Swiss Anticipatory Tax at the rate of 35%, and the
Company will be required to withhold tax at such rate from any dividend payments
made to a holder of registered shares. Such dividend payments may qualify for
reduction of or refund of the Swiss Anticipatory Tax by reason of the provisions
of a double tax treaty between Switzerland and the country of residence or
incorporation of a holder, and in such cases such holder will be entitled to
claim a refund of all or a portion of such tax in accordance with such treaty.
The Treaty provides for a mechanism whereby a United States resident or United
States corporations can generally seek a refund of the Swiss Anticipatory Tax
paid on dividends in respect of registered shares, to the extent such
withholding exceeds 15%. Under a new income tax treaty between Switzerland and
the United States which was signed in October of 1996, but is subject to
ratification, the rates of withholding would be essentially the same as under
the Treaty.
21
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 20-F. The statement of
operations data for the years ended March 31, 1998, 1997 and 1996 and the
balance sheet data at March 31, 1998 and 1997 were derived from the audited
consolidated financial statements of the Company included elsewhere in this Form
20-F. The statement of operations data for the years ended March 31, 1995 and
1994 and the balance sheet data at March 31, 1996, 1995 and 1994 were derived
from audited consolidated financial statements not included herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 390,227 $ 413,716 $ 355,043 $ 302,813 $ 329,941
Cost of goods sold............................ 273,266 290,856 259,264 227,079 236,845
Gross profit.................................. 116,961 122,860 95,779 75,734 93,096
Operating expenses:...........................
Marketing and selling....................... 52,931 54,722 45,730 41,305 47,725
Research and development.................... 27,774 26,481 20,705 18,717 25,815
General and administrative.................. 19,944 20,380 19,553 17,382 23,518
---------- ---------- ---------- ---------- ----------
Restructuring and other (1)................. -- -- -- 8,896 4,236
Operating income (loss)....................... 16,312 21,277 9,791 (10,566) (8,198)
Interest income (expense), net................ (1,592) (752) (2,304) (1,297) (1,417)
Other income (expense), net................... 2,222 2,305 1,747 (6,342) 11,983
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............. 16,952 22,830 9,234 (18,205) 2,368
Provision for income taxes.................... (1,496) (1,770) (1,041) (1,170) (983)
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 15,456 $ 21,060 $ 8,193 $ (19,375) $ 1,385
========== ========== ========== ========== ==========
Net income (loss) per share (2):
Basic....................................... $8.19 $13.00 $5.03 $(11.80) $.92
Diluted..................................... $7.82 $12.36 $4.99 $(11.80) $.90
Shares used to compute
net income (loss) per share (2):
Basic....................................... 1,888,232 1,620,326 1,630,029 1,642,177 1,509,477
Diluted..................................... 1,977,057 1,703,696 1,640,616 1,642,177 1,543,483
Cash dividend per share (3)................... $ -- $0.9623 $ -- $1.7945 $1.6768
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ----------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 72,376 $ 38,504 $ 28,564 $ 36,265 $ 29,880
Total assets.................................. 214,701 216,423 181,321 197,349 215,545
Long-term debt, net of current maturities..... 3,031 3,188 4,768 6,520 21,900
Convertible bond.............................. -- -- -- -- 22,228
Shareholders' equity.......................... 132,734 111,691 71,438 69,162 85,877
</TABLE>
1) The 1995 restructuring charge relates to discontinuing manufacturing
activities in the U.S. and Ireland, the write-off of assets for phased out
product lines, and a reduction in global work force. The 1994 restructuring
charge was to write-off remaining goodwill arising from an acquisition that
was considered permanently impaired.
2) See Note 3 of Notes to Consolidated Financial Statements.
3) Dividends were declared in Swiss francs and translated into U.S. dollars.
22
<PAGE>
EXCHANGE RATES
Fluctuations in the exchange rate between the Swiss franc and the U.S. dollar
will affect the U.S. dollar equivalent of the Swiss franc price of the
registered shares on the Swiss Exchange and, as a result, will likely affect the
market price of the ADSs in the United States, and vice versa.
The following table sets forth certain historical information with respect to
the Noon Buying Rate for dollars expressed in Swiss francs per dollar.
<TABLE>
<CAPTION>
AVERAGE(1) HIGH LOW PERIOD END
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal 1992............................................ Chf 1.471 Chf 1.344 Chf 1.590 Chf 1.502
Fiscal 1993............................................ 1.418 1.225 1.548 1.490
Fiscal 1994............................................ 1.464 1.391 1.531 1.410
Fiscal 1995............................................ 1.314 1.133 1.458 1.133
Fiscal 1996............................................ 1.170 1.117 1.232 1.189
Fiscal 1997............................................ 1.296 1.192 1.489 1.438
Fiscal 1998............................................ 1.460 1.535 1.385 1.522
</TABLE>
(1) Represents the average of the Noon Buying Rates on the last day of each
month during the relevant period.
23
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This annual report to shareholders contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these statements as a result of certain
factors, including those set forth below.
OVERVIEW
The Company was founded in Switzerland in 1981 and operated through a variety
of related corporate entities until 1988. At that time, in connection with the
Company's initial public offering in Switzerland, it was reorganized as a Swiss
holding company, Logitech International S.A. The Company's operational
headquarters are located in Fremont, California, with engineering centers in
Fremont, Romanel-sur-Morges, Switzerland and Taiwan. Manufacturing operations
are located in China and Taiwan, with distribution facilities in the United
States, Europe and Asia.
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, touchpads, joysticks,
gamepads, 3D game controllers, keyboards and remote controls. Net sales of
control devices have accounted for a substantial majority of the Company's total
net sales. Imaging solutions include color digital video cameras and, until
December 1997, color personal scanners. Other products include partner products,
as well as product lines that are being phased out for strategic reasons.
In December 1997, the Company sold its scanner product line to Storm
Technology, Inc. ("Storm") for $5 million in cash, a $4 million convertible
note, and a 10% common stock ownership in Storm. In addition, the Company
entered into an agreement with Storm under which it will market and sell Storm
products in Europe in 1998. Under the sales agreement, the Company continued to
sell its remaining scanner inventory outside of Europe through February 15,
1998.
The Company decided to dispose of its scanner product line because of
fundamental changes in the scanner market. The market has evolved from one
driven by new technology and innovation, where Logitech was a leader, to one
driven by cost, with prices dropping steeply. In addition, unit growth has been
dominated by flatbed scanners, where Logitech was a new entrant in the market,
rather than by color sheetfed scanners where Logitech was the leader. This
transaction will allow Logitech to focus on its profitable control device
product line and pursue new opportunities in emerging areas such as digital
video cameras.
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>
YEAR ENDED MARCH 31,
----------------------------------------------------
1998 1997 1996
--------------- ------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales:
Control devices.......................................... $350,701 $329,439 $289,249
Imaging solutions........................................ 37,260 78,264 56,074
Other.................................................... 2,266 6,013 9,720
-------- -------- --------
Total net sales............................................ $390,227 $413,716 $355,043
======== ======== ========
Net sales:
Control devices.......................................... 90% 80% 81%
Imaging solutions........................................ 9 19 16
Other.................................................... 1 1 3
-------- -------- --------
Total net sales............................................ 100% 100% 100%
======== ======== ========
</TABLE>
24
<PAGE>
The Company sells its products through two primary channels, original
equipment manufacturers ("OEMs") and a network of retail distributors and
resellers ("retail"). Products sold to OEMs, principally control devices, are
generally resold to end-users bundled with new PCs. Sales to OEMs as a
percentage of total net sales can vary significantly and have ranged from 30% to
47% on a quarterly basis over the past three fiscal years.
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. In 1998 and 1997, the Company experienced improvements in
gross margin, primarily due to a higher proportion of relatively higher margin
retail sales, and the realization of cost reductions from the consolidation of
the Company's high volume manufacturing operations in China. Over the long term,
the Company believes this trend is not sustainable. Notwithstanding the
elimination of negative gross margins from scanners in 1999, gross margins are
likely to decline over the long-term due to significant price pressures in the
OEM market from PC manufacturers aggressively targeting low cost PCs, changes in
product mix in the retail market toward lower margin products, and a decline in
the rate of cost reductions in the Company's manufacturing operations.
