--------------------------------------------------------------- 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 MARCH 31, 1997 Commission File Number 0-17187 --------------------------------------------------------------- LOGIC DEVICES INCORPORATED (Exact name of registrant as specified in its charter) --------------------------------------------------------------- CALIFORNIA 94-2893789 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1320 ORLEANS DRIVE, SUNNYVALE, CALIFORNIA 94089 (Address of principal executive offices) (Zip Code) (408) 542-5400 (Registrant's telephone number,including area code) ______________________ 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 May 7, 1997, 6,121,750 shares of Common Stock, without par value, were outstanding. Page 1 of 14 --------------------------------------------------------------- LOGIC DEVICES INCORPORATED INDEX Page NUMBER Part I. Financial Information ITEM 1. FINANCIAL STATEMENTS Balance Sheets as of March 31, 1997 and 3 December 31, 1996 Statements of Income for the three months ended 4 March 31, 1997 and 1996 Statements of Cash Flows for the three months 5 ended March 31, 1997 and 1996 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 Part I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LOGIC DEVICES INCORPORATED BALANCE SHEETS March 31, December 31, 1997 1996 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 552,400 $ 670,900 Accounts receivable, net of allowance 4,508,800 4,368,300 Inventories 13,913,100 13,928,900 Prepaid expenses 1,005,200 922,600 Income taxes receivable 930,500 789,800 Deferred income taxes 920,900 920,900 Total current assets 21,830,900 21,601,400 Equipment and leasehold improvements, net 4,650,600 4,204,300 Other Assets 625,600 694,300 $27,107,100 $26,500,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank borrowings 3,550,000 2,000,000 Current portion of long-term obligations 561,900 561,900 Accounts payable 475,600 1,074,600 Accrued expenses 412,600 531,800 Total current liabilities 5,000,100 4,168,300 Long-term debt obligations, less current portion 773,100 786,600 Deferred income taxes 419,500 419,500 Total liabilities 6,192,700 5,374,400 Shareholders' equity: Common stock 17,341,900 17,341,900 Common stock subscribed (307,500) (307,500) Retained earnings 3,880,000 4,091,200 Total shareholders' equity 20,914,400 21,125,600 $27,107,100 $26,500,000 LOGIC DEVICES INCORPORATED STATEMENTS OF INCOME Three months ended March 31, 1997 and 1996 (unaudited) 1997 1996 Net sales $ 2,803,000 $ 3,609,200 Cost of sales 1,761,000 1,975,400 Gross margin 1,042,000 1,633,800 Operating expenses: Research and development 392,000 394,100 Selling, general and administrative 957,400 911,200 Operating expenses 1,349,400 1,305,300 Income (loss) from operations (307,400) 328,500 Other expense (income), net 41,800 (40,700) Income (loss) before taxes (349,200) 369,200 Income taxes (138,000) 148,500 Net (loss) income $ (211,200) $ 220,700 Net (loss) income per common share $ (0.03) $ 0.04 Weighted average common share equivalents 6,121,750 6,218,750 outstanding LOGIC DEVICES INCORPORATED STATEMENTS OF CASH FLOWS Three months ended March 31, 1997 and 1996 (unaudited) 1997 1996 Cash flows from operating activities: Net (loss) income $ (211,200) $ 220,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 319,900 246,600 Change in operating assets and liabilities: Accounts receivable, net (140,500) 460,300 Inventories 15,800 (547,400) Prepaid expenses and other assets (82,600) 39,000 Accounts payable (599,000) 6,300 Accrued expenses (119,200) 73,500 Income taxes payable (140,700) (679,800) Net cash provided by (used in) (1,109,900) (180,800) operating activities Cash flows from investing activities: Capital expenditures (690,000) (358,000) Increase in other assets (7,500) (69,400) Net cash (used in) investing activities (697,500) (427,400) Cash flows from financing activities: Bank borrowing, net 1,550,000 - Repayment of long-term obligations (13,500) (26,900) Repayment of obligations to shareholders - - Proceeds from exercise of warrants/stock options 258,900 Net cash provided by (used in) 1,536,500 232,000 financing activities Net (decrease) in cash (118,500) (376,200) Cash and cash equivalents at beginning of period $ 670,900 $4,378,500 Cash and cash equivalents at end of period $ 552,400 $4,002,300 LOGIC DEVICES INCORPORATED Notes to Financial Statements March 31, 1997 and December 31, 1996 (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 December 31, 1996 and 1995, 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 March 31, 1997 are not necessarily indicative of the results to be expected for the full year. (B) INVENTORIES A