<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
LOGITECH INTERNATIONAL S.A.
(Exact name of Registrant as specified in its charter)
___________________
Not Applicable
(Translation of Registrant's name into English)
Canton of Vaud, Switzerland
(Jurisdiction of incorporation or organization)
___________________
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)
___________________
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
X Form 20-F Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes X No
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b).
Not applicable
================================================================================
<PAGE>
LOGITECH INTERNATIONAL S.A.
Form 6-K
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at June 30, 1999 and March 31, 1999.......................... 3
Consolidated Statements of Income for the three months ended June 30, 1999 and 1998...... 4
Consolidated Statements of Cash Flows for the three months ended June 30, 1999 and 1998.. 5
Notes to Consolidated Financial Statements............................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8
Quantitative and Qualitative Disclosure About Market Risk.................................. 18
Signatures................................................................................. 19
</TABLE>
2
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 23,890 $ 43,251
Accounts receivable.............................................................. 84,313 93,501
Inventories...................................................................... 58,523 70,100
Other current assets............................................................. 17,397 13,907
------------ ------------
Total current assets......................................................... 184,123 220,759
Investments....................................................................... 15,071 13,856
Property, plant and equipment..................................................... 43,288 40,203
Intangible assets................................................................. 17,203 18,247
Other assets...................................................................... 1,270 1,424
------------ ------------
Total assets................................................................. $ 260,955 $ 294,489
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................................................. $ 20,439 $ 25,385
Accounts payable................................................................. 55,658 83,640
Accrued liabilities.............................................................. 39,834 41,377
------------ ------------
Total current liabilities.................................................... 115,931 150,402
Long-term debt.................................................................... 3,376 3,624
Other liabilities................................................................. 720 709
------------ ------------
Total liabilities............................................................ 120,027 154,735
============ ============
Contingencies (Note 7)
Shareholders' equity:
Registered shares, par value CHF 20 - 2,101,688 authorized, 653,312
conditionally authorized at June 30 and March 31, 1999, 2,001,688 issued and
outstanding at June 30 and March 31, 1999...................................... 28,738 28,738
Additional paid-in capital...................................................... 75,511 75,717
Less registered shares in treasury, at cost, 44,343 at June 30, 1999 and 72,989
at March 31, 1999.............................................................. (4,537) (6,643)
Retained earnings............................................................... 54,911 54,323
Cumulative translation adjustment............................................... (13,695) (12,381)
------------ ------------
Total shareholders' equity................................................... 140,928 139,754
------------ ------------
Total liabilities and shareholders' equity................................... $ 260,955 $ 294,489
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
Net sales............................................................. $ 114,431 $ 70,125
Cost of goods sold.................................................... 85,105 47,059
----------- ----------
Gross profit.......................................................... 29,326 23,066
Operating expenses:
Marketing and selling................................................ 14,716 11,764
Research and development............................................. 7,006 6,366
General and administrative........................................... 6,583 4,612
----------- ----------
Operating income...................................................... 1,021 324
Interest income (expense), net........................................ (204) 652
Other expense, net.................................................... (82) (375)
----------- ----------
Income before income taxes............................................ 735 601
Provision for income taxes............................................ 147 90
----------- ----------
Net income............................................................ $ 588 $ 511
=========== ==========
Net income per share:
Basic................................................................ $ .30 $ .26
Diluted.............................................................. $ .29 $ .26
Net income per ADS (10 ADS : 1 share):
Basic................................................................ $ .03 $ .03
Diluted.............................................................. $ .03 $ .03
Shares used to compute net income per share:
Basic................................................................ 1,946,706 1,929,625
Diluted.............................................................. 2,000,866 1,997,658
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LOGITECH INTERNATIONAL S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 588 $ 511
Non-cash items included in net income:
Depreciation and amortization....................................... 4,609 3,050
Equity in net earnings of affiliated companies...................... (330) --
Deferred income taxes............................................... (704) (59)
Other............................................................... 115 161
Changes in current assets and liabilities:
Accounts receivable................................................. 8,697 8,621
Inventories......................................................... 11,258 (6,167)
Other current assets................................................ (2,668) (1,246)
Accounts payable.................................................... (28,423) 2,978
Accrued liabilities................................................. (1,123) 1,167
---------- ----------
Net cash provided by (used in) operating activities.............. (7,981) 9,016
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment........................... (6,901) (3,508)
Acquisitions and investments in affiliated companies................. (1,121) (12,179)
---------- ----------
Net cash used in investing activities............................ (8,022) (15,687)
---------- ----------
Cash flows from financing activities:
Net repayment of short-term debt.................................... (4,954) (1,039)
Repayment of long-term debt.......................................... (77) --
Proceeds from sale of treasury shares................................ 1,899 493
---------- ----------
Net cash used in financing activities............................ (3,132) (546)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents.......... (226) 9
---------- ----------
Net decrease in cash and cash equivalents............................. (19,361) (7,208)
Cash and cash equivalents at beginning of period...................... 43,251 72,376
---------- ----------
Cash and cash equivalents at end of period............................ $ 23,890 $ 65,168
========== ==========
Supplemental cash flow information:
Interest paid........................................................ $ 223 $ 51
Income taxes paid.................................................... $ 235 $ 439
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
LOGITECH INTERNATIONAL S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- The Company:
Logitech International S.A. designs, manufactures and markets human interface
devices which often serve as the primary physical interface between users and
their personal computers and other multimedia devices. The Company's products
include mice, trackballs, keyboards, joysticks, gamepads, steering wheels, and
PC video cameras. The Company sells its products to both original equipment
manufacturers ("OEMs") and to a network of retail distributors and resellers.
Note 2 -- Interim Financial Data:
The accompanying consolidated financial statements should be read in
conjunction with the Company's 1999 Annual Report on Form 20-F as filed with the
Securities and Exchange Commission. In the opinion of management, the
accompanying financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods. The
results of operations and cash flows for the interim periods presented are not
necessarily indicative of the results of any future period.
The Company reports quarterly results on thirteen-week periods, each ending on
a Friday. For purposes of presentation, the Company has indicated its quarterly
periods as ending on the month end.
Note 3 -- Business Acquisition:
In September 1998, the Company completed the acquisition of Connectix
Corporation's QuickCam(R) PC video camera business for approximately $26.2
million (including closing and other costs). The Connectix business has been
combined with the Company's video division to offer a complete line of PC video
cameras for personal computer platforms. The transaction was recorded using the
purchase method of accounting. Accordingly, the results of operations of the
acquired business from the date of acquisition have been included in the
consolidated statement of income.
In connection with the acquisition, the Company recorded approximately $19.4
million in goodwill and other intangible assets. In addition, the Company
recorded a one-time charge of $6.2 million for acquired in-process research and
development in the quarter ended September 30, 1998.
Note 4 -- Equity Investments:
In June 1998, the Company acquired 49% of the outstanding shares of Space
Control, GmbH., the German-based provider of Logitech's Magellan 3D Controller.
The agreement includes an obligation for the Company to acquire the remaining
outstanding shares of Space Control, if certain conditions are met. The Company
is using the equity method of accounting for this investment.
In April 1998, the Company acquired 10% of the outstanding stock of Immersion
Corporation, a developer of force feedback technology for PC peripherals and
software applications. The Company has used the cost method of accounting for
this investment.
Note 5 -- Comprehensive Income:
Comprehensive income is defined as the total change in shareholders' equity
during the period other than from transactions with shareholders. For the
Company, comprehensive income consists of net income and the net change in the
accumulated foreign currency translation adjustment account. For the three
months ended June 30, 1999 and 1998, comprehensive income (loss) was $(726,000)
and $735,000.