The Company recognizes revenue upon product shipment, less amounts for
estimated returns and price protection. Amounts provided for returns and price
protection are estimated based upon historical experience and the Company's
assessment of inventory in the retail channel. Although the Company believes
that it has provided adequate amounts for projected returns, from time to time
it has experienced return levels in excess of amounts provided, and no assurance
can be given that such amounts will be sufficient for actual returns in future
periods. In addition, the Company continuously introduces product upgrades,
enhancements and improved packaging, and thus may experience higher rates of
returns of its older products.
OTHER MATTERS
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 carryforwards,
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. The Company regularly assesses the realizability of deferred tax assets
based on a number of factors, including the Company's past earnings history and
expected future taxable income. As a result of this process, a valuation
allowance is recorded for deferred tax assets when management believes it is
more likely than not that the Company will not realize such 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 in the past
three fiscal years reflect a variety of factors that may not be present in
fiscal 1999. As a result, the Company's effective income tax rate is likely to
increase in future periods.
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.
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
25
<PAGE>
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.
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 Depository
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.
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>
YEAR ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................................. 70.0 70.3 73.0
----- ------ ------
Gross profit........................................................ 30.0 29.7 27.0
Operating expenses:
Marketing and selling............................................ 13.6 13.3 12.9
Research and development......................................... 7.1 6.4 5.8
General and administrative....................................... 5.1 4.9 5.5
----- ------ ------
Operating income.................................................... 4.2 5.1 2.8
Interest income (expense), net...................................... .4 (.2) (.7)
Loss on sale of product (.8) -- --
line...............................................................
Other income, net................................................... .5 .6 .5
----- ------ ------
Income before income taxes.......................................... 4.3 5.5 2.6
Provision for income taxes.......................................... (.3) (.4) (.3)
----- ------ ------
Net income.......................................................... 4.0% 5.1% 2.3%
===== ====== ======
</TABLE>
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Net Sales
Net sales for the year ended March 31, 1998 decreased 6% to $390.2 million
from $413.7 million in 1997. This decrease was due to a $41 million decline in
scanner revenue compared to the prior year. Scanner revenues were negatively
impacted by extremely aggressive price competition combined with consumer
preference for flatbed scanners, for which Logitech did not have a branded
product. As previously indicated, the Company sold the scanner product line in
December 1997.
Sales of control devices grew by 6%, reflecting moderate growth in both the
retail and OEM channels. The growth in retail sales was primarily due to the
Company's new wheel-enhanced mice offerings, which were introduced in the fall
of 1997. The overall retail sales growth also reflects flat sales in the
entertainment category, as well as the negative impact of a strong dollar.
Sales volume into the OEM market increased substantially in fiscal 1998,
reflecting growth in the PC market and increased demand for the Company's
products from the
26
<PAGE>
majority of the leading PC makers. However, this growth came at the expense of
steeper price declines, approximately 20% to 25%, than the Company has
experienced in the past. Over the last six months of fiscal 1998, PC
manufacturers, specifically most of the large manufacturers where Logitech has a
majority share, have shifted their focus to aggressively target lower cost PC
offerings. The net result was that OEM revenues increased only slightly for the
year despite significantly higher volumes.
Other sales decreased due to the gradual phase-out of sales of partner
products included in the prior year.
Gross Profit
Gross profit consists of net sale, 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 for the year ended
March 31, 1998 decreased 5% to $117 million, or 30% of net sales, compared to
$122.9 million, or 29.7% of net sales in 1997. The slight improvement in gross
margin percentage was primarily due to reduced production costs at the Company's
high volume manufacturing operation in Suzhou, China and a higher proportion of
sales of control devices into the higher margin retail channel. The gross margin
improvement was achieved despite the absorption of nearly $7 million of negative
gross margins from the scanner product line.
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. Marketing and selling
expense for the year ended March 31, 1998 decreased 3% to $52.9 million, or
13.6% of net sales, compared to $54.7 million, or 13.2% of net sales in 1997.
Despite the slight decrease, which was primarily due to reduced selling
expenses, 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 awareness, thereby strengthening 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 for the year
ended March 31, 1998 increased 5% to $27.8 million, or 7.1% of net sales,
compared to $26.5 million, or 6.4% of net sales in 1997. This growth reflects a
21% increase in the control device area partially offset by a 28% reduction in
the scanner area. The large increase for control devices reflects the Company's
ongoing commitment to invest in developing future generations of products in
this core business. In the fourth quarter of fiscal 1998, the Company increased
its research and development investment, particularly in entertainment product
development, and is accelerating these efforts in the first half of fiscal 1999
for entertainment products expected for the 1998 Christmas season. The Company
expects to continue to devote significant resources to research and development
to sustain and improve its competitive position.
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 for the year
ended March 31, 1998 decreased 2% to $19.9 million, or 5.1% of net sales,
compared to $20.4 million, or 4.9% of net sales in 1997.
Interest Income (Expense)
Interest income for the year ended March 31, 1998 was $1.6 million compared to
net interest expense of $.8 million in 1997. 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, the proceeds from the
Company's U.S. initial public offering, and improved working capital management.
27
<PAGE>
Other Income, Net
Other income for the year ended March 31, 1998 decreased slightly to $2.2
million from $2.3 million. The relatively small change reflects lower currency
exchange gains in fiscal 1998, partially offset by the writedown of an
investment to net realizable value in the prior year.
Provision for Income Taxes
The provision for income taxes consists of income and withholding taxes and is
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 realizing deferred tax assets. The
provision for income taxes for the year ended March 31, 1998 decreased to $1.5
million, representing an 8.8% effective tax rate, from $1.8 million,
representing a 7.8% effective tax rate in 1997.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Net Sales
Net sales for the year ended March 31, 1997 increased 17% to $413.7 million
from $355.0 million in the year ended March 31, 1996. This increase was
primarily due to growth in sales of color sheetfed scanners and retail sales of
control devices. These increases were partially offset by a decrease in retail
sales of handheld scanners and OEM sales of trackballs due to a market shift to
touchpads.
Gross Profit
Gross profit for the year ended March 31, 1997 increased 28% to $122.9
million, or 29.7% of net sales, compared to $95.8 million, or 27.0% of net
sales, in the year ended March 31, 1996. The improvement in gross margin was
primarily due to a higher proportion of retail sales and to reduced production
costs resulting from the consolidation of high volume manufacturing in Suzhou.
These improvements were partially offset by the higher proportion of sales of
sheetfed scanners which have lower margins.
Marketing and Selling
Marketing and selling expense for the year ended March 31, 1997 increased 20%
to $54.7 million, or 13.3% of net sales, compared to $45.7 million, or 12.9% of
net sales, in the year ended March 31, 1996. This increase was primarily due to
the Company's introduction and support of new retail products, including
PageScan Color Pro, MouseMan 96, MouseMan Cordless, SurfMan and WingMan Warrior,
and, to a lesser extent, to expenses incurred in connection with the development
of markets in the Asia Pacific region and the enhancement of the corporate logo.
Research and Development
Research and development expense for the year ended March 31, 1997 increased
28% to $26.5 million, or 6.4% of net sales, compared to $20.7 million, or 5.8%
of net sales, in the year ended March 31, 1996. This increase was primarily due
to an increase in personnel engaged in the development of the Company's next
generation of products.
General and Administrative
General and administrative expense for the year ended March 31, 1997 increased
4% to $20.4 million, or 4.9% of net sales, compared to $19.6 million, or 5.5% of
net sales, for the year ended March 31, 1996. This increase resulted primarily
from an increase in compensation expense associated with employee stock benefit
plans, salary increases and, to a lesser extent, additional infrastructure costs
to support expansion in Asia.
28
<PAGE>
Interest Income (Expense)
Interest expense for the year ended March 31, 1997 decreased to $0.8 million
from $2.3 million for the year ended March 31, 1996. This decrease was primarily
due to improved cash flow from operating activities, which led to a reduction in
the Company's average bank borrowings and to an increase in interest-bearing
cash and cash equivalents during the period.
Other Income, Net
Other income for the year ended March 31, 1997 increased to $2.3 million from
$1.7 million for the year ended March 31, 1996, primarily due to foreign
exchange gains.
Provision for Income Taxes
The provision for income taxes for the year ended March 31, 1997 increased to
$1.8 million, representing a 7.8% effective tax rate, from $1.0 million,
representing an 11.3% effective tax rate, for the year ended March 31, 1996. The
decrease in the effective tax rate is primarily due to the recognition of net
deferred tax assets based upon expected future realization, partially offset by
income earned in higher tax jurisdictions, and increases in unrecoverable
withholding taxes and estimated taxes payable in Asia.
