_____________________________________________________________________________ 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, 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 April 30, 1998, 6,121,750 shares of Common Stock, without par value, were outstanding. _____________________________________________________________________________ 1 OF 14 PAGES LOGIC DEVICES INCORPORATED INDEX Page Number Part I. Financial Information ITEM 1. FINANCIAL STATEMENTS Balance Sheets as of March 31, 1998 and 3 December 31, 1997 Statements of Income for the three months ended 4 March 31, 1998 and 1997 Statements of Cash Flows for the three months 5 ended March 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 13 Exhibit 11 14 Exhibit 12 15 2 OF 14 PAGES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LOGIC DEVICES INCORPORATED BALANCE SHEETS March 31, December 31, 1998 1997 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 22,000 $ 87,900 Accounts receivable, net of allowance 7,473,500 6,781,800 Inventories 12,394,800 12,399,100 Prepaid expenses 481,400 412,000 Income taxes receivable 522,000 522,000 Deferred income taxes 621,900 621,900 Total current assets 22,515,600 20,824,700 Equipment and leasehold improvements, net 5,291,100 5,110,000 Other Assets 1,531,400 1,558,300 $28,338,100 $27,493,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank borrowings 4,500,000 3,525,000 Current portion of long-term obligations 569,300 658,500 Accounts payable 1,105,500 1,011,400 Accrued expenses 334,200 446,300 Total current liabilities 6,509,000 5,641,200 Long-term debt obligations, less current portion 678,500 705,300 Deferred income taxes 419,600 419,500 Total liabilities 7,607,100 6,766,000 Shareholders' equity: Common stock 17,341,900 17,341,900 Common stock subscribed (307,500) (307,500) Retained earnings 3,696,600 3,692,600 Total shareholders' equity 20,731,000 20,727,000 $28,338,100 $27,493,000 3 OF 14 PAGES LOGIC DEVICES INCORPORATED STATEMENTS OF INCOME Three months ended March 31, 1998 and 1997 (unaudited) 1998 1997 Net sales $ 3,245,000 $ 2,803,000 Cost of sales 1,869,900 1,761,000 Gross margin 1,375,100 1,042,000 Operating expenses: Research and development 383,200 392,000 Selling, general and administrative 876,500 957,400 Operating expenses 1,259,700 1,349,400 Income (loss) from operations 115,400 (307,400) Other expense (income), net 110,600 41,800 Income (loss) before taxes 4,800 (349,200) Income taxes 800 (138,000) Net (loss) income $ 4,000 $ (221,200) Net (loss) income per common share $ 0.00 $ (0.03) Weighted average common share equivalents 6,121,750 6,121,750 outstanding 4 OF 14 PAGES LOGIC DEVICES INCORPORATED STATEMENTS OF CASH FLOWS Three months ended March 31, 1998 and 1997 (unaudited) 1998 1997 Cash flows from operating activities: Net (loss) income $ 4,000 $ (211,200) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 328,100 319,900 Change in operating assets and liabilities: Accounts receivable, net (691,700) (140,500) Inventories 4,300 15,800 Prepaid expenses and other assets (69,400) (82,600) Accounts payable 94,100 (599,000) Accrued expenses (112,100) (119,200) Income taxes payable - (140,700) Net cash provided by (used in) operating activities (442,700) (957,500) Cash flows from investing activities: Capital expenditures (509,200) (690,000) Increase in other assets 27,000 (7,500) Net cash (used in) investing activities (482,200) (697,500) Cash flows from financing activities: Bank borrowing, net 975,000 1,550,000 Repayment of long-term obligations (116,000) (13,500) Net cash provided by (used in) financing activities 859,000 1,536,500 Net (decrease) in cash (65,900) (118,500) Cash and cash equivalents at beginning of period $ 87,900 $ 670,900 Cash and cash equivalents at end of period $ 87,900 $ 670,900 5 OF 14 PAGES LOGIC DEVICES INCORPORATED Notes to Financial Statements March 31, 1998 and December 31, 1997 (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, 1997 and 1996, 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, 1998 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, 1998 1997 Raw Materials $ 2,863,300 $ 2,824,400 Work-in-process 6,689,600 6,468,900 Finished goods 2,841,900 3,105,800 $12,394,800 $12,399,100 Based on forecasted 1998 sales levels, the Company has on hand inventories aggregating approximately twelve months of sales. 6 OF 14 PAGES LOGIC DEVICES INCORPORATED Notes to Financial Statements March 31, 1998 and December 31, 1997 (unaudited) (C) FINANCING On June 16, 1997, the Company renewed its $6,000,000 revolving line of credit with Sanwa Bank extending the maturity to May 31, 1998. The line of credit bears interest at the bank's prime rate (8.50% at March 31, 1998) plus 0.75%. The line of credit requires the Company to maintain a minimum tangible net worth of $19,000,000, 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 1.50 to 1.00, and profitability on a quarterly basis. As of December 31, 1997 and March 31, 1998, the Company was not in compliance with certain covenants under the borrowings. The Company obtained a waiver from the Bank for December 31, 1997 and for March 31, 1998. 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 conditions. The line of credit facility is secured by all of the assets of the Company. As of March 31, 1998, $1,500,000 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. 