UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
December 31, 1998
Commission File Number
0-17187
Logic Devices Incorporated
California 94-2893789
1320 Orleans Drive, Sunnyvale, California 94089
(408) 542-5400
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of the
issuer's classes of common stock, as of the latest
practicable date. On February 12, 1999, 6,632,388 shares of
Common Stock, without par value, were outstanding.
Logic Devices Incorporated
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of December 31, 1998 and 3
September 30, 1998
Statements of Income for the three months ended 4
December 30, 1998 and 1997
Statements of Cash Flows for the three months 5
ended December 31, 1998 and 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Exhibit 11 13
Exhibit 27 14
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Logic Devices Incorporated
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 18,300 $ 142,900
Accounts receivable, net of allowance 3,460,400 4,553,400
Inventories 12,227,400 12,535,600
Prepaid expenses 430,500 372,100
Income taxes receivable 90,000 90,000
Total current assets 16,226,600 17,694,000
Equipment and leasehold improvements, net 4,490,100 4,935,500
Other assets 941,500 969,400
$ 21,658,200 $ 23,598,900
Liabilities and Shareholders' Equity
Current liabilities:
Bank borrowings 4,250,000 5,350,000
Current portion of long-term
debt obligations 445,600 562,400
Accounts payable 1,005,000 1,585,400
Accrued expenses 477,700 565,700
Total current liabilities 6,178,300 8,063,500
Long-term debt obligations,
less current portion 329,900 392,100
Total liabilities 6,508,200 8,455,600
Shareholders' equity:
Common stock 18,091,900 18,091,900
Common stock subscribed (307,500) (307,500)
Retained earnings (2,634,400) (2,641,100)
Total shareholders' equity 15,150,000 15,143,300
$ 21,658,200 $ 23,598,900
</TABLE>
Logic Devices Incorporated
Statements of Income
Three months ended December 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales $ 3,070,900 $ 3,512,100
Cost of sales 1,680,300 2,203,100
Gross margin 1,390,600 1,309,000
Operating expenses:
Research and development 369,100 257,900
Selling, general and administrative 884,000 894,400
Operating expenses 1,253,100 1,152,300
Income (loss) from operations 137,500 156,700
Other expense (income), net 130,000 233,700
Income (loss) before taxes 7,500 (77,000)
Income taxes 800 (85,000)
Net income (loss) $ 6,700 $ 8,000
Net income (loss) per common share $ 0.00 $ 0.00
Weighted average common share
equivalents outstanding 6,632,388 6,121,750
</TABLE>
Logic Devices Incorporated
Statements of Cash Flows
Three months ended December 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,700 $ 8,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 464,000 524,900
Change in operating assets and liabilities:
Accounts receivable, net 1,093,000 (1,125,000)
Inventories 308,200 353,600
Prepaid expenses and other assets(58,400) 618,500
Income taxes receivable - (522,000)
Deferred income taxes - 299,000
Accounts payable (580,400) 704,500
Accrued expenses (88,000) 145,300
Net cash provided by (used in)
operating activities 1,145,100 1,006,800
Cash flows from investing activities:
Capital expenditures (18,600) (853,900)
Decrease (increase) in other assets 27,900 (737,700)
Net cash provided by (used in)
investing activities 9,300 (1,591,600)
Cash flows from financing activities:
Bank borrowing, net (1,100,000) 250,000
Repayment of long-term obligations(179,000) 57,000
Net cash provided by (used in)
financing activities (1,279,000) 307,000
Net (decrease) in cash (124,600) (277,800)
Cash and cash equivalents
at beginning of period $ 142,900 $ 365,700
Cash and cash equivalents
at end of period $ 18,300 $ 87,900
</TABLE>
Logic Devices Incorporated
Notes to Financial Statements
December 31, 1998 and September 30, 1998
(unaudited)
(A) Basis of Presentation
The accompanying unaudited interim financial statements
reflect all adjustments which are, in the opinion of management,
necessary to present fairly the financial position, results of
operations and cash flows for the periods indicated.
