-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ScLbROOzrApngmGnhtpGKc2vR75sKIM/HV5n/kzF3BDyE62Bfaik62nEkHiyMSW6 rSgMAP0733v3xCpi8jYnyA== 0000802851-97-000008.txt : 19970416 0000802851-97-000008.hdr.sgml : 19970416 ACCESSION NUMBER: 0000802851-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOGIC DEVICES INC CENTRAL INDEX KEY: 0000802851 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942893789 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17187 FILM NUMBER: 97580795 BUSINESS ADDRESS: STREET 1: 628 E EVELYN AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087373300 MAIL ADDRESS: STREET 1: 628 EAST EVELYN AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the Fiscal Year ended December 31, 1996 Commission file number 0-17187 LOGIC DEVICES INCORPORATED (Exact name of registrant as specified in its charter) California 94-2893789 (State of Incorporation) (I.R.S. Employer Identification No.) 1320 Orleans Drive Sunnyvale, CA 94086 (Address of principal executive offices, including Zip Code) (408) 542-5400 (Registrant's telephone number, including Area Code) Securities registered pursuant to Section 12(b) of the Act Title of Class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act Common Stock, without par value (Title of Class) ----------------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant on March 31, 1997 was approximately $14,730,461. On that date, there were 6,121,750 shares of Common Stock issued and outstanding. Documents Incorporated By Reference: Proxy Statement for the 1997 Annual Meeting of Shareholders. Page of 44 Exhibit List Appears at Page 41 PART I ITEM 1. BUSINESS General Development of the Business Logic Devices Incorporated (the "Company") develops and markets high-performance digital integrated circuits. The Company's circuits address applications which require high computational speeds, high-reliability, high levels of circuit integration (complexity), and low power consumption. The Company's circuits are incorporated into products manufactured by OEMs and utilized in high-speed electronic computational applications in digital signal processing, video image processing, and telecommunication. The Company's product strategy is to develop and market industry standard circuits which offer superior performance, as well as proprietary circuits to meet specific customer needs. The Company currently offers products in two areas: (1) DSP (digital signal processing) circuits consisting of high-performance arithmetic computational functions (multipliers, arithmetic- logic units "ALUs", special math functions applicable to digital signal processing computations, and programmable DSP multiple processors units) ; and (2) high-speed SRAMs (static random access memories) including FIFO (first in/first out) memories. As of December 31, 1996, the Company offered 45 products which are sold to a diverse customer base. With the multiplicity of packaging and performance options, the 45 basic products result in nearly 600 catalog items. The Company's products are designed to replace existing industry standard integrated circuits while offering superior performance, lower power consumption, and reduced cost. Proprietary catalog products are developed by the Company to address specific functional application needs or performance levels that are not otherwise commercially available. The Company seeks to provide related groups of circuits that OEMs purchase for incorporation into high-performance electronic systems. The Company relies on third party silicon foundries to process silicon wafers, each wafer having up to several hundred integrated circuits of a given Company design, from which finished products are then assembled. The Company's strategy is to outsource wafer processing to third party foundries in order to avoid the substantial investment in capital equipment required to establish a wafer fabrication facility. See "Business -- Background." The Company works closely with the foundries in order to take advantage of their processing capabilities and continues to explore and develop additional foundry relationships in order to minimize its dependence on any single relationship. The Company markets its products worldwide through its own direct sales force, a network of 34 national and international independent sales representatives, and 21 international and domestic distributors. In 1996, approximately 48% of the Company's net revenues were derived from OEMs, while sales through foreign and domestic distributors accounted for approximately 52% of net revenues. Among the Company's OEM customers are Loral Systems Inc., Honeywell, ADC Telecommunications, Solectron Corporation, Boston Technology, General Dynamics Corporation, Litton Applied Technology, Acuson Corporation, DSC Communications Corporation, Hewlett Packard, Advanced Technology Laboratories, Inc. and Scitex Video Systems. Approximately 80% of the Company's net revenues have historically been derived from the United States and approximately 20% have been derived from foreign sales. The Company was incorporated under the laws of the State of California in April 1983. The Company's principal offices are located at 1320 Orleans Drive, Sunnyvale, California 94089, and its telephone number is (408) 542-5400. Background The semiconductor industry continues to evolve rapid increases in system complexity and performance. In recent years, the challenges to the industry have been innovative product definition, timely product development, customer application support, and the heavy capital investment required to establish semiconductor fabrication facilities. Advances in chip fabrication technology have resulted in the specialization of skills within the semiconductor industry between system and circuit design expertise, and semiconductor processing skills. Selected opportunities have emerged for semiconductor companies which focus on product definition, advanced design techniques, customer service, and utilization of third parties for wafer fabrication. The Company has focused its product strategy on the development of high-performance integrated circuits based on CMOS (Complementary Metal Oxide Semiconductor) process technology for selected markets and applications. The semiconductor industry is intensely competitive and is characterized by rapid technological change, product obsolescence, fluctuations in both demand and capacity, and price erosion. These factors can obsolete processes and products currently utilized or produced by the Company. In such cases, the Company is required to develop products utilizing new processes and to either integrate such products into its existing foundry relationships or establish new foundry sources. Product Development and Production Strategy The Company utilizes several strategies that it believes, in combination, are unique in the industry: 1. Wafer Foundry Strategy - To minimize the amount of capital which the Company must employ and to allow the Company to specialize on its strengths in product definition, design, and development, the Company seeks to establish relationships with wafer foundry suppliers rather than build and operate capital intensive, technologically demanding wafer fabrication facilities. 2. One Upmanship Product Strategy - To enhance the Company's probability of successfully introducing new products, a significant percentage of the Company's product development is directed toward implementation of higher performance, lower power consumption and lower cost versions of established industry standard products. This focus tends to ensure that at least some minimal level of market and financial success will be quickly realized which could not otherwise be guaranteed when a company attempts to pioneer a revolutionary new product or market area. Conversely, an increasing percentage of the Company's product development is targeted towards unique products which offer larger potential returns but require more time to develop market acceptance. 3. Structured Custom Design Methodology - The Company's design approach offers the benefits of full custom circuit design including small chip size, high speed operation, and low operating power consumption, coupled with the short product development cycle and reduced costs associated with semicustom design approaches. With this methodology the Company has developed leadership performance products with a smaller R&D budget than others within the industry. 4. Development of Synergistic Families of Products - The Company attempts to develop synergistic families of products that can be sold and utilized together to address the requirements of targeted end-market applications. This increases the productivity of the Company's sales efforts and maximizes the leverage of the Company's technical expertise. 5. Niche Markets - The Company focuses on product and market areas that are not well served by strong established competitors and has sought to become the dominant supplier in high performance DSP and high precision digital video processing applications. 6. Product Mix - The Company seeks to balance the mix of products produced to include products that: a) generate substantial profit margins; or b) generate unit volumes to a level sufficient to feed a sales network with high volume sales opportunities, to absorb fixed overhead costs over a large enough quantity of units to support first class manufacturing resources, and to position the Company as a valued foundry customer by generating a reasonable and steady volume of wafer requirements. 7. Employee Development - The Company prefers to internally develop and train key personnel in sales and marketing, engineering and manufacturing as opposed to hiring outside experts. This strategy allows the Company to mold the critical skill contributors within the Company to fit the unique environment, strengths, and limitations of the Company's position as it evolves. 8. Financial Commitments - The Company employs a conservative financial perspective when committing to any single new product or internal resource. The Company does not intentionally undertake a direction or activity that encompasses a bet-the-Company risk. Products The Company offers industry standard and proprietary catalog circuits. The Company's standard catalog products are designed to replace existing industry standard products by providing superior performance, lower power consumption, and reduced cost. Proprietary catalog products are developed by the Company to address specific requirements not otherwise commercially available in the marketplace. The Company's products address applications which require high computational speeds, high levels of function circuit integration, low power consumption, and high reliability. The Company's products are utilized in high-speed industrial computing and DSP applications in computers, broadcast and medical video image processing, and telecommunications systems. The Company's circuits are incorporated by OEMs into products which are then sold to end users. Examples of the types of products which utilize the Company's circuits include the following: 1) In the long-distance telephone market, an OEM incorporates a Company produced circuit into a telecommunications product produced by the OEM and sold to long distance carriers. This product removes the echo otherwise experienced in long distance telephone calls. 