summary of inventories follows: March 31, December 31, 1997 1996 Raw Materials $ 3,139,600 $ 3,165,400 Work-in-process 5,918,500 6,744,900 Finished goods 4,855,000 4,018,600 $ 13,913,100 $ 13,928,900 Based on forecasted 1997 sales levels, the Company has on hand inventories aggregating approximately twelve months of sales. LOGIC DEVICES INCORPORATED Notes to Financial Statements March 31, 1997 and December 31, 1996 (unaudited) (C) FINANCING On June 1, 1996, the Company renewed its $8,000,000 revolving line of credit with Sanwa Bank extending the maturity to May 31, 1997. The line of credit bears interest at the bank's prime rate (8.50% at March 31, 1997) plus 0.750%. The line of credit requires the Company to maintain a minimum tangible net worth of $17,500,000, 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 1.50 to 1.00, and profitability on a year to date basis. As of December 31, 1996 and March 31, 1997, the Company was not in compliance with certain covenants under the borrowings. The Company obtained a waiver from the Bank for December 31, 1996 expects to receive a waiver for March 31, 1997. The Company is also in the process of renewing its the line of credit with the bank and the Company expect to renew the line under substantially similar terms and condition. The line of credit facility is secured by all of the assets of the Company. As of March 31, 1997, $4,450,000 was available under the line of credit facility. 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 $2,803,000 for the three months ended March 31, 1997, a decrease of 22% from $3,609,200 for the three months ended March 31, 1996. The decrease in revenues for the period was largely the result of lower sales volume for the Company's DSP products. Sales of the Company's SRAM products increased slightly for the 1997 period. The lower sales volume for the 1997 quarter was the result of limited backlog for the period due to very weak order rate experienced during the last half of 1996. EXPENSES Cost of revenues decreased 11%, from $1,975,400 in the three months ended March 31, 1996 to $1,761,000 in the three months ended March 31, 1997. Gross profit decreased by 36%, from $1,633,800 in 1996 to $1,042,000 in 1997. This was the result of the lower sales volume for the period combined with a lower profit margins experienced on the Company's SRAM products. As a percentage of net revenues, gross profit margin decreased from 45% in the three months ended March 31, 1996 to 37% in the three months ended March 31, 1997. Research and development expense decreased slightly during the period from $394,100 (11% of net revenues) in the 1996 period to $392,000 (14% of net revenues) in the 1997 period. The Company is continuing its new product development efforts and tooling to new foundry technologies. In 1996, the Company invested heavily in new design tools, development software, and additional personnel to increase and accelerate new product development in 1997. The Company plans to continue its substantial investments in new product research and development throughout 1997. Selling, general and administrative expense increased from $911,200 (25% of net revenues) in the 1996 period to $957,400 (34% of net revenues) in the 1997 period. This was the result of increased marketing, promotional, and travel expenses due to the operation of additional regional sales and technical support offices in the 1997 period versus 1996. The Company had a net operating loss for 1997 the period of $307,400 versus operating income of $328,500 in 1996, due to the above mentioned factors. For the 1997 period, the Company incurred $41,800 in Other Expense from interest expense versus Other Income of $40,700 in 1996 which consisted of interest income. As a result of the foregoing, the Company incurred a net loss of $211,200 in the 1997 period versus net income of $220,700 in the 1996 period. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS For the three months ended March 31, 1997, the Company had after-tax cash earnings of $108,700 and $467,300 for the 1996 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 use bank borrowing during the 1997 period. During the 1997 period, after-tax earnings of $108,700 and increases in bank borrowings of $1,550,000 funded increases in accounts receivables of $140,500 and decreases in accounts payable of $599,000 and accrued expenses of $119,200 which resulted in net cash used by operations of $1,109,900. The Company invested $697,500 in capital expenditures and other assets during the period. The Company has an income tax receivable of $930,500 for which the Company expects to receive a refund of $350,000 in the second quarter of 1997 and approximately $500,000 in the third quarter of 1997. During the 1996 period, after-tax earnings of $467,300 supplemented by reductions in income taxes payable of $679,800 and accounts receivables of $460,300 which funded an increase in inventory of $547,400 resulted in net cash used by operations of $180,800. The Company invested $427,400 in capital expenditures and other assets and reduced net indebtedness by $26,900. The Company received proceeds of $258,900 from the exercise of employee stock options and the exercise of certain warrants. 