The accompanying unaudited interim financial statements have
been prepared in accordance with the instructions for Form 10-Q
and therefore do not include all information and footnotes
necessary for a complete presentation of the financial position,
results of operations, and cash flows, in conformity with
generally accepted accounting principles. The Company had filed
audited financial statements which include all information and
footnotes necessary for such a presentation of the financial
position, results of operations and cash flows for the years
ended September 30, 1998 and December 31, 1997, with the
Securities and Exchange Commission. It is suggested that the
accompanying unaudited interim financial statements be read in
conjunction with the aforementioned audited financial statements.
The unaudited interim financial statements contain all normal and
recurring entries. The results of operations for the interim
period ended December 31, 1998 are not necessarily indicative of
the results to be expected for the full year.
(B) Inventories
A summary of inventories follows:
<TABLE>
December 31, September 31,
1998 1998
<S> <C> <C>
Raw materials $ 2,406,300 $ 2,599,900
Work-in-process 6,697,600 5,373,600
Finished goods 3,123,500 4,562,100
$12,227,400 $12,535,600
</TABLE>
Logic Devices Incorporated
Notes to Financial Statements
December 31, 1998 and September 30, 1998
(unaudited)
(C) Financing
On June 1, 1998, the Company renewed its
$6,000,000 revolving line of credit with Sanwa Bank
(the "Bank") extending the maturity to May 31, 1999.
The line of credit bears interest at the Bank's prime
rate plus 1.00%. The line of credit requires the Company
to maintain a minimum tangible net worth of $20,000,000,
a maximum ratio of debt to tangible net worth of not more
than 0.50 to 1.00, a minimum current ratio of not less than
2.00 to 1.00, a minimum quick ratio of not less than 1.20 to
1.00 at September 30, 1998 and increasing to 1.35 to
1.00 at December 31, 1998 and thereafter, a profitability
on a quarterly basis. As of September 30, 1998 and December 31,
1998, the Company was not in compliance with certain covenants
under the borrowings. The Company has not obtained waivers as to these
covenants from the Bank for September 30, 1998 and for December
31, 1998. The line of credit facility is secured by all of the
assets of the Company. As of December 31, 1998, $1,500,000 was
available under the line of credit facility.
The Company has received a proposal from the Bank to amend
the terms of its revolving line of credit facility. Under the
proposal, the maximum borrowing amount would be reduced to
$4,500,000, which is the current amount outstanding under the
facility. In addition, the maximum borrowing amount would be
reduced at future dates prior to maturity. These reduced maximum
amounts would require the Company to repay principal amounts
under the line of credit, and the Company does not currently expect to
have sufficient funds from operations to make these
repayments. Additional financing which may be
necessary to make such repayments has not been
identified as of the date of this report. The proposed
amendments to the facility would also increase the
rate of interest and change and add financial and
operating covenants, which would be more stringent than
those existing under the current line of credit.
The Company is discussing the proposal with the Bank,
but if the Company and the Bank are unable to reach an
agreement as to the proposal, there can be no assurance that
the Bank would not declare an event of default under the
existing line of credit or renew the line of credit when
it matures. Even if the Company agrees to the proposal,
there can be no assurance that the Company would be able to
comply with the amended terms or that the Bank would agree
to waive any such noncompliance.
Under the terms of its line of credit facility, the
Company is precluded from paying any cash dividends
without the consent of the lender even if the Company is
in compliance with all of the financial covenants but is
allowed to pay stock dividends whether or not there was
any other covenant violation. Regardless of any such
restrictions in its bank loan agreements, the Company
does not intend to pay cash dividends in the near future
and anticipates reinvesting its cash flow back into
operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Revenues
Net revenues were $3,070,900 for the three months ended
December 31, 1998, a decrease of 13% from $3,512,100 for the
three months ended December 31, 1997. This decrease in
revenues was a result of the Company's decision to
discontinue many of its more mature products at the end of
the prior quarter as part of a comprehensive restructuring
of its business activities. Increasing revenues on newer
products did not fully offset the lost revenues on these
older products during the reporting quarter.