LIQUIDITY AND CAPITAL RESOURCES
Cash Balances, Available Borrowings and Capital Resources
At March 31, 1998, cash and cash equivalents totaled $72.4 million. In
addition, the Company had credit lines with several European and Asian banks
totaling $47.4 million. As is common for businesses in European countries, these
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 March 31, 1998, $41.4 million was available under these
facilities.
In May 1998, the Company entered into a $20 million revolving working capital
line of credit with a U.S. bank, which is available to fund working capital
needs and other corporate purposes. This facility has a two year revolving
period, is unsecured and, unlike its other credit lines, has a formal bank
commitment.
Since fiscal 1996, the Company has financed its operations and capital
requirements primarily through cash flow from operations, bank borrowings and
the sale of equity securities. The Company's short and long-term liquidity and
capital resource requirements will be provided from three sources: ongoing cash
flow from operations, cash and cash equivalents on hand and borrowings, as
needed, under the credit facilities.
Cash Flow from Operating Activities
The Company's operating activities generated cash of $43.5 million for the
year ended March 31, 1998, compared to $27.5 million in fiscal 1997. The
increase in 1998 was primarily the result of improved working capital
management, as both receivables and product inventories were reduced
significantly more than the decline in product payables. In addition, as a
result of the sale of the scanner product line in December 1997, scanner product
inventories and work-in-process were sold or liquidated and no additional
scanner inventories were added. These reductions in working capital needs more
than offset the lower sales level and resulting lower gross profit.
Cash Flow from Investing Activities
The Company's investing activities used cash of $7.9 million for the year
ended March 31, 1998, consisting of $13 million in capital expenditures, net of
$5 million received from the sale of the scanner product line.
The Company's investing activities used cash of $17.8 million for the year
ended March 31, 1997, primarily for capital expenditures. Investing activities
generated cash of $5.4 million in fiscal 1996, primarily from the sale of the
Company's offices in Fremont, partially offset by $12.3 million of capital
expenditures. The proceeds from the sale of the Fremont offices were used to
repay outstanding indebtedness.
29
<PAGE>
Cash Flow from Financing Activities
Net cash used in financing activities for the year ended March 31, 1998 was
$.3 million. This amount includes cash proceeds of $4.5 million received in
April 1997 from the sale of the 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. The Company had additional proceeds of
$7.4 million from the sale of treasury shares upon exercise of stock options and
purchase rights. In addition, the Company had net borrowings of $.9 million
under its credit lines to meet short-term working capital needs.
The Company's financing activities generated cash of $1.1 million in the year
ended March 31, 1997. Sale of the Company's equity securities generated cash of
$33.4 million, of which $26.8 million represents the proceeds (net of
commissions and expenses) from the U.S. public offering. An additional $3.7
million was generated from the issuance of new equity securities. These cash
flows were partially offset by $14.8 million spent to acquire treasury shares.
Proceeds from the sale of equity securities enabled the Company to reduce its
debt by $21.8 million. Although the Company also 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.
Financing activities used cash of $21.4 million in fiscal 1996, primarily for
repayment of bank borrowings of $19.9 million.
Capital Commitments
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
generated 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.
30
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Daniel V. Borel 47 Chairman of the Board
Pierluigi Zappacosta 47 Vice Chairman of the Board
Guerrino De Luca 45 President and Chief Executive Officer
Erh-Hsun Chang 48 Sr. Vice President, Operations and General Manager, Far East
Wolfgang Hausen 55 Sr. Vice President and General Manager, Control Devices Division
Barry Zwarenstein 49 Sr. Vice President, Finance, New Business Development and Chief Financial Officer
Kwong Soon Chay (1) 45 Director
Pier Carlo Falotti (2) 55 Director
Jean-Louis Gassee (1)(2) 53 Director
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Daniel V. Borel, a founder of the Company, has been the Chairman of the Board
since July 1992. From July 1992 to February 1998, Mr. Borel also served as Chief
Executive Officer of the Company. He has held various other executive positions
with the Company and its predecessors since their founding. Mr. Borel holds an
MS in computer science from Stanford University and a degree in physics from the
Ecole Polytechnique Federale, Lausanne, Switzerland.
Pierluigi Zappacosta, a founder of the Company, has been Vice Chairman of the
Board of Directors of Logitech International S.A. since July 1992. Prior to that
time, Mr. Zappacosta was Chief Executive Officer, President and Vice Chairman.
He has been a director and has held various other executive positions with the
Company and its predecessors since its founding. Mr. Zappacosta holds an MS in
computer science from Stanford University and a Laurea degree in electronic
engineering from the University of Rome, Italy. Mr. Zappacosta has informed the
Company that he will not stand for re-election and will not continue to serve as
Vice Chairman of the Board of Directors.
Guerrino De Luca joined the Company as President and Chief Executive Officer
in February 1998. Prior to that time, Mr. De Luca served as Executive Vice
President of Worldwide Marketing for Apple Computer, Inc. a personal computer
company, from February 1997 to September 1997, and as President of Claris Corp.,
a personal computing software vendor, from February 1995 to February 1997.
Prior to this, Mr. De Luca held various positions in Apple in the United States
and Europe. Mr. De Luca holds a bachelor of science degree in Electronic
Engineering from the University of Rome, Italy.
Erh-Hsun Chang joined the Company as Vice President, General Manager, Far
Eastern Area and Worldwide Operations in December 1995. In April 1997, Mr. Chang
was named Sr. Vice President, General Manager, Far Eastern Area & Worldwide
Operations. During 1986 and 1987, Mr. Chang held various other positions with
the Company. From January 1994 to December 1994, Mr. Chang was Vice President,
Sales and Marketing, Power Supply Division, of Taiwan Liton Electronics Ltd.,
and from December 1991 to January 1994, Mr. Chang was Vice President,
Manufacturing Consulting at KPMG Peat Marwick. Mr. Chang holds a BS in civil
engineering from Chung Yuang University, Taiwan, an MBA from the University of
Dallas, and an MS in industrial engineering from Texas A&M University.
31
<PAGE>
Wolfgang Hausen has been Senior Vice President and General Manager, Control
Devices Business Division of the Company since July 1997. Prior to that time,
Mr. Hausen served as President and Chief Executive Officer of Cardinal
Technologies, Inc., a PC multimedia and modem company from May 1994. From March
1989 to December 1993 Mr. Hausen was Vice President and General Manager of
Quantum Corporation, a global supplier of storage products. Mr. Hausen holds an
MSEE from the Technical University of Darmstadt, Germany and an MBA from Santa
Clara University, California.
Barry Zwarenstein joined Logitech in July 1996 as Vice President and Chief
Financial Officer and currently holds the position of Sr. Vice President
Business Development and Chief Financial Officer. Prior to that time, Mr.
Zwarenstein held various positions with FMC Corporation from June 1975 to June
1996, including Chief Financial Officer, FMC Europe, from February 1992 to June
1996. Mr. Zwarenstein hold a BA in economics from the University of Natal,
South Africa, and an MBA from the Wharton School of the University of
Pennsylvania. Mr. Zwarenstein is a Chartered Accountant (South Africa).
Kwong Soon Chay was elected a director of Logitech International S.A. in June
1997. Since July 1996, Mr. Chay has been Managing Director of IntreSource
Systems Pte, Ltd. Prior to that time, Mr. Chay held various executive positions
with Creative Technology Ltd. from 1986 to June 1996, including President/COO
from 1992. Mr. Chay holds a degree in Physics from University of Singapore.
Pier Carlo Falotti has been a director of Logitech International S.A. since
June 1996. Since September 1996, Mr. Falotti has been Senior Vice President for
Europe, Middle East and Africa of Oracle Corporation. From February 1994 until
September 1996, Mr. Falotti was Executive Vice President of International
Operations for AT&T, where he also served as President and Chief Executive
Officer for Europe, the Middle East and Africa. From 1992 to 1994, Mr. Falotti
was President and Chief Executive Officer of The Ask Group, Inc. From 1969 to
1992, Mr. Falotti was with Digital Equipment Corporation, serving as President
and Chief Executive Officer of Digital Europe, Middle East and Africa from 1983.
Mr. Falotti holds a degree in electrical engineering from the Institute
Avogadro, Torino, Italy.