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 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 360 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 looks at its inventories in relationship to its sales which have ranged from 140 days to 325 days within the periods between 1996 and 1990. This inventory to sales ratio is a more stable measure of inventory levels, versus the traditional inventory turnover measure because, at the times when the Company is experiencing supply disruptions, and therefore lower inventory levels, the Company is also experiencing increased costs of goods due to inefficiencies in its operations stemming from sporadic deliveries which skews the numerator and denominator in different directions for inventory turns calculations. The lowest days on hand of inventory to sales has been experienced when the Company has had supply disruptions as in 1992 and 1993. The Company provides reserves for any product material that is over one year old with no back-log or sales activity, and reserves for future obsolescence. The Company also takes physical inventory write-downs for obsolescence. 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 still 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 52 to 55% of the Company revenues) 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. Although current levels of inventory and accounts receivable impact the Company's liquidity, the Company believes that it is a cost of doing business given the Company's fabless operation. The Company is in the process of diversifying its supplier base to reduce the risk of supply disruption. However, this will require a significant investment in product development to tooling with new suppliers. The Company believes that as it expands its customer base it will be able to even out the flow of its shipments within its quarterly reporting periods. FINANCING On June 1, 1996, the Company renewed its $8,000,000 revolving line of credit with Sanwa Bank extending the maturity to May 31, 1997. The line of credit bears interest at the bank's prime rate (8.50% at March 31, 1997) plus 0.750%. The line of credit requires the Company to maintain a minimum tangible net worth of $17,500,000, 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 1.50 to 1.00, and profitability on a year to date basis. As of December 31, 1996 and March 31, 1997, the Company was not in compliance with certain covenants under the borrowings. The Company obtained a waiver from the Bank for December 31, 1996 expects to receive a waiver for March 31, 1997. The Company is also in the process of renewing its the line of credit with the bank and the Company expect to renew the line under substantially similar terms and condition. The line of credit facility is secured by all of the assets of the Company. As of March 31, 1997, $4,450,000 was available under the line of credit facility. 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. While the Company will continue to evaluate debt and equity financing opportunities, it believes its financing arrangements and cash flow generated from operations provide a sufficient base of liquidity for funding operations and capital needs to support the Company's operations. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 11 - Computation of Earnings Per Common Share. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. 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: MAY 13, 1997 By /S/ WILLIAM J. VOLZ William J. Volz President and Principal Executive Officer Date: MAY 13, 1997 By /S/ TODD J. ASHFORD Todd J. Ashford Chief Financial Officer Principal Financial and Accounting Officer EXHIBIT 11 LOGIC DEVICES INCORPORATED Computation of Earnings per Common Share (unaudited) Three months ended March 31, 1997 and 1996 1997 1996 Weighted average shares of common stock 6,121,750 5,996,750 outstanding Dilutive effect of common stock options - 2,000 Dilutive effect of common stock warrants - 220,000 Weighted average common and 6,121,750 6,218,750 common share equivalents Net (loss) income $ (211,200) $ 220,700 Net (loss) income per common $ (0.03) $ 0.04 share equivalent