2) In the video image processing market, the Company's circuits are utilized in products that create video special effects for the television broadcast industry. 3) In the medical market, ultrasound and x-ray medical images are enhanced using the Company's circuits. 4) In the military market, the Company supplies arithmetic components used in night vision and tactical missile guidance control systems. A tabular presentation of these products is as follows: Markets: Products: Applications: Customers: Telecommunications Custom Products Video Functions Programmable DSP Echo Cancellation Trunkline Multiplexing Digital Filters Tone Decoding DSC Communications, SDX, Intellicall Inc., Estek. Broadcast Video Transmission Video Functions Special Effects Generation Film Editing Time Base Correctors Character Generators Scitex, ADC, Data Translation, Pinnacle, Quantel, Snell & Wilcox, GVC Instrumentation Math Functions Spectrum Analyzers Waveform Generators Emulators Assembly/Inspection Equipment Acumen, KLA, Tencor, Tektronics Medical Imaging Math Functions Ultrasound Magnetic Resonance Acuson, ATL Siemans Military SRAM Math Functions Radar/Sonar Missile Guidance Secure Communications General Dymamics, Hughes, ITT Litton, Loral, Martin Marietta, McDonnell Douglas, TI, Northrop Digital Signal Processing Applications Digital Signal Processing ("DSP") involves converting light, sound, and other natural occurring analog waveforms into a stream of digital values which may be processed, manipulated, exchanged, or sorted by electronic systems. DSP provides many advantages, including: i) the ability to process and manipulate digital data with consistency and precision; ii) the ability to store and recall information; and iii) the ability to extract information content and compress the amount of data which must be stored, processed, or transmitted. Manipulation of the video images and speech requires signal processing at rates and precision that are not practical with analog technology or general purpose (non-DSP) processors. DSP is an important technology for future generations of many emerging product technologies. During 1995, the Company acquired the assets of the former STAR Semiconductor Corporation. As a result of this acquisition the Company has added the STAR programmable digital signal processor to its product line. The STAR processor is particularly suited to various telecommunications applications. Arithmetic Computational Functions. The Company offers a broad line of high speed computational functions ranging from high performance arithmetic building blocks to more highly integrated and specialized functions. The Company's building block products are configured in a myriad of ways by DSP system designers to implement very high computational throughput mathematical functions that perform common DSP algorithms. The Company's more highly integrated function specific compute engines implement the most commonly required video image processing functions into cost effective single chip solutions. These products integrate multiple instances of the Company's building block arithmetic functions, as well as significant blocks of the Company's static memory technology to provide otherwise unachievable performance and cost benefits. High-Speed Static Random Access Memories SRAMs are used for the high-speed storage and retrieval of data in electronic systems. SRAMs enable faster storage and retrieve information than DRAMs (dynamic random access memories). While SRAMs are more convenient to utilize than DRAMs, they also are more costly (for a given number of bits stored) due to greater internal circuit complexity. Because a computer may read from or write to its memory several times to complete a single software instruction, high-performance systems are sensitive to memory performance as a critical factor in determining overall system performance. Data stored in a typical computer is segmented into a hierarchy of memory types to maximize performance consistent with reasonable cost constraints. Low-cost but relatively slow DRAMs are used in "main memory" to store large amounts of data very economically. Faster but more costly SRAMs serve as "cache memory" to store limited amounts of the data most frequently required by the computer as it executes its programs. SRAMs are produced in a wide variety of capacities (densities) and organizations (number of bits available in a single memory access), which collectively result in a large product matrix. This resulting product differentiation creates opportunities for higher pricing and somewhat longer product life cycles than DRAMs. However, as high performance processors have driven the demand for SRAMs, the market has become increasingly competitive. The Company's current SRAM products, with densities ranging from 16K bits to 1024K (K = 1024 or one megabit) bits, generally are targeted toward high-speed applications which are experiencing high rates of growth in unit demand due to sharply increasing usage of cache memory in conjunction with 32-bit microprocessors. FIFO Memory Products FIFO (First-In/First-Out) memory products are frequently utilized at the input and output of DSP systems to handle any mismatches between which input data is available or output data is expected relative to the rate of which signals can be digitally processed. FIFOs incorporate many elements of the Company's memory design expertise and are synergistic to the Company's DSP customer base. Products In Development The Company has historically experienced a close correlation between its success in introducing new products and increases in revenues. As a result, the Company is committed to a high level of product design and development activity. During 1996, the Company committed in excess of $2.5 million to purchase design automation tools and to expand its product development group in order to accelerate the rate of new product development. During 1997, the Company is focusing its product development efforts on two target areas: (1) DSP circuits that address the broadcast, studio, and production quality audio and video image processing requirements, and (2) products utilizing the Company's SRAM technology. The Company must also investing heavily in the re-tooling of its existing product families to develop additional wafer fabrication sources. With the benefit of on-going customer input resulting from its current video image processing products, the Company has a number of new DSP product opportunities which it will undertake to develop in 1997. These products generally would be utilized in conjunction with the Company's current DSP products to further facilitate high precision signal processing. At current resource levels the Company does not expect to be able to complete all of the new product opportunities which it has identified. The level of product development expenditures will be dependent on the Company's success in meeting its financial objectives. The Company is increasingly developing more specialized memory products, as well as implementing certain memory functions that work with, and compliment, certain of the Company's DSP computational functions. Wafer Fabrication Technology The Company relies on third party silicon foundries to produce processed wafers from mask patterns designed by the Company. Through its wafer suppliers, the Company has access to advanced high-speed, high-density CMOS process technology, without the significant investment in capital equipment and facilities required to establish a wafer fabrication facility. Products developed in 1997 will utilize process technology with effective channel lengths under 0.5 micron. Coupled with the Company's design methodology and experience in high-speed circuit design, this technology has allowed the Company to create products that offer high computational speeds, high reliability, high levels of circuit integration (complexity) and low power consumption. The Company currently is dependent on two silicon foundry sources. Wafers are processed to pre-agreed specifications to produce integrated circuits designed by the Company. There can be no assurance that such relationships will continue to be on terms satisfactory to the Company. Except for its relationship with Zentrum Mikroelektronik Dresden GmbH (ZMD), the Company's foundry sources do not guarantee minimum supplies. During 1995 the Company's revenues were limited by its inability to obtain adequate quantities of processed wafers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." Production, Assembly and Test The Company's production operations consist of quality inspection, functional and parametric wafer testing, package marking, hot and cold testing, final inspection, and shipment. During 1996, the Company committed in excess of $2.5 million to purchase new test and package handling equipment to enable it to produce the advance products which it is now developing. As is customary in the industry, the Company's commercial grade plastic package devices are wafer tested and then shipped to high-volume assembly subcontractors in the Far East for assembly. Thereafter, the assembled devices are returned to the Company for final testing and shipment to customers. The Company continues to test raw material through finished product at various stages in the manufacturing process utilizing automated test equipment capable of volume production. Marketing, Sales and Customers The Company markets its products worldwide to a broad range of customers through its own sales efforts, a network of 34 national and international independent sales representatives, and 20 electronics distributors. The Company concentrates its direct marketing efforts on the high-performance segments of the telecommunication, military, industrial, and computer markets in applications where high-speed and low power consumption are critical. Among the Company's OEM customers are Loral Systems Inc., Honeywell, ADC Telecommunications, Solectron Corporation, Boston Technology, General Dynamics Corporation, Litton Applied Technology, Acuson Corporation, DSC Communications Corporation, Hewlett Packard, Advanced Technology Laboratories, Inc. and Scitex Video Systems. The Company coordinates sales from its Sunnyvale, California facility. The Company also maintains regional sales offices in Somersville, New Jersey and Tampa-St. Petersburg, Florida as well as a field applications support offices in Newton, Connecticut to serve the East Coast and San Diego, California to serve the West Coast. The Company also has a sales office in Warminster, England to support the Company's European sales activities. The Company's sales managers direct the activities of the independent sales representative firms and focus on major target accounts. Sales representatives obtain orders on an agency basis and the Company ships directly to its customers. Sales representatives receive commissions on sales within their territories. Distributors purchase the Company's products for resale generally to a broad base of small to medium-size customers. North America is serviced by five regional and national distributors. As is customary in the industry, domestic