Expenses
Cost of revenues decreased 24%, from $2,203,100 in the
three months ended December 31, 1997 to $1,680,300 in the
three months ended December 31, 1998. Gross profit increased
by 7%, from $1,309,000 in 1997 to $1,390,600 in 1998. This
increase in gross margin was the result of the Company's
shift to higher margin proprietary products which are
replacing its legacy second source products. As a
percentage of net revenues, gross profit margin increased
from 38% in the three months ended December 31, 1997 to 46%
in the three months ended December 31, 1998.
Research and development expense increased during the
period from $257,900 (8% of net revenues) in the 1997 period
to $369,100 (12% of net revenues) in the 1998 period. The
Company is continuing its new product development. The
Company plans to continue its substantial investments in new
product research and development throughout 1999.
Selling, general and administrative expense decreased
from $894,400 (26% of net revenues) in the 1997 period to
$884,000 (29% of net revenues) in the 1998 period. Although
expenses remained constant, the Company is in the process of
restructuring its sales activities by replacing its prior
channel management efforts with technical sales and
marketing support activities.
The Company had income from operations for the 1998
period of $137,500 and $156,700 for the 1997 period due to
the above mentioned factors.
The Company incurred $130,000 in 1998 and $223,700 in
1997 of other expense, which consisted of interest expense.
As a result of the foregoing, the Company reported
net income of $6,700 in the 1998 period and $8,000 in the
1997 period.
Liquidity and Capital Resources
Cash Flows
For the three months ended December 31, 1998, the
Company had after-tax cash earnings (defined as net income
plus non-cash depreciation charges) of $470,700 versus
$532,900 for the 1997 period. Although the Company has
historically relied on after-tax earnings as the Company's
primary source of financing for working capital needs and
for capital expenditures, the Company used bank borrowings
during much of the 1998 fiscal year. In the current
reporting quarter, the Company generated substantial cash
from operations which allowed it to reduce its bank
borrowings.
During the 1998 period, after-tax cash earnings of
$470,700 plus decreases in cash of $124,600, accounts
receivable of $1,093,000, inventory of $308,200, accounts
payable of $580,400 and accrued expenses of $88,000, funded
an increase in prepaid expenses of $58,400 and the decrease
in the bank line by $1,100,000. This resulted in total net
cash provided by operations of $1,145,100. The Company
invested $18,600 in capital expenditures during the period.
The Company has an income tax receivable of $90,000, which
the Company expects to receive in the third quarter of 1999.
During the 1997 period, after-tax cash earnings of
$532,900 plus a decrease in cash of $277,800 were offset by
increases in accounts receivable of $1,125,000, inventory of
$353,600 other assets of $737,700 and accounts payable of
$704,500. This resulted in net cash provided by operations
of $1,006,800. The Company invested $1,591,600 in capital
expenditures and other assets and increased net indebtedness
by $307,000.
Working Capital
The Company's investment in inventories and accounts
receivable has been significant and will continue to be
significant in the future. Over prior periods, the Company,
as a nature of its business, has maintained these high
levels of inventories and accounts receivable.
The Company relies on third party suppliers for raw
materials and as a result maintains substantial inventory
levels to protect against disruption in supplies. The
Company has historically maintained inventory turn over of
approximately 225 days to 365 days, since 1990. The low
point in inventory levels came in 1992 and 1993 when the
Company had supply disruptions from one of its major
suppliers.
The Company is shifting its product offerings to higher
margin proprietary products and reducing the total number of
products which it offers. As this transition progresses,
the Company expects to improve its sales to inventory ratio.
The Company provides reserves for product material that
is over one year old with no backlog or sales activity, and
reserves for future obsolescence. The Company also takes
physical inventory write-downs for obsolescence. The Company
has been actively reducing inventory levels over the past
several quarters.
The Company's accounts receivable level has been
consistently correlated to the Company's previous quarter
revenue level. Because of the Company's customer scheduled
backlog requirements, up to 80% of the quarterly revenues
are shipped in the last month of the quarter. This has the
effect of placing a large portion of the quarterly shipments
reflected in accounts receivable not yet due per the
Company's net 30 day terms. This, combined with the fact
that the Company's distributor customers (which make up 66
to 52% of the Company revenues in 1998 and 1997,
respectively), generally pay 90 days and beyond, results in
the accounts receivable balance at the end of the quarterly
period being at its highest point for the period. This has
been consistent over prior periods. The Company is reducing
its dependence on distributors to accelerate accounts
receivable collections.
