UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended

December 31, 2006

 

Commission File Number

0-17187

 

LOGIC Devices Incorporated

(Exact name of registrant as specified in its charter)

 

California

94-2893789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

395 West Java Drive, Sunnyvale, California 94089

(Address of principal executive offices)

(Zip Code)

 

(408) 542-5400

(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   X    No       

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One):

Large Accelerated Filer          Accelerated Filer          Non-Accelerated Filer  X 

 

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes            No    X   

 

Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date. On January 25, 2007, 6,795,438 shares of Common Stock, without par value, were issued and outstanding.


LOGIC Devices Incorporated

 

INDEX

 

Page

Number

 

Part I.  Financial Information

 

Item 1.    Financial Statements

 

Condensed Balance Sheets as of December 31, 2006 and September 30, 2006

3

 

Condensed Income Statements for the fiscal quarters ended December 31, 2006 and 2005

4

 

Condensed Statements of Cash Flows for the fiscal quarters ended December 31, 2006 and 2005

5

 

Notes to Condensed Financial Statements

6

 

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

8

 

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

10

 

Item 4.    Controls and Procedures

10

 

Part II.  Other Information

10

 

Item 1.    Legal Proceedings

10

 

Item 1A. Risk Factors

11

 

Item 6.    Exhibits

11

 

Signatures

12



Part I - Financial Information

 

Item 1.  Financial Statements

 

Condensed Balance Sheets

 

December 31, 

September 30, 

2006 

2006 

(unaudited)

 

ASSETS

 

Current assets:

Cash and cash equivalents

$    627,500 

$ 1,478,100 

Investment in available-for-sale securities

1,019,500 

507,000 

Accounts receivable

872,000 

830,900 

Inventories

5,394,600 

5,239,700 

Prepaid expenses and other current assets

214,900 

141,600 

Total current assets

8,128,500 

8,197,300 

 

Property and equipment, net

1,149,300 

1,100,700 

Other assets, net

470,200 

418,800 

 

$ 9,748,000 

$ 9,716,800 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current liabilities:

Accounts payable

$     71,900 

$    146,900 

Accrued payroll and vacation

131,400 

142,700 

Accrued commissions

6,300 

10,400 

Other accrued expenses

24,700 

Total current liabilities

234,300 

300,000 

 

Deferred rent

14,700 

19,700 

 

Total liabilities

249,000 

319,700 

 

Commitments and contingencies

 

Shareholders' equity:

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

6,793,188 and 6,763,188 shares issued and outstanding

18,505,900 

18,458,500 

Additional paid-in capital

118,700 

118,700 

Accumulated deficit

(9,125,600)

(9,180,100)

Total shareholders' equity

9,499,000 

9,397,100 

 

$ 9,748,000 

$ 9,716,800 

 

See accompanying Notes to Condensed Financial Statements.


 

Condensed Income Statements

(unaudited)

 

             For the fiscal quarter ended:

December 31, 

December 31, 

2006 

2005 

 

Net revenues

$ 1,362,400 

$ 1,100,800 

 

Cost of revenues

657,000 

654,500 

 

Gross margin

705,400 

446,300 

 

Operating expenses:

Research and development

343,000 

139,500 

Selling, general, and administrative

327,200 

303,700 

Total operating expenses

670,200 

443,200 

 

Income from operations

35,200 

3,100 

 

Interest and other income, net

19,300 

6,600 

 

Income before provision for income taxes

54,500 

9,700 

 

Provision for income taxes

800 

 

Net income

$      54,500 

$         8,900 

 

Basic earnings per common share

$ 0.01  

$  - 

 

Diluted earnings per common share

$ 0.01  

$  - 

 

Basic weighted average common shares outstanding

6,773,188 

6,753,188 

 

Diluted weighted average common shares outstanding

6,956,059 

6,753,188 

 

See accompanying Notes to Condensed Financial Statements.