distributors are entitled to certain price rebates and limited stock rotation rights, for which the Company has made a provision in its consolidated financial statements. During 1996 and 1995, sales through both international and domestic distributors accounted for approximately 52% and 55% of net sales, respectively, while direct sales to OEMs accounted for approximately 48% and 45%, respectively, of net sales. In 1996, no one customer accounted for more than 10% of net revenues. In 1995, three customers each accounted for 10% or more of net revenues: All American Semiconductor, Inc. accounted for 13%, Bell Microelectronics, Inc. accounted for 13%, and Milgray Electronics, Inc. accounted for 10% of net revenues. International sales are conducted by sales representatives and distributors located in Japan, Canada, United Kingdom, Germany, France, Italy, Netherlands, Sweden, Finland, Hong Kong, Israel, Korea, Taiwan, and Singapore. During 1996, 1995, and 1994, the Company's export sales were approximately 27%, 20%, and 18%, respectively, of net sales. See Note 11 in "Notes to the Financial Statements" contained in Item 8 below. The Company's international sales are billed in United States dollars and therefore settlements are not directly subject to currency exchange fluctuations. However, changes in the relative value of the dollar may create pricing pressures for the Company's products. Although the Company's international sales are subject to certain export restrictions, including the Export Administration Amendments Act of 1985 and the regulations promulgated thereunder, the Company has not experienced any material difficulties because of these restrictions. The Company's domestic distributors generally market products competitive with the Company's products. The Company's independent sales representatives and foreign distributors also may represent competitors of the Company. The Company warrants its products against defects in materials and workmanship for a period of 12 months from the date of shipment. Warranty expenses to date have been nominal. Backlog As of December 31, 1996, the Company's backlog was approximately $1,565,900 and was approximately $8,356,800 as of December 31, 1995. The Company includes in its backlog all released purchase orders shippable within the following 18 months, including orders from distributors. The Company's backlog, although useful for scheduling production, does not represent actual sales and the backlog at any particular time should not be used as a measure of future sales or revenues. In accordance with accepted industry practice, orders in the backlog are subject to cancellation without penalty at the option of the purchaser at any time prior to shipment and to changes in delivery schedules and do not reflect price adjustments that may be passed on to distributors and credits for returned products. The Company produces certain catalog products that may be shipped from inventory within a short time after receipt of a purchase order. The Company's business for its catalog products, like the businesses of many companies in the semiconductor industry, is characterized by short-term orders and shipment schedules rather than by volume purchase contracts. Research and Development The Company's engineering staff is involved in the design of both systems and integrated circuits. During 1996, the Company sharply increased its product development team and committed to the acquisition of software design automation tolls in order to increase the rate of new product development. In 1996, the Company's development efforts were focused on the development of new digital processing circuits that address video image processing applications as well as enhancement or extension of existing products, especially design of new integrated circuit layouts required for compatibility with new silicon wafer sources. Product design efforts are supplemented by computer- design and simulation equipment. The Company also has an experienced test engineering group which works closely with the designers to develop production test software. Research and development expenditures were 12% of sales in 1996 and historically have been approximately 10% of net sales. See "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Consolidated Statements of Income" contained in Items 6, 7 and 8, respectively. Competition The semiconductor industry is intensely competitive and characterized by rapid technological change and rates of product obsolescence, price erosion, periodic shortage of materials, variations in manufacturing yields and efficiencies, and increasing foreign competition. The industry includes many major domestic and international companies which have substantially greater financial, technical, manufacturing, and marketing resources than the Company. In addition, there are many emerging companies which are attempting to obtain a share of the existing market. The Company faces competition from other manufacturers of high-performance integrated circuits, many of which have advanced technological capabilities, are currently increasing their participation in the high-performance CMOS market and have internal wafer production capabilities. The ability of the Company to compete in this rapidly evolving environment depends on elements both within and outside the control of the Company. These elements include: the Company's ability to develop new products in a timely manner; the cost effectiveness of its manufacturing; the successful introduction to and acceptance by customers of new products; the speed at which customers incorporate the Company's products into their systems; the continued access to advanced semiconductor foundries; the number and capabilities of its competitors as well as general economic conditions. In the area of high-performance DSP circuits, the Company competes with Texas Instruments, Lucent Technology, Raytheon, Analog Devices and Harris among others. In the area of high-performance static random access memories (SRAMs), the Company competes with, among others, Integrated Device Technology, Cypress Semiconductor, UMC, Micron Technology, Hitachi, NEC, Fujitsu, Motorola, Toshiba, and Winbond. Patents and Copyrights Because of the rapidly changing technology in the semiconductor industry, the Company relies primarily upon its design know-how and continued access to advanced CMOS process technology, rather than patents and copyrights, to develop and maintain its competitive position. The Company attempts to protect its trade secrets and other proprietary information through confidentiality agreements with employees, consultants, suppliers, and customers, but there can be no assurance that those measures will be adequate to protect the Company's interests. The Company is of the opinion that patent maskwork protection is of less significance in the Company's business than factors such as the experience and innovative skill of its personnel and the abilities of its management. There can be no assurance that others will not develop or patent technology similar to the Company's technology or copy or otherwise duplicate the Company's products. The Company owns five patents awarded by the United States Patent Office. Since others have obtained patents covering various semiconductor designs and processes, certain of the Company's present or future designs or processes may be claimed to infringe the patents of third parties. The Company has previously received and may in the future receive claims that one or more aspects or uses of the Company's products infringe on patent or other intellectual property rights of third parties. Presently, there are no such claims pending against the Company. The Company does not believe that it infringes any known patents at this time. If any such infringements exist or arise in the future, the Company may be liable for damages and may, like many companies in the semiconductor industry, find it necessary or desirable to obtain licenses relating to one or more of its current or future products. The Company expects, based on industry practice, that any necessary licenses or rights under patents could be obtained on conditions that would not have a material adverse effect on the Company. There can be no assurance, however, that licenses could in fact be obtained on commercially reasonable terms, or at all, or that litigation would not occur. The Company's inability to obtain such licenses or the occurrence of litigation could adversely affect the Company. Employees As of December 31, 1996, the Company had 58 full-time employees: 5 in administration, 9 in research and development, 3 in quality assurance, 27 in production/test and 14 in marketing and sales. In addition, from time to time, the Company uses consultants and part-time employees. The Company's ability to attract and retain qualified personnel is an important factor in its continued success. None of the Company's employees are represented by a collective bargaining agreement, and the Company has never experienced any work stoppage. The Company believes that its employee relations are good. Regulation Federal, state, and local regulations impose various environmental controls on the discharge of chemicals and gases in connection with the wafer manufacturing process. Since the Company relies on third party manufacturers and its activities do not involve utilization of hazardous substances generally associated with semiconductor processing, the Company believes such regulations do not have a material affect on its business or operations. ITEM 2. PROPERTIES The Company's executive offices, as well as its manufacturing and principal research and design facilities, are located in approximately 21,600 square feet of space in Sunnyvale, California pursuant to a lease expiring on December 15, 2002. The Company maintains additional sales or field application support offices located in the metropolitan area of Newton, Connecticut, Somersville, New Jersey, Tampa-St. Petersburg, Florida, San Diego, California, and Warminster, England. The Company currently leases these sales and field application support offices on a month-to-month basis. The Company believes that its facilities will be adequate to meet its reasonably foreseeable needs and, if necessary, that alternative facilities will be available to it on acceptable terms so as to meet its requirements. ITEM 3. LEGAL PROCEEDINGS Insurance Litigation The Company tendered the defense of a wrongful termination action brought by several former employees (which action was settled in 1994 with formal settlement documents completed in early 1996) to several of its insurance carriers, only one of which provided a partial defense. Accordingly, to recover defense fees incurred in defending the wrongful termination action, on September 21, 1992, the Company filed a Complaint for Breach of Contract, Bad Faith Insurance Practices, and Declaratory Relief against those insurance carriers which did not provide defense. [Logic Devices, Inc. v. St. Paul Fire and Marine Ins. Co., Centennial Insurance Co., Fireman's Fund Ins. Co., case number 724849.] St. Paul Fire and Marine Insurance Co. has agreed to a mediation and arbitration procedure in connection with this action. The Company's Complaint is pending against the remaining insurance carriers. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of fiscal 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded under the symbol "LOGC" on the Nasdaq National Market System. The following table sets forth for the period indicated, the high and low closing prices for the Company's Common Stock as reported by Nasdaq: 1995 High Low First Quarter $ 4 3/4 $ 2 1/16 Second Quarter $13 1/2 $ 3 9/16 Third Quarter $15 $ 9 3/4 Fourth Quarter $10 3/4 $ 7 5/16 1996 First Quarter $ 7 7/8 $ 4 7/8 Second Quarter $ 6 1/4 $ 4 Third Quarter $ 4 5/8 $ 3 1/4 Fourth Quarter $ 3 3/4 $ 2 1/16 Holders As of March 31, 1997, there were approximately 3,500 holders of the Common Stock. Dividends The Company has not paid any dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. The Company has entered into bank credit agreements which preclude the payment of dividends without the prior consent of the parties to such agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing". Regardless of any such restrictions in its bank credit agreement, the present policy of the Company is to retain earnings to provide funds for the expansion of its business. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company set forth below for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 has been derived from the Company's audited consolidated financial statements. This data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this report. (Dollars in thousands, except per share amounts) Year ended December 31, 1996 1995 1994 1993 1992 Net revenues . . . . . $12,525 $16,611 $13,492 $12,817 $12,255 Net income . . . . . . 122 1,384 708 277 85 Net income per common share . . . . . 0.02 0.26 0.15 0.06 0.02 Weighted average common shares outstanding (thousands) 6,041 5,420 4,841 4,862 4,741 Working capital . . . . 17,433 17,940 7,217 6,731 6,439 Equipment and leasehold improvements (net) . . . 4,204 2,410 2,163 2,371 2,049 Total assets. . . . . . 25,600 23,366 14,925 13,741 13,030 Long-term debt . . . . . 1,205 391 1,228 1,996 2,277 Shareholders' equity . . 21,126 20,711 8,810 7,902 7,300 Research and development expenses . . 1,450 1,451 1,338 1,285 1,234 Number of employees . . 58 49 44 49 61 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company derives its revenues primarily from the sale of semiconductor products falling into two main groups: DSP circuits and SRAM circuits. The revenue and gross margin contributed by each of the 45 products making up these groups are subject to: (i) availability of such product from the wafer foundry producing it, (ii) market demand for the product, (iii) average selling price for the product and (iv) costs of production. The Company's net revenues, gross margin, operating income and net income can depend upon the success of one or a small number of its products in any given accounting period. The Company believes that in the future its net revenues and operating results may change from period to period depending upon the success of new product introductions, the timing of large orders, and other cyclical factors affecting the semiconductor industry in general. The Company has derived revenues from technology licensing fees, but does not expect such fees to be a significant portion of revenues in the future. The Company believes that relationships with silicon wafer suppliers can provide it with reliable sources of wafers while sparing the Company the substantial investment in capital equipment required to establish a wafer fabrication facility. During 1992 and 1995, the Company was unable to receive adequate supplies of processed wafers conforming to the Company's quality standards from its then foundry suppliers, and accordingly, the Company's business and relationships with its customers were adversely affected. See "Business -- Background." In 1996, the Company had an abundant supply of wafer material from its suppliers as world wide Fab capacity became more readily available. The Company took advantage of this capacity by purchasing some last run material on several of its products utilizing older process technologies as the Company re-tooled these products to newer process technologies to enhance performance and reduce product costs. The Company works closely with the foundries in order to take advantage of their processing capabilities and continues to explore and develop additional foundry relationships in order to minimize its dependence on any single relationship. See "Business -- Wafer Fabrication Technology." The Company's in-house production capabilities consist of wafer testing, package marking, hot and cold testing, assembled product testing, final inspection, and quality/reliability screening. These production activities are included as cost components in the Company's cost of sales. The Company began subcontracting all its assembly operations in 1993 as a means for further cost savings and more efficient operations. The Company historically has maintained high levels of inventory in recognition of the economics of having relatively small lot-runs of its products processed by third-party suppliers and in order to protect against disruptions in supplies. The Company believes that it presently maintains a level of inventory appropriate to its business. It is the Company's policy to provide reserves for any product material that is over one year old with no back-log or sales activity, and to book reserves for future obsolescence. The Company expects to continue to make substantial commitments to research and development of new products and to improve existing products. The Company introduced 2 new products in 1996. In addition to the 45 catalog products currently offered, the Company began the development of additional products which are expected to be introduced in 1997. The following table sets forth for the periods indicated the percentage of net revenues (rounded to the nearest whole percent) represented by certain items of the Company's Consolidated Statements of Income: Year Ended December 31, 1996 1995 1994 96/95 95/94 Net revenues 100% 100% 100% (25)% 23% Cost of revenues 56% 56% 56% (25)% 23% Gross margin 44% 44% 44% (25)% 23% Operating expenses: Research and development 12% 9% 10% -% 8% Selling, general and administrative 30% 21% 24% 4% 9% Total operating expenses 42% 30% 34% 5% 9% Income from operations 2% 14% 10% (90)% 75% Interest expense, net -% 2% 3% (84)% (30)% Income before income taxes 2% 12% 7% (90)% 109% Income taxes 1% 4% 2% (89)% 142% Net income 1% 8% 5% (91)% 96% Results of Operations Year Ended December 31, 1996 compared to the Year ended December 31, 1995 Net revenues for the year ended December 31, 1996 were $12,524,900, a 25% decrease over the $16,611,100 in the year ended December 31, 1995. The decrease was due entirely to sales of the Company's SRAM products which decreased substantially over the former period. The market price for SRAMs fell nearly 80 percent in a matter of months during the first half of 1996. SRAMs which accounted for 45 percent of revenues in 1995, accounted for only 14 percent of revenues in 1996. The short fall was due to both price deterioration and order cancellation from many of our first tier customers. The Company directed its SRAM sales activity towards the high reliability military and industrial segments where superior performance and reliability command more favorable pricing. The Company's DSP product line experienced a 20% growth rate from 1995 to 1996. This growth in revenue from the Company's DSP product was not enough to overcome the weakness in the SRAM market. Cost of revenues decreased from $9,259,200 in the year ended December 31, 1995 to $7,008,900 in the year ended December 31, 1996. Gross profit decreased from $7,351,900 in 1995 to $5,516,000 due to the decrease in net revenues. Gross profit margin as a percentage of sales remained constant at 44% for 1995 and in 1996. The decrease in gross profit dollars was due to the decrease in revenues for 1996. The Company experienced a higher gross profit margin on revenue from product sales in 1996 (as explained above), however, this was offset by higher inventory write downs for the 1996 period. Research and development expenses were $1,450,100 in the year ended December 31, 1996 versus $1,450,600 in the year ended December 31, 1995. Research and development expenses as a percentage of net revenues increased from 9% in 1995 to 12% in 1996. Research and development expenses were essentially the same for the 1996 and 1995 periods as a result of fewer new product development tooling charges for the period offset by substantial investments in R&D personnel and design software which will increase the new product development during 1997. Although the new personnel and software were employed in 1996, the full year effect of their costs along with new product tooling costs will increase R&D expenditures substantially during 1997. Selling, general and administrative expenses increased 7% from $3,572,200 in the year ended December 31, 1995 to $3,827,000 in the year ended December 31, 1996. The increase was largely due to higher Sales and Marketing expenses associated with increased sales personnel and the opening of new sales offices in late 1995 and in 1996 and a decrease in the overall revenues of the Company. The Company incurred additional marketing expenses in an effort to identify new potential markets and products for future development. The Company incurred some nonrecurring costs associated with the move of its corporate headquarters in the fourth quarter of 1996. As a percentage of net revenues, selling, general and administrative expenses increased from 21% in 1995 to 30% in 1996. In the year ended December 31, 1996, operating income decreased 90% to $238,900 from $2,329,100 in the year ended December 31, 1995, due to the above-mentioned factors. As a percentage of net revenues, operating income decreased from 14% in the 1995 period to 2% in the 1996 period. Interest expense decreased from $339,700 in 1995 to $94,500 in 1996 as the Company's borrowing decreased from 1995 to 1996. This was offset by interest income of $102,300 in 1995 and $72,200 in 1996. As a result of the foregoing, net income decreased from $1,383,800 in the year ended December 31, 1995 to $122,300 in the year ended December 31, 1996. Year Ended December 31, 1995 compared to the Year ended December 31, 1994 Net revenues for the year ended December 31, 1995 were $16,611,100, a 23% increase over the $13,492,300 in the year ended December 31, 1994. The increase was due to the increased demand for and availability of the Company's products during 1995. Sales of the Company's SRAM products increased substantially over the former period, as the Company was able to support a portion of the heavy demand for the Company's SRAM product experienced mid-1995 with a limited amount of wafer material. Cost of revenues increased from $7,543,600 in the year ended December 31, 1994 to $9,259,200 in the year ended December 31, 1995. Gross profit increased from $5,948,700 in 1994 to $7,351,900 in 1995 due to the increase in net revenues. Gross profit margin as a percentage of sales was 44% for both 1994 and 1995. Research and development expenses were $1,450,600 in the year ended