6
<PAGE>
Note 6 Inventory
At June 30 and March 31, 1999, inventory consisted of the following:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
(In thousands)
<S> <C> <C>
Raw materials................................................ $13,232 $13,077
Work-in-process.............................................. 91 1,566
Finished goods............................................... 45,200 55,457
--------------- ----------------
$58,523 $70,100
=============== ================
</TABLE>
Note 7 -- Contingencies:
In December 1996, the Company was advised of the intention to begin
implementing a value-added tax ("VAT") on goods manufactured in certain parts of
China since July 1995, including where the Company's operations are located, and
intended for export. In January 1999, the Company was advised that the VAT
would not be applied to goods manufactured during calendar 1999 and subsequent
years. With respect to prior years, the Company is in ongoing discussions with
Chinese officials and has been assured that, notwithstanding statements made by
tax authorities, the VAT for these prior periods would not be charged to the
Company. As a result, the Company has revised its estimate of VAT liability and
released an accrual of approximately $1 million into income during the quarter
ended June 30, 1999. The Company therefore believes this matter will not have a
material adverse effect on the Company's financial position, cash flows or
results of operations.
The Company is involved in a number of lawsuits relating to patent
infringement and intellectual property rights, both as a defendant and a
plaintiff. The Company believes the lawsuits are without merit and intends to
defend against them vigorously. However, there can be no assurances that the
defense of any of these actions will be successful, or that any judgment in any
of these lawsuits would not have a material adverse impact on the Company's
business, financial condition and result of operations.
7
<PAGE>
LOGITECH INTERNATIONAL S.A.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's net sales are derived from sales of interface devices for
computers. These products include mice, trackballs, keyboards, joysticks,
gamepads, steering wheels and PC video cameras.
In September 1998, the Company acquired the PC video camera business of
Connectix Corporation for $26.2 million (including closing and other transaction
costs). Logitech's QuickCam(R) brand is a market leader in PC video cameras for
Windows and Macintosh. The PC video camera market has been experiencing rapid
growth. This acquisition was consistent with the Company's intention to enter
the PC video camera market, and its development efforts in that area. The
Connectix business has been combined with the Company's video division.
Results of Operations
The following table sets forth certain consolidated financial statement
amounts as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales............................................................. 100.0% 100.0%
Cost of goods sold.................................................... 74.4 67.1
---------- ----------
Gross profit.......................................................... 25.6 32.9
Operating expenses:
Marketing and selling................................................ 12.9 16.8
Research and development............................................. 6.1 9.0
General and administrative........................................... 5.9 6.6
---------- ----------
Operating income...................................................... .9 .5
Interest income (expense), net........................................ (.2) .9
Other expense, net.................................................... (.1) (.5)
---------- ----------
Income before income taxes............................................ .6 .9
Provision for income taxes............................................ .1 .2
---------- ----------
Net income............................................................ .5% .7%
========== ==========
</TABLE>
Comparison of three months ended June 30, 1999 and 1998
Net Sales
Net sales for the three months ended June 30, 1999 increased 63% to $114.4
million. This growth was shared across all product categories, but primarily
came from the Company's new keyboard and video products, as well as increases
from the Company's cordless wheel-enhanced mice and OEM corded mice.
Retail sales grew by 72%. As has been the case for the last several quarters,
this growth was shared across all product categories. Sales of the Company's
traditional retail pointing devices, which include mice and trackballs, grew by
17%. This growth was driven by the Company's cordless mouse offerings and
trackball product line. Even with this growth, mice sales represented 44% of
the Company's total retail revenue for this quarter, compared to 68% in the same
quarter last year, reflecting the Company's expanded retail product offerings.
Keyboard products continue to be a source of strong growth with sales increasing
sequentially by 29% over the
8
<PAGE>
fourth quarter of fiscal 1999, the fifth consecutive quarter of sequential sales
growth. The Company introduced its video products in the third quarter of fiscal
1999, including the integration of the QuickCam business acquired in September
1998, providing additional sales growth this quarter.
OEM sales grew this quarter by 49% compared to the same quarter last year,
with unit volume increasing by 82%. The impact of the volume increase on net
sales was partially offset by price reductions due to price pressures in the OEM
market.