 

Condensed Statements of Cash Flows

(unaudited)

 

            For the fiscal quarter ended:

December 31, 

December 31, 

2006 

2005 

Cash flows from operating activities:

Net income

$     54,500 

$       8,900 

Adjustments to reconcile net income to net cash (used in)

provided by operating activities:

Depreciation and amortization

70,200 

64,300 

Inventory reserve

357,100 

50,000 

Loss on disposal of capital equipment

1,200 

AMT Deferred tax asset

(50,000)

Deferred rent

(5,000)

(3,600)

Change in operating assets and liabilities:

Accounts receivable

(41,100)

(91,800)

Inventories

(512,000)

327,400 

Prepaid expenses and other current assets

(73,300)

(58,200)

Accounts payable

(75,000)

(150,000)

Accrued payroll and vacation

(11,300)

24,100 

Accrued commissions

(4,100)

100 

Other accrued expenses

24,700 

27,100 

Net cash (used in) provided by operating activities

(265,300)

199,500 

 

Cash flows from investing activities:

Purchases of available-for-sale securities

(512,500)

Capital expenditures

(118,800)

(7,600)

Other assets

(11,400)

(80,400)

Net cash used in investing activities

(632,700)

(88,000)

 

Cash flows from financing activities:

Exercise of former director stock options

47,400 

 

Net (decrease) increase in cash and cash equivalents

(850,600)

111,500 

 

Cash and cash equivalents, beginning of period

1,478,100 

1,292,900 

 

Cash and cash equivalents, end of period

$   627,500 

$ 1,404,400 

 

See accompanying Notes to Condensed Financial Statements.



LOGIC Devices Incorporated

 

Notes to Condensed Financial Statements

(unaudited)

 

1.

Basis of Presentation

 

The accompanying unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated.

 

The accompanying unaudited interim financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows for the Company, in conformity with accounting principles generally accepted in the United States of America. The Company has filed audited financial statements that include all information and footnotes necessary for such a presentation of the financial position, results of operations, and cash flows for the fiscal years ended September 30, 2006 and 2005, with the Securities and Exchange Commission. It is suggested that the accompanying unaudited interim financial statements be read in conjunction with the aforementioned audited financial statements. In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting of normal and recurring accruals) necessary to make the results of operations for the interim periods a fair statement of such operations. The results of operations for the interim period ended December 31, 2006 are not necessarily indicative of the results to be expected for the full fiscal year to end September 30, 2007.

 

2.

Inventories

 

A summary of inventories follows:

December 31,

2006

 

September 30,

2006

Raw materials

$    983,500 

$    577,000 

Work-in-process

1,305,000 

1,597,600 

Finished goods

3,106,100 

3,065,100 

 

$ 5,394,600 

$ 5,239,700 

 

3.

 

Shareholders' Equity

 

The Company issues common stock options to its employees, certain consultants, and certain of its board members. Effective January 1, 2006, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 123 (revised 2004) ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, such as stock options granted to employees. The Company elected to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense for newly granted options and (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Additionally, the financial statements for the prior interim periods and fiscal year do not reflect any adjusted amounts.



Prior to the adoption of FAS 123 (R), the Company accounted for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Per FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123, the Company must provide disclosure of the effect on net loss and net loss per common share had the Company applied the fair value recognition provisions of Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation as of December 31, 2005. There is no pro forma disclosure for the fiscal quarter ended December 31, 2005 as no stock options were granted and no additional previously granted stock options vested during the quarter.

 

4.

Earnings Per Share

 

Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per share reflects the net incremental shares that would be issued if dilutive outstanding stock options were exercised, using the treasury stock method. In the case of a net loss, no incremental shares would be issued because they are antidilutive. Stock options with exercise prices above the average market price during the period are also antidilutive.

 

For the quarter ended December 31, 2006, the Company had 182,871 dilutive common shares as the weighted average price of the Company's common stock during the quarter was $2.86. No stock options were included in the computation of diluted earnings per share for the fiscal quarter ended December 31, 2005 because the exercise price of all the stock options were greater than the weighted average market price of the common shares. The weighted average exercise price of excluded options was $1.59 at December 31, 2005.


 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Reported financial results may not be indicative of the financial results of future periods. All non-historical information contained in the following discussion constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "anticipates, appears, expects, intends, hopes, plans, believes, seeks, estimates, may, will," and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to operating results, new product introductions and sales, competitive conditions, customer demand, capital expenditures and resources, manufacturing capacity utilization, and intellectual property claims and defense. Factors that could cause actual results to differ materially are included in, but not limited to, those identified in "Item 1A - Risk Factors" in the Annual Report on Form 10-K for the Company's fiscal year ended September 30, 2006 and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in such Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may reflect events or circumstances after the date of this report.