Although current levels of inventory and accounts
receivable impact the Company's liquidity, the Company
believes that these items are a cost of doing business given
the Company's fabless operation. The Company is in the
process of restructuring its sales channels to reduce the
levels of accounts receivable and inventory which it must
carry.
Financing
On June 1, 1998, the Company renewed its $6,000,000
revolving line of credit with Sanwa Bank (the "Bank")
extending the maturity to May 31, 1999. The line of
credit bears interest at the Bank's prime rate plus
1.00%. The line of credit requires the Company to
maintain a minimum tangible net worth of $20,000,000,
a maximum ratio of debt to tangible net worth of not
more than 0.50 to 1.00, a minimum current ratio of not
less than 2.00 to 1.00, a minimum quick ratio of not less
than 1.20 to 1.00 at September 30, 1998 and increasing to
1.35 to 1.00 at December 31, 1998 and thereafter, and
profitability on a quarterly basis. As of September 30, 1998
and December 31, 1998, the Company was not in compliance
with certain covenants under the borrowings. The Company
has not obtained waivers as to these covenants from the Bank
for September 30, 1998 and for December 31, 1998. The line
of credit facility is secured by all of the assets of the
Company. As of December 31, 1998, $1,500,000 was available
under the line of credit facility.
The Company has received a proposal from the Bank to
amend the terms of its revolving line of credit facility.
Under the proposal, the maximum borrowing amount would be
reduced to $4,500,000, which is the current amount
outstanding under the facility. In addition, the maximum
borrowing amount would be reduced at future dates prior
to maturity. These reduced maximum amounts would require
the Company to repay principal amounts under the line of
credit, and the Company does not currently expect to have
sufficient funds from operations to make these repayments.
Additional financing which may be necessary to make such
repayments has not been identified as of the date of this
report. The proposed amendments to the facility would also
increase the rate of interest and change and add financial
and operating covenants, which would be more stringent than
those existing under the current line of credit.
The Company is discussing the proposal with the Bank,
but if the Company and the Bank are unable to reach an
agreement as to the proposal, there can be no assurance
that the Bank would not declare an event of default under
the existing line of credit or renew the line of credit when it
matures. Even if the Company agrees to the proposal, there
can be no assurance that the Company would be able to
comply with the amended terms or that the Bank would agree
to waive any such noncompliance.
Under the terms of its line of credit facility, the
Company is precluded from paying any cash dividends without
the consent of the lender even if the Company is in
compliance with all of the financial covenants but is
allowed to pay stock dividends whether or not there was any
other covenant violation. Regardless of any such
restrictions in its bank loan agreements, the Company does
not intend to pay cash dividends in the near future and
anticipates reinvesting its cash flow back into operations.
Year 2000 Compliance
The year 2000 creates the potential for date related
data to cause computer processing errors or system shut-
downs because computer-controlled systems have historically
used two digits rather than four to define years. For
example, computer programs that contain time data sensitive
software may recognize a date using two digits of "00" as
the year 1900 rather than the year 2000. The
miscalculations and systems failures that may be caused by
such date misrecognition could disrupt the operations of the
Company. Since the risk relates to computer-controlled
systems, the year 2000 issue affects computer software,
computer hardware, and any other equipment with imbedded
technology that involves date sensitive functions. The
Company has determined to assess the scope of its Year 2000
problems, to remediate the problem, and to plan for the
contingency of remediation failure separately for each of
its internal computer software programs, its computer
hardware, its machinery which includes imbedded computer
technology, its suppliers and its products.
The Company completed its assessment of all aspects of
its operations other than it customers and suppliers prior
to the beginning of the fiscal quarter ending December 31,
1998. As a result of its assessment, the Company has
determined that none of its products have date sensitive
functions and, accordingly, that no products will require
modification or replacement.