December 31, 1995 versus $1,337,900 in the year ended December 31, 1994, an increase of 8%. This growth was due to new product development efforts. Research and development expenses as a percentage of net revenues decreased from 10% in 1994 to 9% in 1995. Selling, general and administrative expenses increased 9% from $3,280,900 in the year ended December 31, 1994 to $3,572,200 in the year ended December 31, 1995. The increase was due to higher Sales and Marketing expenses incurred during the period to support the growth in revenues. Sales commissions paid to the Company's salesmen and independent sales representatives plus expenses associated with increased Marketing promotion efforts constituted the majority of the expense increase. As a percentage of net revenues, selling, general and administrative expenses decreased from 24% in 1994 to 21% in 1995. In the year ended December 31, 1995, operating income increased 75% to $2,329,100 from $1,329,900 in the year ended December 31, 1994, due to the above-mentioned factors. As a percentage of net revenues, operating income increased from 10% in the 1994 period to 14% in the 1995 period. Interest expense remained constant between the two periods, at $338,600 in 1994 and $339,700 in 1995. Interest income increased from $800 in the 1994 period to $102,300 in the 1995 as a result of interest earned on cash investment. As a result of the foregoing, net income increased from $707,800 in the year ended December 31, 1994 to $1,383,800 in the year ended December 31, 1995. Liquidity and Capital Resources For the three years ended December 31, 1996 the Company's after-tax cash earnings (net income plus non-cash items) significantly exceeded its net income, due to significant non-cash charges for depreciation, amortization, and ESOP compensation expense. Such after-tax cash earnings ($1,595,200 in 1996, $2,020,900 in 1995, and $1,963,500 in 1994) have served as a primary source of financing for the Company's working capital needs and for capital expenditures during these years. During 1996, the Company's after-tax cash earnings (net income of $122,300 plus non-cash items of $1,472,900) along with cash provided from accounts receivables of $1,191,500, was more than offset by increases in inventories of $5,632,900 (increases in inventories was funded by after-tax cash earnings, cash provided from receivable and cash on hand). These items along with net other cash flows items from operations used a total of $4,060,700 in net cash from operating activities. Capital equipment expenditures and increases to other assets used $1,517,500 in cash. Bank borrowing provided $2,000,000 in cash, exercise of warrants and stock option provided $292,500 in cash and repayment of long-term capital lease obligation used $421,900 in cash. Net of such amounts resulted in a decrease in cash and cash equivalents of $3,707,600 for the 1996 period. During 1995, the Company's after-tax cash earnings provided funding for increases of $1,214,400 in inventories, $1,856,400 of accounts receivable and $199,800 in net other resulting in net cash used by operations of $1,249,700. Capital equipment expenditures and increases to other assets used $911,700 net in cash. The Company completed three private placements of securities during the period which provided $9,665,200 in net cash. Repayment of bank notes (including a term loan in the principal amount of $800,000 which had been used previously to repay certain debt to shareholders) used $3,889,700 net in cash. The Company was also provided with cash flow from the exercise of certain warrants and employee stock options which provided $542,100 in cash flow for the period. During 1994, after-tax cash earnings of $1,963,500 supplemented by an increase in accounts payable and other operating assets and liabilities of $593,500 funded increases of $1,509,400 in inventories and $402,500 of accounts receivable and resulted in net cash provided by operations of $645,100. Such amount plus a net increase in indebtedness of $166,500 and an increase of $116,700 from the sales of common stock financed capital expenditures and increases in other assets of $900,400. The Company believes that its after-tax cash earnings, combined with cash on hand, reduction in levels of inventories, and financing available under its existing line of credit will be sufficient to support its working capital and capital expenditure requirements for at least the next twelve months. 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. For the year ended December 31, 1996, the Company took physical inventory write-downs of approximately $1,783,900. 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 (8.25% at December 31, 1996) 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 the Company was not in compliance with certain covenants under the borrowings, however, the Company obtained a waiver from the Bank. See Note 6 of Notes to Consolidated Financial Statements. The line of credit facility is secured by all of the assets of the Company. As of December 31, 1996, $6,000,000 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. Warrants to purchase an aggregate of 150,000 shares of Common Stock had been issued in connection with an extension of the Shareholder Loan under a Loan Extension and Warrant Purchase Agreement entered into in March 1991. Warrants to purchase 74,955 shares were exercised during the year ended December 31, 1995 and warrants to purchase 75,045 were exercised in February of 1996. The exercise price of the warrants was $3.45 per share. During 1996 the Company extended loans to two non-employee director warrant holders to purchase 120,000 shares of Common Stock at the warrant exercise price of $2.5625. The notes mature July 1998 and accrue interest at reference rate plus 2%. On February 15, 1995, the non- employee directors of the Company were granted warrants to purchase an aggregate of 220,000 shares of Common Stock. The grants were ratified by shareholders of the Company at the Company's 1996 annual meeting of shareholders held June 13, 1996. The warrants have an exercise price of $2.5625 per share, which was the last reported transaction price of the Common Stock on February 15, 1995, and expire on February 15, 2000. Certain other warrants to purchase an aggregate of 34,350 shares of Common Stock were issued by the Company in connection with two of the private placements which occurred in 1995. Under one transaction, the warrant gives the holders the right to purchase from the Company up to 31,850 shares of Common Stock at an exercise price equal to $12.625 per share (the last reported transaction price on August 21, 1996). The warrant was exercisable immediately upon its issuance and expires on August 21, 1998. Under the other transaction, the warrants gives the holders the right to purchase from the Company up to 2,500 shares of Common Stock at an exercise price equal to $11.875 per share (the closing bid price on September 14, 1996). These warrants were exercisable immediately upon their issuance and expire on September 19, 1998. All of the warrants granted in these transactions are transferable by the holders thereof in accordance with applicable securities laws and the shares underlying these warrants have been registered under the Securities Act of 1933, as amended. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES CONSOLIDATED FINANCIAL STATEMENTS: Page Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 20 Consolidated Balance Sheets, December 31, 1996 and 1995. . . . . . . . 21 Consolidated Statements of Income, years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 22 Consolidated Statements of Shareholders' Equity, years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . 23 Consolidated Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . 24 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 25 Quarterly Financial Data (unaudited) years ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 34 CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . 39 Exhibit 11 - Computation of Earnings per Common Share. . . . . . . . . . 43 MC Meredith, Cardozo & Lanz LLP Certified Public Accountants Independent Auditors Report To the Board of Directors and Shareholders Logic Devices Incorporated We have audited the consolidated financial statements of Logic Devices Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Logic Devices Incorporated and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Meredith, Cardozo & Lanz LLP San Jose, California March 20, 1997 LOGIC DEVICES INCORPORATED Consolidated Balance Sheets December 31, 1996 and 1995 Assets (Note 6) 1996 1995 Current assets: Cash and cash equivalents $ 670,900 $ 4,378,500 Accounts receivable, net of allowance for doubtful accounts of $403,700 and $119,500, respectively (Note 12) 4,368,300 5,844,000 Inventories (Note 3) 13,928,900 8,296,000 Prepaid expenses and other assets (Note 9) 922,600 980,300 Income taxes receivable (Note 7) 789,800 -- Deferred income taxes (Note 7) 920,900 704,700 Total current assets 21,601,400 20,203,500 Property and equipment, net (Notes 4 and 8) 4,204,300 2,409,800 Other assets (Note 2) 694,300 752,700 $ 26,500,000 $ 23,366,000 Liabilities and Shareholders' Equity Current liabilities: Bank borrowings (Note 6) $ 2,000,000 $ -- Accounts payable 1,074,600 991,000 Accrued expenses 531,800 278,800 Current portion of obligations under capital leases (Note 8) 561,900 175,200 Income taxes payable (Note 7) -- 819,000 Total current liabilities 4,168,300 2,264,000 Obligations under capital leases, less current portion (Note 8) 786,600 166,200 Deferred income taxes (Note 7) 419,500 225,000 Shareholders' equity (Notes 5 and 10): Preferred Stock, no par value; 1,000,000 shares authorized; 5,000 designated as Series A; 0 shares issued and outstanding -- -- Common Stock, no par value; 10,000,000 shares authorized; 6,121,750 and 5,916,705 shares issued and outstanding, respectively 17,341,900 16,741,900 Common Stock subscribed (307,500) -- Retained earnings 4,091,200 3,968,900 Total shareholders' equity 21,125,600 20,710,800 Commitments and contingencies (Notes 5, 6, 8 and 9) $ 26,500,000 $ 23,366,000 LOGIC DEVICES INCORPORATED Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 Net revenues (Note 11) $ 12,524,900 $ 16,611,100 $ 13,492,300 Cost of revenues (Notes 9 and 11) 7,008,900 9,259,200 7,543,600 Gross margin 5,516,000 7,351,900 5,948,700 Operating expenses: Research and development 1,450,100 1,450,600 1,337,900 Selling, general and administrative 3,827,000 3,572,200 3,280,900 Total operating expenses 5,277,100 5,022,800 4,618,800 Income from operations 238,900 2,329,100 1,329,900 Other (income) expense: Interest expense 94,500 339,700 338,600 Interest income (72,200) (102,300) (800) Other 14,300 (7,900) (11,500) 36,600 229,500 326,300 Income before income taxes 202,300 2,099,600 1,003,600 Income taxes (Note 7) 80,000 715,800 295,800 Net income $ 122,300 $ 1,383,800 $ 707,800 Earnings per share: Net income per common share $ 0.02 $ 0.26 $ 0.15 Weighted average common shares outstanding 6,041,483 5,419,672 4,841,373 LOGIC DEVICES INCORPORATED Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 Guarantee of leveraged Preferred Stock Common Stock Retained ESOP Shares Amount Shares Amount