 

Results of Operations

 

Revenues

 

The Company's net revenues for the fiscal quarter ended December 31, 2006 increased by $261,600 or 24% compared to the same period of fiscal 2006. This increase is due to a strong contribution from a digital cinema customer, which is expected to continue. The Company's interest and other income, net, increased by $12,700 or 192% compared to the same period of fiscal 2006, mainly a result of earnings from its investments in available-for-sale securities, which increased from zero at December 31, 2005 to $1,019,500 at December 31, 2006.

 

Expenses

 

The cost of revenues increased by $2,500 for the fiscal 2007 quarter, or less than 1% compared to the same period of fiscal 2006. While net revenues increased, the cost of revenues was similar. While the Company sold some items at higher margins, this was partially offset by an increase to the inventory reserve of $357,100.

 

Research and development (R&D) expenditures for the fiscal quarter ended December 31, 2006 increased by $203,500 or 146% compared to the same period of fiscal 2006. This increase was mainly the result of an increase in staffing. While this is a significant increase in dollars, as a percentage of net revenues, R&D remains within the Company's goal of 20% to 25% of net revenues. New product development remains the primary focus for the Company.

 

Selling, general, and administrative expenditures for the fiscal quarter ended December 31, 2006 increased by $23,500 or 8% compared to the same period of fiscal 2006. This increase was the result of a new sales structure implemented in late fiscal 2006.

 

As a result of the increase in net revenues partially offset by increases in operating expenses, the Company had net income of $54,500 in the fiscal quarter ended December 31, 2006, which represents an improvement of $45,600 from the same period of fiscal 2006.



Liquidity and Capital Resources

 

Cash Flows

 

Although the Company had a net income of $54,500 for the fiscal quarter ended December 31, 2006, it used net cash of $215,300 for operations during the quarter, mainly the result of purchasing $489,000 of raw materials. The Company used $512,500 and $118,800 for the purchases of available-for-sales securities and capital expenditures, respectively.

Although the Company had a minimal net income of $8,900 for the fiscal quarter ended December 31, 2005, it produced net cash of $199,500 from operations during the period. The Company used $208,200 to increase prepaid expenses and reduce accounts payable, while it generated $327,400 from the reduction of its inventories. The Company used $80,400 for capitalized software development costs.

 

Working Capital

 

Historically, due to order scheduling by our customers, up to 80% of the Company's quarterly revenues are often shipped in the last month of the fiscal quarter, so a large portion of the shipments included in quarter-end accounts receivable are not yet due per the Company's net 30-day terms. As a result, quarter-end accounts receivable balances are often at their highest point for the respective period.

 

Our investment in inventories has been significant and will continue to be significant in the future. However, during the past few years, we

have been able to reduce our levels of inventories as we shift from more competitive second source products to proprietary sole source products. We seek to further streamline our inventories as we continue to shift to sole source proprietary products. Although high levels of inventory impact liquidity, the Company believes these costs are a less costly alternative to owning a wafer fabrication facility.

 

During fiscal 2006, the Company reduced its inventory by 7%, or $386,700. While the Company increased its inventories slightly through purchases of wafers in the quarter ended December 31, 2006, the Company expects to continue its efforts to reduce inventory during the remainder of fiscal 2007 and in future periods. The Company establishes reserves through periodic reviews of inventory on-hand, including lower-of-cost-or-market and excess analyses. For example, if a product type has unit costs higher than the average selling price or has more on-hand than it has sold or expects to sell, the Company provides a reserve. The Company believes its current reserve (approximately 36% of total gross inventories) provides a reasonable estimate of the recoverability of inventories. The Company also takes inventory write-downs for obsolete and slow-moving items when deemed necessary. In the quarter ended December 31, 2006, 16% of the Company's net revenues were from items previously written down to zero compared to 18% of net revenues for the same period in fiscal 2006.

 

Financing

 

While we will continue to evaluate future debt and equity financing opportunities, we believe the cost reductions implemented in the past few years have resulted in the cash flow generated from operations providing an adequate base of liquidity to fund future operating and capital needs. Based on the fact that, as of January 25, 2007, we hold approximately $1.5 million in cash reserves and available-for-sale securities and our anticipated cash usage for operations is approximately equal to or less than our current revenue rate, we believe we can cover our cash operating expenses using future revenues, while saving current cash reserves for future capital expenditures, such as mask tooling for new products.