Jean-Louis Gassee has been a director of Logitech International S.A. since
June 1993. Since October 1990, Mr. Gassee has been Chief Executive Officer of Be
Inc. Before founding Be, Mr. Gassee held various executive positions with Apple
Computer, Inc. during the period December 1980 to September 1990, including
President of the Apple Products Division. Mr. Gassee holds a science degree from
the Universite de Paris.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company has entered into agreements to indemnify its directors and
officers. Certain of these agreements are between the respective officer or
director and Logitech International S.A., and cover claims brought under U.S.
laws to the fullest extent permitted by Swiss law. In addition, Logitech Inc.
has entered into separate indemnification agreements with the Company's
executive officers and directors. The agreements with Logitech Inc. are broader
in certain respects than those entered into with Logitech International S.A.
These agreements, among other things, indemnify directors and officers for
certain expenses (including attorneys fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of the Company, arising out of such person's services
as a director or officer of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified
directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company as to which indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
BOARD COMPOSITION
The Company's Articles of Incorporation set the minimum number of directors at
three. The Company presently has five directors. Directors are elected by the
shareholders at a shareholders meeting for a term of three years. Executive
officers are appointed by the Board of Directors to serve on such terms and
conditions and with such restrictions as the Board of Directors establishes.
32
<PAGE>
The Board has established an Audit Committee and a Compensation Committee. The
Audit Committee oversees actions taken by the Company's independent accountants,
recommends the engagement of accountants and reviews the Company's internal
audits. The Compensation Committee approves the compensation of executives of
the Company and makes recommendations to the Board of Directors with respect to
standards for setting compensation levels for other employees.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
In the fiscal year ended March 31, 1998, the Company's three non-employee
directors during that year were paid an aggregate of $ 58,662 (translated at the
Noon Buying Rate on March 31, 1998). In addition, each of the Company's non-
employee directors were eligible to receive 240 registered shares as partial
compensation for service on the Board of Directors. Directors who are also
employees of the Company do not receive any additional compensation for their
service on the Board of Directors. Directors are reimbursed for certain expenses
in connection with attendance at Board and Committee meetings.
The Company paid an aggregate of $1,363,762, denominated in U.S. dollars and
in Swiss francs and Taiwanese dollars (translated at the Noon Buying Rate on
March 31, 1998), to six executive officers for services rendered in all
capacities to the Company in the fiscal year ended March 31, 1998. A portion of
the compensation paid to the executive officers in fiscal 1998 was pursuant to
certain annual performance-based bonus arrangements.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
As of June 1, 1998, there were outstanding options to purchase an aggregate of
343,511 registered shares at exercise prices ranging from $13.14 - $177.50 and
expiration dates ranging from October 1998 to April 2008. As of June 1, 1998,
the Company's directors and executive officers held options to purchase an
aggregate of 82,574 registered shares at exercise prices ranging from $13.14 -
$177.50 with expiration dates ranging from March 2002 to February 2008.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-20.
33
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Report of Independent Accountants
Consolidated balance sheets at March 31, 1998 and 1997 Consolidated
statements of operations for the years ended March 31, 1998, 1997 and
1996
Consolidated statements of cash flows for the years ended March 31,
1998, 1997 and 1996
Consolidated statements of changes in shareholders' equity for the
years ended March 31, 1998, 1997 and 1996
Notes to consolidated financial statements
b. Exhibits
Exhibit
Number Description of Document
------ -----------------------
23.1 Consent of PRICE WATERHOUSE SA, Independent Accountants.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: June 29, 1998
Logitech International S.A.
By: /s/ Guerrino De Luca
----------------------
Guerrino De Luca
President and Chief Executive Officer
By: /s/ Barry Zwarenstein
-----------------------
Barry Zwarenstein
Chief Finance Officer,
Chief Accounting Officer,
and U.S. Representative
35
<PAGE>
LOGITECH INTERNATIONAL S.A.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-2
Consolidated balance sheets at March 31, 1998 and 1997 F-3
Consolidated statements of income for the years
ended March 31, 1998, 1997 and 1996 F-4
Consolidated statements of cash flows for the years
ended March 31, 1998, 1997 and 1996 F-5
Consolidated statements of changes in shareholders' equity
for the years ended March 31, 1998, 1997 and 1996 F-6
Notes to consolidated financial statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Logitech International S.A.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Logitech International S.A. and its subsidiaries at March 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 1998, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE SA
Lausanne, Switzerland
May 1, 1998
F-2
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31,
---------------------------
1998 1997
---------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 72,376 $ 38,504
Accounts receivable.............................................................. 62,998 71,634
Inventories...................................................................... 32,417 63,377
Other current assets............................................................. 15,087 9,253
-------- --------
Total current assets......................................................... 182,878 182,768
Property, plant and equipment..................................................... 28,721 32,135
Other assets...................................................................... 3,102 1,520
-------- --------
Total assets................................................................. $214,701 $216,423
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................................................. $ 5,999 $ 17,849
Current maturities of long-term debt............................................. -- 162
Accounts payable................................................................. 37,565 44,406
Accrued liabilities.............................................................. 34,783 38,690
-------- --------
Total current liabilities.................................................... 78,347 101,107
Long-term debt, net of current maturities......................................... 3,031 3,188
Other liabilities................................................................. 589 437
-------- --------
Total liabilities............................................................ 81,967 104,732
-------- --------
Commitments and contingencies (Note 10)
Shareholders' equity:
Registered shares, par value Chf 20 - 2,101,688 authorized, 353,312
conditionally authorized, 2,001,688 issued and outstanding at March 31, 1998
and 1997....................................................................... 28,738 28,738
Additional paid-in capital...................................................... 75,577 73,430
Less registered shares in treasury, at cost, 72,989 at March 31, 1998 and
182,839 at March 31, 1997...................................................... (6,677) (16,813)
Retained earnings............................................................... 47,186 31,730
Cumulative translation adjustment............................................... (12,090) (5,394)
-------- --------
Total shareholders' equity................................................... 132,734 111,691
-------- --------
Total liabilities and shareholders' equity................................... $214,701 $216,423
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
------------- ----------- --------------
<S> <C> <C> <C>
Net sales................................................................ $ 390,227 $ 413,716 $ 355,043
Cost of goods sold....................................................... 273,266 290,856 259,264
---------- ---------- ----------
Gross profit............................................................. 116,961 122,860 95,779
Operating expenses:
Marketing and selling................................................... 52,931 54,722 45,730
Research and development................................................ 27,774 26,481 20,705
General and administrative.............................................. 19,944 20,380 19,553
---------- ---------- ----------
Operating income......................................................... 16,312 21,277 9,791
Interest income (expense), net........................................... 1,592 (752) (2,304)
Loss on sale of product line............................................. (3,174) -- --
Other income, net........................................................ 2,222 2,305 1,747
---------- ---------- ----------
Income before income taxes............................................... 16,952 22,830 9,234
Provision for income taxes............................................... (1,496) (1,770) (1,041)
---------- ---------- ----------
Net income............................................................... $ 15,456 $ 21,060 $ 8,193
========== ========== ==========
Net income per share:
Basic................................................................... $ 8.19 $ 13.00 $ 5.03
Diluted................................................................. $ 7.82 $ 12.36 $ 4.99
Net income per ADS:
Basic................................................................... $ .82 $ 1.30 $ .50
Diluted................................................................. $ .78 $ 1.24 $ .50
Shares used to compute net income per share:
Basic................................................................... 1,888,232 1,620,326 1,630,029
Diluted................................................................. 1,977,057 1,703,696 1,640,616
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 15,456 $ 21,060 $ 8,193
Non-cash items included in net income:
Depreciation and amortization...................................... 13,379 11,483 10,032
Loss on disposal of property, plant and equipment.................. 792 1,045 162
Loss on sale of product line....................................... 3,174 -- --
Write-down of investments.......................................... -- 1,222 379
Stock compensation expense......................................... 419 2,765 594
Deferred income taxes.............................................. (1,239) (3,107) 526
Changes in assets and liabilities:
Accounts receivable................................................ 6,068 (12,656) (5,379)