The Company is still in the process of determining the
extent to which its customers and suppliers may be impacted
by year 2000 computer processing problems. This assessment
has been slower than the Company's other assessment efforts
since it necessarily involves obtaining information from
third parties, and the Company's suppliers are foreign
operations which may have local customs or attitudes
regarding disclosure which differ from those in the United
States. Conversely, because the Company relies on third
parties to manufacture its chips and assemble its products,
the Company's production may be slowed or other of its
operations may be adversely impacted by the Year 2000
problems of its suppliers. Although the Company has
received assurances from certain of its suppliers, including
the silicon foundaries supplying the Company with silicon
wafers, that they are Year 2000 compliant, the Company plans
to shortly require a written evaluation from each of its
suppliers about their state of Year 2000 readiness. The
Company does not believe it has any technological interfaces
with customers that will be affected by the Year 2000 issue.
The Company completed remediation of its computer
hardware, internal computer software programs and equipment
with imbedded technology in March 1998. Through December
31, 1998, the Company has spent approximately $50,000
modifying or replacing its internal computer software
programs, its computer hardware, and machinery with embedded
computer technology, primarily to upgrade software and to
modify maintenance agreements. Since it believes
remediation of such systems has been completed, the Company
does not expect to expend any material amounts on such
remediation in the future. However, if the Company has
failed to properly assess any of the year 2000 problems or
failed to fully remedy any identified year 2000 problems of
its computer hardware, computer software programs, or
machinery with embedded technology, the Company may be
forced to spend more than anticipates on such remediation in
the future.
Until its assessment efforts are complete, the Company
will not be able to reasonably estimate the future costs of
eliminating problems caused by the Year 2000 problems of its
suppliers, whether by investing in new technology or
software to interface with these parties or finding
alternative sources of supply. Beginning June 1, 1999, the
Company expects to shift production away from suppliers that
have not demonstrated Year 2000 compliance to the Company's
satisfaction and to the Company's current suppliers that are
Year 2000 compliant. If such current suppliers are unable
to satisfy increased production burdens, the Company expects
to engage new suppliers that are Year 2000 compliant. There
can be no assurance that the Company will be able to shift
additional production to any of its current suppliers or to
new suppliers without additional costs or at all. Shifts to
new suppliers typically require capital outlays and
increased time requirements for production, either of which
may adversely affect the results of operations of the
Company.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 - Computation of Earnings Per Common Share.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Logic Devices Incorporated
(Registrant)
Date: February 12, 1999 By /s/ William J. Volz
William J. Volz
President and Principal
Executive Officer
Date: February 12, 1999 By /s/ Mary C. deRegt
Mary C. deRegt
Chief Financial Officer
Principal Financial and
Accounting Officer
EXHIBIT 11
Logic Devices Incorporated
Computation of Earnings per Common Share
(unaudited)
Three months ended December 31, 1998 and 1997
<TABLE>
1998 1997
<S> <C> <C>
Weighted average shares of
common stock outstanding 6,632,388 6,121,750
Dilutive effect of common stock options - -
Dilutive effect of common stock warrants - -
Weighted average common and
common share equivalents 6,632,388 6,121,750
Net income (loss) $ 6,700 $ 8,000
Net income (loss) per common
share equivalent $ 0.00 $ 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,300
<SECURITIES> 0
<RECEIVABLES> 3,629,900
<ALLOWANCES> 169,500
<INVENTORY> 12,227,400
<CURRENT-ASSETS> 16,226,600
<PP&E> 16,211,100
<DEPRECIATION> 11,721,000
<TOTAL-ASSETS> 21,658,200
<CURRENT-LIABILITIES> 6,178,300
<BONDS> 0
0
0
<COMMON> 18,091,900
<OTHER-SE> (307,500)
<TOTAL-LIABILITY-AND-EQUITY> 21,658,200
<SALES> 3,070,900
<TOTAL-REVENUES> 3,070,900
<CGS> 1,680,300
<TOTAL-COSTS> 884,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,000
<INCOME-PRETAX> 7,500
<INCOME-TAX> 800
<INCOME-CONTINUING> 6,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,700
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