Earnings Borrowing Total Balances as of December 31, 1993 154 $154,000 4,737,584 $ 5,954,500 $1,877,300 $(83,800) $7,902,000 Proceeds from exercise of Common stock options -- -- 25,000 116,700 -- -- 116,700 ESOP compensation expense -- -- -- -- -- 83,800 83,800 Net income -- -- -- -- 707,800 -- 707,800 Balances as of December 31, 1994 154 154,000 4,762,584 6,071,200 2,585,100 -- 8,810,300 Proceeds from exercise of common stock options -- -- 66,000 283,500 -- -- 283,500 Private stock offerings, net of issuance costs of $416,300 -- -- 912,500 9,665,200 -- -- 9,665,200 Conversion of Series A preferred stock into common stock (154) (154,000) 25,666 154,000 -- -- -- Purchase of assets for stock (Note 2) -- -- 75,000 309,400 -- -- 309,400 Conversion of stock warrants (Note 5) -- -- 74,955 258,600 -- -- 258,600 Net income -- -- -- -- 1,383,800 -- 1,383,800 Balances as of December 31, 1995 -- -- 5,916,705 16,741,900 3,968,900 -- 20,710,800 Proceeds from exercise of common stock options -- -- 10,000 33,600 -- -- 33,600 Conversion of stock warrants (Note 5) -- -- 195,045 566,400 -- (307,500) 258,900 Net income -- -- -- -- 122,300 -- 122,300 Balances as of December 31, 1996 -- $ -- 6,121,750$17,341,900 $4,091,200 $(307,500)$21,125,600 LOGIC DEVICES INCORPORATED Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (Note 13) 1996 1995 1994 Cash flows from operating activities: Net income $ 122,300 $ 1,383,800 $ 707,800 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,210,400 1,120,100 1,246,100 Allowance for doubtful accounts 284,200 70,000 (12,500) ESOP expense -- -- 83,800 Deferred income taxes (21,700) (553,000) (61,700) Changes in assets and liabilities: Accounts receivable 1,191,500 (1,856,400) (402,500) Inventories (5,632,900) (1,214,400) (1,509,400) Prepaid expenses and other assets 57,700 (574,500) 166,900 Income taxes receivable (789,800) -- -- Accounts payable 83,600 (279,200) 226,600 Accrued expenses 253,000 (13,700) 48,600 Income taxes payable (819,000) 667,600 151,400 Net cash (used in) provided by operating activities (4,060,700) (1,249,700) 645,100 Cash flows from investing activities: Capital expenditures (1,344,400) (884,800) (711,900) Other assets (173,100) (26,900) (188,500) Net cash used in investing activities (1,517,500) (911,700) (900,400) Cash flows from financing activities: Proceeds from bank borrowings 2,000,000 3,011,400 3,412,400 Repayments of bank borrowings -- (5,857,800) (2,466,300) Proceeds from long-term debt obligations -- 800,000 -- Repayments of long-term debt obligations(421,900) (979,400) (579,600) Repayments of obligations to shareholders -- (863,900) (200,000) Sale of common stock 292,500 10,207,300 116,700 Net cash provided by financing activities 1,870,600 6,317,600 283,200 Net (decrease) increase in cash and cash equivalents (3,707,600) 4,156,200 27,900 Cash and cash equivalents at beginning of year 4,378,500 222,300 194,400 Cash and cash equivalents at end of year $ 670,900 $4,378,500 $ 222,300 LOGIC DEVICES INCORPORATED Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The Company Logic Devices Incorporated (the Company) develops and markets high-performance digital complementary metal oxide silicon (CMOS) integrated circuits for applications which require high-operating speeds and low-operating power. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated. Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost. Depreciation on equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements and assets held under capital leases are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Certain tooling costs are capitalized by the Company and amortized on a straight-line basis over the shorter of the related product life cycle or five years. Cost in Excess of Fair Value of Net Assets Acquired Costs in excess of the fair value of net assets acquired is amortized on a straight line basis, generally over 7 years. Capitalized Software Costs Internal test computer software development costs incurred subsequent to the determination of its technical feasibility are capitalized and amortized on a straight-line basis over the shorter of the related expected product life cycle or five years. As of December 31, 1996 and 1995, such costs aggregated $1,903,700 and $1,812,500, respectively, and are included in other assets in the consolidated financial statements net of accumulated amortization of $1,708,700 and $1,519,200, respectively. Revenue Recognition Revenue is generally recognized upon shipment of product. Sales to distributors are made pursuant to agreements which provide the distributors certain rights of return and price protection on unsold merchandise. Revenues from such sales are recognized upon shipment, with a provision for estimated returns and allowances recorded at that time. (continued) 1. Summary of Significant Accounting Policies - continued Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Deferred income taxes as of December 31, 1996 and 1995, primarily result from certain expenses that are not currently deductible for tax purposes. Net Income Per Common Share Net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding for each year. Common equivalent shares consist of convertible preferred stock (in 1995 and 1994) and the dilutive effect, if any, of stock options and warrants. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The new standard is effective for fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a material effect upon the Company s financial condition or consolidated results of operations in 1996. Stock-Based Incentive Program In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which encourages entities to recognize compensation costs for stock-based employee compensation plans using the fair value based method of accounting defined in SFAS No. 123, but allows for the continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company elected to continue with the accounting prescribed by APB Opinion No. 25 and as such is required to disclose pro forma net income and earnings per share as if the fair value based method of accounting had been applied (Note 10). Reclassification Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. (continued) 2. Acquisition On April 14, 1995, the Company acquired and accounted for as a purchase, certain intellectual and intangible assets of STAR Semiconductor Corporation. Total consideration for the acquisition was 75,000 shares of the Company s common stock valued at $309,400, for which the entire amount was assigned to costs in excess of fair value of the net assets acquired and other intangible assets. As of December 31, 1996 and 1995, such costs are included in other assets on the consolidated balance sheets net of accumulated amortization of $ 267,400 and $ 309,400 , respectively. Pro forma results of operations assuming that this acquisition had taken place at the beginning of the respective periods have not been presented because the effects of the acquisition were not significant. 3. Inventories A summary of inventories follows: 1996 1995 Raw materials $ 3,165,400 $ 938,000 Work-in-process 6,744,900 3,912,600 Finished goods 4,018,600 3,445,400 $ 13,928,900 $ 8,296,000 Based on 1996 s sales of $12,524,900 at December 31, 1996, the Company has in excess of one year s supply of inventory. 4. Property and Equipment A summary of property and equipment follows: 1996 1995 Equipment $ 7,752,200 $ 5,729,000 Tooling costs 4,870,600 4,182,700 Leasehold improvements 225,200 162,800 12,848,000 10,074,500 Less accumulated depreciation and amortization 8,643,700 7,664,700 $ 4,204,300 $ 2,409,800 Equipment under capital lease obligations aggregated $1,763,000 and $1,043,400 in 1996 and 1995, with related accumulated amortization of $622,000 and $741,100, respectively. 5. Related Party Transactions Warrants Between the years 1991 and 1993, the Company granted warrants to purchase 150,000 shares of the Company s common stock to two groups of family trusts (the Trusts) established for members of the families of two of the Company s board of directors, for extension of the then outstanding shareholder obligation. These warrants were exercisable at $3.45 per share and expire in March, 1996 (Note 10). In 1995, warrants for 74,955 shares of common stock were converted for aggregate cash proceeds of $258,600. In 1996, warrants for 75,045 shares of common stock were converted for aggregate cash proceeds of $258,900. (continued) 5. Related Party Transactions - continued In 1995, the Company granted 200,000 warrants to two non-employee directors related to the Trusts referred to above and 20,000 warrants to one non-employee director to purchase the Company s common stock. These warrants are exercisable at $2.5625 per share and expire February 15, 2000 (Note 10). In 1996, 120,000 of the non-employee director warrants related to the trust referred to above were exercised via the issuance of two promissory notes maturing July 1998, and bearing interest at a reference rate plus 2%. These notes are included in common stock subscribed in the accompanying consolidated financial statements. 6. Debt Financing Bank Borrowings The Company has a $8,000,000 revolving line of credit with a bank which expires on May 31, 1997, bears interest at the bank s prime rate (8.250% at December 31, 1996), and is secured by the assets of the Company. The line of credit requires the Company to maintain a minimum tangible net worth, a maximum ratio of debt to tangible net worth, a minimum current ratio, a minimum quick ratio, and profitability over a specified interval of time. As of December 31, 1996, the Company was not in compliance with certain covenants under the bank borrowings, however, the Company has obtained a waiver from the bank. At December 31, 1996, the Company had $6,000,000 available under the revolving line of credit. In 1995, the Company used $3,697,000 from the proceeds of the private stock offerings to retire the then outstanding obligations under the revolving line of credit and term debt. 7. Income Taxes Income tax expense for the years ended December 31, 1996, 1995 and 1994 comprise: Current Deferred Total 1996: Federal $ 86,200 $ (18,400) $ 67,800 State 15,500 (3,300) 12,200 $ 101,700 $ (21,700) $ 80,000 1995: Federal $ 1,075,100 $ (468,800) $ 606,300 State 193,700 (84,200) 109,500 $ 1,268,800 $ (553,000) $ 715,800 1994: Federal $ 302,900 $ (52,300) $ 250,600 State 54,600 (9,400) 45,200 $ 357,500 $ (61,700) $ 295,800 (continued) 7. Income taxes - continued Deferred income taxes result from timing differences in the recognition of certain expenses and income items for tax and financial reporting purposes as follows: 1996 1995 1994 Distributor sales $ (40,100) $ (5,700) $ 14,700 Capitalized inventory costs (81,700) (223,100) (19,700) Reserve not currently deductible (120,800) (71,900) 120,500 Depreciation 264,400 (191,200) (83,200) Capitalized software costs (43,500) (61,100) (94,000) $ (21,700) $ (553,000) $ (61,700) The following summarizes the difference between the income tax expense and the amount computed by applying the Federal income tax rate of 34% in 1996, 1995 and 1994 to income before income taxes: 1996 1995 1994 Federal income tax at statutory rate $ 68,800 $ 717,300 $ 341,200 Utilization of tax credits (13,200) (121,400) (107,000) State