Inventories........................................................ 19,923 (13,177) (10,859)
Other current assets............................................... 2,295 (309) 3,880
Accounts payable................................................... (12,355) 8,706 (4,226)
Accrued liabilities................................................ (4,439) 10,418 5,508
-------- -------- --------
Net cash provided by operating activities....................... 43,473 27,450 8,810
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment............................ (13,013) (18,059) (12,267)
Proceeds from sales of property, plant and equipment.................. 125 190 17,851
Cash proceeds from sale of product line............................... 5,000 -- --
Other investing activities............................................ -- 45 (212)
-------- -------- --------
Net cash provided by (used in) investing activities............. (7,888) (17,824) 5,372
-------- -------- --------
Cash flows from financing activities: --
Net repayment of short-term debt...................................... (12,012) (18,388) (19,866)
Borrowings of long-term debt.......................................... -- 2,146 620
Repayment of long-term debt........................................... (107) (3,400) (2,249)
Purchase of treasury shares........................................... (29) (14,824) (3,249)
Proceeds from sale of treasury shares................................. 11,896 33,389 3,359
Proceeds from issuance of registered shares........................... -- 3,741 --
Dividends paid........................................................ -- (1,571) --
-------- -------- --------
Net cash provided by (used in) financing activities............... (252) 1,093 (21,385)
Effect of exchange rate changes on cash and cash equivalents........... (1,461) (779) (498)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.............. 33,872 9,940 (7,701)
Cash and cash equivalents at beginning of period.......................... 38,504 28,564 36,265
-------- -------- --------
Cash and cash equivalents at end of period................................ $ 72,376 $ 38,504 $ 28,564
======== ======== ========
Supplemental cash flow information:
Interest paid....................................................... $ 530 $ 1,943 $ 2,822
Income taxes paid................................................... $ 1,494 $ 3,033 $ 1,568
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
REGISTERED SHARES ADDITIONAL TREASURY SHARES CUMULATIVE
------------------- PAID-IN -------------------- RETAINED TRANSLATION
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
-------- ---------- ------------ ---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 1, 1995.......................... 1,955,000 $28,090 $45,256 327,298 $(14,860) $ 4,048 $ 6,628 $ 69,162
Net income............................. -- -- -- -- -- 8,193 -- 8,193
Purchase of treasury shares............ -- -- -- 52,073 (3,249) -- -- (3,249)
Sale of treasury shares upon exercise
of options and purchase rights........ -- -- 1,036 (56,895) 3,228 -- -- 4,264
Cumulative translation adjustment...... -- -- -- -- -- -- (6,932) (6,932)
--------- ------- ------- -------- -------- ------- -------- ---------
March 31, 1996......................... 1,955,000 28,090 46,292 322,476 (14,881) 12,241 (304) 71,438
Net income............................. -- -- -- -- -- 21,060 -- 21,060
Dividends ($0.9623 per share).......... -- -- -- -- -- (1,571) -- (1,571)
Purchase of treasury shares............ -- -- -- 121,667 (14,824) -- -- (14,824)
Sale of treasury shares upon exercise
of options and purchase rights........ -- -- 2,132 (60,020) 5,607 -- -- 7,739
Sale of treasury shares................ -- -- 59 (1,284) 100 -- -- 159
Issuance of registered shares upon
exercise of options................... 46,688 648 5,336 -- -- -- -- 5,984
Sale of treasury shares in public
offering, net of related expenses..... -- -- 19,611 (200,000) 7,185 -- -- 26,796
Cumulative translation adjustment...... -- -- -- -- -- -- (5,090) (5,090)
--------- ------- ------- -------- -------- ------- -------- ---------
March 31, 1997......................... 2,001,688 28,738 73,430 182,839 (16,813) 31,730 (5,394) 111,691
Net income............................. -- -- -- -- -- 15,456 -- 15,456
Purchase of treasury shares............ -- -- -- 200 (29) -- -- (29)
Sale of treasury shares upon exercise
of options and purchase rights........ -- -- 348 (80,050) 7,424 -- -- 7,772
Sale of treasury shares in public
offering, net of related expenses..... -- -- 1,799 (30,000) 2,741 -- -- 4,540
Cumulative translation adjustment...... -- -- -- -- -- -- (6,696) (6,696)
--------- ------- ------- -------- -------- ------- -------- ---------
March 31, 1998......................... 2,001,688 $28,738 $75,577 72,989 $ (6,677) $47,186 $(12,090) $(132,734)
========= ======= ======= ======== ======== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
Logitech International S.A. is incorporated in the Canton of Vaud, Switzerland
and, together with its subsidiaries, is collectively referred to as "Logitech"
or the "Company." The Company designs, manufactures and markets human interface
devices which include control devices and imaging solutions which often serve as
the primary physical interface between users and their personal computers and
other multimedia devices. The Company sells its products to both original
equipment manufacturers ("OEMs") and to a network of retail distributors and
resellers.
NOTE 2 -- 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 Depository
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, resulting 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 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly and majority-owned subsidiaries. All material intercompany balances
and transactions have been eliminated. The consolidated financial statements are
presented in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") and comply with relevant Swiss law.
Use of Estimates
In conformity with U.S. GAAP, management has used estimates and assumptions
that affect the reported amounts of assets, liabilities, net sales and expenses,
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
Revenue Recognition
Revenues are recognized when products are shipped. Revenues from sales to
distributors and authorized resellers are subject to terms allowing price
protection and certain rights of return. Accordingly, accruals for estimated
future returns and credits for price protection are provided for upon revenue
recognition. Such amounts are estimated based on historical rates of returns,
distributor inventory levels and other factors.
Foreign Currency
The functional currencies of 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. The financial statements of the Company's subsidiaries whose
functional currency is other than the U.S. dollar are translated to U.S. dollars
using period-end rates of exchange for assets and liabilities and using the
monthly average rates for net sales and expenses. Translation gains and losses
are deferred and included in the cumulative translation adjustment component of
shareholders' equity. Gains and losses arising from transactions denominated in
currencies other than a subsidiary's functional currency are reflected in other
income, net in the statements of income.
F-7
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents, accounts and
notes receivable and certain other current assets. The Company maintains cash
and cash equivalents with various financial institutions, and this policy is
designed to limit exposure with any one financial institution.
The Company sells its products to large OEMs and to high volume resellers and,
as a result, maintains individually significant receivable balances with large
customers. At March 31, 1998, two customers represented 5.5% and 5.7% of total
accounts receivable; and at March 31, 1997, two customers represented 5.5% and
8.5% of total accounts receivable.
The Company's OEM customers tend to be well capitalized, multi-national
companies, while retail customers may be less well capitalized. The Company
controls its credit risk with respect to accounts receivable through ongoing
credit evaluation of its customers' financial condition and by purchasing credit
insurance on European retail accounts receivable. The Company generally does not
require collateral from its customers.
Following the sale of the scanner product line to Storm Technology Inc.
("Storm"), the Company holds a $4 million note receivable from Storm,
convertible at the Company's option into Storm common stock, and a $1.5 million
trade receivable from Storm.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a
first-in, first-out basis. Provisions are made for potentially excess or slow
moving inventories.
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost. Additions and improvements
are capitalized, whereas maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over estimated useful
lives of five to 25 years for plant and buildings and one to five years for
equipment.
Software Development Costs
Software development costs incurred prior to technological feasibility are
expensed as incurred. The Company defines establishment of technological
feasibility as the completion of a working model. Software development costs
incurred subsequent to the establishment of technological feasibility through
the period of market availability of products are capitalized. To date,
capitalized software development costs have not been material.
Income Taxes
The Company provides for income taxes using the liability method, which
requires that deferred tax assets and liabilities be recognized for the expected
future tax consequences of temporary differences arising between the bases of
assets and liabilities for financial reporting and income tax purposes. In
estimating future tax consequences, expected future events are taken into
consideration, with the exception of potential tax law or tax rate changes.
F-8
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
The Company does not currently enter into foreign currency exchange contracts
to hedge against the effects of changes in foreign currency exchange rates on
its net investment in foreign subsidiaries, although it may elect to do so in
the future. The Company undertakes limited hedging of its net exposures from
assets and liabilities denominated in foreign currencies. There were no open
foreign currency exchange contracts at March 31, 1998 and 1997. Before April 1,
1996 when the Company was actively hedging in material amounts, gains and losses
on foreign currency exchange contracts which hedged foreign subsidiary
investments were recorded in the cumulative translation adjustment component of
shareholders' equity. Gains and losses on foreign currency exchange contracts
which hedged net exposures from assets and liabilities denominated in foreign
currencies are recorded in other income, net.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts and notes receivable, accounts payable and accrued
liabilities, short-term debt and current maturities of long-term debt, carrying
value approximates fair value due to their short maturities. The carrying values
of long-term debt do not materially differ from their estimated fair values
based upon quoted market prices for the same or similar instruments.