Gross Profit
Gross profit consists of net sales, less cost of goods sold which consists of
materials, direct labor and related overhead costs, costs of manufacturing
facilities, costs of purchasing finished products from outside suppliers,
distribution costs and inventory write-offs. Gross profit increased 27% to
$29.3 million. This increase was due principally to higher sales volume. In
addition, in January 1999, the Company was advised that a value-added tax on
goods manufactured in China would not be applied to good manufactured during
calendar 1999 and subsequent years. The Company has been assured by Chinese
officials that, notwithstanding statements made by tax authorities, the VAT for
periods prior to 1999 would not be charged the Company. As a result, the
Company has revised its estimate of VAT liability and released an accrual of
approximately $1 million into income during the quarter ended June 30, 1999.
Gross profit as a percentage of net sales decreased from 32.9% to 25.6%. In
the retail channel, the product mix has shifted towards lower margin retail
products such as keyboards and PC digital video cameras. This reflects the
Company's broadening of the overall retail product offering and the Company's
aggressive efforts to increase market share in growing product categories. In
addition, the OEM market continues to experience price pressures which led to a
significant margin decline compared to the first quarter of fiscal 1999, but a
much smaller decrease compared to the fourth quarter of fiscal 1999. While the
Company continues to achieve cost reductions offsetting much of the impact of
lower prices, the price reductions for some of the largest OEM customers have
outpaced the cost reduction efforts.
Operating Expenses
Total operating expenses increased 24%, from $22.7 million to $28.3 million.
As a percentage of net sales, operating expenses decreased from 32.4% to 24.8%.
The increase in sales and marketing expenses is directly related to the
Company's increased sales performance. The Company continues to make
significant investments in channel marketing, as well as brand awareness through
refreshed packaging and associated marketing materials, and advertising. The
Company has also increased its development efforts in the gaming device area and
the PC video camera area, and plans to introduce a number of new products for
the Christmas season. Development efforts are also focused on new product
development and cost reductions on existing products. The increase in general
and administrative expenses primarily reflects higher costs related to
intellectual property litigation. The Company is involved in a number of such
disputes, as both defendant and plaintiff. To a lesser extent, the increase in
general and administrative costs reflects increased headcount and amortization
of goodwill and intangible assets.
Interest Income (Expense)
Interest expense for the most recent quarter was $.2 million, compared to
income of $.7 million in the prior year. The decline was the result of using
excess cash and borrowings over the past twelve months to make a number of
investments, including the acquisition of the QuickCam business from Connectix,
and funding working capital needs to support higher sales volume.
Other Expense
Other expense was $.1 million for the current quarter, compared to $.4 million
last year. This reduction was primarily due to lower net foreign exchange
losses.
9
<PAGE>
Provision for Income Taxes
The provision for income taxes consists of income and withholding taxes. The
amount recorded in each period reflects management's best estimate of the
effective tax rate for the fiscal year. Estimates are based on factors such as
management's expectations as to payments of withholding taxes on amounts
repatriated through dividends, the jurisdictions in which taxable income is
generated, changes in local tax laws and changes in valuation allowances based
upon the likelihood of recognizing deferred tax assets. The Company has
reviewed its projections of taxable income in various tax jurisdictions for
fiscal 2000. Based on a number of factors, including the phased expiration of a
tax holiday in China and expected changes in taxable income in certain tax
jurisdictions, the Company believes its effective tax rate for fiscal 2000 will
be 20%. As a result, the provision for income taxes for the three months ended
June 30, 1999 was $.1 million, representing a 20% effective tax rate, compared
to a 15.0% effective tax rate for the three months ended June 30, 1998.
Liquidity and Capital Resources
Cash Balances, Available Borrowings, and Capital Resources
At June 30, 1999, cash and cash equivalents totaled $23.9 million. In
addition, the Company had credit lines with several European and Asian banks
totaling $56.5 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 June 30, 1999, $36.4 million was available under these
facilities.
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 anticipates that its capital resource requirements will
be provided from three sources: 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 used cash of $8 million for the three
months ended June 30, 1999, compared to providing cash of $9 million for the
three months ended June 30, 1998. The decrease in 1999 was primarily due to a
reduction in payables and to increased working capital requirements needed to
support higher sales volumes.