income taxes, net of federal tax benefit 12,400 129,500 61,600 Other, net 12,000 (9,600) -- $ 80,000 $ 715,800 $ 295,800 Deferred tax assets comprises the following: 1996 1995 Distributor sales $ 80,400 $ 40,300 Capitalized inventory costs 494,400 412,700 Reserve not currently deductible 428,700 307,900 Depreciation (487,500) (223,100) Capitalized software costs (14,600) (58,100) Net deferred tax asset $ 501,400 $ 479,700 (continued) 8. Commitments The Company leases its facilities and certain equipment under operating leases. The facility lease requires the Company to pay certain maintenance and operating expenses such as taxes, insurance, and utilities. Rent expense related to these operating leases was $1,174,400, $939,100, and $918,600, during 1996, 1995 and 1994, respectively. A summary of the future minimum lease payments under capitalized leases together with the present value of such minimum lease payments and future minimum payments required under noncancelable operating leases with terms in excess of one year follows: Noncancelable Years ending Capitalized operating December 31, leases leases 1997 $ 696,800 $ 1,125,200 1998 566,900 1,109,000 1999 306,600 848,700 2000 -- 443,900 2001 -- 323,700 Thereafter -- 323,600 Future minimum lease payments 1,570,300 $ 4,174,100 Less amount representing interest (9.5% to 15.8%) 221,600 Present value of future minimum lease payments 1,348,700 Less current portion 561,900 $ 786,800 9. Product Development and Foundry Agreements In order to secure a long-term volume source of wafer production, in December 1995, the Company entered into a foundry capacity agreement (the Agreement) with Zenitrum Mikroelektronik Dresden (ZMD), a German limited liability company. Under the terms of the Agreement, the Company entered into a non- cancelable purchase commitment for one year s production capacity of certain of its products with ZMD, at predetermined prices. The Agreement required a $792,000 pre-payment for the year s purchases, which is included in prepaid expenses and other assets, and is renewable annually upon satisfaction of various provisions. The Company extended its foundry capacity agreement with ZMD through March, 1998. 10. Capital Stock Preferred Stock In June 1995, each share of the Series A Preferred Stock held by the Trusts (Note 5), was converted into 166.67 shares of common stock. As of December 31, 1996 and 1995, there were no shares of Series A Preferred Stock outstanding. (continued) 10. Capital Stock - continued Common Stock During 1995, the Company issued a total of 912,500 shares of the Company s common stock in private placement transactions exempt from registration under the Securities Act, which generated net proceeds of approximately $9,665,200. These proceeds were used to repay the then outstanding bank debt of $3,697,000. Also during 1995, the Company purchased certain assets of Star Semiconductor Corporation for 75,000 shares of the Company s common stock (Note 2). Stock Purchase Warrants As of December 31, 1996, the following common stock warrants were issued and outstanding: Issued with Shares Subject Exercise Expiration Respect to: To Warrant Price Date Private Placement 31,850 $ 12.6250 August 21, 1998 Private Placement 2,500 $ 11.8750 September 19, 1998 Non-employee Board of Directors Compensation 100,000 $ 2.5625 February 15, 2000 Stock Option Plan FASB Statement 123, Accounting for Stock-Based Compensation , requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company s stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement 123. The Company estimates the fair value of stock options at the grant date by using the Black- Scholes option pricing-model with the following weighted average assumptions used for grants in 1994, 1995, 1996, respectively: dividend yield of 0; expected volatility of 42, 112, 129 percent; risk-free interest rates of 6.1, 6.4, 6.6 percent for the 1994 Plan options; and expected lives of 4 years for the all plan options. Under the accounting provisions of FASB Statement 123, the Company s net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1994 1995 1996 Net income: As reported $ 707,800 $ 1,383,800 $ 122,300 Pro forma $ 705,500 $ 1,320,300 $ 39,200 Primary earnings per share: As reported $ 0.15 $ 0.26 $ 0.02 Pro forma $ 0.15 $ 0.24 $ 0.01 (continued) 10. Capital Stock - continued A summary of the status of the Company s stock option plan as of December 31, 1994, 1995, and 1996, and changes during the years ended on those dates is presented below: Options Outstanding December 31, 1994 December 31, 1995 December 31, 1996 Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at beginning of year 78,000 $ 2.740 78,000 $ 2.778 97,000 $ 7.540 Granted 25,000 $ 2.750 85,000 $ 8.000 10,000 $ 6.000 Exercised (25,000) $ 1.625 (66,000) $ 7.000 (10,000) $ 1.625 Forfeited -- -- -- -- (3,500) $ 8.000 Outstanding at end of year 78,000 $ 2.778 97,000 $ 7.540 93,500 $ 7.830 Options exercisable at year-end 78,000 12,000 43,000 Weighted-average fair value of options granted during the year $ 2.750 $ 8.000 $ 6.000 The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Aver Exercise at Contractual Exercise at Exercise Price 12/31/96 Life Price 12/31/96 Price $4.25 2,000 3.75 Years $4.25 2,000 $4.25 $8.00 91,500 9 Years $8.00 41,000 $8.00 93,500 $7.92 43,000 $7.83 11. Major Customers, Suppliers and Export Sales Major Customers In 1996, two customers each accounted for approximately 10% of net revenues. In 1995, two customers each accounted for approximately 13% of net revenues, and one customer accounted for approximately 10% of net revenues. In 1994, one customer accounted for approximately 17% of net revenues. (continued) 11. Major Customers, Suppliers and Export Sales - continued Major Suppliers In 1996, two suppliers were in excess of 10% of the Company s total purchases and aggregated approximately $ 4,094,600. There was no outstanding accounts payable to these suppliers at December 31, 1996. Export Sales The Company had the following export sales: 1996 1995 1994 Western Europe $ 2,341,300 $ 1,831,400 $ 1,517,000 Far East 904,000 1,500,600 939,300 Other 99,600 108,800 22,200 $ 3,344,900 $ 3,440,800 $ 2,478,500 12. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amounts of credit exposure to any one financial institution. A significant portion of the Company s accounts receivable are derived from one major class of customer (distributors) with the remainder spread across many other customers in various electronic industries. The Company believes any risk of accounting loss is significantly reduced due to provision being made at the date of the sale for returns and allowances, diversity of its products, end-customers, geographic sales areas and insurance on foreign distributor sales. The Company performs credit evaluations of its customers financial condition whenever necessary. The Company generally does not require cash collateral or other security to support customer receivables. 13. Statements of Cash Flows The Company paid $94,500, $339,700 and $338,600 for interest and $1,794,300, $454,600 and $98,700 in income taxes in 1996, 1995 and 1994, respectively. Noncash investing activities for 1996 and 1995 consisted of the acquisition of $1,429,000 and $240,200, respectively, of equipment under capital leases. In addition, as discussed in Note 2, noncash investing activities in 1995 included the issuance of 75,000 shares of the Company s common stock for certain assets of STAR Semiconductor Corporation. Quarterly Financial Data (Unaudited) The following is a summary of unaudited results of operations (dollars in thousands except per share data) for the years ended December 31, 1996 and 1995. 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Total Net revenues $ 3,609 $ 3,496 $ 3,390 $ 2,030 $ 12,525 Gross margin 1,634 1,696 1,542 643 5,516 Income from operations 329 186 156 (432) 239 Income before income taxes 369 214 161 (542) 202 Net income 221 134 95 (328) 122 Earnings per share 0.04 0.02 0.02 (0.06) 0.02 Weighted average shares 6,219 6,222 6,222 6,041 6,041 1995 First Second Third Fourth Quarter Quarter Quarter Quarter Total Net revenues $ 3,550 $ 4,408 $ 4,517 $ 4,136 $ 16,611 Gross margin 1,666 1,827 1,833 2,026 7,352 Income from operations 499 696 689 445 2,329 Income before income taxes 400 602 648 450 2,100 Net income 272 407 441 264 1,384 Earnings per share 0.06 0.08 0.08 0.05 0.26 Weighted average shares 4,913 5,294 5,667 5,420 5,420 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The following is a list of the directors and executive officers of the Company as of December 31, 1996, all of whom are elected annually: Positions Held Name Age With the Company William J. Volz 49 President Director Todd J. Ashford 40 Chief Financial Officer Secretary William Jackson 49 Vice President/Manufacturing Howard L. Farkas 72 Chairman of the Board Burton W. Kanter 66 Director Albert Morrison, Jr. 58 Director Bruce B. Lusignan 46 Director Mr. Volz is a founder of the Company. He has served as a director since its inception and has been the President of the Company since December 1987. Mr. Volz served as the Company's Vice President of Engineering from 1983 to 1987. He was previously employed by Texas Instruments, Inc., Mostek Corporation, and E-Systems, Inc. Mr. Ashford joined the Company in 1984 as Director of Finance and Administration. Since 1985, Mr. Ashford has served as the Company's Chief Financial Officer. Mr. Ashford was previously employed by W.R. Grace & Company, Inc. Mr. Jackson joined the Company in 1990. Before joining the Company, Mr. Jackson held various engineering and management positions at Advanced Micro Devices ("AMD") and Monolithic Memories Inc. ("MMI"). Prior to AMD and MMI, he was employed by Raytheon Corporation, Litronix Corporation, and Western Electric. Mr. Jackson was appointed Vice President of Manufacturing in 1992. Mr. Farkas is Chairman of the Board of the Company and has been a director since 1983. Mr. Farkas has been part owner of and a broker with Farkas Group, Inc., a commercial real estate company, since 1981. He has been a business advisor to Mr. S. A. Hellerstein, trustee of the Farkas Trusts, and Mr. Hellerstein's predecessor since 1964. He serves as a director of Synthetech, Inc., Power Cell, Inc. and Acquisition Industries, Inc. Mr. Farkas is vice president of G.A.S. Corp., a privately held corporation which serves as the corporate general partner of Gas Acquisition Services Limited Partnership. On June 27, 1990, such limited partnership sought protection under Chapter 11 of the federal bankruptcy laws. On September 22, 1992, Mr. Farkas filed for personal protection under Chapter 7 of the federal bankruptcy laws. Mr. Kanter has served as a director of the Company since 1983. He is "of counsel" to the law firm of Neal Gerber & Eisenberg in Chicago. He serves as a director of numerous companies, including the following public companies: Walnut Financial Services, Inc., HealthCare COMPARE Corp., Scientific Measurement Systems, Inc., Channel America, Inc. and PowerCell-Inc. He also is a member of the Board of Directors or the Board of Trustees of: the Midwest Film Center of the Chicago Art Institute, the Chicago International Film Festival and the Museum of Contemporary Art of