Net Income Per Share
The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," ("SFAS 128") for the quarter ending December 31, 1997.
All previously reported amounts were restated in accordance with SFAS 128.
Under SFAS 128, basic earnings per share is computed by dividing net income by
the weighted average number of outstanding registered shares. Diluted earnings
per share are computed using weighted average registered shares and, if
dilutive, weighted average registered share equivalents. The registered share
equivalents included in the Company's diluted earnings per share computations
are registered shares issuable upon the exercise of stock option or stock
purchase plan agreements (using the treasury stock method).
Stock Compensation Plans
The Company has adopted the pro forma disclosure-only requirements of SFAS
123, "Accounting for Stock-Based Compensation," which requires companies to
measure employee stock compensation based on the fair value method of
accounting. As permitted by SFAS 123, the Company will continue to follow the
accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation expense is not
recognized unless the exercise price of an option is less than the market value
of the underlying stock on the date of grant.
NOTE 4 -- SALE OF PRODUCT LINE:
On December 18, 1997, the Company sold its scanner product line to Storm for
$5 million in cash, a $4 million convertible note, included in other current
assets in the accompanying balance sheet, and a 10% common stock ownership in
Storm. In addition, the Company entered into an agreement with Storm under which
it will market and sell Storm products in Europe in 1998, and may earn
additional cash, notes and Storm common stock based on its sales of Storm
products in Europe during that period. Such amounts, if any, will be recognized
as earned. Under the sales agreement, the Company continued to sell Logitech
scanner inventory outside of Europe through February 15, 1998.
F-9
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loss on the sale of the scanner product line of $3,174,000 reflects sale
proceeds, less the cost of inventory and capital assets sold, costs to conclude
certain contractual obligations, and other exit costs. The note receivable from
Storm was non-interest bearing and was due March 27, 1998. At that time, the
note was automatically extended one year at a 10% interest rate and became
convertible, at the Company's option, into Storm common stock using the Storm
closing price at March 27, 1998 of $2 per share. The Company's common stock
ownership of Storm would increase to approximately 17% on conversion, but may
not exceed 20% without Storm shareholder approval, and is subject to certain
resale restrictions.
NOTE 5 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1998 1997
-------------- ----------
(In thousands)
<S> <C> <C>
Accounts receivable:
Accounts receivable................................................................. $ 64,835 $ 73,951
Allowance for doubtful accounts..................................................... (1,837) (2,317)
-------- --------
$ 62,998 $ 71,634
======== ========
Inventories:
Raw materials....................................................................... $ 5,695 $ 11,289
Work-in-process..................................................................... 1,441 2,255
Finished goods ..................................................................... 25,281 49,833
-------- --------
$ 32,417 $ 63,377
======== ========
Property, plant and equipment:
Land................................................................................ $ 1,881 $ 2,203
Plant and buildings................................................................. 25,051 25,007
Equipment........................................................................... 57,148 56,448
-------- --------
84,080 83,658
Less accumulated depreciation....................................................... (55,359) (51,523)
-------- --------
$ 28,721 $ 32,135
======== ========
</TABLE>
Note 6 -- Financing Arrangements:
Short-term Credit Facilities
To support short-term working capital requirements, the Company had several
uncommitted, unsecured bank lines of credit aggregating $47,397,044 at March
31, 1998. Borrowings outstanding were $5,999,000 and $17,849,000 at March 31,
1998 and 1997. At March 31, 1998, the borrowings under these agreements were
denominated in Japanese yen at a 1.5% annual interest rate, and were due on
demand.
F-10
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1998 1997
-------------- ---------
(In thousands)
<S> <C> <C>
Long-term debt:
Renewable Swiss mortgage loan due in April 1999, bearing interest at 5.45%,
secured by properties with net book values aggregating $1,954,073 at March
31, 1998..................................................................... $3,031 $3,188
Various unsecured borrowings.................................................. -- 162
------ ------
Total long-term debt.......................................................... 3,031 3,350
Less current maturities....................................................... -- (162)
------ ------
Long-term portion............................................................. $3,031 $3,188
====== ======
</TABLE>
NOTE 7 -- SHAREHOLDERS' EQUITY:
In June 1996, the shareholders approved an increase of 100,000 authorized
registered shares, par value Chf 20, and an additional 400,000 conditional
registered shares, par value Chf 20, the issuance of which is conditional upon
the exercise of stock options granted under the Company's stock option plans and
the issuance of shares under the Company's employee share purchase plans.
Pursuant to Swiss corporate law, Logitech International S.A. may only pay
dividends in Swiss francs. The payment of dividends is limited to certain
amounts of unappropriated retained earnings (approximately $11,630,000 at March
31, 1998) and is subject to shareholder approval.
Under Swiss corporate law, a minimum of 5% of the Company's annual net income
must be retained in a legal reserve until this reserve equals 20% of the
Company's issued and outstanding aggregate par value share capital. Certain
other countries in which the Company operates apply similar laws. These legal
reserves represent an appropriation of retained earnings that are not available
for distribution and approximated $5,267,000 at March 31, 1998.
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
STOCK COMPENSATION PLANS
Employee Share Purchase Plans
Under the 1989 and 1996 Employee Share Purchase Plans (the "Purchase Plans"),
eligible employees may purchase registered shares at the lower of 85% of the
fair market value at the beginning or the end of each six-month offering period.
Subject to continued participation in the Purchase Plans, purchase agreements
are automatically exercised at the end of each offering period. No compensation
expense was recorded under the Purchase Plans for the year ended March 31, 1998.
Compensation expense of $1,440,000 and $435,000 was recorded for the years ended
March 31, 1997 and 1996, and was credited to additional paid-in capital.
F-11
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
Under the 1988 Stock Option Plan (the "1988 Option Plan"), options to purchase
registered shares were granted to employees and consultants at exercise prices
ranging from zero to amounts in excess of the fair market value of the
registered shares on the date of grant. The terms and conditions with respect to
options granted were determined by the Board of Directors who administer the
1988 Option Plan. Options generally vest over four years and remain outstanding
for periods not exceeding ten years.
Compensation expense is recorded when the exercise price of an option is less
than the fair market value of the underlying stock on the date of grant.
Compensation expense of $408,587, $1,325,000 and $159,000 was recorded for the
years ended March 31, 1998, 1997 and 1996. Such amounts are accrued as a
liability when the expense is recognized and subsequently credited to additional
paid-in capital upon exercise of the related stock option. Compensation expense
arising from stock options outstanding at March 31, 1998 to be recognized in
future periods approximates $602,000. Further grants may not be made under
this plan.
In recognition of the decline in the fair market value of the Company's
registered shares, the Company repriced options to purchase approximately
129,500 registered shares in July 1995 to amounts slightly in excess of the then
current fair market value.
In June 1996, the shareholders approved the 1996 Stock Option Plan (the "1996
Option Plan"), which became effective upon closing the U.S. public offering in
March 1997. Under the 1996 Option Plan, options for registered shares may be
granted to employees at exercise prices of not less than 100% of the fair market
value of the registered shares on the date of grant. A total of 300,000
registered shares may be issued under the 1996 Option Plan. Options generally
vest over four years and remain outstanding for periods not exceeding ten years.
A summary of activity under the stock option plans, and a limited number of
other option agreements, is as follows (shares are translated into U.S. dollars
based upon specific Swiss franc prices; ADSs are included at equivalent share
numbers and prices):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------- ----------------------------
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
------------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........... 222,070 $ 86 154,617 $0-101 155,294 $ 0-200
Granted.................................. 182,044 $167 167,095 $ 103 67,850 $ 0-103
Exercised................................ (56,896) $120 (77,105) $ 84 (14,510) $ 0- 95
Cancelled or (35,263) $143 (22,537) $ 88 (54,017) $ 0- 95
expired.................................
Outstanding, end of year................. 311,955 $121 222,070 $ 86 154,617 $ 0-101
Exercisable, end of 68,341 $ 81 66,152 $ 79 73,538 $ 0-101
year....................................