7 OF 14 PAGES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS REVENUES Net revenues were $3,245,000 for the three months ended March 31, 1998, a increase of 16% from $2,803,000 for the three months ended March 31, 1997. The increase in revenues for the period was primarily the result of increased sales volume on the Company's DSP products. Sales of the Company's SRAM products increased slightly for the 1998 period. The increased sales volume for the 1998 quarter was the result of an increased backlog of orders for the period compared to the very weak order rates experienced during late 1996 which impacted the first quarter of 1997. EXPENSES Cost of revenues increased 7%, from $1,761,000 in the three months ended March 31, 1997 to $1,869,900 in the three months ended March 31, 1998. Gross profit increased by 32%, from $1,042,000 in 1997 to $1,375,100 in 1998. This was the result of increased sales volume for the period which spreads fixed overhead costs over more units. As a percentage of net revenues, gross profit margin increased from 38% in the three months ended March 31, 1997 to 43% in the three months ended March 31, 1998. Research and development expense decreased slightly during the period from $392,000 (14% of net revenues) in the 1997 period to $383,200 (12% of net revenues) in the 1998 period. The Company is continuing its new product development efforts and tooling to new foundry technologies. In 1997, the Company invested heavily in new product development. The Company plans to continue its substantial investments in new product research and development throughout 1998. Selling, general and administrative expense decreased from $957,400 (35% of net revenues) in the 1997 period to $876,500 (27% of net revenues) in the 1998 period. This was the result of aggressive expense controls in marketing, and travel expenses. The Company had income from operations for the 1998 period of $115,400 versus a loss of $307,400 in 1997, due to the above mentioned factors. For the 1998 period, the Company incurred $110,600 in other expense from interest expense versus other expense of $41,800 in 1997, which consisted of interest income. As a result of the foregoing, the Company enjoyed net income of $4,000 in the 1998 period versus a net loss of $221,200 in the 1997 period. 8 OF 14 PAGES LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS For the three months ended March 31, 1998, the Company had after-tax cash earnings (defined as net income plus non-cash depreciation charges) of $332,100 versus $108,700 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 borrowing during both the 1997 and 1998 periods. During the 1998 period, after-tax cash earnings of $332,100 and increases in net indebtedness of $859,000, plus decreases in cash of $65,900, accounts payable of $94,100 and inventory of $4,300, funded increases in accounts receivables of $691,700, increases in accrued expenses of $112,100, and increases in prepaid expenses and other assets of $69,400. This resulted in total net cash used by operations of $442,700. The Company invested $482,000 in capital expenditures and other assets during the period. The Company has an income tax receivable of $522,000 for which the Company expects to receive a refund in the second quarter of 1998. During the 1997 period, after-tax cash earnings of $108,700 were supplemented by a reduction in inventory of $15,800 but were offset by increases in accounts receivable of $140,500, increases in prepaid expenses and other assets of $82,600, increases in accounts payable of $599,000, increases in accrued expenses of $119,200 and an increase in income taxes payable of $140,700. This resulted in net cash used by operations of $957,500. The Company invested $697,500 in capital expenditures and other assets and increased net indebtedness by $1,536,500. 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 looks at its inventories in relationship to its sales which have ranged from 140 days to 365 days within the periods between 1998 and 1992. 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 9 OF 14 PAGES 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 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 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 currently working to accelerate accounts receivable collections. 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 tool 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 16, 1997, the Company renewed its $6,000,000 revolving line of credit with Sanwa Bank extending the maturity to May 31, 1998. The line of credit bears interest at the bank's prime rate (8.50% at March 31, 1998) plus 0.75%. The line of credit requires the Company to maintain a minimum tangible net worth of $19,000,000, 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 1.50 to 1.00, and profitability on a quarterly basis. As of December 31, 1997 and March 31, 1998, the Company was not in compliance with certain covenants under the borrowings. The Company obtained a waiver from the Bank for December 31, 1997 and a waiver for March 31, 1998. 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, 1998, $1,500,000 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 10 OF 14 PAGES 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. 11 OF 14 PAGES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 11 - Computation of Earnings Per Common Share. (b) Exhibit 12 - The registrant filed a Form 8-K on March 23, 1998 with the Securities and Exchange Commission. 12 OF 14 PAGES 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 14, 1998 By /S/ WILLIAM J. VOLZ William J. Volz President and Principal Executive Officer Date: MAY 14, 1998 By /S/ MARY C. DEREGT Mary C. deRegt Chief Financial Officer Principal Financial and Accounting Officer 13 OF 14 PAGES EXHIBIT 11 LOGIC DEVICES INCORPORATED Computation of Earnings per Common Share (unaudited) Three months ended March 31, 1998 and 1997 1998 1997 Weighted average shares of common stock 6,121,750 6,121,750 outstanding Dilutive effect of common stock options - - Dilutive effect of common stock warrants - - Weighted average common and common share equivalents 6,121,750 6,121,750 Net income (loss) $ 4,000 $ (221,200) Net income (loss) per common share equivalent $ 0.00 $ (0.04) 14 OF 14 PAGES