Chicago. He is also on the advisory board of the Wharton School of the University of Pennsylvania Real Estate Center and the University of Chicago Annual Tax Conference. Mr. Morrison has served as a director since 1983 and has been President of Morrison, Brown, Argiz & Company, P.C., a certified public accounting firm in Miami, Florida, since 1969. Mr. Morrison is Vice Chairman of the Dade County Industrial Development Authority, Treasurer of the Board of Trustees of Florida International University and a member of the Board of Directors of Chicago Holdings, Inc., Heico Corporation and a Trustee of the Greater Miami Chamber of Commerce. Dr. Lusignan was elected to the Board of Directors in 1996. Dr. Lusignan is Director of the Communications Satellite Planning Center, a research laboratory of Stanford University's Electrical Engineering Department. Dr. Lusignan is Vice President of Engineering for Primary Communication, Inc., a small telecommunications consulting firm and does consulting work for Becker, Gurman, Lucas, Meyers and O'Brien (regulatory law), Mendes and Mount (satellite insurance), the Intergovernmental Bureau of Informatics, Cairo University, King Saud University, E.F. Johnson Corporation, and the U.S. Congress Office of Technology Assessment. Committees of the Board of Directors The Board has an Audit Committee and a Compensation Committee. Currently, the members of the Audit Committee are Howard L. Farkas, Burton W. Kanter and Albert Morrison, Jr., and the members of the Compensation Committee are Howard L. Farkas, William J. Volz and Burton W. Kanter. The functions of the Audit Committee include reviewing the independence of the Company's independent auditors, recommending to the Board the engagement and discharge of independent auditors, reviewing with the independent auditors the plan and results of auditing engagements, reviewing the scope and adequacy of internal accounting controls and directing and supervising special investigations. The Audit Committee held one meeting during 1996. The functions of the Compensation Committee include reviewing and making recommendations to the Board with respect to the compensation of officers and other employees of the Company and establishing employee benefit programs. The Compensation Committee held one meeting during 1996. The Board held five meetings during 1996. All members of the Board attended each meeting during the year. Compliance with Section 16(a) of the Exchange Act Based solely upon a review of Form 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, the Company is not aware of any directors, officer or beneficial owner of more than 10% of the shares of the Company's Common Stock who failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal year except that an SEP of Burton W. Kanter sold 2,500 shares of the Company's Common Stock on May 25, 1995 which sale was not reported on Form 4 until August of 1995. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements appear at pages 21 to 34 of this report; see Index to Consolidated Financial Statements at page 19 of this report. (2) Consolidated Financial Statement Schedules appear at page 40 of this report; see Index to Consolidated Financial Statement Schedules at page 19 of this report. (3) The Index to Exhibits appears at page 41 of this report. (b) Reports on Form 8-K: During the last quarter of fiscal 1996, the Company filed no Current Report on Form 8-K. Schedule II - Valuation and Qualifying Accounts Balance Charged to Charged Balance at at Beginning costs and to Other end Description of Period expenses Accounts Deductions of Period 1996 Allowances for: Doubtful Accounts $ 119,500 $ 400,000 -- $ 115,800 $ 403,700 Inventory Reserve $ 575,000 $1,783,900 -- $1,783,900 $ 575,000 Sales Returns $ 100,500 $ 100,000 -- -- $ 200,500 1995 Allowances for: Doubtful Accounts $ 49,500 $ 120,000 -- $ 50,000 $ 119,500 Inventory Reserve $ 478,500 $ 749,800 -- $ 653,300 $ 575,000 Sales Returns $ 100,500 $ 507,600 -- $ 507,600 $ 100,500 1994 Allowances for: Doubtful Accounts $ 62,000 $ 90,000 -- $ 102,500 $ 49,500 Inventory Reserve $ 756,600 $ 872,500 -- $1,150,000 $ 478,500 Sales Returns $ 143,500 $ 274,200 -- $ 317,200 $ 100,500 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LOGIC DEVICES INCORPORATED Date: April 8, 1997 By: /s/ William J. Volz William J. Volz, President and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ William J. Volz President April 8, 1997 William J. Volz (Principal Executive Officer) /s/ Todd J. Ashford Chief Financial Officer April 8, 1997 Todd J. Ashford (Principal Financial and Accounting Officer) /s/ Howard L. Farkas Chairman of the Board April 8, 1997 Howard L. Farkas of Directors /s/ Burton W. Kanter Director April 8, 1997 Burton W. Kanter /s/ Albert Morrison, Jr. Director April 8, 1997 Albert Morrison, Jr. /s/ Bruce B. Lusignan Director April 8, 1997 Bruce B. Lusignan INDEX TO EXHIBITS Exhibit No. Description 3.1 Articles of Incorporation, as amended [3.1] (1). 3.2 Bylaws, as amended. [3.2] (1). 4.1 Form of Warrant to purchase an aggregate of 2,500 shares of common stock. [4.1] (15) 4.2 Form of Warrant to purchase an aggregate of 31,850 shares of common stock. [10.2] (13) 10.1 Master Agreement dated August 11, 1988 between Registrant, Howard L. Farkas, Burton W. Kanter, William Volz, Albert Morrison, Jr., as trustee of the T.C. Family Trust, Burton W. Kanter, as trustee of the Logical Trust, L.A. Hellerstein, as trustee, the Farkas Trusts, and Solomon A. Weisgal as trustee of the Bea Ritch Trusts, with exhibits. [10.1] (1). 10.2 Logic Devices Incorporated Stock Purchase Plan. [10.2] (1). 10.3 Incentive Stock Agreement dated September 1, 1986 between Registrant and certain employees and former employees of Registrant, including William Volz, James McAllister, Todd Ashford and Jesse Huffman. [10.3] (1). 10.4 Agreement of Lease dated May 4, 1989 between Registrant and the Koger Company covering Registrant's facility in St. Petersburg, Florida. [10.7] (5) 10.5 Sales Incentive Plan. [10.11] (1). 10.6 Logic Devices Incorporated incentive and non-qualified stock option plan. [10.26] (6). 10.7 Stock option agreement between Todd J. Ashford and the Registrant, dated May 15, 1990. [10.27] (7) 10.8 Stock option agreement between Tony Bell and the Registrant, dated April 16, 1990. [10.28] (7) 10.9 SRAM Development Memorandum of Understanding between the Registrant and OKI Electric Industry Co., Ltd. dated March 3, 1992. [10.32] (9) (17) 10.10 Form of Warrant to purchase an aggregate of 220,000 shares of Common Stock. [10.23] (12) 10.11 Form of Registration Agreement regarding the Warrants referenced in Exhibit 10.14. [10.24] (12) 10.12 Foundry Capacity Agreement between Zentrum Mikroelektronik Dresden (ZMD) and Logic Devices Incorporated, dated December 14, 1995. [10.27](12)(17) 10.13 Real Estate lease regarding Registrant's Sunnyvale facilities. [10.1](16) 10.14 Assignment of Warrant to purchase an aggregate of 100,000 shares of Common Stock. [10.1](14) 10.15 Secured Promissory Note between Howard Farkas and Registrant. [10.4](14) 10.16 Secured Promissory Note between Albert Morrison, Jr. and Registrant. [10.5](14) 11.1 Computation of Earnings per Common Share 23.1 Consent letter of Meredith Cardozo & Lanz LLP 26.1 Financial Data Schedule ___________________ [ ] Exhibits so marked have been previously filed with the Securities and Exchange Commission as exhibits to the filings shown below under the exhibit numbers indicated following the respective document description and are incorporated herein by reference. (l) Registration Statement on Form S-18 ("Registration Statement"), as filed with the Securities and Exchange Commission ("SEC") on August 23, 1988. (2) Amendment No. 1 to Registration Statement as filed with the SEC on September 27, 1988. (3) Amendment No. 2 to Registration Statement, as filed with the SEC on October 7, 1988. (4) Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as filed with the SEC on April 14, 1989. (5) Annual report on Form 10-K for the fiscal year ended December 31, 1989, as filed with the SEC on April 14, 1990. (6) Proxy Statement relating to the Annual Meeting of Shareholders held on June 12, 1990, as filed with the SEC on May 24, 1990. (7) Annual Report on Form 10-K for the fiscal year ended December 31, 1990, as filed with the SEC on April 14, 1991. (8) Annual Report on Form 10-K for the fiscal year ended December 31, 1991, as filed with the SEC on April 14, 1992. (9) Annual Report on Form 10-K for the fiscal year ended December 31, 1992, as filed with the SEC on April 15, 1993. (10) Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as filed with the SEC on March 31, 1994. (11) Annual Report on Form 10-K for the fiscal year ended December 31, 1994, as filed with the SEC on March 31, 1995. (12) Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as filed with the SEC on April 12, 1996. (13) Registration Statement on Form S-3 as filed with the SEC on August 31, 1995 [Registration No. 33-62299] (14) Registration Statement on Form S-3 as filed with the SEC on November 21, 1996 [Registration No. 333-16591] (15) Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, as filed with the SEC on November 14, 1995. (16) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, as filed with the SEC on November 14, 1996. (17) Confidential treatment requested with respect to certain portions of such agreements. EXHIBIT 11 Computation of Earnings per Common Share 1996 1995 1994 Weighted average shares outstanding common stock 6,041,483 5,233,575 4,758,146 Common stock equivalent convertible preferred stock -- -- 25,666 Dilutive effect of common stock options -- 13,743 28,035 Dilutive effect of common stock warrants -- 172,354 29,526 Weighted average common and common share equivalents 6,041,483 5,419,672 4,841,373 Net income $ 122,300 $1,383,800 $ 707,800 Net income per common share equivalent $ 0.02 $ 0.26 $ 0.15 EXHIBIT 23.1 MC Meredith, Cardozo & Lanz LLP Certified Public Accountants Independent Auditors Consent The Board of Directors Logic Devices Incorporated We consent to the use of our report included herein, dated March 20, 1996, relating to the consolidated balance sheets of Logic Devices Incorporated (the Company ) as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders equity and cash flows and related schedules for each of the years in the three-year period ended December 31, 1996, to the incorporation by reference of such report into the Registration Statement on Form S-3 filed by the Company with the Securities and Exchange Commission ( SEC ) November 21, 1996 [Registration No. 333-16591], into the Registration Statement on Form S-8 filed by the Company with the SEC on September 28, 1993 [File No. 33- 69630], and into the Registration Statement on Form S-8 filed by the Company with the SEC on July 6, 1996 [Registration No. 33-60993]. /s/ Meredith, Cardozo & Lanz LLP San Jose, California March 20, 1996 EX-27 2 ARTICLE 5 FDS FOR 10-K
5 1 YEAR DEC-31-1995 DEC-31-1995 670,900 0 4,368,900 403,700 13,928,900 21,601,400 12,848,000 8,643,700 26,500,000 4,168,300 0 17,341,900 0 0 0 26,500,000 12,524,900 12,524,900 7,008,900 5,277,100 14,300 0 94,500 202,300 80,000 122,300 0 0 0 122,300 0.02 0.02
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