</TABLE>
The Company had reserved 311,955 conditional shares for the future exercise of
stock options outstanding at March 31, 1998.
F-12
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information regarding stock options outstanding
at March 31, 1998 (shares are translated into U.S. dollars based upon specific
Swiss franc prices; ADSs are included at equivalent share prices):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE EXERCISE CONTRACTUAL EXERCISE
PRICES NUMBER PRICE LIFE (YEARS) NUMBER PRICE
- ----------------- ---------- --------------- ---------------- -------- -----------
<S> <C> <C> <C> <C> <C>
$ 0 - $ 76 39,288 $ 56 5.8 28,397 $ 51
$ 77 - $ 88 40,391 $ 84 7.8 13,774 $ 82
$ 89 - $ 94 47,075 $ 89 8.3 19,903 $ 90
$ 95 - $ 160 90,351 $150 9.5 6,034 $112
$ 161 - $ 182 94,850 $174 9.2 233 $174
-------- --------
311,955 $121 8.6 68,341 $ 81
======== ========
</TABLE>
Pro Forma Stock Compensation Disclosure
The Company applies the provisions of APB 25 and related interpretations in
accounting for compensation expense under the purchase plans and the stock
option plans. Had compensation expense under these plans been determined
pursuant to SFAS 123, the Company's net income and net income per share would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
-------------- ------------- -----------
<S> <C> <C> <C>
Pro forma net income.................................................... $11,888 $19,968 $6,712
Pro forma basic net income per share.................................... $ 6.30 $ 11.76 $ 4.11
Pro forma diluted net income per share.................................. $ 6.01 $ 11.40 $ 3.90
</TABLE>
The fair value of the grants under the purchase plans and stock option plans
was estimated using the Black-Scholes valuation model with the following
assumptions and values:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------
PURCHASE PLANS STOCK OPTION PLANS
------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield........................ 0 0 0 0 0 0
Expected life......................... 6 months 6 months 6 months 3.2 years 3 years 3 years
Expected volatility................... 37 % 45 % 49 % 41 % 74 % 80 %
Risk-free interest rate............... 5.6 % 5.7 % 5.4 % 5.5 % 6.7 % 5.5 %
Weighted average fair value of grant.. $39.00 $39.00 $29.00 $56.26 $65.00 $64.00
</TABLE>
The above pro forma amounts include compensation expense based on the fair
value of options vesting during the years ended March 31, 1998, 1997 and 1996,
and exclude the effects of options granted prior to April 1, 1995. Accordingly,
these amounts are not representative of the effects of computing stock option
compensation expense using the fair value method for future periods.
F-13
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the year ended March 31, 1997, the Company granted 121,295 options with
exercise prices less than the fair market value of the underlying stock at the
date of grant. The weighted average exercise price of such options was $99, and
the weighted average fair value was $64.
PENSION PLANS
Defined Contribution Plans
Certain of the Company's subsidiaries have defined contribution employee
benefit plans covering all or a portion of their employees. Contributions
pursuant to these plans are discretionary for certain plans and are based on
specified or statutory requirements for others. The charges to expense for these
plans for the years ended March 31, 1998, 1997 and 1996, were $957,000, $801,000
and $830,000.
Defined Benefit Plan
One of the Company's subsidiaries sponsors a noncontributory defined benefit
pension plan covering substantially all of its employees. Retirement benefits
are provided based on employees' years of service and earnings. The Company's
practice is to fund amounts sufficient to meet the requirements set forth in the
applicable employee benefit and tax regulations.
Net pension cost in the statement of income includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1998 1997 1996
---------- ------------ -------
(In thousands)
<S> <C> <C> <C>
Service cost of benefits earned.................................................. $ 395 $ 346 $ 326
Interest cost on projected benefit obligations................................... 132 108 79
Actual return on plan assets..................................................... (93) (91) (70)
Amortization of transition amount................................................ (43) (5) (5)
----- ----- -----
Net pension cost................................................................. $ 391 $ 358 $ 330
===== ===== =====
</TABLE>
The funded status of the defined benefit pension plan is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
--------------- -----------
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................................................. $ -- $ 4
Nonvested.............................................................................. 661 387
------- -------
Accumulated benefit obligation.......................................................... 661 391
Excess of projected benefit obligation over accumulated benefit obligation.............. 1,746 1,061
------- -------
Total projected benefit obligation...................................................... 2,407 1,452
Plan assets at fair value............................................................... (1,700) (1,163)
------- -------
Plan assets less than projected benefit obligation...................................... 707 289
Unrecognized net gain................................................................... (179) --
Unrecognized net liability arising at transition........................................ 47 62
------- -------
Net pension liability................................................................... $ 575 $ 351
======= =======
</TABLE>
F-14
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended March 31, 1998 and 1997, the actuarial assumptions used
for determining the present value of the projected benefit obligation included a
7% discount rate and an annual increase of 7% in compensation levels. The
expected long-term rate of return on plan assets was 7%. Plan assets are
comprised primarily of stocks, bonds and short-term deposits.
NOTE 9 -- INCOME TAXES:
The Company is incorporated in Switzerland but operates in various countries
with differing tax laws and rates. Further, the Company's income before taxes
and the provision for income taxes are generated primarily outside of
Switzerland. Consequently, the weighted average expected tax rate may vary from
period to period to reflect the generation of taxable income in different tax
jurisdictions.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1998 1997 1996
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Swiss.................................................................. $ 1,192 $ 1,011 $(1,514)
Foreign................................................................ 1,542 3,866 2,029
Deferred:
Swiss.................................................................. -- -- 598
Foreign................................................................ (1,238) (3,107) (72)
------- ------- -------
Total................................................................. $ 1,496 $ 1,770 $ 1,041
======= ======= =======
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
-------------- ------------
(In thousands)
<S> <C> <C>
Net operating loss carryforwards....................................................... $ 636 $ 777
Depreciation and amortization.......................................................... 1,119 794
Research and development and other tax credit carryforwards............................ 4,194 2,733
Accruals............................................................................... 7,522 7,287
Other.................................................................................. 1,103 923
------- -------
Gross deferred tax assets.............................................................. 14,574 12,514
Gross deferred tax liabilities......................................................... -- (172)
Valuation allowance.................................................................... (9,817) (8,824)
------- -------
Net deferred tax assets................................................................ $ 4,757 $ 3,518
======= =======
</TABLE>
Management regularly assesses the realizability of deferred tax assets
recorded in each of the Company's subsidiaries based upon the weight of
available evidence, including such factors as the recent earnings history and
expected future taxable income. The methodology used by management to determine
the amount of deferred tax assets that are more likely than not to be realized
is based upon the Company's recent earnings and estimated future taxable income
for approximately the next twelve months. Management believes that it is more
likely than not that the Company will not realize a portion of its deferred tax
assets and, accordingly, a valuation allowance of $9,817,000 has been
established for such amounts at March 31, 1998. At March 31, 1998, the Company
had tax credit carryforwards for U.S. federal and state purposes of
approximately $4,000,000.
F-15
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected tax provision at the weighted average rate is generally
calculated using pre-tax accounting income (loss) in each country multiplied by
that country's applicable statutory tax rates. A provision has not been made for
additional taxes on undistributed earnings of foreign subsidiaries of
approximately $2,660,000 at March 31, 1998, because such earnings are considered
to be indefinitely reinvested. The difference between the provision for income
taxes and the expected tax provision at the weighted average tax rate is
reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax provision at weighted average rate......................... $2,725 $ 5,744 $1,455
Permanent differences................................................... 377 192 124
Net operating losses utilized........................................... -- (1,569) (768)
Tax credits utilized.................................................... (467) (590) --
Change in estimate...................................................... -- 579 --
Increase (decrease) in valuation allowance.............................. (993) (2,464) 306
Other................................................................... (146) (122) (76)
------ ------- ------
Total provision for income taxes........................................ $1,496 $ 1,770 $1,041
====== ======= ======
</TABLE>
Changes in estimated taxes payable during the year ended March 31, 1997
related to the closure of the Company's operations in Asia during fiscal 1996.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
The Company leases facilities under operating leases, certain of which require
it to pay property taxes, insurance and maintenance costs. Operating leases for
facilities are generally renewable at the Company's option and usually include
escalation clauses linked to inflation.