Cash Flow from Investing Activities
The Company's investing activities used cash of $8 million and $15.7 million
for the three months ended June 30, 1999 and June 30, 1998. Included in 1998 is
$12.2 million to make two investments: 49% of the outstanding shares of Space
Control GmbH, and 10% of the outstanding shares of Immersion Corporation.
Capital expenditures totaled $6.9 million in 1999, compared to $3.5 million in
1998. The increase in 1999 capital expenditures related primarily to the
Company's computer systems implementation project.
Cash Flow from Financing Activities
Net cash used in financing activities for the three months ended June 30, 1999
was $3.1 million. This represents a $5 million net paydown of short-term debt,
net of $1.9 million of proceeds from the sale of treasury shares.
Net cash used in financing activities for the three months ended June 30, 1998
was $.5 million. This represents a $1 million net paydown of short-term debt,
net of $.5 million of proceeds from the sale of treasury shares.
10
<PAGE>
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
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. Fixed commitments for capital expenditures, primarily for
computer system implementation, approximated $1 million at June 30, 1999.
Certain Factors Affecting Operating Results
This quarterly report on Form 6-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934 relating to, among other things, i) price
competition, ii) an emerging environment in the PC video camera market, iii) the
Company's brand strategy, iv) the Company's research and development strategy,
v) bank credit line availability, vi) cash liquidity, vii) the effect of the
Year 2000 issue on the Company and the Company's projected costs and strategy
addressing this issue, and viii) the outcome of contingencies. Predictions of
future events involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in the forward-looking statements
due to, among others, the following risk factors:
Year 2000
The "Year 2000 Issue" is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Software
with time-sensitive functions may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations.
Program Management
To address the potential effects of the year 2000 issue, the Company has
adopted a program that addresses two areas, internal infrastructure and external
infrastructure. The Company's Y2K program involves all levels and departments,
and the project plan, status, accomplishments and risks are reported regularly
to the Board of Directors. The Company's Y2K effort is being handled
internally, and the costs have not been nor are they expected to be significant.
Internal Infrastructure
The Company's IS efforts can be divided into five phases: Inventory,
Assessment, Verification, Testing, and Remediation. The Inventory phase
consists of compiling a master list of all potentially affected hardware,
software, and intelligent devices. Once the list is completed, the Assessment
phase involves review of the list to determine critical items. The critical
list is then put through the Verification phase, where the Y2K status of each
item is determined, and vendor test procedures and results obtained if possible.
The Testing phase covers testing all items on the critical list, using vendor
test procedures if possible and an industry-standard procedure if not, for Y2K
compliance. If any Y2K-related failures are found, those items are listed for
the Remediation phase to fix or replace.
The first four phases of this program are complete. The final phase,
Remediation, will be complete in the third calendar quarter of 1999.
The Company is currently engaged in a separate project to replace the computer
hardware and software it uses to operate, monitor and manage its business on a
daily basis. The suppliers have indicated that their products accurately
accommodate dates beyond the year 1999. The Company is testing these
capabilities as part of its implementation process. Under the current schedule,
this implementation will be complete by the third calendar quarter of 1999. As
a backup, the company has upgraded the unimplemented sites to a new version of
the current software that is Y2K compliant. As a contingency, the Company could
continue to use the upgraded version of the current software if the
implementation of the new software is delayed.
11
<PAGE>
External Infrastructure
The Company has developed and implemented an extensive supplier verification
program, addressing both material and service suppliers. All significant
component suppliers have been surveyed and the top suppliers, representing all
commodities used in manufacture, have been visited on site to generate assurance
of their Y2K readiness. All site visits have been completed and all top
suppliers will continue to be monitored throughout the remainder of the year.
All significant component suppliers and operational business partners have also
attended conferences held at the Company's facilities to further develop and
mutually discuss awareness of potential Y2K issues.
Service suppliers have been identified and mission critical companies have
been surveyed worldwide. In addition, direct contact has been made with many of
the top companies to further determine their Y2K efforts. If any concerns are
discovered, the Company will work closely with the supplier and pursue
resolution, including seeking alternatives, as necessary.