 

New Accounting Pronouncements

 

In September 2006, the Securities and Exchange Commission published Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). The interpretations in SAB 108 are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice to build up improper amounts on the balance sheet. This guidance will apply to fiscal years ending after November 15, 2006 and early application in interim periods is encouraged. We do not  believe the adoption of SAB 108 will have a material impact on our financial position, results of operations, or cash flows.

 

In June 2006, Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 percent likely of being realized upon ultimate settlement. This guidance will apply to fiscal years beginning after December 15, 2006. Though we are currently evaluating the impact this statement will have on our financial statements, due to our net operating loss carryforward amounts, we do not believe the provisions will change our financial statements

.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We conduct all of our transactions, including those with foreign suppliers and customers, in U.S. dollars. We are therefore not directly subject to the risks of foreign currency fluctuations and do not hedge or otherwise deal in currency instruments in an attempt to minimize such risks. Demand from foreign customers and the ability or willingness of foreign suppliers to perform their obligations to us may be affected by the relative change in value of such customer or supplier's domestic currency to the value of the U.S. dollar. Furthermore, changes in the relative value of the U.S. dollar may change the price of our products relative to the prices of our foreign competitors.

 

Item 4.

Controls and Procedures

 

Based upon an evaluation as of December 31, 2006, the Company's President and Chief Financial Officer both concluded that the Company's disclosure controls and procedures are effective. There have been no changes in the Company's internal control over financial reporting that occurred during the Company's quarter ended December 31, 2006 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

Part II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

From time to time, we receive demands from various parties asserting patent or other claims in the ordinary course of business. These demands are often not based on any specific knowledge of our products or operations. Because of the uncertainties inherent in litigation, the outcome of any such claim, including simply the cost of a successful defense against such a claim, could have a material adverse impact on us.



Item 1A.

Risk Factors

 

There are no material changes to the risk factors disclosed in the Form 10-K filed for the fiscal year ended September 30, 2006.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 5.

Other Information

 

Not applicable.

 

Item 6.

Exhibits

 

The Index to Exhibits appears as Page 13 of this report.



SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LOGIC Devices Incorporated

(Registrant)

 

Date:    January 26, 2007     

By:    /s/  William J. Volz          

William J. Volz

President and Principal Executive Officer

 

Date:    January 26, 2007     

By:    /s/  Kimiko Milheim         

Kimiko Milheim

Chief Financial Officer and Principal Financial

and Accounting Officer



INDEX TO EXHIBITS

 

Exhibit No.

Description

 

3.1

 

Articles of Incorporation, as amended. [3.1] (1)

3.2

Bylaws, as amended. [3.1] (1)

10.1

Real Estate lease regarding Registrant's Sunnyvale, California facilities. [10.2] (2)

10.2

LOGIC Devices Incorporated 1996 Stock Incentive Plan. [99.1] (3)

10.3

Amended and Restated LOGIC Devices Incorporated 1998 Director Stock Incentive Plan, as amended. [10.3] (4)

10.4

Rights Agreement, dated April 30, 1997. [1] (5)

10.5

Registration Rights Agreement dated October 3, 1998 between William J. Volz, BRT Partnership, and Registrant. [10.19] (6)

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.

32.1

Certifications of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

 

[  ]

 

Exhibits so marked have been previously filed with the Securities and Exchange Commission (SEC) as exhibits to the filings shown below under the exhibit numbers indicated following the respective document description and are incorporated herein by reference.

 

(1)

Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004, as filed with the SEC on January 26, 2005.

 

(2)

Annual Report on Form 10-K for the fiscal year ended September 29, 2002, as filed with the SEC on December 10, 2002.

 

(3)

Registration Statement on Form S-8, as filed with the SEC on August 17, 1997 [Registration No. 333-32819].

 

(4)

Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004, as filed with the SEC on May 12, 2004.

 

(5)

Registration Statement on Form 8-A, as filed with the SEC on May 5, 1997 [Registration No. 000-17187].

 

(6)

Annual Report on Form 10-K for the transition period from January 1, 1998 to September 30, 1998, as filed with the SEC on January 13, 1999.