Future minimum annual rentals at March 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1999................................................................... $1,247
2000................................................................... 1,250
2001................................................................... 1,100
2002................................................................... 936
2003 and thereafter.................................................... 4,341
------
$8,874
======
</TABLE>
Rent expense was $2,018,000, $1,900,000 and $1,100,000 during the years ended
March 31, 1998, 1997 and 1996.
F-16
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
NOTE 11 -- INTEREST AND OTHER INCOME:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1998 1997 1996
-------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income............................................................ $2,122 $ 1,191 $ 518
Interest expense........................................................... (530) (1,943) (2,822)
------- ------- -------
Interest income (expense), net............................................. $ 1,592 $ (752) $(2,304)
======= ======= =======
Exchange gains, net........................................................ $2,151 $ 2,727 $ 1,190
Other, net................................................................. 71 (422) 557
------- ------- -------
Other income, net.......................................................... $ 2,222 $ 2,305 $ 1,747
======= ======= =======
</TABLE>
Other, net includes rental income of $234,000, $228,000 and $1,437,000 for the
years ended March 31, 1998, 1997 and 1996, respectively, while the related
rental expense amounted to $114,000, $0 and $894,000 respectively.
F-17
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- GEOGRAPHIC INFORMATION:
The Company operates in one business segment, which is the design, production
and marketing of computer peripherals and software products designed to enhance
personal computer usability. Inter-area sales are recorded at amounts which
approximate market.
The following table summarizes financial information by geographic area (in
thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------
NORTH
EUROPE FAR EAST AMERICA ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- --------------- -------------
Year ended March 31, 1998
- -------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers............................. $145,064 $ 70,387 $174,776 $ -- $390,227
Inter-area sales............................................ 8,344 198,005 5,520 (211,869) --
-------- -------- -------- --------- --------
Total net sales............................................. $153,408 $268,392 $180,296 $(211,869) $390,227
======== ======== ======== ========= ========
Operating income............................................ $ 4,618 $ 5,205 $ 5,378 $ 1,111 $ 16,312
======== ======== ======== ========= ========
Identifiable assets......................................... $ 66,998 $ 90,804 $ 55,411 $ (53,554) $159,659
======== ======== ======== =========
Corporate assets............................................ 55,042
--------
Total assets................................................ $214,701
========
Year ended March 31, 1997
- -------------------------
Sales to unaffiliated customers............................. $151,648 $ 64,138 $197,930 $ -- $413,716
Inter-area sales............................................ 8,640 186,326 9,128 (204,094) --
-------- -------- -------- --------- --------
Total net sales............................................. $160,288 $250,464 $207,058 $(204,094) $413,716
======== ======== ======== ========= ========
Operating income............................................ $ 8,335 $ 6,919 $ 10,875 $ (4,852) $ 21,277
======== ======== ======== ========= ========
Identifiable assets......................................... $ 77,908 $113,226 $ 73,984 $ (84,249) $180,869
======== ======== ======== =========
Corporate assets............................................ 35,554
--------
Total assets................................................ $216,423
========
Year ended March 31, 1996
- -------------------------
Sales to unaffiliated customers............................. $129,917 $ 60,024 $165,102 $ -- $355,043
Inter-area sales............................................ 14,377 188,719 3,691 (206,787) --
-------- -------- -------- --------- --------
Total net sales............................................. $144,294 $248,743 $168,793 $(206,787) $355,043
======== ======== ======== ========= ========
Operating income............................................ $ 5,855 $ 2,546 $ 7,658 $ (6,268) $ 9,791
======== ======== ======== ========= ========
Identifiable assets......................................... $117,830 $ 98,772 $ 63,113 $(106,844) $172,871
======== ======== ======== =========
Corporate assets............................................ 8,450
--------
Total assets................................................ $181,321
========
</TABLE>
F-18
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the current leadership in China,
by evolving interpretation and enforcement of legal standards, by strains on the
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 events. Fluctuations in exchange rates between the U.S. dollar and the
Chinese renminbi or the Taiwanese dollar may also adversely affect the Company's
results of operations.
NOTE 13 -- OTHER DISCLOSURES REQUIRED BY RELEVANT SWISS LAW:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
Balance Sheet Items 1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Prepayments and accrued income........................................................ $ 2,206 $ 1,618
Non-current assets.................................................................... $31,823 $33,655
Pension liabilities, current.......................................................... $ 84 $ 54
Fire insurance value of property, plant, and equipment................................ $52,832 $45,266
</TABLE>
Statement of Income Items
Total personnel expenses amounted to $50.4 million, $62.6 million and $47.2
million in fiscal 1998, 1997 and 1996.
F-19
<PAGE>
LOGITECH INTERNATIONAL S.A.
QUARTERLY SUMMARY
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
------------------------------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1998 1997 1997 1997 1997 1996 1996 1996
----------- ------------ ------------- ----------- ---------- ------------ ------------ -------------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 86.1 $ 114.8 $ 99.2 $ 90.1 $ 108.3 $ 128.8 $ 92.2 $ 84.4
Gross profit......... 28.0 35.1 28.0 25.8 32.2 38.1 27.4 25.2
Operating expenses:
Marketing and
selling......... 12.9 15.4 12.5 12.1 14.4 15.5 12.8 12.0
Research and
development..... 6.9 6.8 6.9 7.2 7.7 6.8 5.6 6.4
General and
administrative.. 5.5 4.7 4.9 4.8 5.3 5.4 4.8 4.9
-------- -------- -------- -------- ------- -------- ---------- ----------
Total............ 25.2 26.9 24.2 24.1 27.4 27.7 23.2 23.3
Operating income..... 2.8 8.2 3.7 1.7 4.8 10.4 4.2 1.9
Gain (loss) on sale
of product line (1). (3.5) .3 -- -- -- -- -- --
Net income........... $ .6 $ 9.1 $ 3.6 $ 2.2 $ 4.7 $ 10.5 $ 3.4 $ 2.4
Shares used to
compute net income
per share:
Basic.......... 1,921,349 1,905,239 1,878,017 1,845,167 1,600,394 1,604,769 1,641,303 1,633,996
Diluted........ 1,989,521 1,988,055 1,974,270 1,954,961 1,725,228 1,678,776 1,678,304 1,689,278
Net income per share:
Basic.......... $ .30 $ 4.78 $ 1.93 $ 1.17 $ 2.94 $ 6.54 $ 2.08 $ 1.49
Diluted........ $ .29 $ 4.58 $ 1.84 $ 1.10 $ 2.73 $ 6.25 $ 2.04 $ 1.45
Net income per ADS(2):
Basic.......... $ .03 $ .48 $ .19 $ .12 $ .29 $ .65 $ .21 $ .15
Diluted........ $ .03 $ .46 $ .18 $ .11 $ .27 $ .63 $ .20 $ .15
</TABLE>
(1) On December 18, 1997, the Company sold its scanner product line and
recorded a $.3 gain on the sale, net of estimates of the cost of inventory and
capital assets sold, costs to conclude certain contractual obligations, and
other exit costs. The Company subsequently revised certain estimates of
inventory, realizable value and other exit costs and, as a result, recorded an
additional $3.5 million of such costs in the quarter ended March 31, 1998.
(2) Net income per ADS represents net income divided by the proforma
conversion of each weighted average registered share and equivalent into 10
ADS's.
The following table sets forth certain quarterly financial information as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
------------------------------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30,
1998 1997 1997 1997 1997 1996 1996 1996
----------- ------------ ------------- ----------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit......... 32.6 30.6 28.2 28.6 29.7 29.6 29.7 29.9
Operating expenses:
Marketing and
selling............ 15.0 13.5 12.6 13.4 13.3 12.0 13.9 14.2
Research and
development........ 8.0 5.9 6.9 8.1 7.1 5.2 6.1 7.5
General and
administrative..... 6.4 4.1 5.0 5.3 4.9 4.2 5.2 5.9
------ ------ ------ ------ ----- ------ ------ -----
Total............... 29.4 23.5 24.5 26.8 25.3 21.4 25.2 27.6
Operating income..... 3.2 7.1 3.7 1.8 4.4 8.2 4.5 2.3
Net income........... .6% 7.9% 3.7% 2.4% 4.3% 8.2% 3.7% 2.9%
</TABLE>
F-20
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-7058) of Logitech International S.A. of our
report dated May 1, 1998 appearing on page F-2 of this Annual Report on Form 20-
F.
PRICE WATERHOUSE SA
Lausanne, Switzerland
June 24, 1998