The Company's global operations rely heavily on the infrastructure within the
countries in which it does business, particularly in China where the Company's
manufacturing facilities are located. Like other companies operating in foreign
countries, lack of readiness by power, water and communication agencies or
providers of general infrastructure could pose significant impediments to the
Company's ability to carry on its normal operations.
Products
The Company's complete current product line is fully Y2K compliant. Although
none of the Company's products contain any integral date-handling, all current
products have been tested for compliance and Y2K-related testing has been
incorporated into the quality assurance procedure for all newly-released
products. The Company maintains a comprehensive list of its compliant products
on its Y2K web page.
Conclusion
Despite the Company's efforts to address the Y2K impact on its systems and
operations, the Company has not fully identified such impact or whether it can
be resolved without disruption of its business without incurring significant
expense. In addition, even if the systems and operations of the Company are not
materially affected by the Y2K issue, the Company could be affected through
disruption in the operation of the enterprises with which the Company interacts.
As a result, an interruption of certain normal business activities could result,
which could materially and adversely affect the Company's operations, liquidity
and financial condition.
Euro
On January 1, 1999, certain member countries of the European Union established
a new common currency, the euro. Also on January 1, 1999, the participating
countries fixed the rate of exchange between their existing legacy currencies
and the euro. The new euro currency will eventually replace the legacy
currencies currently in use in each of the participating countries. Euro bills
and coins will not be issued until January 1, 2002.
Companies operating within the participating countries may, at their
discretion, choose to operate in either legacy currencies or the euro until
January 1, 2002. The Company expects its affected subsidiaries to continue to
operate in their respective legacy currencies for at least one year. The
Company can, however, accommodate transactions for customers and suppliers
operating in either legacy currency or euros.
The Company believes that the creation of the euro will not significantly
change its market risk with respect to foreign exchange. Having a common
European currency may result in certain changes to competitive practices,
product pricing and marketing strategies. Although we are unable to quantify
these effects, if any, management at this time does not believe the creation of
the euro will have a material effect on the Company.
12
<PAGE>
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.
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.
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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.
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 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.
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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 economic or 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 differences in interpretation and
enforcement to 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
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.
Risk of Margin Declines
The Company's gross margins are affected by a number of factors, including the
mix between retail and OEM sales, product mix, product obsolescence, price and
cost reductions. The Company has experienced significant price pressures in the
OEM market from PC manufacturers aggressively targeting low cost PCs, and
changes in product mix in the retail market toward lower margin products. As a
result, the Company believes that gross margins will continue to fluctuate.
Intense Competition; Pricing Pressure
The Company's business is characterized by intense competition, a trend of
declining average selling prices in OEM and performance enhancements of
competing products in retail. 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.
The Company competes primarily with 3Com, Alps, Creative Technology, Intel,
Interact Multimedia, Kensington/Advanced Gravis, Kodak, KYE/Mouse Systems,
Microsoft, Mitsumi, Philips and Primax.
Many of the Company's current and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and larger customer bases,
than the Company. In this regard, Microsoft is the Company's chief competitor
in the market for pointing and gaming devices. Microsoft is also a leading
producer of operating systems and applications with which the Company's pointing
and gaming devices are designed to operate. As a result of its position,
Microsoft may be able to make improvements in the functionality of its pointing
and gaming devices to correspond with ongoing modifications and enhancements to
its operating systems and software applications in advance of the
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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. In addition, Microsoft has
broadened its keyboard product offering, which could cause a slowdown in the
Company's growth in this category. 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.
Reliance on Suppliers
Certain key components used in the manufacture of the Company's products, as
well as certain products, are currently purchased by the Company from single or
limited sources that specialize in such components or products. At present,
single-sourced components include certain of the Company's ASICs, certain other
integrated circuits and components, and balls used in certain of the Company's
trackballs. The Company generally does not have long-term agreements with its
single or limited sources of supply. Lead times for materials and components
ordered by the Company or its contract manufacturers can vary significantly and
depend on factors such as the specific supplier, contract terms and demand for a
component at a given time. From time to time the Company has experienced supply
shortages and fluctuation in component prices. Shortages or interruptions in
the supply of components or subcontracted products, or the inability of the
Company to procure these components or products from alternate sources at
acceptable prices in a timely manner, could have a material adverse effect upon
the Company's business, financial condition and results of operations.
Dependence on Key Personnel
The Company's success depends to a significant degree on the continued
contributions of the Company's management and other key design, development,
manufacturing, marketing and sales personnel. The loss of any of such personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. Certain of the Company's other senior
management and other key personnel have recently joined the Company. In this
regard, the Company's Chief Financial Officer, Kristen Onken, joined the Company
in February 1999. 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.
Fluctuations in Effective Tax Rates; Potential Tax Increases
The Company operates in multiple jurisdictions and its profits are taxed
pursuant to the tax laws of such jurisdictions. The Company's effective tax
rate may be affected by changes in or interpretations of tax laws in any given
jurisdiction, utilization of net operating losses and tax credit 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
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history and expected future taxable income over a two-year period. 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 2000. As a result, the Company's effective income tax rate
is likely to increase in future periods.
Outcome of Legal Proceedings
There has been substantial litigation in the technology industry regarding
rights to intellectual property. The Company is involved from time to time in
disputes with respect to its intellectual property rights and the intellectual
property rights of others. Through its U.S. and China subsidiaries, the Company
is currently involved in several pending lawsuits with respect to patent and, to
a lesser extent, trade secret infringement claims by third parties. In this
regard, the Company is currently a defendant in a lawsuit involving a claim of
patent infringement regarding the Company's mouse products that is scheduled to
go to trial later this fiscal year. The Company believes that all of these
pending lawsuits are without merit and intends to defend against them
vigorously. There can be no assurance, however, that the defense of any of
these actions will be successful, or that any judgment in or settlement of any
of these lawsuits 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 significant diversion of effort
by the Company's technical and management personnel, 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. In
addition, 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.
Other
For discussions identifying other factors that could cause actual results to
differ from those anticipated in the forward-looking statements, see
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Form 20-F for the year
ended March 31, 1999. The Company cautions that the foregoing list of risk
factors is not exhaustive.
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LOGITECH INTERNATIONAL S.A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates and interest rates. These exposures may change
over time as business practices evolve and could have a material adverse impact
on the Company's financial results.
Foreign Currency Exchange Rates
Currently, the Company's primary exposures relate to non-dollar denominated
sales in Europe and Asia and non-dollar denominated operating expenses and
inventory costs in Europe and Asia, as well as net assets located in these
geographies. For the quarter ended June 30, 1999, 42% of the Company's sales
were denominated in non-U.S. currencies and 26% of the Company's net assets were
recorded in non-U.S. currencies. For the quarter ended June 30, 1998, 37% of the
Company's sales were denominated in non-U.S. currencies and 26% of the Company's
net assets were recorded in non-U.S. currencies.
The Company primarily uses the local currencies of its foreign subsidiaries as
the functional currency. Accordingly, unrealized foreign currency gains or
losses resulting from the translation of net assets denominated in foreign
currencies to the U.S. dollar are accumulated in the cumulative translation
adjustment component of shareholders' equity. At the present time, the Company
does not hedge any currency exposures. The Company estimates that if the U.S.
dollar had appreciated by an additional 10% as compared to the functional
currencies used by foreign subsidiaries, net income for the quarters ended June
30, 1999 and 1998 would have been adversely impacted by approximately $1.0
million and $.4 million.
Interest Rates
Changes in interest rates could impact the Company's anticipated interest
income on its cash equivalents and interest expense on debt. The Company
prepared sensitivity analyses of its interest rate exposures to assess the
impact of hypothetical changes in interest rates. Based on the results of these
analyses, a 10% adverse change in interest rates from the fiscal 1999 and 2000
quarter end rates would not have a material adverse effect on the Company's
results of operations, cash flows or financial condition for the next year.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Logitech International S.A.
By: /s/ Guerrino De Luca
--------------------------------------
Guerrino De Luca
President and Chief Executive Officer
By: /s/ Kristen M. Onken
--------------------------------------
Kristen M. Onken
Chief Finance Officer,
Chief Accounting Officer,
and U.S. Representative
August 16, 1999
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